Cano Petroleum Announces FY 2008 Second Quarter Results and Earnings Call and Provides an Operations Update
Cano Petroleum, Inc. (Amex:CFW) today announced its financial results for its fiscal year second quarter ended December 31, 2007. Following are selected financial highlights from the Company’s 10-Q.
Second Quarter Results
For the quarter ended December 31, 2007 (“current quarter”), Cano’s revenues were $10.0 million, which is $3.9 million, or 63%, higher than the same period last year. For the current quarter, the Company recorded a net loss applicable to common stock of $1.6 million, or $0.04 per share, as compared to a net loss of $1.4 million, or $0.04 per share, for the quarter ended December 31, 2006 (“prior year quarter”). For the current quarter, income from operations of $1.1 million compares with a loss of $0.4 million for the prior year quarter. The current quarter was adversely impacted by a $1.8 million unrealized loss on commodity derivatives recorded in other income (expenses).
The $3.9 million revenue increase was driven by both higher prices, which contributed $3.1 million and higher volumes which contributed $0.8 million. For the current quarter, Cano’s sales were 67 MBbls of oil and 365 MMcf of natural gas, or 128 MBOE, an 11% increase when compared to the prior year quarter. During the current quarter, the average prices the Company received for its oil and natural gas sales were $87.06 per barrel of oil and $11.15 per Mcf of gas, respectively. For the prior year quarter, oil sales were 64 MBbls at an average price of $58.40 per barrel and natural gas sales were 308 MMcf at an average price of $7.84 per Mcf. The increased oil sales are primarily attributed to the New Mexico Properties (Cato) which were acquired in March 2007; the increased natural gas sales are primarily attributed to Barnett Shale production in our Desdemona properties. Cano’s production was adversely effected by freezing weather in December 2007. The Panhandle and Pantwist properties were shut-in for five days and the Davenport and Nowata properties were shut in for 10 days. This is further discussed below under “Operations Update” section.
During the current quarter, our total operating expenses were $8.9 million or $2.3 million higher than the same period last year. The increase is primarily attributed to higher general and administrative expenses (“G&A”) of $1.1 million, increased lease operating expense (“LOE”) of $0.9, higher production and ad valorem taxes of $0.2 million, and depletion and depreciation expense of $0.1 million.
The primary reasons for increased G&A expense was the $0.9 million increase in non-cash stock based compensation expense and higher legal expense pertaining to the fire litigation. For the current quarter, the LOE per barrel equivalent was $24.72 as compared to $19.62 for the prior year quarter. The increased LOE is attributed to the weather related outages and non-recurring operating expense in the Desdemona Properties. We expect the per barrel cost to decrease during this fiscal year as production increases from our development activities.
Other expenses for the quarter totaled $2.1 million compared with a $0.5 million in the same quarter last year. The major contributing factor was the $1.8 million recorded in unrealized loss on commodity derivatives. This charge reflects the mark-to-market valuation of the derivative contracts Cano has in place. We have attached a schedule of all of the derivative contracts currently in place.
On November 7, Cano closed a private placement of 3.5 million shares of common stock. The net proceeds of $23.4 million will primarily be used to fund our capital investing for the balance of the fiscal year. At December 31, 2007 our outstanding debt balance was $42.0 million. The Series D convertible preferred stock was reduced by voluntary conversion of four thousand shares plus accrued dividends. The conversions resulted in our temporary equity being reduced to $44.6 million at December 31, 2007.
Operations Update
As a direct result of the $23.4 million equity raise previously discussed, we increased our FY 2008 capital budget from $57.0 million to $78.0 million. Through December 2007, Cano has spent roughly $41.9 million out of its approved $78.0 million FY 2008 capital budget. Listed below is a table representing capital spending by field and second quarter net daily production in addition to specific project highlights:
YTD Capital
Daily Production (1)
($Million)
(Net BOEPD) (2)
Panhandle
$14.8
590
Cato
12.7
90
Pantwist
—
334
Desdemona:
Barnett Shale
7.9
138
Waterflood
3.0
16
Corsicana
0.9
0
Nowata
1.3
197
Davenport
1.1
63
Total
$41.7
1,428 (a)
(1) Fiscal Second Quarter average daily (unaudited) production.
(2) Barrels of Oil Equivalent per Day
(a) Cano experienced a major ice storm in December 2007 at its Panhandle and Oklahoma properties. As a result of these severe storms, production was off-line for 5 and 10 days respectively for Panhandle and Nowata/ Davenport. Production was reduced by 190 BOEPD for the month of December, or 63 BOEPD for the quarter.
Panhandle Properties — Waterflood
We are observing preliminary response from 26 producing wells. Increased water inflow, gas cut and incremental gas rates are being reported. This is setting the stage for the waterflood response at the Cockrell Ranch Unit. Engineering calculations indicate that meaningful oil response is expected to occur after approximately .15 to .25 pore volumes (“PV”) of water has been injected. Therefore, when 15% to 25% of the void space has been displaced with water, the flood fronts are expected to advance to a point where production response should be seen at the producing wells. Currently, we have injected close to 3.0 million barrels of water into the Brown Dolomite formation at the Cockrell Ranch Unit. We have increased our water injection rates steadily since September 2007 to a current rate of 48,000 barrels of water per day (“BWPD”). We have completed injection plant and production facility installation in both Phase I and Phase II of the project. This represents 54 injectors and 50 producers. Additionally, we will be operational by the end of February 2008 with the remaining injectors and producers in the final contingent of Phase III development.
In the Phase I, or the south area of the Cockrell Ranch, which has been under injection since July 2007, Cano has injected between 10% PV and 12% PV. We are currently producing approximately 5,000 barrels of fluid per day with an increasing oil cut. This response is consistent with our modeling and we expect oil cuts to increase over the near term as the flood front is expected to advance. In the NE area, or Phase II, we have injected over 1,000,000 barrels of water and have started to see increasing fluid levels and increased gas rates. We expect the response to continue on a path similar to what is being experienced in the south area, or Phase I.
New Mexico Properties — Cato Field
We completed the acquisition of the Cato Field on March 30, 2007. As previously announced, and with the recently announced equity raise, our FY 2008 capital budget has been increased in this field to $27.1 million. We are focusing on a program of Return-To-Production and new well/infill drilling program to develop the San Andres formation in this field. To date, 10 wells have been drilled and completed in the Cato Field. Since we acquired this field in March 2007, we have increased production from 35 BOEPD to 160 BOEPD at the end of January 2008.
1. Return-to-Production (“RTP”): We have brought on 40 existing wells since the acquisition. Additionally, we have committed one workover rig to the Tomahawk field as a result of the RTP rates of 2-4 BOEPD from eight of these wells which have been recently brought on-line. Cano has approximately 10 more RTP candidates to bring on-line in the Tomahawk Field before we focus on the TomTom Field.
2. New Infill Well Drilling: Cano currently has two drilling rigs and three workover rigs working in the Cato Field. To date, we drilled and completed 10 wells in the Cato Field.
a. 40-Acre Infill Wells: We have drilled and completed two of these wells. These wells penetrated the P-1, P-2 and P-3 intervals. However, these two wells were not drilled deep enough to see the P-4 or P-5 intervals. The initial production (“IP”) range is approximately 5-8 BOEPD.
b. 20-Acre Infill Wells: We have drilled and completed eight of these wells. During the process of drilling these wells, we discovered previously unproduced P-4 and P-5 intervals, in addition to the P-1, P-2 and P-3 intervals. The IP range is approximately 10-30 BOEPD. We are currently producing these wells out of all of these intervals.
3. 20-Acre Waterflood Development: We have accelerated the waterflood development in Sections 11 and 14 by drilling the above mentioned 20-acre infill wells. Our goal is to drill and complete all required wells by fiscal year-end June 2008 and commence waterflood facility construction and start waterflood operations in FY 2009.
Desdemona Properties:
Desdemona Properties — Waterflood We have injected close to 700,000 barrels of water into the Duke Sand. We are seeing oil response at three producers with an increasing oil cut. Since this is not a pattern waterflood, but a peripheral flood, the PV fill-up method utilized in the Panhandle Field is not as exact a method for determining response profiles in this field. However, we expect meaningful increases in the number of responding wells and increased oil response by the second calendar quarter of 2008.
Desdemona Properties — Barnett Shale As anticipated, after we stopped our drilling program in the Barnett Shale, decline rates have been experienced in gas production. For December 2007, we had an average daily production rate of 100 BOEPD. We continue to supply the Desdemona Field waterflood with over 7,000 BWPD of produced water for injection from the Barnett Shale gas production.
Nowata Properties We began injecting alkaline surfactant polymer (“ASP”) chemicals during December 2007. The plant has had extended run time through January 2008. Response is anticipated in the second calendar quarter of 2008.
Corsicana Properties The waterflood was successfully re-instated in December 2007. We achieved full injection of 4,000 BWPD and are monitoring initial flood results. We expect to produce between 20-30 BOEPD during the first calendar quarter of 2008.
Davenport Properties During the six months ended December 31, 2007, we have returned to production five injector wells and four producing wells as we progress toward optimizing the waterflood pattern. As a direct result of this RTP activity, the production has increased to 70-80 BOEPD.
Management Comments
Jeff Johnson, Cano’s Chairman and CEO, stated, “After incurring delays from the weather and facility procurement issues in November and December, we recently achieved full water injection rates at the Panhandle Field. We continue to see increasing pre-response indicators in the waterflood project.” Johnson added, “In regard to the Cato Field, the 20-acre infill waterflood development program is on schedule, having completed eight wells during the quarter, and we anticipate beginning water injection during the second half of calendar year 2008. In addition to the waterflood development, we are also experiencing incremental production from deeper San Andreas reservoir intervals. With the advancement of these two projects, coupled with our Nowata ASP project and Desdemona waterflood, we are poised to see positive results from our four major projects.”
Earnings Call
The Company will hold an earnings call to discuss fiscal second quarter results and provide an update on its operations on Monday, February 11, 2008, at 12:00 P.M. Eastern Time (11:00 A.M. Central Time).
Interested parties can participate in the call by dialing 888-680-0893. For calls outside the U.S., parties may dial 617-213-4859. The passcode is 81920037. This call is being webcast by Thomson/CCBN and can be accessed at Cano’s website at www.canopetro.com.
The webcast is also being distributed through the Thomson StreetEvents Network. Individual investors can listen to the call at www.earnings.com, Thomson’s individual investor portal, powered by StreetEvents. Institutional investors can access the call via Thomson StreetEvents (www.streetevents.com), a password-protected event management site.
ABOUT CANO PETROLEUM:
Cano Petroleum Inc. is an independent Texas-based energy producer with properties in the mid-continent region of the United States. Led by an experienced management team, Cano’s primary focus is on increasing domestic production from proven fields using enhanced recovery methods. Cano trades on the American Stock Exchange under the ticker symbol CFW. Additional information is available at www.canopetro.com.
Safe-Harbor Statement — Except for the historical information contained herein, the matters set forth in this news release are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends that all such statements be subject to the “safe-harbor” provisions of those Acts. Many important risks, factors and conditions may cause the Company’s actual results to differ materially from those discussed in any such forward-looking statement. These risks include, but are not limited to, estimates or forecasts of reserves, estimates or forecasts of production, future commodity prices, exchange rates, interest rates, geological and political risks, drilling risks, product demand, transportation restrictions, the ability of Cano Petroleum, Inc. to obtain additional capital, and other risks and uncertainties described in the Company’s filings with the Securities and Exchange Commission. The historical results achieved by the Company are not necessarily indicative of its future prospects. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
FINANCIAL STATEMENTS AND SCHEDULES TO FOLLOW
CANO PETROLEUM, INC.
Operating Revenue Summary
Three and Six Months Ended December 31, 2007 and 2006
See Form 10-Q and accompanying notes to these unaudited financial statements
CANO PETROLEUM, INC.
Consolidated Balance Sheets
December 31, 2007 and June 30, 2007
See Form 10-Q and accompanying notes to these unaudited financial statements
CANO PETROLEUM, INC.
Consolidated Statements of Operations
Three and Six Months Ended December 31, 2007 and 2006
See Form 10-Q and accompanying notes to these unaudited financial statements
CANO PETROLEUM, INC.
Operating Revenues Summary
Quarter endedDecember 31,
Increase
Six months endedDecember 31,
Increase
2007
2006
(Decrease)
2007
2006
(Decrease)
Operating Revenues
$
10,018,879
$
6,157,932
$
3,860,947
$
18,740,044
$
13,832,732
$
4,907,312
Sales
— Crude Oil (MBbls)
67
64
3
136
134
2
— Natural Gas (MMcf)
365
308
57
716
638
78
— Total (MBOE)
128
115
13
256
241
15
Average Price
— Crude Oil ($/ Bbl)
$
87.06
$
58.40
$
28.66
$
79.73
$
64.04
$
15.69
— Natural Gas ($/ Mcf)
$
11.15
$
7.84
$
3.31
$
10.77
$
8.21
$
2.56
Hedging Schedule
Time Period
Floor
Oil Price
Barrels
per Day
Floor
Gas Price
Gas Mcf
per Day
Barrels of
Equivalent
Oil per Day
1/1/08 – 12/31/08
$
55
479
$
7.50
1,534
735
1/1/08 – 12/31/08
$
60
66
$
7.60
592
164
1/1/09 – 4/30/09
$
60
59
$
7.60
559
152
1/1/09 – 12/31/09
$
55
395
$
7.60
1,644
668
1/1/10 – 6/30/10
$
55
365
$
7.00
1,657
641
7/1/10 – 12/31/10
$
55
395
$
7.50
1,957
721
Time Period
CeilingOil Price
Barrels
per Day
CeilingGas Price
Gas Mcf per Day
Barrels of
Equivalent
Oil per Day
1/1/08 – 6/30/08
$
86
460
$
—
—
460
CANO PETROLEUM, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
June 30,
2007
2007
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents
$
853,797
$
2,119,098
Restricted cash
2,818,062
—
Accounts receivable
2,898,998
4,081,498
Prepaid expenses
568,617
309,216
Derivative assets
—
810,174
Inventory and other current assets
400,419
292,540
Total current assets
7,539,893
7,612,526
Oil and gas properties, successful efforts method
231,732,830
189,842,882
Less accumulated depletion and depreciation
(8,375,726
)
(6,201,635
)
Net oil and gas properties
223,357,104
183,641,247
Fixed assets and other, net
1,485,692
1,547,875
Restricted cash
—
6,000,000
Derivative assets
1,137,527
1,881,800
Goodwill
785,796
785,796
TOTAL ASSETS
$
234,306,012
$
201,469,244
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
$
8,117,023
$
7,508,795
Oil and gas sales payable
1,451,510
1,345,537
Accrued liabilities
1,181,887
1,421,484
Taxes payable
650,899
450,062
Derivative liability
416,405
—
Current portion of asset retirement obligations
275,870
264,140
Total current liabilities
12,093,594
10,990,018
Long-term liabilities
Long-term debt
42,000,000
33,500,000
Asset retirement obligations
2,183,683
2,150,930
Deferred litigation credit
6,000,000
6,000,000
Deferred tax liability
31,846,000
32,371,000
Total liabilities
94,123,277
85,011,948
Temporary equity
Series D convertible preferred stock and paid-in-kind dividend; par value $.0001 per share, stated value $1,000 per share; 49,116 authorized and 45,116 shares issued; liquidation preference of $47,928,846 and $50,862,925, respectively.
44,661,982
47,596,061
Commitments and contingencies
Stockholders’ equity
Common stock, par value $.0001 per share; 100,000,000 authorized; 38,603,283 and 37,334,989 shares issued and outstanding at December 31, 2007, respectively; and 33,956,392 and 32,688,098 shares issued and outstanding at June 30, 2007, respectively.
3,861
3,396
Additional paid-in capital
114,720,969
85,238,362
Accumulated deficit
(18,633,345
)
(15,809,791
)
Treasury stock, at cost; 1,268,294 shares held in escrow
(570,732
)
(570,732
)
Total stockholders’ equity
95,520,753
68,861,235
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
234,306,012
$
201,469,244
CANO PETROLEUM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
Six Months Ended
December 31,
December 31,
2007
2006
2007
2006
Operating Revenues:
Crude oil sales
$
5,872,961
$
3,743,117
$
10,868,686
$
8,594,034
Natural gas sales
4,066,646
2,362,872
7,712,792
5,129,414
Other revenue
79,272
51,943
158,566
109,284
Crude oil and natural gas sales
10,018,879
6,157,932
18,740,044
13,832,732
Operating Expenses:
Lease operating
3,183,840
2,284,291
6,286,838
5,056,022
Production and ad valorem taxes
754,646
556,209
1,454,004
1,174,920
General and administrative
3,762,524
2,640,238
7,384,733
5,785,275
Depletion and depreciation
1,152,477
1,072,408
2,287,146
2,049,360
Accretion of discount on asset retirement obligations
54,235
29,445
108,637
58,336
Total operating expenses
8,907,722
6,582,591
17,521,358
14,123,913
Income from operations
1,111,157
(424,659
)
1,218,686
(291,181
)
Other income (expenses):
Interest expense
(265,275
)
(122,017
)
(664,772
)
(1,964,732
)
Unrealized loss on commodity derivatives
(1,845,862
)
(693,016
)
(2,361,899
)
(156,990
)
Realized gain (loss) on commodity derivatives
(37,785
)
235,128
258,695
751,457
Interest income
51,763
74,413
154,952
91,181
Total other income (expenses)
(2,097,159
)
(505,492
)
(2,613,024
)
(1,279,084
)
Loss from continuing operations before income taxes
(986,002
)
(930,151
)
(1,394,338
)
(1,570,265
)
Income tax benefit
344,632
399,871
474,632
597,070
Loss from continuing operations
(641,370
)
(530,280
)
(919,706
)
(973,195
)
Income (loss) from discontinued operations, net of related taxes
(48,654
)
85,109
(48,654
)
160,131
Net loss
(690,024
)
(445,171
)
(968,360
)
(813,064
)
Preferred stock dividend
888,222
966,972
1,855,194
1,235,575
Net loss applicable to common stock
$
(1,578,246
)
$
(1,412,143
)
$
(2,823,554
)
$
(2,048,639
)
Net income (loss) per share – basic and diluted
Continuing operations
$
(0.04
)
$
(0.04
)
$
(0.08
)
$
(0.07
)
Discontinued operations
—
—
—
$
—
Net loss per share – basic and diluted
$
(0.04
)
$
(0.04
)
$
(0.08
)
$
(0.07
)
Weighted average common shares outstanding
Basic and diluted
35,101,346
31,891,608
33,858,581
28,967,429