Any thoughts on why this company doesn't rate a higher price
June 23, 2000
TSE Symbol: KWE
President's Letter
Dear Fellow Shareholder:
KeyWest is nearing the mid-year point and operations are going well. For the five months ended May 31, 2000
the Company has drilled 17 wells which resulted in seven oil wells, three gas wells, two water injector wells and
five dry holes for a success rate of 71%. KeyWest's average working interest in these wells was 97%. The
Company operated all of its drilling
All seven successful oil wells were drilled on our Chin Coulee project in southern Alberta. This is truly turning
out to be one of the best oil projects we have ever been involved in. Two of the gas wells were drilled at Merid
in western Saskatchewan and the remaining gas well was drilled at Carbon in central Alberta. Six of the seven
Chin Coulee oil wells have just been drilled and they are currently being flowline connected to the central
battery. (We had initially planned on drilling just four wells in this round of drilling at Chin Coulee, however we
had an excellent rig and crew who were able to reduce our drilling time by a day and a half to four days per well
and cut our drilling costs by 20%.) The two gas wells drilled on the Merid exploratory project were completed
and put on stream in the second quarter. Both are gas wells and one is better than expected and the second,
although it had a strong test, is producing less than we had hoped for.
The Company will continue a busy drilling program into the third and fourth quarters with plans to drill
another 12 to 15 wells on its core properties at Carbon, Chin Coulee and Merid.
KeyWest's current production is over 1900 barrels of oil equivalent per day (where 10 mcf = 1 bbl) which is
67% oil. Thirteen months ago the Company produced 520 boepd so we have had almost a fourfold increase in
our production.
With the number of successful oil and gas wells drilled since year-end, and the amount of capital expended,
the Company elected to get an updated evaluation of its oil and gas reserves as of June 1, 2000 to measure its
progress. This was done by the independent engineering firm of Gilbert, Laustsen Jung. The new report shows
that KeyWest has added one million barrels of proven oil and one billion cubic feet of gas in the first five
months of this year. KeyWest now has proven and probable oil reserves of 4.5 million barrels and proven and
probable gas reserves of 19 billion cubic feet. The Company's net asset value using proven and one-half
probable reserves at a 10% and 15% present worth discount, plus land and working capital, increases
KeyWest's value per share to $1.44 and $1.28 per share respectively. KeyWest has 46.9 million shares
outstanding. Given our current share price of $1.08 KeyWest shares are an attractive investment!
Finding and development costs are the true tests of a Company's ability to add shareholder value. Since May
1, 1999 (inception of oil and gas operations) to June 1, 2000 KeyWest's finding and development costs for
proven reserves only is $6.86 per boe and $5.75 per boe for proven plus probable reserves. These results put
KeyWest in the upper quartile of the industry. Another key ratio is the Company's recycle ratio or
reinvestment ratio. KeyWest's ratio is 3.2:1, or stated another way, for each dollar spent the Company has
added $3.20 of value.
KeyWest continues to have a strong financial position with positive working capital of $1.5 million at May 31
and no debt. The Company currently projects cash flow this year of $12 million ($0.26 per share) and net
earnings of $3.9 million ($0.08 per share). These projections assume current pricing and average production for
the year of 1850 boepd. KeyWest has recently increased its credit line to $20 million to take advantage of
potential purchase opportunities. As many of you know our corporate strategy is to grow through both
acquisitions and new drilling opportunities. The key on acquisitions is to ensure that they are quality assets
with upside potential which we can exploit and develop. Over the past several months we have looked at
several opportunities which we ultimately turned down because of either quality concerns or lack of
development upside. We have recently seen a quality improvement in the deals we are seeing and a couple of
new situations are showing early promise.
One of KeyWest's greatest advantages moving forward is the record level oil and gas prices we receive for our
production. Oil prices are much stronger than expected because of OPEC's new discipline plus we are hearing
reports that many OPEC nations may already be producing at near capacity. On the natural gas side we are
seeing a leveling of production rates while North American demand continues to increase. We are also seeing
storage levels 20% below last year and some industry observers are already expressing concerns about
shortfalls in the coming winter's gas supplies.
With growing confidence in longer-term oil prices and potentially higher gas prices in the upcoming winter
season, we believe stock market valuations in companies like KeyWest will increase in the coming months.
We look forward to keeping you up-to-date on our future activities.
Sincerely yours,
Harold V. Pedersen
President
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