Kulczyk Oil Q3 - Record Levels of Operating Income and Production

CALGARY, ALBERTA--(Marketwire - Nov 13, 2012) - Kulczyk Oil Ventures Inc. (WARSAW:KOV) ("Kulczyk Oil", "KOV" or the "Company"), an international upstream oil and gas exploration and production company, is very pleased to announce its financial and operating results for the period ended 30 September 2012. All dollar amounts are expressed in United States currency.

HIGHLIGHTS

Financial

  • Q3 2012 represented the tenth consecutive quarter of increased oil and gas revenue, 4% higher than Q2 2012 and more than 136% higher than Q3 2011;
  • Record net cash flow generation for the first nine months of 2012 of $23.8 million, compared to a cash outflow in the same period last year of ($1.6 million);
  • Strong cash flow generated by Ukraine operations is sufficient to cover the operating cash outflows for the rest of the Company;
  • Gross revenue from hydrocarbon sales for the first nine months of 2012 increased nearly 2.5 times to $72.3 million when compared with the same period in 2011 ($20.9 million);
  • Ukraine assets generated revenue after royalties net to the Company''s 70% interest of $40.7 million in 2012 up 245% from the $11.8 received in 2011;
  • Netback after royalty and production expenses averaged $8.00 per Mcf for natural gas during the first nine months of 2012 compared to $5.45 per Mcf during the same period in 2011, an increase of 47%;
  • For condensate, the netback after royalty and production expenses average $61.29 in the first nine months of 2012 compared to $47.85 per barrel during the same period in 2011, a 28% increase; and
  • Total assets decreased by 22% to $172.4 million (2011: $220.3 million) due to the impairment of Brunei Block M.

Operational

  • Natural gas production, net to KOV, averaged 14.5 million cubic feet per day ("MMcf/d") and condensate production, net to KOV, averaged 142 barrels per day during the first nine months of 2012;
  • Combined average of 15.4 million cubic feet of gas equivalent ("MMcfe/d") or 2,561 barrels of oil equivalent per day ("boe/d"), an increase of 107% year-on-year and a 3% increase when compared to the first half of 2012;
  • Five wells were drilled or drilling in 2012 prior to 30 September, all of them in Ukraine. Of these, one was tied-in and is producing gas, two have been cased to total depth and are awaiting completion and tie-in for commercial production one was assessed as non-commercial for conventional production - but remains a frac candidate and one was drilling at 30 September;
  • In 2012 prior to 30 September, five wells have been tied-in for commercial production, including four wells on the Olgovskoye Licence (O-12, O-6, O-8, O-18) and one well on the Makeevskoye Licence (M-21); 
  • In Q3 2012 the Makeevskoye-20 well tested gas at a high rate of 5.3 MMcf/d and drilling commenced on two new wells (K-7, M-16);
  • For the first time in KUB-Gas'' history two drilling rigs have been working simultaneously which allowed for acceleration of the 2012 drilling program;
  • Started work during the third quarter on the first dual completion, using the KUB-Gas owned snubbing unit delivered in January 2012;
  • Brunei Block L: interpretation of the seismic data is on-going and a number of drilling targets have been identified;
  • Brunei Block M: PetroleumBRUNEI advised that they would not extend the term of the Production Sharing Contract beyond the 27 August 2012 expiry date; and
  • Syria Block 9: declared force majeure under the terms of the Syria Block 9 Production Sharing Contract.

Tim Elliott, President and Chief Executive Officer of KOV stated that:

"We continue to make great progress in Ukraine with our continuous drilling program. There is always a bit of time lag between drilling and casing the wells and then testing and completing the wells and ultimately their start of production. As the wells we drill get tied in our production continues to increase and given that commodity prices have held steady our revenues have grown materially. During the first nine months of the year, we drilled, or are drilling, five wells. During the same period five wells have been tied-in and brought on production, four wells on the Olgovskoye Licence and one well on the Makeevskoye Licence. As a result, revenue from hydrocarbon sales has increased by 245% in the 9-month period compared with the previous period.

One notable highlight is that we have two drilling rigs working at the same time in Ukraine. The Company''s rig has just finished drilling the K-7 well and will be moved to the NM-2 drilling location and a drilling rig contracted by KUB-Gas from a third party is currently drilling the M-16 well, which has a target depth of 4,300 metres. M-16 will be the deepest well we have ever drilled in Ukraine, and it is penetrating rocks that we have never drilled through before, although we know that an equivalent stratigraphic section is productive elsewhere in Ukraine.

With an active drilling and work-over program going forward, we expect to continue the upward trajectory in production. Before the year is out, we will have used our snubbing unit, which was imported from Canada early in 2012, to execute several dual completions. Dual completion allows two separate zones to produce simultaneously from the same well and using the snubbing unit lets us perform the operation without killing the existing producing zone. This is a unique operation which will be a first for KOV and, to our knowledge, perhaps even a first for Ukraine.

The progress and success to date are a great tribute to our teams in Ukraine and Calgary, and their successful collaboration."

Production

All of KOV''s production is from Ukraine. Production volumes have increased significantly both for the nine month reporting period and for the third quarter of 2012 when compared to the same periods in 2011.

Gas and condensate production, net to KOV, increased to 2,561 boe/d (15.4 MMcfe/d), an increase of 107% year-on-year. Gas production for the nine months ended 30 September 2012, net to KOV, averaged 14.5 MMcf/d compared to an average of 7.1 MMcf/d for the nine months ended 30 September 2011, an increase of 105% year-on-year.

Production increased relatively steadily throughout the year. As of 30 September 2012 the Company had recorded ten consecutive quarters of oil and gas revenue increases dating back to the second quarter of 2010. This trend has continued into the fourth quarter of 2012 with production reaching an all-time high of 25.8 MMcf/d (18 MMcf/d net to KOV) on 7 November 2012. Further development of the R8 pool through the drilling of the M-21 and M-20 wells, the tie-in of the O-6 and O-8 wells that were fracture stimulated in the fourth quarter of 2011, and the tie-in of both the O-12 well in January 2012 and the O-18 well in March 2012, all contributed to production growth in the first nine months of 2012. The three wells in the R-8 pool (M-19, M-21 and M-20) now produce 12.9 MMcf/d gross (9.1 MMcf/d net to KOV), while the O-12 well currently produces 4.6 MMcf/d gross (3.2 MMcf/d net to KOV).

Financial performance

Revenue from hydrocarbon sales increased by 245% in the nine month period when compared to the same period in 2011. Since the KUB-Gas acquisition in June 2010, KUB-Gas has generated $116.4 million of gross production revenue, with KOV''s 70% share being $81.5 million.

The price received for natural gas during the first nine months of 2012 averaged $11.74 per Mcf, 11% higher than the $10.53 per Mcf received during the same period in 2011. Condensate price was $99.18 per barrel during the period, up from the $94.92 per barrel realized in the same period in 2011.

Increased sales volumes and the improved selling price for natural gas contributed to an increase in the netback per Mcfe to $8.13 during nine months ended 30 September 2012 compared to $6.39 during the 2011 fiscal year and $5.82 in the first nine months of 2011. (Netback is calculated as gross selling price, less royalties and operating expenses.)

In mid-July 2012, the Company further evaluated the situation in Syria and formally declared force majeure under the terms of the Syria Block 9 Production Sharing Contract. Prior to the finalization of its 2011 audited accounts, the Company had concluded that, due to the escalating crisis in the country as well as the strict sanctions imposed by the United States, Canada, the European Union and the Arab League, indicators of impairment existed. Accordingly, it had fully impaired the value of the exploration asset in Syria in its audited accounts for 2011.

In August 2012, PetroleumBRUNEI formally notified the operator of the Brunei Block M joint venture that it would not grant an extension to the term of the Phase 2 exploration period of the Block M Production Sharing Agreement, the result of which is that the Block M PSA expired on 27 August 2012. By separate notice, PetrolemBRUNEI notified the Block M joint venture of its demand in accordance with the Block M PSA for a payment in respect of the remaining outstanding minimum work commitments of which KOV''s share would be $6.0 million. This stands in marked contrast to the treatment received by the Block L joint venture where KOV is operator and represents the joint venture in its dealing with PetroleumBRUNEI and where an extension in similar circumstances was granted. While KOV intends to continue to evaluate options, if any, that may be available to it to continue to explore in the former Block M area, International Financial Reporting Standards ("IFRS") require that the carrying value of Block M be fully impaired in the Q3 financial statements. It is noteworthy that the Company''s operations and activities in Block L continue as planned, and remain unaffected by the expiration of the Block M PSA.

In addition to the consideration and evaluation of potential alternatives to continue exploration activities on the former Block M lands, KOV is also investigating and considering other options, including legal options directed towards the former parent company of the operator of the Block M joint venture pursuant to a parent company guarantee, which, if successful, would allow it to recover costs incurred on Block M. 

Operational

During the nine months ended 30 September 2012, the Company incurred $36.8 million in capital expenditures on exploration and evaluation assets and on property, plant and equipment, including costs incurred on the following projects:

  • Ukraine: the drilling of the M-21, NM-1, M-20, M-16 and K-7 wells, the work-over program involving various wells in the Olgovskoye and Makeevskoye fields, completion of the pipeline tie-ins to M-21 and M-20, the production facilities and tie-in of the O-18, O-6 and O-8 wells, and completion of the North Makeevskoye 3D seismic program;
  • Brunei Block L: an extension to Phase 2 of the exploration period was granted and the Company completed the acquisition and processing of 191.8 km2 of 3D, 16.2 km2 of 3D swath and 14 kilometres of 2D seismic data. Interpretation of the new seismic is on-going and invitations to tender for all material contracts required for the two well drilling program were issued;
  • Brunei Block M: the joint venture was not granted an extension to Phase 2 of the exploration period and as a result the Company wrote off its investment in Block M.

In Block L, the acquisition in December 2011 of AED Southeast Asia enabled KOV to increase its ownership position to 90% and become the operator. In addition, the exploration period of the production sharing agreement was extended by 12 months to August 2013 to allow time to drill the two remaining commitment wells. In June, the Company announced completion of field operations for the acquisition of 191.8 km2 of 3D seismic data, 16.2 km2 of 3D swath data and 14 kilometres of 2D seismic data on Block L. While interpretation of the new seismic data is on-going, a number of drilling targets have already been identified. Tenders for all material contracts required to drill two wells have been issued and the tender for the drilling rig is expected to be finalized in late November or early December 2012. Drilling of the first well is expected to commence in March of 2013.

Outlook

Prior to the end of 2012 KOV intends to complete the:

  • Drilling, logging and casing of the M-16 well;
  • Additional work on the K-7 well:
  • Dual completion of the O-18 well;
  • Fracking and dual completion of the M-21 well;
  • Tie-in of the dually completed new zones in the M-21 and O-18 wells;
  • Award of all material contracts to enable the drilling of two wells on Block L Brunei in 2013.

KOV has filed its operating and financial results as at, and for the nine month period ended 30 September 2012 in Canada by filing on SEDAR (www.sedar.com) and in Poland by filing on ESPI (www.gpwinfostrefa.pl) and has posted them on its website at www.kulczykoil.com.

Cautionary Statement

Production information is commonly reported in units of barrel of oil equivalent ("boe" or "BOE") or in units of natural gas equivalent ("Mcfe"). However, BOEs or Mcfes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf:1 barrel, or an Mcfe conversion ratio of 1 barrel:6 Mcf, is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

About Kulczyk Oil

Kulczyk Oil is an international upstream oil and gas exploration and production company with a diversified portfolio of projects in Ukraine, Brunei and Syria and with a risk profile ranging from exploration in Brunei and Syria to production and development in Ukraine. The common shares of the Company trade on the Warsaw Stock Exchange under trading symbol "KOV".

In Ukraine, KOV owns an effective 70% interest in KUB-Gas LLC. The assets of KUB-Gas consist of 100% interests in five licences near to the City of Lugansk in the northeast part of Ukraine. Four of the licences are gas producing.

In Brunei, KOV owns a 90% working interest in a production sharing agreement which gives the Company the right to explore for and produce oil and natural gas from Block L, a 1,123 square kilometre area covering onshore and offshore areas in northern Brunei.

In Syria, KOV holds a participating interest of 50% in the Syria Block 9 production sharing contract which provides the right to explore for and, upon the satisfaction of certain conditions, to produce oil and gas from Block 9, a 10,032 square kilometre area in northwest Syria. The Company has an agreement to assign a 5% ownership interest to a third party which is subject to the approval of Syrian authorities, and which, if approved, would leave the Company with a remaining effective interest of 45% in Syria Block 9. KOV declared force majeure, with respect to its operations in Syria, in July 2012.

The main shareholder of the Company is Kulczyk Investments S.A., an international investment house founded by Polish businessman Dr. Jan Kulczyk.

For further information, please refer to the Kulczyk Oil website (www.kulczykoil.com).

Translation: This news release has been translated into Polish from the English original.

Forward-looking Statements

This release may contain forward-looking statements made as of the date of this announcement with respect to future activities of KUB-Gas and related to its five licence areas in Ukraine and to certain wells drilled or seismic activities undertaken within those licence areas that either are not or may not be historical facts and with respect to certain activities In Brunei or Syria. Although the Company believes that its expectations reflected in the forward-looking statements are reasonable as of the date hereof, any potential results suggested by such statements involve risk and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Various factors that could impair or prevent the Company from completing the expected activities on its projects include that the Company''s projects experience technical and mechanical problems, there are changes in product prices, failure to obtain regulatory approvals, the state of the national or international monetary, oil and gas, financial, political and economic markets in the jurisdictions where the Company operates and other risks not anticipated by the Company or disclosed in the Company''s published material. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties and actual results may vary materially from those expressed in the forward-looking statement. The Company undertakes no obligation to revise or update any forward-looking statements in this announcement to reflect events or circumstances after the date of this announcement, unless required by law.

Canada
Suite 1170, 700-4th Avenue S.W., Calgary, Alberta, Canada
Telephone: +1-403-264-8877
Facsimile: +1-403-264-8861
 
Dubai
Al Shafar Investment Building, Suite 123, Shaikh Zayed Road,
Box 37174, Dubai, United Arab Emirates
Telephone: +971-4-339-5212
Facsimile: +971-4-339-5174
 
Poland
Nowogrodzka 18/29
00-511 Warsaw, Poland