EARNINGS / Seventh Energy Ltd. Announces its Financial and Operating
Results
TSE SYMBOL: SEV.A
ASE SYMBOL: SEV.B
NOVEMBER 20, 1998
CALGARY, ALBERTA--Seventh Energy Ltd announces its financial and
operating results for the third quarter and first nine months of
1998. Seventh continued to realize improvement in its financial
situation during the third quarter. The two main reasons were
higher netbacks on our oil production and lower G&A costs. Both
helped improve cash flow and earnings during the quarter. As well,
asset sales of $371,000 helped reduce total debt to approximately
$6,100,000 at the end of the quarter.
In spite of low oil prices, management's focus on rebuilding
Seventh through sound operating decisions has been effective in
patiently but consistently improving the financial health of the
Company. We continue to implement a three pronged approach.
Firstly, reduce our trade payables to a manageable level, a
position which we have virtually reached. Secondly, maximize the
production from existing wells, which we will have achieved by
year end. And thirdly, to negotiate third party activity on our
lands in order to create a larger reserve and production base.
This has now become the main focus of the Company, as the first
two items are closer to being completed.
Seventh started to move in a positive direction financially during
the third quarter, and that direction has been maintained in the
fourth quarter. We have reviewed several corporate opportunities,
but none would let existing Seventh shareholders share equitably
in the future upside of Seventh's oil based assets. Since
management's initiatives continue to improve the operating and
financial health of the Company, maintaining this course remains
the preferable strategy in the current circumstances.
OPERATIONS REVIEW
Producing property sales late in the second and early in the third
quarters reduced production from a second quarter average of 698
BOE per day to a third quarter average of 442 BOE per day. Crude
oil as a volume percentage of total production moved from 92
percent to 95 percent, as a result of the disposition of our Niton
gas property in July.
Capital expenditures were minimal in the third quarter, amounting
to $121,739. In the fourth quarter, we are planning to tie in four
Arcs oil wells at Hays-Enchant, and by doing so will conserve
solution gas and eliminate gas-oil ratio production penalties. The
total cost is estimated to be $450,000, and will be financed by a
separate term loan. We are anticipating a net production increase,
by January 1, 1999, of 150 BOE per day. Tie in of the wells will
also reduce production costs on these four wells, by an estimated
ten to twenty percent. Offset development drilling will be more
attractive, as GOR penalty concerns will be eliminated and
production costs will be lower, making the overall economics
better.
Fourth quarter production is now estimated to average 440 BOE per
day, bringing the 1998 average to approximately 600 BOE per day.
With the Arcs production tied in, we estimate 1999 production,
from existing wells, will average 600 BOE per day. Production
costs will average just under $6.00 per BOE this year, and are
projected to be flat or decrease slightly next year.
FINANCIAL REVIEW
Seventh's financial performance improved substantially in the
third quarter over the second quarter, despite a 21 percent
decrease in petroleum and natural gas sales. Lower sales were due
to the impact that asset dispositions had on production volumes.
However, lower oil quality differentials and the falling Canadian
dollar contributed to the highest oil sales price, $16.50 per
barrel, that Seventh has received in the three quarters to date in
1998. Stabilized production expenses and royalties, combined with
the higher sales price, resulted in third quarter netbacks being
the highest for any quarter this year. Netbacks averaged $9.47 per
BOE and were 35 percent higher than the first six month average,
and 71 percent higher than those realized in the second quarter.
This more than offset the decrease in production from asset
dispositions, and resulted in net operating revenue 10 percent
greater than the second quarter.
/T/
Three months Nine months
ended ended
September 30, 1998 September 30, 1998
--------------------------------------------------------------
Sales price $ 16.89 $ 14.97
Royalties, net of ARTC (1.48) (1.44)
Production expenses (5.94) (5.94)
---- ----
Netback $ 9.47 $ 7.59
/T/
Seventh's funds from operations were $251,229, a turnaround from
the negative amount incurred in the previous quarter. The small
net loss in the third quarter was $55,173, also a significant
improvement. On a BOE basis, funds from operations were $6.17, a
133 percent increase relative to the first six months. This was
due to improved netbacks and reductions in G&A and interest
expenses. G&A dropped to $1.05 per BOE in the third quarter due,
mainly due to the 50 percent reduction in staff on June 30, 1998
and the allocation to G&A recoveries of half the $186,648 in
management fees received from Seventh's recently concluded land
fund. The remaining $93,324 will be allocated to G&A recoveries in
the fourth quarter. All controllable expenses, namely interest
expenses, G&A expenses, and production expenses, were lower in the
third quarter as compared to the second quarter, and reflect
management's ongoing commitment to improve the financial health of
the Company.
Total debt, which includes long-term debt and working capital
deficiency, was $6,123,429 at September 30, 1998. This represents
a reduction of $500,648 from June 30, 1998, and was achieved by
selling assets and applying cash flow to debt reduction.
OUTLOOK
The positive direction of financial change which began at the end
of the second quarter has continued through to the present.
Assuming an average WTI price of $US17.00 per barrel, a light to
medium oil gravity quality differential of $6.00 per barrel, and
our projected average production rate of 600 BOE per day, 1999
cash flow is estimated to be $1,600,000, or $0.15 per share fully
diluted. We expect to continue to make asset sales of
non-producing properties in order to reduce overall debt, and we
are actively seeking drilling commitments to enhance the value of
our core properties. While 1998 will go down as an extremely
difficult year for both Seventh and the oil industry in general,
we are looking forward with a positive view to 1999.
Our full report will be filed through SEDAR and therefore should
be available at www.sedar.com
/T/
SEVENTH ENERGY LTD.
HIGHLIGHTS
($, except where noted)
--------------------------------------------------------------
For The Three For The Nine For The Two
Months Ended Months Ended Months Ended
September 30, September 30, September 30,
1998 1998 1997
--------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Petroleum and natural
gas sales 687,445 2,683,984 657,227
Funds from operations 251,229 618,554 368,557
Per class A share
(basic) 0.03 0.06 0.06
Per class A share
(fully diluted) 0.03 0.06 0.03
Net earnings (loss) (55,173) (628,867) 53,557
Per class A share
(basic) (0.01) (0.06) 0.01
Per class A share
(fully diluted) (0.01) (0.06) 0.00
Capital expenditures 121,739 2,683,131 14,291,776
Capital dispositions 277,158 4,556,907 -
Working capital
deficiency (surplus) 1,490,329 (623,478)
Long-term debt 4,633,100 -
Class A shares outstanding
at end of period
Basic 10,859,737 10,444,738
Fully diluted 11,873,737 11,808,738
--------------------------------------------------------------
--------------------------------------------------------------
OPERATING HIGHLIGHTS
Oil production
Barrels 38,590 168,862 29,700
Barrels per day 419 619 487
Average selling price
($Cdn per bbl) 16.50 14.67 19.39
WTI ($US per bbl) 14.14 14.93 19.87
Gas production
Thousand cubic feet 21,055 104,538 20,178
Thousand cubic feet
per day 229 383 331
Average selling price
($Cdn per mcf) 2.41 1.98 1.24
Barrels of oil equivalent
production
Barrels of oil equivalent 40,696 179,316 31,718
Barrels of oil equivalent
per day 442 657 520
Average netback ($/BOE) 9.47 7.59 12.56
--------------------------------------------------------------
--------------------------------------------------------------
/T/
(x) As the Corporation did not commence commercial production
until August 1,1997 comparative highlights for 1997 are presented
for only two months.
/T/
SEVENTH ENERGY LTD.
STATEMENTS OF OPERATIONS AND DEFICIT
Unaudited
---------------------------------------------------------------
For The Three For The Nine For The Two
Months Ended Months Ended Months Ended
Sepember 30, Sepember 30, September 30,
1998 1998 1997
---------------------------------------------------------------
Revenues
Petroleum and
natural gas sales $687,445 $2,683,984 $657,227
Royalties (60,391) (258,801) (45,724)
---------------------------------------
627,054 2,425,183 611,503
---------------------------------------
Expenses
Production 241,825 1,064,525 129,898
General and
administrative 42,841 498,664 92,308
Interest 65,456 217,737 20,740
Depletion and
depreciation 330,202 1,410,627 315,000
---------------------------------------
680,324 3,191,553 557,946
---------------------------------------
Net earnings (loss)
before writedown (53,270) (766,370) 53,557
Writedown of
investment to market - 322,823 -
---------------------------------------
Net earnings (loss)
before income taxes (53,270) (1,089,193) 53,557
Capital taxes 25,703 25,703 -
Deferred income tax
recovery (23,800) (486,029) -
---------------------------------------
Net earnings (loss) (55,173) (628,867) 53,557
Retained earnings
(deficit), beginning
of period (307,348) 266,346 -
---------------------------------------
Retained earnings
(deficit), end of
period $(362,521) $(362,521) $53,557
----------------------------------------
----------------------------------------
Earnings (loss) per class A share
Basic $(0.01) $(0.06) $0.01
Fully diluted $(0.01) $(0.06) $0.00
------------------------------------------------------------
/T/
(x) As the Corporation did not commence commercial production
until August 1,1997 the comparative statement of operations and
deficit is presented for only two months.
/T/
SEVENTH ENERGY LTD.
BALANCE SHEETS
--------------------------------------------------------------
September 30,1998 December 31,1997
(unaudited) (audited)
--------------------------------------------------------------
Assets
Current
Cash $16,070 $27,864
Accounts receivable 803,896 2,380,148
Prepaid expenses 40,306 33,680
------- ---------
860,272 2,441,692
Investment - 416,823
Property and equipment 19,394,806 23,613,893
----------- -----------
$20,255,078 $26,472,408
-----------------------------------------------------------
-----------------------------------------------------------
Liabilities
Current
Accounts payable $2,350,601 $6,771,658
Long-term debt 4,633,100 4,368,793
Future site restoration 168,810 45,720
Deferred income taxes 174,359 660,388
---------- ----------
7,326,870 11,846,559
---------- ----------
Shareholders' Equity
Share capital 13,290,729 14,359,503
Retained earnings (deficit) (362,521) 266,346
---------- ----------
12,928,208 14,625,849
----------- -----------
$20,255,078 $26,472,408
-----------------------------------------------------------
SEVENTH ENERGY LTD.
STATEMENTS OF CASH FLOWS
Unaudited
--------------------------------------------------------------
For The For The For The For The
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September September September September
30, 1998 30, 1997 30, 1998 30, 1997
--------------------------------------------------------------
Operating activities
Net income
(loss) $(55,173) $53,557 $(628,867) $53,557
Items not
involving cash
Depletion and
depreciation 330,202 315,000 1,410,627 315,000
Deferred income
tax recovery (23,800) - (486,029) -
Writedown of
investment - - 322,823 -
---------------------------------------------
Funds from
operations 251,229 368,557 618,554 368,557
Change in non-
cash working
capital (133,950) 570,248 (427,715) 570,248
---------------------------------------------
117,279 938,805 190,839 938,805
---------------------------------------------
Financing activities
Increase in long-
term debt 389,843 - 264,307 -
Issuance of
share capital - 7,870,300 - 8,380,300
Share issue costs - (1,492) - (3,800)
Tax benefits
renounced to
shareholders - - (11,000) -
---------------------------------------------
389,843 7,868,808 253,307 8,376,500
---------------------------------------------
Investing activities
Expenditures on
property and
equipment (121,739)(1,568,558) (2,683,131)(2,865,709)
Purchase of
Westward Energy
Ltd. -(11,426,067) -(11,426,067)
Proceeds from
sale of property
and equipment 277,158 - 4,556,907 -
Proceeds from
sale of
investment 94,000 - 94,000 -
Change in non-
cash working
capital (759,050) (65,470) (2,423,716) (166,542)
---------------------------------------------
(509,631)(13,060,095) (455,940)(14,458,318)
---------------------------------------------
Decrease in cash (2,509) (4,252,482) (11,794) (5,143,013)
Cash, beginning
of period 18,579 6,659,392 27,864 7,549,923
---------------------------------------------
Cash, end of
period $16,070 $2,406,910 $16,070 $2,406,910
--------------------------------------------------------------
/T/
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