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Caspian Oil and Gas: Q1 Results and Updates

Tuesday, May 15th, 2012

Caspian Energy Inc. announced today its financial results for the three months ending March 31, 2012. Its unaudited condensed interim consolidated financial statements for the quarter and related management’s discussion and analysis have been filed with Canadian securities regulatory authorities and are available for viewing at www.sedar.com.

Operational highlights

  • Well EZ #306 spud on January 9, 2012, drilling ahead at 3,637 metres, after coring KT-I
  • Currently well EZ #301 is producing an average 252 barrels per day by natural pressure, after being permitted by regulators to return to production
  • EZ well #213 is pumping at a daily rate of 152 barrels

Operational highlights – outside of period

  • East Zhagabulak field resumes production on May 3, 2012
  • Well EZ #315 spud May 9, 2012, surface casing set
  • Well EZ #308 spud on July 16, 2011 -  production casing  set to 4,775 metres, running production tubing Sakramabas #316 spud on July 22, 2011, encountered net pay zones aggregating 184.8 metres, well log survey underway

Outlook 2012

  • Presently, preparations are ongoing for a well-log survey and acoustic cement bond logging

 

  • Success at well #316 will enable Aral to declare a commercial discovery in the North Block

 

  • Completion of construction and commissioning of the gas pipeline to transfer gas to the Alibekmola Gas Processing Plant is expected to occur in Q4 12/Q1 13

 

  • Concurrently, the pilot production stage will end and the development stage will begin in East Zhagabulak

 

 

Financial highlights

  • Oil revenues before transportation costs $505,000 (2011: $304,000)
  • Comprehensive loss was $2,225,000 (2011: $2,185,000)
    • For the three months ending March 31, 2011, CEK’s comprehensive loss was $2,225,000, this compares to a comprehensive loss for the three months ending March 31, 2011, of $2,185,000.  Caspian recorded charges of $1,397,000 (1Q 2011 – $719,000) pertaining to finance expense. Depletion, depreciation and accretion expenses were $60,000 and $55,000, respectively. CEK’s operations used $843,000 in cash during the three month period and used $751,000 for the comparative quarter of 2011.

Financial Performance

For the period ended March 31, 2012, Caspian’s comprehensive loss was $2,225,000 (2011: $2,185,000).  Caspian recorded a charge of $1,397,000 (2011 – $719,000) pertaining to finance expense. Pursuant to the pronouncements of IFRS, Caspian’s convertible debentures constitute a financial liability with an embedded derivative (which is the conversion feature of this instrument).  Revaluation of the derivative component of the Company’s Convertible Debentures from the date of the Second Amending Agreement to quarter end has resulted in an unrealized gain equal to $118,000 as the fair value of the conversion option has decreased due to the deteriorating market value per share of the Company’s common shares. Through to the end of Q1 2012, due to the fluctuation in the Canadian dollar versus the United States dollar and Kazakh Tenge, mostly unrealized foreign exchange losses of $477,000 were recorded (to the close of 2011 – $939,000).

Depletion, depreciation and accretion expenses were $60,000 and $55,000 respectively. CEK’s operations used $843,000 in cash during 2012 and used $751,000 for 2011.

At the close of Q1 2012, Caspian had a working capital deficiency of $47.6 million; however, this figure reflects the pro rata addition of Aral’s current liabilities, which include $31.3 million of Caspian’s loan that had been assigned to Asia Sixth pursuant to the transaction. The residual amount of the loan, $52.3 million, retained by Caspian and present in Aral’s records, prior to consolidating elimination, provides an avenue to receive tax-free distributions from Aral.

The Company had a cash balance of $872,000 in Canadian accounts and domestic liabilities of $337,000, at the close of the first quarter.

Oil revenues before transportation costs during 1Q 2012 were $550,000 and for Q1 2011 were $304,000.  For the quarter ended March 31, 2012 operating costs were $317,000 and for the 2011 comparative period, operating costs were $121,000, while transportation expenses were $24,000 and $118,000, respectively. Administrative expenses for the same periods were $618,000 and $537,000, respectively.

 

Operational Performance

East Zhagabulak

Currently, well EZ #301 is producing an average 252 barrels per day by natural pressure, after being permitted by regulators to return to production on May 3, 2012 on the premise that both East Zhagabulak wells will begin capturing solution gas by year-end. EZ #213 is pumping at a daily rate of 152 barrels.

Completion of construction and commissioning of the gas pipeline to transfer gas to the Alibekmola Gas Processing Plant is expected to occur in Q4 12/Q1 13. Concurrently, the pilot production stage will end and the development stage will begin in East Zhagabulak.

 

Well EZ #308 spud on July 16, 2011. Production casing was set to 4,775 metres. Electronic logging operations have identified substantial intervals of possible pay in the KT-I zone and an additional 88 metres of net pay in the KT-II. Presently, production tubing of varying sizes is being run in the well.

Well #306 spud on January 9, 2012. It is intended to delineate the southern extent of the discovery and further confirm the considerable value of the East Zhagabulak field. The geological conditions for Well 306 are the same as for the recently drilled well 308, targeting the same hydrocarbon bearing horizons; KT-I at a depth of 3,360 to 3,879 metres and KT-II at 4,070 to 4,700 metres. Well #306 is presently drilling ahead at 3,637 metres, while having cored the KT-I at 3,628 – 3,637 metres.

Sakramabas well #316 spud on July 22, 2011. This well encountered net pay zones aggregating 184.8 metres and equates to a new discovery well in the West Zhagabulak field of Kazakhstan.

Following successful logging, Well #316 has been cased to a depth of 4,950 metres. Presently, preparations are ongoing for a well-log survey and acoustic cement bond logging.

 

Success at well #316 will enable Aral to declare a commercial discovery in the North Block. Successful testing of this well, followed by government confirmation, will qualify us to seek an extension of our exploration contract over the entire Greater Zhagabulak field by a further two or possibly three years. The current three-year exploration contract expires December 29, 2012.

The rig which drilled well #316 to total depth in the West Zhagabulak field, was immediately mobilized to East Zhagabulak, where it set surface casing on Well 315 on May 9, 2012. If successful, well #315 will result in the material conversion of P3 (possible) reserves to P2 (probable) reserves.

West Zhagabulak

Sakramabas well #316 spud on July 22, 2011. This well encountered net pay zones aggregating 184.8 metres and equates to a new discovery well in the West Zhagabulak field of Kazakhstan.

Following successful logging, well #316 has been cased to a depth of 4,950 metres. Presently, preparations are ongoing for a well-log survey and acoustic cement bond logging.

 

Success at well #316 will enable Aral to declare a commercial discovery in the North Block. Successful testing of this well, followed by government confirmation, will qualify us to seek an extension of our exploration contract over the entire Greater Zhagabulak field by a further two or possibly three years. The current three-year exploration contract expires December 29, 2012.

The rig which drilled well #316 to total depth in the West Zhagabulak field, was immediately mobilized to East Zhagabulak, where it set surface casing on well #315 on May 9, 2012. If successful, well #315 will result in the material conversion of P3 (possible) reserves to P2 (probable) reserves.

Funding

Aral Petroleum Capital LLP (Aral or APC), the operating entity in Kazakhstan, holds a 25-year production licence for East Zhagabulak and a three-year exploration permit for the larger North Block, an area of some 1,549 square kilometres in West-Central Kazakhstan that contains both East and West Zhagabulak.

The deal with Asia Sixth was signed November 1, 2010 and closed on December 29, 2011, with satisfaction of the last of several conditions precedent. Caspian now owns 40 per cent of Aral Petroleum Capital LLP, the operating entity in Kazakhstan, while Asia Sixth Energy Resources Limited owns 60 per cent of Aral.

Caspian, originally a 50 per cent owner in Aral, conveyed 10 per cent ownership to Asia Sixth in return for Asia Sixth’s undertaking to finance capital expenditures to the cumulative threshold of US$80 million over the duration of the deal. Caspian also receives a US$2 million loan, secured by production-oriented cash flow, plus access to a further two million on each of the first two anniversaries of the transaction. This arrangement permits Caspian to access a total of US$6 million over two years, if the Company so decides. Loans have a maturity of 10 years and bear interest at 10 per cent per year for the first five years.

These loans, together with the US$80 million capital facility, ensure that Caspian will have sufficient funds for the initial phase of the project in East Zhagabulak, though the program should become self-funding before the loan facility is fully expended.

Under the Exploration Agreement with the ROK, the approved work program calls for expenditures of US$25.8 million in 2011 and US$22.5 million in 2012. The various requirements of the work program agreed to with the Ministry of Oil and Gas for 2011, both in terms of functions and expenses, have been carried out by Aral. During 2011, Aral’s total expenditures for the year exceeded the commitment, reaching a total of US$34.3 million. As at March 31, 2012, Aral had incurred US$11.0 million of qualifying expenditures.

Share structure

On April 16, 2012, 1,672,012 common shares and 836,007 share purchase warrants were issued to satisfy the 4Q 2011 interest obligation on the Company’s Convertible Debentures. The deemed price of the stock issued is US$0.139625 per share and the warrant exercise price is US$0.191065.

Nabors dispute

During 2007, Aral had a dispute with its drilling subcontractor, Nabors, in relation to a mechanical failure at the drilling site that resulted in the loss of the well and the re-drilling of an interval of the well. Nabors made a claim for compensation. Aral viewed Nabors as responsible for the failure. The matter was under negotiation and the amount of possible cash outflows was not then determinable.

 

The negotiations to settle were unsuccessful and on October 25, 2011, the Specialized Inter-District Economical Court of Almaty City found in favour of Nabors and ordered Aral to pay the equivalent of approximately US$3.2 million to Nabors. Aral appealed this decision and on December 28, 2011, the Almaty City Court (Appellate Collegium) upheld the lower court’s decision.

 

Aral continues to believe in the merits of its defence against Nabors’ claim and is making legal arrangements to file a supervisory appeal to The Supreme Court of the Republic of Kazakhstan, which is Aral’s final route of appeal.  If Aral is unsuccessful in its appeal, Caspian will be required to fund approximately US$1.6 million of Aral’s obligation to Nabors pursuant to an indemnity in favour of Asia Sixth.

 

 

The Company’s existing sources of financing and expected cash flow from operating activities are not sufficient to meet: (i) the repayment of the Loans payable of US$36,818,000; and (ii) the Convertible Debentures plus accrued interest, totalling US$9,408,000 on March 31, 2012, which mature on June 2, 2013.

 

The Company’s ability to continue as a going concern is in significant doubt and is dependent upon achieving profitable operating results from its Kazakhstan operations.  There are no assurances that these initiatives will be successful. See Note 1 to the Condensed Interim Consolidated Financial Statements (Unaudited).

 Source

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