November 29, 2012 – Santa Barbara, California –
Underground Energy Corporation (“Underground”, “UGE” or the
“Company”) (TSX VENTURE SYMBOL: UGE; OTCQX: UGGYF) today announced its
financial results for the three and nine months ended September 30,
2012. All amounts are
in US dollars unless otherwise noted and these results have been
prepared in accordance with International Financial Reporting
Standards (“IFRS”).
Financial Results
·
Loss for the three months ended September 30, 2012 $2,943,867,
$0.01 per share (three months ended September 30 2011 - $4,476,953,
$0.03 per share)
·
Loss for the nine months ended September 30, 2012 $10,401,820,
$0.05 per share (nine months ended September 30, 2011 - $6,359,763,
$0.06 per share)
·
Working capital deficit at September 30, 2012 - $1,547,443
(December 31, 2011 working capital - $13,255,349)
·
Cash investment in oil and natural gas interests of $10,994,841 for
the nine months ended September 30, 2012
·
Cash investment in exploration and evaluation assets of $1,615,674
for the nine months ended September 30, 2012
Recent Highlights
During Q3, we:
·
Modified the facilities at Burrel to correct operational issues
inherited from the prior operator. Since Gabriel 1-35 went back on
production, it has been pumping at an average rate of 50 barrels of
oil per day (“bopd”).
·
Tested Chamberlin 2-2 at the Zaca Field Extension Project (‘Zaca’)
resulting in production of 30 bopd during a 61-hour test period,
from the bottom one-third of the productive zone. We moved Chamberlin 2-2 off
production, pending additional completion operations.
·
Installed a higher capacity pump on Chamberlin 3-2 in order to
handle the larger than expected amounts of fluid; and conducted a
series of production tests. During the initial ten-hour
production test, the well pumped at daily rates of approximately
1,100 barrels of fluid, including 42 bopd. We suspended the testing of the
Chamberlin 3-2 well, pending the availability of cost effective
water disposal.
·
Received the results of a resource evaluation conducted by
Netherland, Sewell and Associates, Inc. – Dallas-based independent
petroleum consultants – the results of which are set forth in the
Company's press release dated August 22, 2012
Highlights subsequent to quarter-end
include:
·
Executed a letter of intent (“LOI”) to farm-out a portion of our
Zaca project to Sovereign Resources LLC whereby Sovereign will
joint venture on and have the right to earn up to a 75% working
interest in 2,857 gross acres of the Northwest corner of
Zaca. Under the terms
of the agreement, Sovereign will enter into a continuous drilling
program to drill a maximum of seven wells to earn its full working
interest. UGE will be
carried for wells one and two; thereafter UGE will have the right,
but not the obligation, to pay their share of drilling and related
costs for each subsequent well. Closing of this arrangement will
be through execution of a Farm out Agreement. Discussions are underway on that
agreement.
·
Executed a LOI with AmRich Energy, Inc. (“AmRich’) whereby AmRich
will farm-in on and have the right to earn up to a 75% working
interest in 1,062 gross acres of the Central Southern section of
Zaca. Under the terms
of the agreement, AmRich will enter into a continuous drilling
program of up to 3 wells to earn its full working interest and
acreage position.
AmRich will carry UGE on the drilling and completion costs of these
initial 3 wells and also the costs of installing facilities and
infrastructure to support the wells. A Farm out Agreement was executed
November 21st. Final closing remains subject to
certain conditions.
·
Raised $691,000 via a financing of convertible secured debentures
of the Company.
Financial Review
Selected Financial Highlights
As at
As
at
September 30, 2012 December
31, 2011
Cash and cash equivalents
869,298
14,646,951
Oil and natural gas interests
15,757,790
4,778,378
Exploration and evaluation assets
1,132,505 5,377,653
Total assets
20,642,423
27,519,369
3 months ended
3 months
ended
September 30, 2011 September 30,
2011
Net loss
(2,943,867)
(4,476,953)
Net loss per share – basic & diluted
(0.01)
(0.03)
As a development stage company, we constantly consume cash for our
operating activities and for our investing activities. Subsequent to quarter-end, the Company’s working capital
has improved to an estimated deficiency $1,268,923 as of the date
of this announcement. Subsequent to September 30, 2012, the
Company closed convertible secured debenture offerings totaling
$621,000 on October 4th with officers and directors and
totaling $70,000 on November 16th with independent
investors. The
Company is actively seeking a buyer for one of its exploration and
evaluation properties.
A non-refundable $100,000 deposit received in July was forfeited by
a potential buyer on a transaction that failed to
close. There is doubt
that without additional financing or the sale of non-core
properties, that the Company possesses adequate cash to maintain
its operations.
Accordingly, as required under applicable rules of
IFRS, a going concern note has been included in the required form
in Note 1 to the Company’s unaudited condensed interim consolidated financial
statements.
Oil & natural gas interests increased by approximately
$11,000,000 since year-end and $1,335,000 during Q3, due primarily
to Zaca drilling & completions.
Exploration and evaluation (“E&E”) assets decreased by
approximately $4,250,000 since year-end and decreased $1,220,000
during Q3. The
decrease in E&E assets during the quarter was due to
$840,000 of impairment of prospects and $380,000 for the
reclassification of the property under an option agreement to
exploration assets held for sale.
Results of operations
Three Months
Nine Months
Ended September 30
Ended September
30
2012
2011
2012
2011
Oil and natural gas revenues
222,227
–
522,156
–
Other income
100,000
–
100,000
47,925
Revenues
322,227
–
622,156
47,925
Production and operating expense
797,867
–
1,716,698
–
Exploration and evaluation expense
1,693,817
609,834
5,932,595
1,094,573
Administrative expense
762,456
3,868,813
3,348,119
5,306,697
Other expense
7,933
–
10,155
–
Net finance expense (income)
4,021
(1,694)
7,920
6,418
Share of loss of equity accounted
investments
–
–
8,489
–
Net loss
2,943,867
4,476,953 10,401,820
6,359,763
Net Loss decreased by $1,535,000 compared to the same quarter last
year due to the cost of the merger with Shenul Capital Inc. being
included in 2011, offset by operating losses and impairments of
exploration and evaluation assets.
-
Oil and natural gas revenues increased by $220,000 compared to the
same quarter last year due to oil production from the Gabriel 1-35
oil well at Burrel Deep.
-
Other income increased by $100,000, due to a forfeited
non-refundable deposit made on the purchase of certain oil and gas
leases.
-
Production and Operating Expense increased by $800,000
compared to the same quarter last year due to the commencement of
operations.
-
Exploration and Evaluation (“E&E”) Expense increased by
$1,085,000 compared to the same quarter last year primarily due to
the impairment provision on exploration and evaluation assets of
$840,000 in 2012 plus the charging of all exploration and
evaluation expenditures in Q2 and Q3 of 2012 to E&E
expense. As
exploration and evaluation properties are stated at the expected
recoverable amount, expenditures on exploration are expensed in Q2
and Q3 2012, whereas they were added E&E Assets in
2011.
-
Administrative Expense decreased by $3,110,000
compared to the same quarter last year primarily due to the costs
of the merger in 2011 with Shenul Capital Inc. not repeating in
2012.
Outlook
Upon, and subject to, receipt of additional capital, we plan
to:
-
Permit and commission a water disposal well at Zaca, which we
expect to reduce our
water disposal costs from the current $9.75/barrel of water to
$0.20/barrel of water.
This will allow us to flow the Chamberlin 3-2 well with an economic
cost structure; and
§
Stimulate and bring Chamberlin 1-2 back on line at Zaca (production
of approximately 10 bopd was previously suspended to allow drilling
of Chamberlin 2-2, off the same drilling pad).
§
Apply additional completion operations on Chamberlin 2-2, which we
expect to bring this well’s production in line with the infill
drilling done nearby in the 1970’s through the 1990’s when wells
averaged optimized production rates of 70 bopd and 375,000 barrels
cumulative oil recovery.
To view the Company’s Third Quarter 2012 Unaudited
Condensed Interim Financial Statements, related Notes to Unaudited
Condensed Interim Financial Statements, and Management’s Discussion
and Analysis, please see the Company’s quarterly filings which will
be available on
www.sedar.com. Further information is available on the Company’s
website
www.ugenergy.com.
About Underground Energy Corporation
Underground is focused on developing its Zaca Field
Extension Project in Santa Barbara County, California. In total, Underground currently
holds mineral rights on approximately 64,000 net acres of
prospective lands in California and Nevada with an initial focus on
the Monterey Shale in California. For more information on
Underground, please visit
www.ugenergy.com. Underground’s regulatory filings are available under
the Company’s profile at
www.sedar.com.
Cautionary Statements
Statements in this press release contain forward-looking
information and forward-looking statements within the meaning of
applicable securities laws (collectively, "forward-looking
information").
Forward-looking information is frequently characterized by words
such as "plan", "expect", "project", "intend", "believe",
"anticipate", "estimate" and other similar words, or statements
that certain events or conditions "may" or "will"
occur. In particular,
forward-looking information in this press release includes, without
limitation, statements with respect to: (i) the terms of and timing
for the farm-out agreements to be entered into with AmRich Energy,
Inc. and Sovereign Resources LLC; and (ii) the statements set forth
under the heading titled "Outlook" in respect of the Company's
planned future operations and results therefrom; and (iii) the
Company's plans for raising additional capital and its further
plans for the use of such capital.
Although we believe that the expectations and assumptions reflected
in the forward-looking information are reasonable, there can be no
assurance that such expectations or assumptions will prove to be
correct. In particular, assumptions have been made that: (i)
Underground will be able to obtain equipment, qualified staff and
regulatory approvals in a timely manner to carry out its planned
exploration and development activities; (ii) Underground will have
sufficient financial resources with which to conduct its planned
capital expenditures; and (iii) the current regulatory and tax
regime will remain substantially unchanged. Certain or all of the
forgoing assumptions may prove to be
untrue.
Forward-looking information is based on the opinions and estimates
of management at the date the statements are made, and is subject
to a variety of risks and uncertainties and other factors (many of
which are beyond the control of Underground) that could cause
actual events or results to differ materially from those
anticipated in the forward-looking information. Some of the risks and other
factors could cause results to differ materially from those
expressed in the forward-looking information include, but are not
limited to: operational risks in exploration, development and
production; delays or changes in plans; competition for and/or
inability to retain drilling rigs and other services; competition
for, among other things, capital, acquisitions of reserves,
undeveloped lands, skilled personnel and supplies; risks associated
to the uncertainty of reserve and resource estimates; governmental
regulation of the oil and gas industry, including environmental
regulation; geological, technical, drilling and
processing problems
and other difficulties in producing reserves; the uncertainty of
estimates and projections of production, costs and expenses;
unanticipated operating events or performance which can reduce
production or cause production to be shut in or delayed; incorrect
assessments of the value of acquisitions; the need to obtain
required approvals from regulatory authorities; stock market
volatility; volatility in market prices for oil and natural gas; liabilities inherent
in oil and natural gas operations; access to capital; and other
factors. Readers are
cautioned that this list of risk factors should not be construed as
exhaustive.
The forward-looking information contained in this news release is
expressly qualified by this cautionary statement. Underground does not undertake
any obligation to update or revise any forward-looking statements
to conform such information to actual results or to changes in our
expectations except as otherwise required by applicable securities
legislation. Readers
are cautioned not to place undue reliance on forward-looking
information.
The well test results set forth in this press release are
not necessarily indicative of long-term performance or of ultimate
recovery.
Neither the TSX Venture Exchange nor its Regulation Services
Provider (as that term is defined in the policies of the TSX
Venture Exchange) accepts responsibility for the adequacy or
accuracy of this release.
For further information please contact:
Peter Ballachey
Simon Clarke
Chief Financial Officer
Vice President, Corporate Development
Underground Energy Corporation
Underground Energy Corporation
Tel: 805-845-4700 x 17
Tel: 604-551-9665
UNDERGROUND ENERGY
CORPORATION
Condensed Interim Consolidated
Statements of Financial Position
(in US dollars) |
(unaudited)
September 30,
2012
December 31, 2011
Assets
Cash and cash equivalents
$
869,298
$
14,646,951
Restricted cash
156,384
1,077,260
Accounts receivable
481,012
302,422
Prepaid expenses and
deposits
719,197
653,370
Loans receivable
–
167,970
Exploration property held for sale
1,122,458
–
Total current assets
3,348,349
16,847,973
Investments
111,757
155,374
Property, plant and equipment
16,049,812
5,138,369
Exploration and evaluation assets
1,132,505
5,377,653
Total non-current assets
17,294,074
10,671,396
Total assets
$
20,642,423
$
27,519,369
Liabilities
Accounts payable and accrued
liabilities
$
4,767,792
$
3,144,624
Warrant liability
128,000
448,000
Total current liabilities
4,895,792
3,592,624
Loans and borrowings
13,384
–
Decommissioning obligations
provision
210,747
99,012
Total liabilities
5,119,923
3,691,636
Equity
Share capital
38,186,408
37,590,330
Share-based payment reserve
2,824,795
1,324,286
Deficit
(25,488,703)
(15,086,883)
Total equity
15,522,500
23,827,733
Going concern
Subsequent events
Commitments
Total equity and liabilities
$
20,642,423
$
27,519,369
UNDERGROUND ENERGY
CORPORATION
Condensed Interim
Consolidated Statements of Comprehensive Loss
(in US dollars) |
(unaudited)
Three Months
Nine Months
Ended September
30 Ended September
30
2012
2011
2012
2011
Revenues
Oil and natural gas revenue
$
222,227 $
– $ 522,156 $
–
Other income
100,000
–
100,000
47,925
Expenses
Production and operating
797,867
–
1,716,698
–
Exploration and evaluation
1,693,817
609,834
5,932,595
1,094,573
Administrative
762,456
3,868,813
3,348,119
5,306,697
Loss on divestiture of property, plant
and
equipment assets
7,933
–
10,155
–
3,262,073
4,478,647
11,007,567
6,401,270
Operating Loss
2,939,846
4,478,647
10,385,411
6,353,345
Finance income
(768)
(9,907)
(11,634)
(13,896)
Finance expense
4,789
8,213
19,554
20,314
Net
finance expense (income)
4,021
(1,694)
7,920
6,418
Loss
before loss of equity accounted
investments
2,943,867
4,476,953 10,393,331
6,359,763
Share of loss of equity accounted
investments
–
–
8,489
–
Loss
and comprehensive loss for the period
$2,943,867
$ 4,476,953
$ 10,401,820 $ 6,359,763
Loss per
share:
Basic and diluted
$
(0.01)
$
(0.03)
$
(0.05)
$
(0.06)
UNDERGROUND ENERGY
CORPORATION
Condensed Interim Consolidated
Statements of Changes in Equity
(in US dollars) |
(unaudited)
Number
Share-
of
based
ordinary
Share
payment
Total
shares
capital
reserve
Deficit
equity
Balance
at December 31, 2010
56,334,336
$
5,028,198
$
433,625 $
(4,919,052)
$
542,771
Issue of ordinary shares
134,440,376
32,177,450
–
–
32,177,450
Share issuance costs, net of tax of
$nil
–
(2,283,446)
–
–
(2,283,446)
Options
exercised
1,211,000
17,500
–
–
17,500
Shenul Capital Inc.
shares
outstanding brought forward
upon merger
9,900,000
–
–
–
–
Net assets of Shenul Capital Inc.
acquired upon merger
–
2,613,600
42,667
–
2,656,267
Share-based payments
–
–
172,027
–
172,027
Non-cash dividends paid
–
–
–
(2,853)
(2,853)
Loss for the period
–
–
–
(6,359,763)
(6,359,763)
Balance at
September 30, 2011
201,885,712
$ 37,553,302
$
648,319
$
(11,281,668) $
26,919,953
Number of shares has been adjusted to reflect the
corporate merger, which is described in note 13 of the Audited
Consolidated Financial Statements for the year ended December 31,
2011.
Number
Share-
of
based
ordinary
Share
payment
Total
shares
capital
reserve
Deficit
equity
Balance
at December 31, 2011
202,152,379
$
37,590,330
$
1,324,286 $
(15,086,883) $
23,827,733
Warrants exercised
2,749,906
596,078
–
–
596,078
Share-based payments
–
–
1,500,509
–
1,500,509
Loss for the period
–
–
–
(10,401,820)
(10,401,820)
Balance at
September 30, 2012
204,902,285
$
38,186,408
$
2,824,795 $
(25,488,703) $
15,522,500
UNDERGROUND ENERGY
CORPORATION
Condensed Interim Consolidated
Statements of Cash Flows
(in US dollars) |
(unaudited)
Three Months
Nine Months
Ended September 30 Ended September
30
2012
2011
2012
2011
Cash flows from operating
activities:
Loss for the period
$
(2,943,867) $ (4,476,953)
$ (10,401,820) $(6,359,763)
Adjustments for:
Share of loss of
equity accounted
investments
–
–
8,489
–
Depletion,
depreciation and amortization
66,601
19,904
170,969
48,916
Impairment losses on
exploration and
evaluation assets
871,065
250,247
4,738,774
291,652
Loss on divestiture
of PP&E assets
7,933
–
10,155
–
Gain on sale of
exploration and evaluation
assets
–
–
–
(47,925)
Accretion of
decommissioning obligations
736
–
1,299
–
Share-based
compensation
236,174
63,102
1,500,509
214,694
Warrant liability,
mark-to-market adjustment
(160,000)
(128,000)
(320,000)
(128,000)
Change in non-cash working capital,
operating activities
127,392
2,344,377
(1,572,247)
2,052,456
Net
cash used in operating activities
(1,793,966)
(1,927,323)
(5,863,872)
(3,927,970)
Cash flows from investing
activities:
Additions to property, plant and
equipment
(1,358,707)
(57,879)
(10,994,841)
(189,556)
Additions to exploration and evaluation
assets
–
(1,465,400) (1,615,674) (2,950,661)
Proceeds from sale of exploration and
evaluation
assets
–
–
–
50,000
Investment in Subset Energy, LLC
–
–
35,128
–
Investment in Careaga Sand and Asphalt
Company
–
–
(2,853)
Proceeds from sale of PP&E
assets
12,300
–
12,300
–
Reduction in restricted cash
320,270
–
920,876
–
Change in non-cash working capital,
investing activities
(611,847)
–
2,597,968
–
Net
cash used in investing activities
(1,637,984)
(1,523,279)
(9,044,243) (3,093,070)
Cash flows from financing
activities:
Proceeds from issue of share capital
–
25,499,300
–
32,177,450
Share issuance costs
–
(2,135,175)
–
(2,283,446)
Proceeds from (repayments on) loans
(843)
–
13,384
–
Proceeds upon exercise of warrants
–
–
596,078
–
Proceeds upon exercise of options
–
17,500
–
17,500
Change in non-cash working capital,
financing activities
521,000
–
521,000
–
Net
cash from financing activities
520,157
23,381,625
1,130,462
29,911,504
Change in cash and cash
equivalents
(2,911,793)
19,931,023
(13,777,653)
22,890,464
Cash and cash equivalents beginning of
period
3,781,091
3,387,171
14,646,951
427,730
Cash
and cash equivalents end of period
$
869,298 $
23,318,194
$
869,298 $
23,318,194
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