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 released financial results for the first half of 2010 (first quarter and second quarter) and provided an update of operations at its Block 12 license area in the country of Georgia.
2010 Half Year Results Highlights
For the six months ending June 30, 2010, the Company incurred a net loss of $9.2 million, or $0.07 per share on a fully-diluted basis. This loss compares to a net loss of $13.2 million, or $0.18 per share for the corresponding six months of 2009. The decrease in net loss is due primarily to lower general and administrative, operating, and other expenses.
There were $2.3 million of crude oil sales during the six months ended June 30, 2010, compared to $1.7 million of crude oil sales during the corresponding period in 2009. The increase was mainly attributable to increases in sales volume in the 2010 period.
Exchange Offer, Working Capital Update and Related Party Transaction
The Company’s exchange offer that was initiated on April 13, 2010 for outstanding 2012 and 2013 notes (the “Exchange Offer”) and the concurrent offer to exchange its outstanding placement warrants for new warrants has been terminated as a result of the fact that despite initial support, after extended discussions with the majority of the owners of the notes, there was not sufficient notes tendered to meet the requisite minimum approval requirements.
The Company expects to fund its working capital needs through the remainder of the year from a combination of revenues generated by current production levels, private placements of equity at or around prevailing market prices and, if necessary, advances from directors or management. While the directors are confident in their ability to raise sufficient working capital, inability to do so may require the Company to curtail its operations. In addition, the Company is seeking a strategic partner for its Basin Edge Play and Taribani Field Units.
During the six months ending June 30, 2010, an associate of a director of the Company advanced $1.9 million to the Company pursuant to a series of one-year promissory notes. The first such payment was made on February 10, 2010 and was for an amount of $0.3 million. As a result of further advances made since June 30, 2010, the most recent of which being $0.2 million on August 25, 2010, total one-year promissory notes outstanding at the date of this announcement are $2.7 million (the “Promissory Notes”). The Promissory Notes will mature and repayment will fall due one year from the date of the advance, with the first such repayment falling due on February 10, 2011. The Promissory Notes accrue interest at a rate of 15% per annum. As a result of the fact that the cash advanced under the terms of the Promissory Notes has been provided by an associate of a Director of the Company, the entering into of the Promissory Notes by the Company constitutes a related party transaction for the purposes of the AIM Rules. The independent Directors of the Company, being all Directors with the exception of Steve Nicandros (the “Independent Directors”), consider, having consulted with Strand Hanson Limited (“Strand Hanson”), the Company’s Nominated Adviser, that the issuing of the Promissory Notes is fair and reasonable insofar as the Company’s shareholders are concerned. Strand Hanson has taken into account the Independent Directors’ commercial assessment of the terms of the Promissory Notes. A full schedule of the one-year Promissory Notes and the date on which they were advanced is set out at the end of this announcement.
Recent Operational Highlights
Shallow Fields Production Unit Resources Report: Netherland, Sewell & Associates is finalizing the results of its estimate of contingent and prospective resources associated with fields and prospects situated within the Shallow Fields Production Unit in accordance with standards established by the Society of Petroleum Engineers. The report is expected to be released shortly, and the Company intends to issue a separate notification upon the release of the report.
Mirzaani Field: Evaluation and production testing have continued at the Mirzaani Field, focusing on preparation for future frac completions at the Mirzaani #1, Mirzaani #2, and Mirzaani #5 wells. Frontera’s analysis has continued to underscore the potential commerciality that can be achieved from frac completions of wells within the underdeveloped portions of the field. The first frac completion is expected in late September on the Mirzaani #5 well.
Mtsare Khevi Field: A recently completed production engineering study of the field’s currently producing oil wells has concluded that immediate production increases can be achieved by upgrading current artificial lift equipment. New pumps are now scheduled to be installed during October. Additionally, the previously disclosed pipeline project designed to initiate gas sales from shut-in gas wells within the field is now expected to commence by the end of this year, subject to completion of financing arrangements.
Taribani Field Unit: A production engineering study was recently completed and concluded that immediate production increases can be achieved by installation of artificial lift in currently producing wells. New pumps are now scheduled to be installed during September.
Basin Edge Play Unit: A remapping project relating to the Basin Edge prospects has resulted in an increase in Frontera’s internal prospective recoverable resource estimates associated with primary objective Mesozoic age reservoirs in the ‘B’ and ‘C’ prospects. Low/Mid/High case potential for the primary objectives has increased from 125/320/820 million barrels, to 160/660/1,500 million barrels, respectively. A new independent assessment is currently being prepared by Netherland, Sewell & Associates and will be released as soon as practicable. Additionally, an effort commenced earlier this year to seek a strategic partner and evaluations are currently at various stages of progress by potential candidates for the continuation of exploration efforts.
Operational Developments and Financial Overview
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 the Mirzaani Field, Mtsare Khevi Field, Nazarlebi Field, and Patara Shiraki Field, these assets represent discovered yet undeveloped or underdeveloped fields that have additional associated exploitation potential. In addition, this unit contains an inventory of look-alike prospects known as the Kakabeti, Lambalo, Mkralihevi, Mlashiskhevi-Oleskhevi and Tsitsmatiani prospects. Each of these prospects contains Soviet-era wells that demonstrated hydrocarbon shows while drilling but were never placed on production or adequately appraised. 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.
In recent months, work at the Mirzaani Field has focused on maintaining oil production of approximately 100 barrels per day from 90 producing wells in the field, further evaluation and testing at the Mirzaani #1, Mirzaani #2 and Mirzaani #5 wells, and completion of Netherland, Sewell & Associates assessment of the field’s oil resource potential.
Ongoing analysis of results from the #1, #2 and #5 wells continue to confirm the upside prospectivity associated with the underdeveloped northwest and southwest portions of the field and have further validated the attractiveness of frac completions. Frac completions have now been designed for these wells, which are expected to maximize production rates and enhance the economic value of the field.
Schlumberger has been contracted to provide services for a multi-zone frac completion at the #5 well that is expected to be completed in late September. Frontera’s internal modeling of the frac and well performance parameters indicates that the well is potentially capable of producing 150 barrels per day. This would result in an increase in total field oil production from a current level of 100 barrels per day to 250 barrels per day.
Investments made within the past year have resulted in the discovery and confirmation of large undeveloped or underdeveloped portions of the field. In addition, operations resulted in the acquisition of important new technical information related to the reservoirs associated with the large undeveloped area of the Mirzaani Field. While it was not originally expected that frac completions would be necessary to bring the field into commercial production, analysis indicates that fracing is the key to maximizing production rates and enhancing the economic value of the field. In this context, small-scale, internally designed test fracs were successfully applied to two of the three wells to further validate this premise ahead of contracting Schlumberger to apply conventional large-scale fracs. Finally, after drilling the three new wells, Frontera believes it has developed the technical capability to more efficiently drill and complete wells in the field and successfully manage the initially unexpected abnormal formation pressures, thereby reducing the overall well costs.
Discovered in 1932, the Mirzaani Field has historically produced approximately 7 million barrels of oil, but contains extensive undeveloped and underdeveloped areas. The Mirzaani #1, #2 and #5 wells are the newest wells to be drilled in the field since the Soviet-era. In 2006, Frontera acquired approximately 100 kilometers of new 2D 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 unrisked 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, development is targeted 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. Work in recent months has focused on maintaining oil production of approximately 100 barrels per day from ten wells in the field, completing an associated production engineering study designed to identify ways to increase production from existing wells, and completing Netherland, Sewell & Associates’ assessment of the field’s oil and gas resource potential. In addition, work has continued in preparation for commencement of an infrastructure project designed to commence gas sales from eight wells in the field.
A recently completed production engineering study of the field’s currently producing oil wells has concluded that immediate production increases can be achieved by upgrading current artificial lift equipment and practices. New pumps are now scheduled to be installed during the month of October and are expected to increase production from a current level of 100 barrels per day to 200 barrels per day. Additionally, the previously disclosed infrastructure project designed to initiate gas sales from shut-in wells within the field is now expected to commence by the end of this year, subject to completion of financing arrangements. Initial gas sales are expected to be as much as 50,000 cubic meters per day (1.8 million cubic feet per day).
Frontera’s investments and operations in the field within the past year have resulted in successfully continuing to extend the known area for oil and gas production. Work has also resulted in the following accomplishments: analysis of long term oil production history in support of field development operations, including design of new pump installations to enhance current production levels; testing of gas wells awaiting connection to the national grid for commencement of gas sales; application of low-cost fracs to enhance and optimize production from existing oil wells; completion of a study that highlighted the viability of low-cost waterflood techniques to enhance recovery factors of oil from existing wells; and advancement of learning in drilling operations to continue to bring down well costs. Finally, a new engineering design study for the planned gas pipeline project installation was completed after it became necessary to change original plans related to the national grid connection point.
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, nominally produced and partially delineated with multiple exploration wells from 1989 to 1994, but never developed. After completing a field study in 2007, Frontera designed a plan to bring the shallow reservoirs from the Akchagil formation into production. A new independent reserve report is currently being prepared for the Mtsare Khevi Field and will be released as soon as practicable.
Taribani Field Unit
An analysis of production history over the past two years from the Dino #2 and T-#45 wells has demonstrated that the frac completions applied in 2008 resulted in successful reservoir stimulation that has provided two years of natural flowing oil production, with minimal observed decline (approximately 2% per year).
Based on this data, engineering parameters for future frac completions have been redesigned to allow for greater per-well yield. In addition, new analytical work has also confirmed the operational viability of applying frac completions to multiple horizons within a single well-bore within the field, thereby enhancing potential commerciality.
This new engineering analysis has resulted in the design of a new plan to workover, sidetrack and frac multiple horizons within the existing Niko #1well that is situated near the Dino#2 and T-#45 wells. Internal modeling predicts a sustainable ‘most-likely’ case of 1,000 barrels per day of resulting oil production from such a completion. When Frontera originally drilled the Niko #1 well in 2000, it produced 5,345 barrels of 41° API oil during a 40-day production test and flowed at a peak rate of 960 barrels per day. However, stable rates could not be achieved and sustained due to mechanical issues associated with the well’s completion design that Frontera believes have since been overcome with evolvement of learning from the Dino #2 and T-#45 wells.
Overall, all of the work along the continuum of operations at the Taribani Field has set the stage to continue investment to the extent new capital becomes available or bring in a strategic partner in order to commercially develop this significant field. In the meantime, Frontera has completed a study of historical production data indicating that with inexpensive pumpjack installations at the Dino #2 and T-#45 wells, current production can be doubled from each well. Internal modeling projects that this should result in total oil production from the field increasing from 40 barrels per day to 90 barrels per day. New pumps are now scheduled to be installed during the month of September.
The Taribani Field is a large, undeveloped oil field covering an area of approximately 80 square kilometers with productive horizons situated in Miocene and Pliocene age reservoirs. These reservoirs are located at depths between 2,200 meters and 3,500 meters. In 2005, Netherland, Sewell & Associates assigned 118 million barrels of P3 reserves from Zones 9, 14, 15 and 19 within the field. Additionally, Netherland, Sewell & Associates assigned as much as 36 million barrels of unrisked resource potential associated with five deeper horizons in the field. This assessment can be accessed at www.fronteraresources.com.
Basin Edge Play Unit
At the Basin Edge Play Unit, work over the past year has resulted in a reprocessing of the 3D seismic volume over the Basin Edge ‘C’ Prospect and the associated remapping of the ‘B’ Prospect and the ‘A’ Prospect. This work, which also incorporated the drilling results from the Lloyd #1 well, has increased the estimated size of the ‘C’ prospect and the ‘B’ prospect by as much as a factor of two. Internal prospective recoverable resource estimates associated with primary objective Mesozoic age reservoirs in the ‘B’ and ‘C’ prospects show Low/Mid/High case potential for the primary objectives has increased from 125/320/820 million barrels, to 160/660/1,500 million barrels, respectively.
Earlier this year, Frontera undertook an initiative to seek a strategic industry partner to join in the continuation of exploration efforts. This initiative continues to progress, as evaluations are currently underway by multiple potential candidates.
Frontera’s Basin Edge Play Unit is located along the northern border of Block 12 and represents what the Company believes is one of the newest and potentially most prolific exploration plays in the Upper Kura Basin. In 2005, Netherland, Sewell & Associates estimate total unrisked resource potential to be in excess of one billion barrels of recoverable oil within the unit’s two major prospects (“B” and “C”). Of this total, prior to the acquisition of new seismic data suggesting an even larger structure, the “C” Prospect was estimated to contain as much as 300 million barrels of recoverable oil from primary reservoir targets and as much as 250 million barrels from secondary reservoir objectives. Frontera’s primary reservoir targets are located in the Cretaceous age carbonate rocks, with secondary reservoir targets in the Tertiary age clastic rocks as well as Jurassic carbonates. A new independent resource assessment is currently being prepared and will be released as soon as practicable. The existing assessment can be accessed at www.fronteraresources.com.
Block 12: New Prospectivity Identified
Over time, separate from the Shallow Fields Production Unit, the Taribani Field Unit and the Basin Edge Play Unit, Frontera has developed an extensive inventory of leads and prospects throughout Block 12 that, according to internal estimates, contain significant additional prospectivity.
In accordance with this ongoing effort, work over the past year has resulted in the completion of a study relating to the shale gas potential associated with Block 12. This work resulted in identification of a prospective area encompassing approximately 1,180 square kilometers where potentially significant quantities of natural gas could be exploited from the regionally present Oligocene-Lower Miocene age Maykop shales and Mesozoic age Liassic shales. Potentially similar to extensive natural gas shale plays in North America and Europe, study work to further define the play’s prospectivity will continue through the end of this year, with an objective of next year seeking a strategic partner to explore the play or undertaking new investment to the extent capital becomes available.
2010 First Half Financial Report: Six Months Ending June 30, 2010
For the six months ending June 30, 2010, the Company incurred a net loss of $9.2 million, or $0.07 per share, on a fully-diluted basis. This loss compares to a net loss of $13.2 million, or $0.18 per share, for the corresponding six months of 2009. The decrease in net loss is due primarily to lower general and administrative expenses, operating costs and other expenses.
There were $2.3 million of crude oil sales during the six months ended June 30, 2010, compared to $1.7 million of crude oil sales during the corresponding period in 2009. The increase was mainly attributable to increases in sales volume in the 2010 period.
Total operating costs and expenses decreased to $8.1 million for the six months ended June 30, 2010, compared to $11.1 million for the same period in 2009. Field operating and project costs decreased $1.1 million to $2.3 million during the first half of 2010 as a result of cost cutting initiatives. General and administrative expenses decreased $1.1 million to $5.5 million for the six months ended June 30, 2010 due to a series of cost cutting measures initiated in 2009 and 2010, primarily related to lower activity and associated headcount reductions in Georgia and Houston.
Total other expenses decreased to $3.4 million in the six month period ended June 30, 2010, from $3.8 million in the six month period ended June 30, 2009. The $0.4 million decrease is primarily attributable to a $2.8 million increase in derivative income.
Steve C. Nicandros, Chairman and Chief Executive Officer, commented:
“Frontera’s continued focus on increasing near-term production from our ongoing efforts at the Mirzaani Field and the Mtsare Khevi Field has been an absolute priority for the Company. Concurrently, efforts to aggressively cut costs across the Company have allowed us to bring down the running costs of our entire organization such that I strongly believe we can become cash-flow positive during the fourth quarter of this year.
With our currently planned programs, we expect to see production levels increase from a current level of approximately 250 barrels per day to approximately 500 barrels per day by the end of October. This will establish the foundation for the self-sustainability and organic growth that we have been working very hard to achieve as we continue to navigate realization of the significant potential that our historical investments have identified, not only at the Shallow Fields Production Unit, but from other areas of our portfolio as well.
Additionally, ongoing study of our historical work at the Taribani Field Unit and the Basin Edge Play Unit has continued to progress our prospecting efforts such that important new technical milestones have been achieved this year that serve to enhance value and further lower the risk of future operations related to the giant prospectivity of these assets. Finally, the identification of a potential new shale gas resource play within our area of operations provides yet another new avenue for potentially significant value creation for our shareholders.
In the meantime, we are aggressively seeking to access new sources of capital and strategic partners to accelerate the Company’s progress. In this context our efforts since April of this year to restructure Frontera’s long-term debt have unfortunately fallen short of expectations. Our largest holders of this debt initially supported a debt exchange on the announced terms. After extended discussions, however, different views associated with the value potential related to the Company’s asset portfolio, the necessity of restructuring at the present time given the 2012 and 2013 maturity dates and the appropriate terms of the restructuring led to a decision to terminate the announced exchange offer and defer consideration of a debt exchange until a later date. As a result, we will progress our near-term plan on a combination of revenues generated by our current production levels, small private placements of equity at or around prevailing market prices when needed and continued advances from management when necessary to ensure we remain on schedule. Although there is no guarantee this funding will be available, I am confident this will be the case. To this end, as you will note from our financial disclosures, I have personally continued to financially support the Company this year, as I strongly believe in the value of our assets and the underlying business plan that we are pursuing.
Looking ahead, assuming we achieve our third and fourth quarter objectives, I believe that our ability to access greater amounts of new capital will be enhanced and I look forward to reporting this success in the weeks and months ahead.”
Schedule of One-Year Promissory Notes
|February 10, 2010||$300,000|
|February 24, 2010||$300,000|
|March 1, 2010||$300,000|
|March 12, 2010||$100,000|
|April 28, 2010||$95,000|
|May 13, 2010||$100,000|
|May 27, 2010||$60,000|
|June 4, 2010||$500,000|
|June 29, 2010||$110,000|
|July 19, 2010||$100,000|
|July 28, 2010||$500,000|
|August 25, 2010||$190,000|
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
+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 and financing 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.