Frontera Resources Corporation (London Stock Exchange, AIM Market – Symbol: FRR; OTCQX Market, U.S.A. – Symbol: FRTE), an independent oil and gas exploration and production company (“Frontera” or the “Company”), today announced audited final results for the year ended 31 December 2009 and provided an update of operations at its Shallow Fields Production Unit located within its Block 12 license area in the country of Georgia.
2009 Final Results
Results for the year ended 31 December 2009 reflect a net loss of $28.5 million, or $0.31 per share on a fully-diluted basis. This loss compares to a net loss of $78.8 million, or $1.09 per share for the fiscal year 2008. The decrease in the net loss reported is due primarily to a large ceiling test write-down during the twelve months ended 31 December 2008 in comparison to a much smaller adjustment required in the 2009 period.
Revenues from crude oil sales for 2009 were $4.1 million, a decrease of $0.7 million from $4.8 million during the same period in 2008. The decrease in revenues was due mainly to decreases in commodity prices in the 2009 period.
Recent Operational Developments
Completed drilling campaign at Mirzaani Field in the Shallow Fields Production Unit and continued testing and analysis of results from Mirzaani #5 and Mirzaani #1 wells. At the Mirzaani #5 well, laboratory core analysis associated with core samples taken from primary reservoir target zone 13 revealed better than anticipated porosity and permeability values.
Since February this year, new well production testing at Mirzaani Field has been focused on secondary reservoir target zones 15 and 17, at both the Mirzaani #1 well and Mirzaani #5 well, in order to determine upside prospectivity associated with undeveloped northwest and southwest portions of the field. Results have confirmed upside associated with these secondary reservoir intervals and internal technical analysis has indicated frac completions will serve to maximize production results.
In March, a small test frac was applied to a 12 meter interval associated with Zone 17 at the Mirzaani #5 well with excellent results, thereby confirming the technical effectiveness of frac completions in the Mirzaani reservoir intervals to maximize well productivity. Plans are now being made to arrange larger scale frac completions for all three recently drilled wells at Mirzaani that will target primary and secondary reservoir objectives.
The Mtsare Khevi gas project is now expected to commence gas sales by the end of the second quarter due to delays in the procurement of equipment and materials.
Shallow Fields Production Unit
Frontera’s Shallow Fields Production Unit is located in the central portion of Block 12 and represents what the Company believes to be an extensive trend of low-cost, low-risk oil and gas resources. Containing four discovered yet undeveloped or underdeveloped fields that have additional exploration potential, objectives are considered to be traditional, well-known reservoirs of Pliocene and Miocene age that are situated at depths from 10 meters to 1,500 meters.
As reported in February, Frontera recently completed a three-well drilling campaign to test undeveloped or underdeveloped portions of the Mirzaani Field (see map at right). With objective reservoir intervals situated between 800 meters and 1,500 meters in depth, the drilling campaign targeted primary reservoir objectives of Zones 12 and 13, as well as deeper, secondary reservoir Zones 14-18 in the Lower Pliocene age Shiraki formation.
At the most recently drilled Mirzaani #5 well, extensive laboratory analysis of a 12.5 meter core taken from Zone 13 has been completed and has revealed average porosity of 21% and average permeability of 80 millidarcies. The previously reported observation of seven meters of good quality oil-saturated reservoir within the core sample has now formed the basis for advancing development of Zone 13.
In March this year, an important breakthrough was achieved in the testing program at the Mirzaani #5 well. A low-cost, small-scale test frac was applied to a 12 meter interval associated with Zone 17, in order to confirm the anticipated effectiveness of large-scale frac completions. This test yielded an initial production rate of approximately 450 barrels of oil per day, and production has now stabilized at a rate of approximately 25 barrels per day. Based on its analysis of the frac results, Frontera believes that large-scale frac completions will yield significantly higher stabilized production rates, in the range of 100-250 barrels of oil per day, per well. Plans are now underway to procure frac completions for the Mirzaani #1, #2 and #5 wells that will initially access production from Zones 12, 13, 15 and 17.
Discovered in 1932, the Mirzaani Field has historically produced approximately 7 million barrels of oil, but contains many undrilled locations across the structure. The Mirzaani #1, #2 and #5 wells are the newest wells to be drilled in the field since 1972. In 2006, Frontera acquired approximately 100 kilometers of new seismic data over the field area as part of an effort to re-map and identify new potential associated with the field. Based on analysis of data to date, Frontera estimates Mirzaani Field to contain as much as 50 million barrels of contingent resources within the Shallow Fields Production Unit. A new independent reserve report is currently being prepared for the Mirzaani Field and will be released as soon as practicable.
Mtsare Khevi Field
At the Mtsare Khevi Field, a total of 18 wells have now been completed, with the latest new well finished in January. The development is designed to produce oil from Zones I and II throughout the field and gas from Zone III, all from reservoirs associated with the Akchagil formation, situated between 200 meters and 350 meters in depth. Current oil production operations at the field are focused on maintaining and increasing current daily production rates.
Efforts to commence gas production and associated sales from the field have been delayed due to unanticipated engineering design modifications required by the regional gas distributor, as previously reported. These modifications have resulted in delays in procurement of required equipment and materials. As a result, first gas sales are now expected to occur by the end of the second quarter. Once on stream, Frontera expects to deliver as much as 100,000 cubic meters (3.5 million cubic feet) of gas per day (590 boepd) to an existing gas pipeline network within twelve kilometers of the field.
The Mtsare Khevi Field is located in the western portion of Block 12 with multiple objective reservoirs situated at depths between 200 meters and 1,100 meters. The field was discovered and partially delineated with multiple exploration wells from 1989 to 1994, but never developed and produced. After completing a field study in 2007, Frontera designed a plan to bring the shallow reservoirs from the Akchagil formation into production. Additional reserve potential exists in deeper Miocene age sandstone horizons that have previously tested and flowed oil. This potential is currently under study and will become a focus of future operations to fully develop the Mtsare Khevi Field. Rigs and equipment sourced from within Georgia are being utilized to undertake the currently ongoing development program. A new independent reserve report is currently being prepared for the Mtsare Khevi Field and will be released as soon as practicable.
Year Ending December 31, 2009
For the year ending December 31, 2009, Frontera incurred a net loss of $28.5 million, or $0.31 per share on a fully-diluted basis. This loss compares to a net loss of $78.8 million, or $1.09 per share for the fiscal year 2008. The decrease is due primarily to a large ceiling test write-down during the twelve months ended December 31, 2008 in comparison to a much smaller adjustment required in the 2009 period.
Revenues from crude oil sales for 2009 were $4.1 million, a decrease of $0.7 million from $4.8 million during 2008. The decrease in revenues was due mainly to decreases in commodity prices in the 2009 period.
Operating expenses were $22.1 million in 2009, a decrease of $52.5 million from $74.6 million in 2008, primarily due to an impairment provision attributable to the 2008 ceiling test write-down with no like adjustment required in the 2009 period. Field operating costs decreased $2.3 million in 2009 mainly due to lower cost of oil sold in the 2009 period. General and administrative expenses decreased $3.6 million to $14.9 million for 2009 from $18.5 million in 2008. The decrease was generally due to a series of cost cutting measures instituted in 2009, primarily related to headcount reductions in Georgia and Houston.
Total other expense increased to $10.6 million in 2009 from $9.1 million in 2008. The $1.5 million increase is primarily attributable to a $2.6 million realized loss on investments, an increase in interest expense of $1.9 million, a decrease in interest income of $0.8 million, partially offset by a $2.0 million arbitral award collected in the second quarter of 2009 and derivative income of $1.5 million.
The Company’s consolidated financial statements for the fiscal year ending 31 December 2009 contained an explanatory paragraph regarding the Company’s ability to continue as a going concern in its report of independent auditors. The Company’s ability to continue as a going concern is discussed in more detail in Note 2 to the financial statements.
The Company expects to issue a more comprehensive review of its 2009 financial results and operations prior to its annual meeting of stockholders, and to continue to issue news releases in the ordinary course of business in the interim as events warrant. Additional disclosure and financial information about the Company, including the audited financial statements of the Company as of 31 December 2009 can be found at www.fronteraresources.com.
The Company has today also announced an offer to exchange existing long-term convertible notes for either new convertible notes with a longer maturity, shares of common stock or a combination of both, in order to restructure and reduce the Company’s existing debt (the “Exchange Offer”).
The Company believes that this restructuring, if completed will likely increase its ability to access new capital, the raising of which would enable the Company to continue its desired work program to increase oil and gas production levels, although there can be no assurance any such prospective capital raise or work program will be successful. Full details of the Exchange Offer are contained in a separate Frontera announcement made simultaneously with this announcement and also available on the Company’s website at www.fronteraresources.com.
Steve C. Nicandros, Chairman and Chief Executive Officer, commented:
“The continued success associated with our work at Mirzaani Field represents an important milestone in our efforts to bring this field into near-term commercial production. Results from ongoing analysis of logs and cores taken during our recent drilling campaign have continued to provide us with important data that supports our objective of significantly increasing production from the Mirzaani Field. Moreover, the successful test frac that was conducted at the Mirzaani #5 well now establishes the basis for larger scale operations that we believe will move the field into higher levels of near-term production.
Overall, recent results continue to support our belief that the successful completion of our work programs will increase daily production from current levels of approximately 275 barrels per day to as much as approximately 1,000 barrels of oil equivalent per day from the Shallow Fields Production Unit, once we apply large-scale frac completions to the Mirzaani #1, #2 and #5 wells and have connected Mtsare Khevi Field gas wells that are awaiting installation of infrastructure to the regional sales point.
In the meantime, we continue to manage the cost of our operations in line with our focus on the Shallow Fields Production Unit, and eagerly anticipate working with both Strand Hanson and Arbuthnot Securities in the weeks and months ahead to secure new capital to fund our ongoing work programs. I am confident that the process we are undertaking to restructure our balance sheet, coupled with our recent operational successes will allow us to access the capital we need to complete our planned work programs and generate sufficient cash flow to meet our needs for 2010 and beyond.”
Frontera Resources Corporation
Vice President, Investor Relations and Corporate Communications
Strand Hanson Limited
James Harris / Paul Cocker / Liam Buswell
+44 (0)20 7409 3494
Arbuthnot Securities Limited
Andrew Fairclough / Henry Willcocks
+44 (0)20 7012 2000
Notes to editors:
1. Frontera Resources Corporation is an independent Houston, Texas, U.S.A.-based international oil and gas exploration and production company whose strategy is to identify opportunities and operate in emerging markets around the world. Frontera has operated in Georgia since 1997 where it holds a 100 percent working interest in a production sharing agreement with the government of Georgia. This gives Frontera the exclusive right to explore for, develop and produce oil and gas from a 5,060 square kilometer area in eastern Georgia known as Block 12. Frontera Resources Corporation shares are traded on the London Stock Exchange, AIM Market – Symbol: FRR and via the Over-the-Counter Market, U.S.A. – OTCQX Symbol: FRTE. For more information, please visit www.fronteraresources.com. For more information regarding Frontera’s work at the Shallow Fields Production Unit, please visit: www.fronteraresources.com/Operations.php?link_id=43 .
2. Information on Reserve Estimates: The contingent resources estimates contained in this announcement were determined in accordance with the petroleum resource definitions adopted by the Society of Petroleum Engineers (SPE), World Petroleum Council (WPC) and the American Association of Petroleum Geologists (AAPG) in 2000. Contingent resources are those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. Contingent resources may include, for example, projects for which there are no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Gerard Bono, Frontera’s Vice President and Chief Reservoir Engineer, who is a member of the SPE, is the qualified person who reviewed and approved the statements in this announcement and the contingent resources estimates associated with the Mirzaani Field and Mtsare Khevi Field. These estimates are being reviewed by Netherland, Sewell & Associates and will be released as soon as practicable.
3. This release may contain certain forward-looking statements, including, without limitation, expectations, beliefs, plans and objectives regarding the potential drilling and construction schedule, well results, debt restructuring transactions and other matters discussed in this release, as well as reserves, future drilling, development and production. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: future exploration and development activities; availability and performance of needed equipment and personnel; the Company’s ability to raise capital to fund the planned exploration and development programs; seismic data; evaluation of logs, cores and other data from wells drilled; fluctuations in oil and gas prices; weather conditions; general economic conditions; the political situation in Georgia and relations with neighboring countries; and other factors listed in Frontera’s financial reports, which are available at www.fronteraresources.com/Investors.php?link_id=23. There is no assurance that Frontera’s expectations will be realized, and actual results may differ materially from those expressed in the forward-looking statements.