KEYWEST.
ENERGY CORPORATION
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Dear Fellow Shareholder:
1200, 520 - 5th Avenue S.W., Calgary, AB UP 3R7 Phone (403) 261-2766 0 Fax (403) 234-9637 www.keywestenergy.com
December 9, 1999
President's Letter
With the year drawing to a close, I felt it would be timely to update you on the ongoing development of KeyWest Energy Corporation. A great deal has been accomplished since we acquired our first oil and gas production about seven months ago. We take pride in having now built a very solid base of high quality, long-life oil and gas production and reserves in Alberta that will be the foundation of our future growth. Our continuing success is certainly being enhanced by current strong product prices. Since the beginning of 1999, oil prices have more than doubled to $26.00 U.S. per barrel (setting a 10 year high!) and we have seen natural gas prices climb to $2.90 U.S. per thousand cubic feet (mcf) before softening to the $2.25 U.S. per mcf range because of mild winter weather throughout most of North America.
KeyWest's first acquisition at Carbon in central Alberta is performing nicely: our initial four-well, $2.8 million development drilling program resulted in three gas wells and one oil well for a 100% success rate! The result is that production at Carbon is up 50% to 850 barrels of oil equivalent (BOE) per day which has doubled projected cash flow from the property for next year. (These results are even more impressive when you consider that KeyWest converts gas to BOEs on the basis that 10 mcf of gas equates to one barrel of oil. Many companies use the more favorable BOE "energy equivalent" conversion whereby 6 mef of gas equals one barrel of oil.) The next drilling phase at Carbon, comprising a three-well program, is scheduled for the first quarter of the coming year.
Our second major purchase was at Chin Coulee in Southern Alberta, and it's doing even better than we expected. KeyWest's initial development drilling program on the property is nearing completion with five of the six scheduled wells having now been drilled. All five are successful oil wells. We own 100% interest in this project and expect that the results of the drilling program will more than double our production from the area to over 800 barrels of oil a day by the end of January. As a result, we anticipate that two additional drilling programs will be conducted on the property next year, creating significant new shareholder value. For your information, well depths for this project are approximately 3,200 ft. and the cost of a completed well is $325,000. The economics are very attractive with cost recovery in less than a year.
On the exploration front, we have drilled four exploratory wells which resulted in two discoveries. Both will be followed up with additional drilling in the first quarter of next year. We are particularly excited about a new gas discovery on the Merid prospect located in Western Saskatchewan. Our initial well encountered two gas zones and is currently being flow-tested. We expect to put the well on production before Christmas. The Merid project has a lot of appeal because KeyWest has the opportunity to drill a number of additional wells on lands owned by a senior producer to earn a 60% interest in the project. Wells here are relatively shallow at 2,800 feet and the cost of a completed well is approximately $300,000 which should payout within a year. While the economics are extremely attractive, there is always greater risk associated with this type of exploration project as compared to a development area such as Carbon or Chin Coulee.
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We believe that people are vital to the success of any business venture. To complement KeyWest's senior management (who have previously built and run two successful public oil and gas companies) we have added five high-octane young managers with impressive track records to drive our growth. As a result we now have the team and systems in place to run a company at least twice our size.
We continue to maintain a strong balance sheet which is the envy of our counterparts. We concluded two transactions in September that resulted in cash proceeds of $6.6 million in exchange for KeyWest shares issued at a price of $1.01 per share. In November we raised another $2.5 million at $1.05 per share. As a consequence, we have working capital of over $10 million and no debt. We have also set up a $15 million line of credit with the CIBC which is a major Canadian bank.
We now expect to end 1999 with cash flow of around $3.2 million ($0.09 per share) and net earnings of $1.5 million ($0.04 per share). For the year 2000, we are currently projecting cash flow of $8.5 million ($0.18 per share) and earnings of $3.1 million ($0.07 per share). Our budget is based on conservative assumptions with volumes averaging 1,800 barrels of oil equivalent per day (split evenly between oil and gas) and price forecasts of $20.00 U.S. per barrel for oil and $2. 10 U.S. per thousand cubic feet for gas.
We expect that year 2000 will be a period of strong growth with shareholder value created through a combination of strategic acquisitions and new drilling opportunities. To date this year, we have drilled 12 wells and expect to drill 30 6i more next year! We also continue to see an active market in Calgary for both property acquisitions and corporate mergers which we evaluate on an ongoing basis as part of our growth strategy.
With working capital of $10 million, no debt and production of over 1,500 barrels of oil equivalent per day evenly divided between oil and gas, KeyWest is a serious industry competitor! We have come a long way over the past year, and we have the people, the finances, and the base to help us move ahead as we build an exciting new oil and gas company. I look forward to keeping you up-to-date on our progress entering into the new millennium. All of us at Keywest wish each and every one of you a Merry Christmas and a very prosperous New Year.
Sincerely yours,
Harold V. Pedersen President
HVPcew
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