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Ivanhoe Energy 2006 First Quarter Results and Production Update

Posted on: Wednesday, 10 May 2006, 09:10 CDT

VANCOUVER, May 10 /PRNewswire-FirstCall/ -- Ivanhoe Energy Inc. will today file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.

"Revenue for the first quarter of 2006 was up 14% from the fourth quarter of 2005 and up 72% from the first quarter of 2005, to US$9.9 million, due to record oil and gas revenue from continued high oil prices and increased production," said David Martin, Ivanhoe Energy's Chairman. "This improvement in revenue was offset by a significant increase in depletion and depreciation expenses and an increase in business and product development expenses. Cash flow from operating activities remained positive for the sixth consecutive quarter, generating US$2.1 million, and continued to exceed our goal of funding our ongoing operations, excluding capital investments. Our net loss for the quarter was US$5.4 million.

"We made considerable progress in the first quarter of 2006 in the development of our proprietary heavy oil upgrading technology (HTL). Our commercial HTL demonstration facility in California achieved several important benchmarks, and preparations are under way for upcoming key test runs in the second quarter."

Consolidated Corporate Highlights (unaudited; thousands of U.S. dollars except per share and production amounts) ---------------------------------- Three Months Ended ---------------------------------- March 31 Dec. 31 March 31 2006 2005 2005 ---------- ---------- ---------- Financial --------- Net loss $ (5,376) $ (8,885) $ (1,483) Net loss per share - basic and diluted $ (0.02) $ (0.04) $ (0.01) Cash flow from operating activities $ 2,080 $ 4,233 $ 1,092 Revenue $ 9,864 $ 8,651 $ 5,736 Depletion and depreciation $ 7,847 $ 5,197 $ 2,207 Capital investments $ 4,892 $ 9,195 $ 12,287 Total assets (at end of period) $ 258,462 $ 240,877 $ 130,337 Cash and cash equivalents (at end of period) $ 7,460 $ 6,724 $ 9,335 Operating --------- Net production (after royalties): Barrel of oil equivalent (BOE) 181,163 159,258 149,772 BOE/day for the period 2,013 1,731 1,664 Heavy-to-Light Oil Upgrading Activities

The HTL heavy oil upgrading commercial demonstration facility (CDF) that has a processing capacity of 1,000-barrels-per-day, located in the Belridge heavy oil field in California, successfully completed an extended run in early 2006, followed by another run in early March that upgraded the heaviest fraction of California heavy oil. The CDF runs to date have successfully demonstrated a number of commercial configurations and processing alternatives, including both high yield (once through) and high quality (recycle) modes of operation. During the test program, we have validated process enhancements, including gas sulphur capture, heavy metals capture and crude acidity reduction.

The CDF is currently undergoing a series of upgrades in preparation for test runs that will demonstrate the processing of vacuum tower bottoms and Athabasca bitumen from Western Canada in extended commercial testing in a high quality configuration. Bitumen from Canada's Athabasca oil sands region has been delivered from Western Canada and is currently at the CDF in onsite storage ready for processing. The upgrades, expected to be completed in May, are primarily related to peripheral equipment linked to either the disposal of by-product energy or to equipment redundancy required for more extended runs.

This high quality configuration, appropriate for numerous resource opportunities around the world, including the oil sands in Western Canada, produces a more fully upgraded product, as well as high amounts of by-product energy.

We are in discussions with a number of heavy oil resource owners and others, including major oil companies and national oil companies, for the potential commercial deployment of our HTL upgrading technology in heavy oil fields around the world. These discussions are at various stages and we are contemplating a number of different contract formats, including production sharing, profit sharing and other joint-venture arrangements. We believe that the value of this technology can be maximized by using it to create opportunities to acquire interests, and actively participate, in heavy oil development projects by building and owning the facilities, rather than licensing the technology to third parties.

Our heavy oil upgrading technology produces lighter, more valuable crude oil at lower cost and in smaller-sized plants than conventional technologies. The technology addresses four key challenges to heavy oil development:

- the facilities can be field-located and effective at a scale as low as 10,000 to 15,000 barrels per day; - the value of the upgraded heavy oil is substantially increased; - the viscosity of the upgraded product is dramatically reduced, allowing it to be transported by pipeline without the need for light blend oils; and - significant amounts of by-product energy are produced for use as an on-site source for the production of the steam and/or power needed in heavy oil recovery. U.S. Oil and Gas Operations (unaudited; thousands of U.S. dollars except production amounts) ---------------------------------- Three Months Ended ---------------------------------- March 31 Dec. 31 March 31 2006 2005 2005 ---------- ---------- ---------- Financial --------- Revenue $ 3,005 $ 3,581 $ 2,875 Depletion and depreciation $ 1,188 $ 1,271 $ 1,167 Capital investments $ 1,274 $ 1,259 $ 807 Identifiable assets (at end of period) $ 46,441 $ 48,070 $ 47,602 Operating --------- Net production (after royalties): Barrel of oil equivalent (BOE) 57,669 69,695 77,537 BOE/day for the period 641 758 862 California ----------

South Midway - We have 57 producing wells in the 1,400-acre South Midway heavy oil field, with a working interest of 100%. Production performance is very stable with good response to both cyclic and continuous steam injection. Consistent with our strategy of development of our existing fields, a 10-well development drilling program is scheduled for the third quarter of 2006.

Citrus (Lost Hills) - We sold our interest in the producing Citrus properties in the first quarter of 2006 for US$5.4 million. We retain 2,415 acres in the prospect. We have farmed out three wells to be drilled to test the shallow Etchegoin gas potential on three of our leases south of the previously owned producing section at Citrus. Drilling is expected to commence in the second quarter of 2006. After the farmout we will hold a 50% working interest in the prospect.

North Salt Creek - We have reduced the sale of natural gas from the North Salt Creek No. 1 well in preparation for steaming of the two heavy oil discovery wells. The initial steam cycles are scheduled for the second quarter using internally produced natural gas. Pending the results of the steam cycles, we are preparing to drill additional wells to delineate the potential size of the field and increase production. We are the operator and own a 24% working interest in the well and the 900-acre lease block.

Knights Landing (Sacramento Basin) - We completed a 3-D seismic acquisition program in the fourth quarter of 2005 and interpretation of the seismic data is underway. We expect to complete processing and interpretation of the seismic data by the end of the second quarter of 2006, and to recommence drilling in the third quarter of 2006. All existing development wells were fully depleted by the end of the first quarter.

Peach (North South Forty) - In 2005, we discovered natural gas at the Peach prospect in the North Antelope Hills area of Kern County. We have a 50% interest in the initial well after payout and a 50% working interest in the 1,800-acre prospect. Production from the discovery well is expected to commence in the second quarter of 2006.

North Yowlumne - In December 2005, drilling commenced on the North Yowlumne prospect to a total depth of 13,000 feet to test the Stevens sand which has produced over 110 million barrels of oil in the nearby Yowlumne field. The test program is proceeding from the lowest zone to the highest zone in the well. The lower zones tested a minimal amount of light 32 degrees and 36 degrees API gravity oil. A flow rate has yet to be confirmed, and preparations are underway by the operator to install an artificial lift system to enable the well to be put on a sustained production test before testing the final upper zone of interest. The upper zone had the best log characteristics in the well. Final results of the well are expected to be known during the second quarter of 2006.

Wyoming -------

LAK Ranch - We commenced continuous steaming in the fourth quarter of 2005 at the LAK Ranch enhanced oil recovery pilot program. An early production response was realized from the steam injection, with oil rates increasing to 40-50 barrels of oil per day. Temperature has risen steadily in the reservoir to about 140 degrees F currently. Continued increases in the reservoir temperature are expected to lower the viscosity of the oil and increase its rate of flow. One vertical well was drilled in the first quarter of 2006 for data collection purposes. We plan continuous steam injection throughout 2006 while monitoring the production response and expect to reach a decision regarding future development by the fourth quarter of 2006. We currently have a 43% working interest in this project.

Texas -----

Spraberry - Our working interests range from 31% to 48% in 25 wells, which have stable oil and gas production of approximately 75 net barrels of oil equivalent per day. The oil produced is high-quality light oil that commands a premium price to West Texas Intermediate oil.

China Oil and Gas Operations (unaudited; thousands of U.S. dollars except production amounts) ---------------------------------- Three Months Ended ---------------------------------- March 31 Dec. 31 March 31 2006 2005 2005 ---------- ---------- ---------- Financial --------- Revenue $ 6,837 $ 5,039 $ 2,826 Depletion and depreciation $ 5,424 $ 3,921 $ 1,034 Capital investments $ 2,717 $ 6,611 $ 9,551 Identifiable assets (at end of period) $ 87,223 $ 65,020 $ 54,501 Operating --------- Net production (after royalties): Barrel of oil equivalent (BOE) 123,494 89,563 72,235 BOE/day for the period 1,372 973 803

Dagang - The gross production rate at the end of the first quarter of 2006 at the Dagang project was approximately 2,450 barrels of oil per day, compared to 2,310 barrels per day at the end of 2005. Our net production for the first quarter of 2006 includes the additional production from February 1, 2006 as a result of the acquisition of an additional 40% working interest in the project. In the first quarter we completed one well and fracture stimulated five wells in the northern block. Our stimulation program continues in the northern block where we are evaluating the results of prior fracture stimulations and production in order to choose additional wells for the stimulation program and to assist in making critical decisions on resuming our drilling program.

On March 25, 2006, the Ministry of Finance of the People's Republic of China (PRC) issued the "Administrative Measures on Collection of Windfall Gain Levy on Oil Exploitation Business" (Windfall Levy Measures). According to the Windfall Levy Measures, effective March 26, 2006, enterprises exploiting and selling crude oil in the PRC are subject to a windfall gain levy (Windfall Levy) if the monthly weighted average price of crude oil is above US$40 per barrel. The Windfall Levy is imposed at progressive rates from 20% to 40% on the portion of the weighted average sales price exceeding US$40 per barrel. We understand that the Windfall Levy will be deductible for corporate income tax purposes in the PRC and will be eligible for cost recovery under our production sharing contract with China National Petroleum Corporation in respect of the Dagang project. Although we have not yet fully assessed the financial impact of the Windfall Levy, at current oil sales prices of approximately US$60 per barrel, the application of the Windfall Levy is expected to reduce our revenue by approximately US$0.3 million per month. However, its effect may, in part, be offset by recent increases in the price of oil in world markets. In addition, we evaluate the carrying value of our oil and gas properties for impairment and recognize any impairment on a quarterly basis. As a result of the imposition of the Windfall Levy, we impaired our China oil and gas properties by US$0.8 million for the three-month period ended March 31, 2006.

In 2004, Richfirst Holdings Limited (Richfirst), a subsidiary of CITIC Group, acquired a 40% working interest in the Dagang field. The farm-out agreement gave Richfirst the right to convert its working interest in the Dagang field for our common shares at any time prior to eighteen months after closing the farm-out agreement. Richfirst elected to convert its 40% interest in the Dagang field and in February 2006 we re-acquired Richfirst's 40% working interest for a total of US$28.3 million, consisting of 8,591,434 of our common shares for US$20 million, a non-interest bearing, unsecured note payable of approximately US$7.4 million (US$6.5 million after being discounted to net present value) and the forgiveness of US$1.8 million of unpaid joint venture receivables. The note is payable in 36 equal monthly installments commencing March 31, 2006. We have the right, during the three-year loan repayment period, to require Richfirst to convert the remaining balance of the loan into common shares of Sunwing Energy Ltd (Sunwing), our wholly-owned China subsidiary, or another company owning all of the outstanding shares of Sunwing, subject to Sunwing or the other company having obtained a listing of its common shares on a prescribed stock exchange.

We now have a 100% working interest in the Dagang project and Richfirst is the holder of approximately 3.7% of our issued and outstanding common shares, and becomes a strategic shareholder as we continue to develop oil and gas opportunities in China.

Zitong - In December 2005, we were granted an extension of the first phase of our exploration contract to May 31, 2006 and in April 2006, a further extension was granted provided the second Phase 1 exploration well is spud before November 30, 2006. In the first quarter of 2006 we continued prospect development of this block using geological and geophysical data, working towards selecting our next exploration well location. In January 2006, we finalized a farm-out agreement with Mitsubishi Gas Chemical Company Inc. (Mitsubishi), where Mitsubishi will pay us US$4 million for a 10% interest in the Zitong block. After the drilling of the second exploration well in 2006, we will evaluate the results and make an election, along with Mitsubishi, to enter into the next three-year exploration phase. We will have a 90% working interest in this project, subject to final approvals of the farmout, and are the operator.

In February 2006, we announced the signing of a non-binding Memorandum of Understanding regarding a proposed merger of Sunwing with China Mineral Acquisition Corporation (CMA), a U.S. public corporation. CMA will effectively acquire all of the issued and outstanding shares of Sunwing for an aggregate acquisition price of US$100 million, subject to working capital and long-term debt adjustments at closing. This transaction is subject to regulatory approval, negotiation of definitive documentation, completion of satisfactory due diligence, board approvals and the approval of CMA shareholders. If the proposed merger is successfully completed the resulting public corporation would be approximately 75% to 80% owned by Ivanhoe Energy.

Liquidity and Capital Resources

On March 31, 2006, our cash position was US$7.5 million and we had negative working capital of US$11.7 million, approximately the same as the negative working capital of US$11.4 million that we had at the end of 2005. Our operating activities provided US$2.1 million in cash for the first quarter of 2006. Our capital investments for the first quarter of 2006 were US$4.9 million and are expected to be US$32.5 million for the remainder of the year.

In order to generate sufficient resources to assure continuation of our operations and achieve our capital investment objectives management will consider the sale of additional equity securities, alliances, or other partnership agreements with entities with the resources to support our projects as well as convertible loan, debt and mezzanine financing.

In early April we completed a US$25.4 million non-brokered private placement financing. The financing involved the issuance of 11,400,000 Special Warrants to three investors at US$2.23 per Special Warrant. Each Special Warrant is convertible, at no additional cost, into one common share and one common share Purchase Warrant. Each Purchase Warrant carries a 5-year term and provides the holder the right to purchase one common share at US$2.63 per share.

Negotiations with a third party carried out over the last several quarters for a transaction that was to have involved the formation of a joint venture for the deployment, in a specific region of the world, of the HTL and GTL technologies we own or license and a potentially significant equity investment in Ivanhoe Energy by the third party, have now ended without a definitive agreement having been reached. However management is engaged in other discussions for potential strategic alliances or partnership arrangements with other entities that we believe have the ability to help advance our projects.

This news release summarizes our 2006 first quarter results of operations and financial condition and should be read in conjunction with our Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, which contains full financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. Copies of the Form 10-Q may be obtained from the Ivanhoe Energy website at http://www.ivanhoe-energy.com/, on EDGAR at http://www.sec.gov/ or SEDAR at http://www.sedar.com/.

Ivanhoe Energy is an independent international oil and gas exploration and development company focused on pursuing long-term growth in its reserve base and production using key technologies, including its proprietary heavy oil upgrading process (HTL), state-of-the-art drilling and enhanced oil recovery (EOR) techniques and the conversion of natural gas to liquids (GTL). Core operations are in the United States and China, with business development opportunities worldwide.

Ivanhoe Energy trades on the NASDAQ Capital Market with the ticker symbol IVAN and on the Toronto Stock Exchange with the symbol IE.

Conference Call: ----------------

Ivanhoe Energy will host a conference call today, Wednesday, May 10, for investors and analysts at 4:30 p.m. EDT (1:30 p.m. PDT) to discuss 2006 first quarter results. The conference call may be accessed by dialing 1-866-540-8136 in Canada and the United States, or 1-416-340-8010 in the Toronto area and internationally. A simultaneous webcast of the conference call will be provided through http://www.ivanhoeenergy.com/ and http://www.newswire.ca/webcast. If you are unable to participate in the call it will be archived for later playback by dialing 1-416-695-5800 and entering the pass code 3186203 followed by the number sign, or via http://www.ivanhoeenergy.com/. The archived playback will be available until June 9, 2006.

Information contacts: All locations: Cindy Burnett, (604) 331-9830 (North America) In Asia: Patrick Chua, 86-1370-121-2607, 852-9193-4056 Website: http://www.ivanhoe-energy.com/

FORWARD-LOOKING STATEMENTS: This document includes forward-looking statements, including forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, but are not limited to, statements concerning the potential benefits of Ivanhoe Energy's heavy oil upgrading technology, the potential for and future application of the heavy oil upgrading technology and other technologies, statements relating to the continued advancement of Ivanhoe Energy's projects, planned additional exploration and development drilling, dependence on new product development and associated costs, statements relating to anticipated capital expenditures, the necessity to seek additional funding, statements relating to increases in production and other statements which are not historical facts. When used in this document, the words such as "could,""plan,""estimate,""expect,""intend,""may,""potential,""should," and similar expressions relating to matters that are not historical facts are forward-looking statements. Although Ivanhoe Energy believes that its expectations reflected in these forward-looking statements are reasonable, such statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Important factors that could cause actual results to differ from these forward-looking statements include the potential that the company's projects will experience technological and mechanical problems, new product development will not proceed as planned, the RTP(TM) process to upgrade bitumen and heavy oil may not be commercially viable, geological conditions in reservoirs may not result in commercial levels of oil and gas production, the availability of drilling rigs and other support services, uncertainties about the estimates of reserves, the risk associated with doing business in foreign countries, environmental risks, changes in product prices, our ability to raise capital as and when required, competition and other risks disclosed in Ivanhoe Energy's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on EDGAR and the Canadian Securities Commissions on SEDAR.

RESERVES DATA AND OTHER OIL AND GAS INFORMATION: Ivanhoe Energy's disclosure of reserves data and other oil and gas information is made in reliance on an exemption granted to Ivanhoe Energy by Canadian securities regulatory authorities, which permits Ivanhoe Energy to provide disclosure in accordance with U.S. disclosure requirements.

The information provided by Ivanhoe Energy may differ from the corresponding information prepared in accordance with Canadian disclosure standards under National Instrument 51-101 (NI 51-101). Further information about the differences between the U.S. requirements and the NI 51-101 requirements is set forth under the heading "Reserves, Production and Related Information" in Ivanhoe Energy's Annual Report on Form 10-K.

Ivanhoe Energy Inc.

CONTACT: All locations: Cindy Burnett, (604) 331-9830(North America); In Asia: Patrick Chua, 86-1370-121-2607, 852-9193-4056;Website: http://www.ivanhoe-energy.com/;To request a free copy of this organization's annual report, please go tohttp://www.newswire.ca/ and click on Tools for Investors.

Source: PRNewswire-FirstCall

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