Galleon Energy Inc. Reports Q1 2011 Results

Marketwired

CALGARY, ALBERTA--(Marketwire - May 25, 2011) - Galleon Energy Inc. ("Galleon" or the "Corporation") (TSX:GO - News) announces Q1 2011 financial results from operations and revised 2011 budget.Q1 2011 Financial Highlights




-- Revenues (before realized financial derivatives) of $48.0 million ($0.57
per basic share) and funds flow from operations of $26.8 million ($0.32
per basic share) were generated from average production of 13,048 BOE/d
(32% oil and liquids and 68% natural gas) in Q1 2011. This compares to
revenues (before realized financial derivatives) of $46.0 million ($0.55
per basic share), funds flow from operations of $21.2 million ($0.25 per
basic share) and average production of 13,556 BOE/d (29% oil and liquids
and 71% natural gas) in Q4 2010;
-- Revenues averaged $44.97/BOE which includes $4.06/BOE from realized
commodity financial derivatives. Revenues, including realized commodity
financial derivatives, were generated 53% from oil and liquids sales and
47% from natural gas sales;
-- Operating expenses averaged $10.51/BOE;
-- The operating netback was $27.36/BOE and the corporate netback was
$22.86/BOE;
-- A net loss of $13.3 million ($0.16 per basic share) was recorded, which
included a non-cash unrealized loss from financial derivatives of $19.0
million;
-- The Corporation drilled 16 (13.4 net) wells resulting in 4 (3.8 net)
natural gas wells and 12 (9.6 net) oil wells, for a success rate of 100%
during the quarter;
-- Capital of $48.1 million was invested in exploration and development
activities and proceeds from dispositions net of acquisitions were $0.7
million;
-- Net debt was $173.5 million at March 31, 2011 including $146.0 million
drawn on available bank credit facilities of $250 million;
-- At March 31, 2011, issued and outstanding Class A shares were 83,980,083
with share options totaling 7,011,333 with an average exercise price of
$5.38.

Q1 2011 Operations HighlightsEastern Montney Business Unit - Comprised of Eastern Montney Gas/Oil and Culp/McLeans Creek Light OilEastern Montney production averaged 5,178 BOE/d (67% natural gas and 33% oil and NGLs) during the first quarter of 2011, compared to 5,228 BOE/d (78% natural gas and 22% oil and NGL) during the same period in 2010. This business unit contributed 44% to total funds from operating activities in Q1 2011 based on 40% of production volumes. The economics of this area are strong due to the low operating and capital costs, as well as the associated oil and NGLs that are produced with the gas.The Eastern Montney project was initially developed using vertical wells. As technology evolved to allow effective stimulation of horizontal wellbores, Galleon implemented horizontal development in 2008. To date, Galleon has drilled over 70 horizontal wells and over 80 vertical wells in the project area. The project area encompasses a fairway that is 30 miles long by 10 miles wide that has been mapped and tested. Galleon's approach to this gas project continues to be to pursue a level of drilling activity that would utilize the capacity available in the existing gas plant. This will be the approach until gas prices improve, at which time the project and facilities will be expanded.During the second half of 2010 Galleon confirmed by drilling 4 wells the presence of significant oil in this Montney fairway. This oil project has been advanced in the first quarter of 2011 with the drilling of four additional Montney oil wells. Galleon plans to continue with the development of this pool over the remainder of 2011. Facility modification and pipeline relicensing is required prior to adding significant new volumes from this project. This work is expected to be completed in September 2011.A total of 8 (7.9 net) wells were drilled within this business unit in the first quarter of 2011. A total of 6 Montney gas wells, 1 Montney oil well and 1 Cretaceous well are planned for Q2 2011, along with 4 Montney natural gas wells and 4 Montney oil wells in Q3 2011.Kakut Business Unit - Comprised of Kakut, Senex/Sawn Lake and Edam, Sask.The Kakut property continues to be a significant development area for Galleon. Production for Q1 2011 averaged 3,812 BOE/d (71% natural gas and 29% oil and NGLs), representing a 15% decrease from 4,486 BOE/d in Q1 2010 (77% natural gas and 23% oil and NGLs). The Kakut business unit contributed 25% of total funds from operating activities based on 29% of production volumes in Q1 2011.The Kakut Doig light oil/natural gas play is a regional resource that is defined by over 40 vertical wells and occurs at a relatively shallow depth of 1,550 meters. Drilling by Galleon of 27 horizontal wells has confirmed a productive fairway of at least 15 miles in length.In Q1 2011, Galleon drilled 3 (100%) successful Doig horizontal wells at Kakut. The Corporation plans to continue drilling on this project at a measured pace and to closely monitor results. The evolution of a cost effective drilling and completion technique will assist to determine the optimal depletion strategy. In order to model long-term well-performance expectations there will be a focus in 2011 on developing a reliable reservoir simulation, based upon production and pressure histories, as well as incorporating petrophysical parameters gathered from open-hole logs and core.Just prior to year end 2010, Galleon received approval from the ERCB for Temporary Net Gas-Oil Ratio Penalty relief in the Kakut Doig B pool for the go forward period of January 1, 2011 to December 31, 2011. This 12 month timeframe will allow Galleon to observe and design the optimal depletion strategy for the pool.In Q2 2011, Galleon expects to receive down spacing approval for the Kakut Doig on an additional 9 sections, resulting in a total of 20 sections that are approved for 4 horizontal wells per section.At Sawn Lake, during the first quarter of 2011, 2 non-operated horizontal wells were drilled. Galleon's working interest in these wells is 25%. Early indications are very positive and these two wells are expected to be placed on continuous production during Q3 2011. Several companies operating in the same area have seen prolific results using multi-stage fractures with acid, which is the completion technique that was used in the Galleon wells.North Peace River Arch Business Unit ("NPRA") - Comprised of various properties, including Eaglesham, Whitelaw, Flood, Dixonville, Alexis/St. Anne, and N.E. BCProduction in the NPRA business unit averaged 4,058 BOE/d in Q1 2011 (66% natural gas and 34% oil and NGLs), a decrease of 9% from the first quarter of 2010 (69% natural gas and 31% oil and NGLs). In Q1 2011, NPRA contributed 31% of the funds from operations and 31% of production volumes.In this business unit, Galleon has targeted two emerging Triassic oil resource plays. The Corporation has assembled a significant land position over the plays. One vertical well in the first Triassic oil project was recompleted in Q4 2010 along with the drilling of one horizontal test well, both with encouraging results. This activity, along with vertical well control and seismic, provides support for an emerging resource play. This play has considerable aerial extent and thick hydrocarbon charge. Galleon expects to use horizontal drilling technology to develop these opportunities.Large oil-in-place assets at Alexis/St. Anne continue to be exploited and optimized with horizontal oil wells planned in Q2 and Q3 of 2011. In Q1 2011, in the NPRA business unit, Galleon drilled 2 (1.3 net) horizontal wells targeting Triassic oil both of which were successful.2011 Outlook/Revised BudgetThe 2011 capital expenditure budget, excluding acquisition and dispositions, of between $131 and $140 million remains unchanged from prior guidance. Approximately 70% of the capital program is directed towards oil projects.Up to 64 wells are planned in 2011 of which 16 wells were drilled in Q1 2011. Beyond Q1 2011, up to 33 wells are planned in the Eastern Montney business unit including up to 16 horizontal light oil wells. Up to a combined 15 wells are planned in the North Peace River Arch and Kakut business units during the last 3 quarters of 2011.At December 31, 2010, crude oil and liquids production comprised approximately 30% of total production. The 2011 year-end target is to increase crude oil and liquids production to approximately 40% of total production. By December, 2011, approximately 65% of revenues are estimated to be generated from oil and liquids production.Production for 2011 is forecasted to average 12,641 BOE/d (50.2 Mmcf/d natural gas and 4,278 Bbl/d of crude oil and liquids). The percentage of oil production is expected to increase significantly during the third and fourth quarters as 67% of drilling expenditures in the 2nd through 4th quarters will be spent on oil projects. Based on current hedge contracts and non-hedged commodity prices of $90.00 Cdn WTI and $4.00/Mcf natural gas for the year, Galleon expects to generate cash flow of $1.31 per share.The increase in oil production is expected to come from 7 projects including Eastern Montney, Culp/Mclean Creek, Kakut Doig, Senex Lake, Alexis/St.Anne and two emerging Triassic oil resource plays in NPRA. Galleon has assembled a significant land position within these oil projects which is expected to fuel the growth of oil production in 2011 and 2012.Change in ManagementMr. Steve Sugianto has resigned, effective immediately, as President and Chief Executive Officer and a Director of the Corporation. A search committee comprised of Messrs. Glenn Carley, John Brussa and Lanny Fenwick has been constituted to recruit a new President and Chief Executive Officer. The Board of Directors wishes to express their thanks to Mr. Sugianto for his eight years of service to the Corporation.




FINANCIAL AND OPERATING HIGHLIGHTS Three months ended March 31
($000s except per share and per unit 2011 2010
amounts)
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Financial
Petroleum and natural gas revenue 48,042 62,284
Funds flow from operations (1) 26,842 31,680
Per share - basic 0.32 0.37
Per share - diluted 0.32 0.37
Net income (loss) (13,297) 18,808
Per share - basic (0.16) 0.22
Per share - diluted (0.16) 0.22
Capital expenditures 48,121 40,046
Total assets 885,286 1,010,720
Net debt 1,2 173,540 252,214
Total non-current financial liabilities 10,823 -
Shareholders' equity 567,529 600,610
Weighted average shares outstanding
Basic 83,980,083 85,098,939
Diluted 83,980,083 85,098,939
Operating
Average daily production
Light oil (Bbl/d) 2,832 3,249
Heavy oil (Bbl/d) 948 1,161
NGLs (Bbl/d) 368 527
Natural gas (Mcf/d) 53,398 64,165
Total (BOE/d) 13,048 15,631
Average selling prices (3)
Light oil ($/Bbl) 83.14 77.47
Heavy oil ($/Bbl) 64.08 64.91
NGLs ($/Bbl) 67.84 56.80
Natural gas ($/Mcf) 3.98 5.22
Total (BOE/d) 40.91 44.28
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(1) See Advisories
(2) Net debt includes bank indebtedness, working capital and financing
leases, but excludes financial derivatives
(3) The average prices reported are prior to financial derivatives and
transportation charges

The 23% decrease in revenue before royalties and financial derivatives in the first quarter of 2011 compared to 2010 was primarily due to decreases in gas prices and production volumes. Average production in Q1 2011 was 13,048 BOE/d compared to 15,631 BOE/d in Q1 2010. The 2,583 BOE per day reduction reflects a decline in natural gas production and the sale of properties, primarily the Puskwa light oil assets sold in the second quarter of 2010.Excluding volumes from properties which were sold, average daily production for the three months ended March 31, 2011 was 8% lower than the average production recorded in the three months ended March 31, 2010. By product, excluding volumes which were sold, a 20% increase in oil production was offset by a 16% decrease in natural gas production.The average price for natural gas, before transportation and financial derivative contracts, was $3.98/Mcf in the first three months of 2011, down 24% from $5.22/Mcf in the first three months of 2010. Crude oil prices increased 6% in Q1 2011 compared to Q1 2010 to $78.41/Bbl.Funds flow from operations decreased by $4.8 million, or 15%, in the first quarter of 2011, compared to the first quarter of 2010. The $9.7 million decrease in petroleum and natural gas revenue net of royalties was partially offset by a $3.3 million increase in realized gains on financial derivative contracts and a $1.2 million reduction in interest expense. The increase in realized gains on financial derivatives reflects higher gains on natural gas derivative contracts.Net debt at March 31, 2011 was $173.5 million. The $78.7 million reduction from $252.2 million outstanding at March 31, 2010 represents a decrease of 31%. Debt was reduced with the application of proceeds received on the sale of the Puskwa assets during the second quarter of 2010.The net loss in the first quarter of 2011 includes a $19.0 million unrealized loss on financial derivative contracts, compared to an unrealized gain on financial derivative contacts of $18.5 million in Q1 2010.



Results of Operations

Comparative financial results for the quarter are as follows:

Three months ended 2011 2010
March 31
----------------------------------------------------------------------------
($000s) 1,174,344 BOE 1,406,752 BOE
$/BOE $/BOE
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Petroleum and
natural gas revenue 48,042 40.91 62,284 44.28
Realized gain on
financial
derivatives 4,771 4.06 1,435 1.02
Royalties (9,310) (7.93) (15,281) (10.86)
GCA (1) 3,171 2.70 4,599 3.27
Transportation costs (2,200) (1.87) (2,189) (1.56)
Operating costs (12,342) (10.51) (12,487) (8.88)
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Net 32,132 27.36 38,361 27.27
G&A (3,156) (2.69) (3,568) (2.54)
Interest costs (1,857) (1.58) (3,014) (2.14)
Exploration expenses (215) (0.18) - -
Capital and other
taxes (62) (0.05) (99) (0.07)
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Funds from
operations (2) 26,842 22.86 31,680 22.52
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(1) GCA means Gas Cost Allowance
(2) See Advisories

Crude Oil Prices

Three months ended March
31 2011 2010
$ $/Bbl $ $/Bbl
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Crude oil 26,674 78.41 29,437 74.17
Realized financial
contracts (1,154) (3.39) (180) (0.45)
Transportation (655) (1.93) (392) (0.99)
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Net crude oil 24,865 73.09 28,865 72.73
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Natural Gas Prices

Three months ended March
31 2011 2010
$ $/Mcf $ $/Mcf
----------------------------------------------------------------------------
Natural gas 19,121 3.98 30,154 5.22
Realized financial
contracts 5,915 1.23 1,775 0.31
Transportation (1,535) (0.32) (1,797) (0.31)
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Net natural gas 23,501 4.89 30,132 5.22
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NGL Prices

Three months ended March
31 2011 2010
$ $/Bbl $ $/Bbl
----------------------------------------------------------------------------
NGL 2,247 67.84 2,693 56.80
Transportation (10) (0.30) - -
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Net NGL 2,237 67.54 2,693 56.80
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Performance by Property

Three months ended March 31
2011
----------------------------------------------------------------------------
Operating Funds
netbacks/ from
Production BOE (1) operations(2)
----------------------------------------------------------------------------
BOE/d % $ %
Eastern Montney 5,178 40 22.94 44
Kakut 3,812 29 17.73 25
North Peace River Arch 4,058 31 20.36 31
Sold properties - - - -
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13,048 100 20.60 100
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Three months ended March 31
2010
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Operating Funds
netbacks/ from
Production BOE(1) operations(2)
---------------------------------------------------------------------------
BOE/d % $ %
Eastern Montney 5,228 33 21.63 32
Kakut 4,486 29 21.20 27
North Peace River Arch 4,452 29 19.71 24
Sold properties 1,465 9 41.55 17
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15,631 100 22.83 100
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(1) Operating netbacks/BOE exclude GCA and hedging gains and losses,
and are calculated by subtracting royalties, operating costs, and
transportation from revenues and dividing the result by the average
production for the period
(2) See Advisories

Capital Expenditures

Three months ended March 31 2011 2010
($000s) $ % $ %
----------------------------------------------------------------------------
Land 8,056 17 2,697 7
Geological and geophysical 647 1 282 1
Drilling and completion 34,012 71 29,760 74
Plant and facilities 4,868 10 6,105 15
Inventory 523 1 1,171 3
Other assets 15 - 31 -
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Capital expenditures 48,121 100 40,046 100
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GALLEON ENERGY INC.
Consolidated Statements of
Financial Position
(unaudited) March 31, December 31, January 1,
($000's) 2011 2010 2010
ASSETS
CURRENT
Accounts receivable 25,272 28,829 41,270
Deposits and prepaid expenses 3,109 3,361 6,190
Fair value of financial
derivatives 16,261 20,815 4,241
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44,642 53,005 51,701
Property and equipment 840,644 816,647 881,937
Goodwill - - 25,333
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885,286 869,652 958,971
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LIABILITIES
CURRENT
Accounts payable and accrued
liabilities 55,896 49,369 55,531
Financing lease - - 1,545
Bank loan 146,025 135,682 217,243
Other liability - - 3,775
Fair value of financial
derivatives 24,973 6,411 13,789
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226,894 191,462 291,883
Decommissioning liabilities 41,035 39,947 38,228
Fair value of financial 10,823 14,980 -
derivatives
Deferred income taxes 39,005 43,257 49,245
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317,757 289,646 379,356
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SHAREHOLDERS' EQUITY
Share capital 586,626 586,626 595,559
Contributed surplus 41,401 40,581 30,174
Retained earnings (deficit) (60,498) (47,201) (46,118)
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567,529 580,006 579,615
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885,286 869,652 958,971
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GALLEON ENERGY INC.
Consolidated Statements of Earnings (Loss), and Comprehensive Income (Loss)
(unaudited)
Three months ended March 31
($000s, except per share
amounts) 2011 2010
----------------------------------------------------------------------------
REVENUE
Petroleum and natural gas
revenue 48,042 62,284
Royalties, net of GCA (6,139) (10,682)
Realized gain on financial
derivatives 4,771 1,435
Unrealized gain (loss) on
financial derivatives (18,959) 18,529
Other income 123 -
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27,838 71,566
EXPENSES
Operating 12,342 12,487
Transportation 2,200 2,189
General and administration 3,156 3,568
Share-based compensation 599 1,578
Interest 1,857 3,014
Exploration expenses 215 -
Accretion 810 747
Derecognition expense 3,400 2,043
Depletion and depreciation 20,746 19,584
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45,325 45,210
Earnings (loss) before taxes (17,487) 26,356
Income taxes
Capital and other taxes 62 99
Deferred income taxes
(recovery) (4,252) 7,449
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(4,190) 7,548
NET EARNINGS (LOSS) AND
COMPREHENSIVE INCOME (LOSS) (13,297) 18,808
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NET EARNINGS (LOSS) AND
COMPREHENSIVE INCOME (LOSS) PER
SHARE
Basic (0.16) 0.22
Diluted (0.16) 0.22
Weighted average Class A shares
- basic 83,980,083 85,098,939
- diluted 83,980,083 85,098,939

GALLEON ENERGY INC.
Consolidated Statement of Changes in Equity
(unaudited)


Retained
Share Contributed Earnings
($000s) Capital Surplus (Deficit) Total
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Balance, January 1, 2010 595,559 30,174 (46,118) 579,615
Share-based compensation - 6,380 - 6,380
Options exercised 460 (123) - 337
Shares purchased and
cancelled (8,304) 4,150 - (4,154)
Tax deduction of share
issue costs (1,089) - - (1,089)
Comprehensive loss - - (1,083) (1,083)
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Balance, December 31,
2010 586,626 40,581 (47,201) 580,006
Share-based compensation - 820 - 820
Comprehensive loss - - (13,297) (13,297)
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Balance, March 31, 2011 586,626 41,401 (60,498) 567,529
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GALLEON ENERGY INC.
Consolidated Statement of Changes in Equity
(unaudited)

Retained
($000s) Share Contributed Earnings
Capital Surplus (Deficit) Total
----------------------------------------------------------------------------

Balance, January 1, 2010 595,559 30,174 (46,118) 579,615
Share-based compensation - 2,239 - 2,239
Options exercised 290 (78) - 212
Tax deduction of share issue
costs (264) - - (264)
Comprehensive income - - 18,808 18,808
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Balance, March 31, 2010 595,585 32,335 (27,310) 600,610
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GALLEON ENERGY INC.
Consolidated Statements of Cash
Flows
(unaudited)
($000s) Three months ended March 31
2011 2010
----------------------------------------------------------------------------
Cash provided by (used in):
OPERATING ACTIVITIES
Net earnings (loss) (13,297) 18,808
Items not requiring cash:
Deferred income taxes (recovery) (4,252) 7,449
Depletion and depreciation 20,746 19,584
Derecognition expense 3,400 2,043
Accretion 810 747
Share-based compensation 599 1,578
Other income (123) -
Unrealized loss (gain) on
financial derivatives 18,959 (18,529)
Abandonment costs (81) (235)
Change in non-cash working
capital 1,172 1,555
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27,933 33,000
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FINANCING ACTIVITIES
Issue of common shares - 212
Capital lease payments - (203)
Bank loan (repayment) 10,343 12,308
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10,343 12,317
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INVESTING ACTIVITIES
Additions to property and
equipment (48,121) (40,046)
Disposition (acquisition) of oil
and gas properties (note 5) 681 (16,966)
Change in non-cash working
capital (note 15) 9,164 11,695
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(38,276) (45,317)
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CHANGE IN CASH - -
CASH, BEGINNING AND END OF PERIOD - -
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SUPPLEMENTAL INFORMATION
Cash interest paid 1,847 3,474
Cash taxes paid 62 -
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Galleon has approximately 84.0 million shares issued and outstanding which trade on the Toronto Stock Exchange under the symbol "GO".ADVISORIES: Certain information regarding Galleon Energy Inc. in this news release including management's assessment of future plans and operations including development plans, drilling plans timing of completion of facilities, timing of receipt of down spacing approvals, timing of commencement of production from new wells, 2011 capital expenditures and the funding thereof and the nature of expenditures, 2011 target commodity mix and projected 2011 cash flow per share may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, capital expenditure costs, including drilling, completion and facilities costs, unexpected decline rates in wells, wells not performing as expected, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Readers are cautioned that the foregoing list of factors is not exhaustive.Projected level of 2011 cash flow per share may constitute future oriented financial information or a financial outlook under applicable securities laws, which was approved by management of the Corporation as at May 25, 2011. This is provided to provide readers with expected 2011 cash flow per share based on the various assumptions described. Readers are cautioned that the information may not be appropriate for other purposes.Additional information on these and other factors that could affect Galleon's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), at Galleon's website (www.galleonenergy.com). Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and Galleon does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.This news release contains terms commonly used in the oil and gas industry, such as funds flow from operations, funds flow from operations per share, and operating netback. These terms are not defined by GAAP and should not be considered an alternative to, or more meaningful than, cash provided by operating activities or net earnings as determined in accordance with Canadian GAAP as an indicator of Galleon's performance. Management believes that in addition to net earnings, funds flow from operations is a useful financial measurement which assists in demonstrating the Corporation's ability to fund capital expenditures necessary for future growth or to repay debt. Galleon's determination of funds flow from operations may not be comparable to that reported by other companies. All references to funds flow from operations throughout this news release are based on cash flow from operating activities before changes in non-cash working capital and abandonment expenditures. The Corporation calculates funds flow from operations per share by dividing funds flow from operations by the weighted average number of Class A shares outstanding.Galleon uses the term net debt. This measure does not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable to similar measures presented by other companies.Disclosure provided herein in respect of barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Contact:
Glenn R. Carley
Galleon Energy Inc.
Executive Chairman
(403) 261-6012

Shivon Crabtree
Galleon Energy Inc.
Vice President and Chief Financial Officer
(403) 261-6012
www.galleonenergy.com
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