Fortress Energy Inc. Announces Second Quarter 2009 Financial and Operating Results

CryptoPotato

August 14, 2009 4:06pm Comments

CALGARY, ALBERTA--(Marketwire - Aug. 14, 2009) -

THIS NEWS RELEASE IS NOT FOR DISSEMINATION IN THE UNITED STATES OR TO ANY UNITED STATES NEWS SERVICES.

Fortress Energy Inc. ("Fortress" or the "Company") (TSX:FEI) announces the results for the second quarter ended June 30, 2009.

North American Natural Gas Market Overview

With less that 680 rigs operating in the United States and 82 operating in Canada focused on natural gas drilling, the North American natural gas supply may decline quickly absorbing much of the surplus of gas that is currently appearing in buoyant inventories. Mr. Bailey, President and CEO of Fortress, has completed an analysis of North American Natural Gas Markets which can be reviewed at:

http://fortressenergy.ca/files/US%20Natural%20Gas%20Markets%20August%201...
along with

"Has Anyone Done the Math?"

http://www.fortressenergy.ca/files/Has%20Anyone%20Done%20the%20Math%20v4....

His conclusion is there is an insufficient number of natural gas focused rigs operating, which will cause critical supply shortages and natural gas prices to increase.

Recent Initiatives

In light of the current down turn and our view of current market fundamentals, we have undertaken a number of initiatives to assist in improving future profitability:

- Entered into a series of forward sale contracts that result in 4.6 Mmcf/d, being 60% of our current production, receiving an average price of $7.92/mcf until December 31, 2009 and $8.36/mcf until March 31, 2010.

- Voluntarily shutting-in approximately 1.8 Mmcf/d of production which can be brought back on stream when higher natural gas prices prevail.

- Reduction of fixed operating costs by consolidating remote operations at Square Creek and re-routing gas at Velma allowing for annual savings of $800,000, being $0.28/mcf. Further operating cost reductions are being pursued. The operating cost reduction will not be experienced in operating results until the third quarter of 2009.

- Entered into a Letter of Intent which allows Fortress to acquire the 50% working interest in Square Creek it currently does not own, for cash consideration of $7,000,000. Completion of the acquisition would provide Fortress an additional 2.7 Mmcf/d of production and the potential to increase production from the area. Since Fortress is the operator of the property, no additional staff or overhead would be required to manage these additional assets.

Highlights of the second quarter include:

- During the quarter Fortress received an average price of $6.22/mcf ($37.35 per boe) from 7.7 Mmcf/d (1,279 boe/d) of production compared to an average spot price of $3.45/mcf during the quarter.

- Operating net back was $1,800,000 or $2.58/mcf ($15.46/boe).

- Achieved funds from operations of $557,000 or $0.02 per share.

- Production from Square Creek averaged gross 5.4 mmcf/d (2.7 mmcf/d net) with approximately 3.6 Mmcf/d (1.8 Mmcf/d net) voluntarily shut-in.

- The low natural gas price environment has resulted in a ceiling test impairment charge of $14,276,000 having the effect of reducing the book value of the Company's assets by such amount.

Fortress's board of directors has accepted the resignation of Richard A. Grafton as a director of the Company. In tendering his resignation Mr. Grafton cited personal reasons, and expressed concern that he may not be able to dedicate the time that may be required as a director of Fortress. The Company accepted Mr. Grafton's resignation with regret, thanked him for his attention to the affairs of the Company since his initial appointment in January 2008 and wished him well in all of his future endeavors.

FINANCIAL AND OPERATING SUMMARY

/T/

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Three months ended June 30,
2009 2008
($000s) $/boe ($000s) $/boe
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Petroleum and natural gas sales 4,346 37.35 7,231 54.31
Royalties (442) (3.80) (1,293) (9.71)
Operating costs (1,855) (15.95) (2,051) (15.40)
Transportation (249) (2.14) (237) (1.78)
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Operating netback (1) 1,800 15.46 3,650 27.42
General and administrative expenses (639) (5.48) (566) (4.25)
Professional fees (337) (2.90) (149) (1.11)
Bad debts (37) (0.32) 53 0.40
Interest expense (212) (1.82) (361) (2.71)
Current income tax expense (18) (0.15) - -
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Funds from operations (1) 557 4.79 2,627 19.74
Unrealized gain (loss) on commodity
contracts (922) (7.92) 151 1.13
Depletion, depreciation and accretion (3,695) (31.75) (3,712) (27.88)
Ceiling test impairment (14,276) (122.69) - -
Stock-based compensation expense (48) (0.41) (54) (0.41)
Write-down of pipeline asset held for
sale - - - -
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Loss before future income taxes (18,384) (157.98) (988) (7.42)
Future income tax recovery 3,779 32.48 244 1.83
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Net loss (14,605) (125.50) (744) (5.59)
Sales volume (boe/d) 1,279 1,463
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Six months ended June 30,
2009 2008
($000s) $/boe ($000s) $/boe
----------------------------------------------------------------------------
Petroleum and natural gas sales 9,552 41.07 12,868 51.83
Royalties (920) (3.96) (2,263) (9.12)
Operating costs (3,670) (15.78) (3,426) (13.80)
Transportation (495) (2.13) (449) (1.80)
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Operating netback (1) 4,467 19.20 6,730 27.11
General and administrative expenses (1,361) (5.85) (1,054) (4.25)
Professional fees (488) (2.10) (337) (1.36)
Bad debts (179) (0.77) 53 0.21
Interest expense (453) (1.95) (741) (2.98)
Current income tax expense (36) (0.15) - -
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Funds from operations (1) 1,950 8.38 4,651 18.74
Unrealized gain (loss) on commodity
contracts 1,496 6.43 (2,990) (12.04)
Depletion, depreciation and accretion (7,508) (32.28) (6,822) (27.48)
Ceiling test impairment (14,276) (61.37) - -
Stock-based compensation expense (127) (0.55) (72) (0.29)
Write-down of pipeline asset held for
sale - - (552) (2.22)
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Loss before future income taxes (18,465) (79.39) (5,785) (23.29)
Future income tax recovery 3,867 16.63 1,586 6.38
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Net loss (14,598) (62.76) (4,199) (16.91)
Sales volume (boe/d) 1,285 1,364
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(1) Non-GAAP measures. See discussion in the following Management Discussion
& Analysis.

/T/

MANAGEMENT'S DISCUSSION AND ANALYSIS

August 14, 2009

This management's discussion and analysis (MD&A) should be read in conjunction with the unaudited interim financial statements of Fortress Energy Inc. ("Fortress" or the "Company") as at and for the three and six months ended June 30, 2009 and the audited consolidated financial statements of Fortress Energy Inc. for the year ended December 31, 2008. The interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). All tabular amounts in the following discussion are in thousands of Canadian dollars unless otherwise noted. Additional information is available on the Company's web site at www.fortressenergy.ca or under the Company's profile at www.sedar.com.

This MD&A provides management's analysis of Fortress' historical financial and operating performance based on information currently available. Actual results will vary from estimates and variances may be significant. Historical results are not indicative of future performance.

Non-GAAP Measurements

The terms "funds from operations" and "operating netback" used in the MD&A are not recognized measures under GAAP. Management believes that in addition to net income, funds from operations and operating netback are useful supplemental measures as they provide an indication of the results generated by the Company's principal business activities before the consideration of how those activities are financed. Investors are cautioned, however, that these measures should not be construed as alternatives to net income determined in accordance with GAAP.

The Company's method of calculating funds from operations may differ from that of other companies, and, accordingly it may not be comparable to measures used by other companies. The Company calculates funds from operations by taking cash flow from operating activities as determined under GAAP before changes in non-cash operating working capital and abandonment expenditures. The consolidated statements of cash flows included in the consolidated financial statements present the reconciliation between net income (loss) and funds from operations. A summary of this reconciliation is as follows:

/T/

Operating netback is calculated on a per boe basis taking the sale price and
deducting royalties, operating expenses and transportation expenses, as
follows:

/T/

BOE Presentation

Natural gas reserves and volumes recorded in thousand cubic feet are converted to barrels of oil equivalent ("boe") on the basis of six thousand cubic feet ("mcf") of gas to one barrel ("bbl") of oil. The term "barrels of oil equivalent" may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalent conversion method primarily applicable at the burner tip and is not intended to represent a value equivalent at the wellhead.

Forward-Looking Statements

Certain statements in this MD&A may contain forward-looking information including expectations of future production, components of cash flow and earnings, expected future events and/or financial results that are forward-looking in nature and subject to substantial risks and uncertainties. Without limiting the generality of the foregoing, the Company has made materially forward-looking statements:

(i) Under "Capital Expenditures" regarding the Pine Creek exploration well and anticipated timing of production; and

(ii) Under "Liquidity and Capital Resources" regarding working capital requirements.

The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. The Company cautions the reader that actual performance will be affected by a number of factors, including changes in economic and political circumstances throughout the world. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of the Company. These risks include, but are not limited to: the risks associated with the oil and gas industry, commodity prices and exchange rate changes; industry related risks could include, but are not limited to, operational risks in exploration, development and production (applicable to the forward-looking statements (i) through (iii) above), delays or changes in plans (applicable to the forward-looking statements identified in (i) through (iii) above); risks associated with the uncertainty of reserve estimates, health and safety risks and the uncertainty of estimates and projections of production, costs and expenses. These external factors beyond the Company's control may affect the marketability of oil and natural gas produced, industry conditions including changes in laws and regulations, changes in income tax regulations, increased competition, fluctuations in commodity prices, interest rates, and variations in the Canadian/United States dollar exchange rate. The reader is cautioned not to place undue reliance on this forward-looking information.

Statements throughout this MD&A that are not historical facts may be considered "forward-looking statements." These forward-looking statements sometimes include words to the effect that management believes or expects a stated condition or result. All estimates and statements that describe the Company's objectives, goals or future plans are forward-looking statements. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to any number of risks including, but not limited to:

(i) Risks associated with the oil and gas industry and regulatory bodies (e.g. operational risks in exploration, development and production, or changes in royalty rates);

(ii) Delays or changes in plans with respect to exploration or development projects or capital expenditures;

(iii) Uncertainty of estimates and projections relating to recoverable reserves, costs and expenses;

(iv) Health, safety and environmental risks;

(v) Commodity price and exchange rate fluctuations; and

(vi) Liquidity risk and working capital requirements (refer to "Liquidity and Capital Resources" on page 10 of this MD&A).

Forward-looking statements contained herein are made as of the date hereof subject to the requirements of applicable securities legislation and except as otherwise required by law, the Company assumes no obligation to update any forward-looking statements, whether as a result of new information, future events and results, or otherwise. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, the reader is cautioned not to place undue reliance on forward-looking statements.

DESCRIPTION OF THE BUSINESS

Fortress' primary focus is the exploration and development of natural gas reserves in Western Canada. The Company has approximately 80,500 net acres of undeveloped land in the Ladyfern, Velma and Buick Creek areas in northeast British Columbia and the Chigwell, Bashaw, Square Creek, Halverson, and Mearon areas of Alberta.

The Company's strategy is to acquire and exploit properties that are early in their development cycle and that offer exploration, appraisal and development drilling opportunities, while maintaining low finding and development costs. Fortress is the operator of most of its production, providing control over cost management of its operating and capital programs.

DETAILED FINANCIAL ANALYSIS

Production

/T/

Sales volumes for the three months ended June 30, 2009 were 1,279 boe/d compared to 1,463 boe/d for the three months ended June 30, 2008. Total sales volumes have decreased by 13 percent in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. This decrease results from the Company electing to cut back production by 300 boe/d by shutting in several Square Creek wells due to low natural gas prices. This shut-in production can be restored at the Company's choice.

Sales volumes for the six months ended June 30, 2009 were 1,285 boe/d compared to 1,364 boe/d for the six months ended June 30, 2008, a decrease of 6 percent. This decrease is consistent with the three months ended June 30, 2009, as previously noted.

Revenue

/T/

----------------------------------------------------------------------------
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Three months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Petroleum and natural gas sales ($000s) 4,346 7,231 9,552 12,868
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Average realized prices:
Natural gas ($/mcf) 3.71 10.32 4.53 9.33
Realized gain (loss) on commodity
contracts ($/mcf) 2.51 (1.34) 2.31 (0.80)
----------------------------------------------------------------------------
Realized natural gas price ($/mcf) 6.22 8.98 6.84 8.53
Oil and NGL ($/bbl) 45.11 108.04 41.95 88.34
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Combined average realized price
($/boe) 37.35 54.31 41.07 51.83
----------------------------------------------------------------------------
Benchmark prices:
AECO average natural gas price ($/mcf) 3.45 9.82 4.18 8.90
Edmonton par crude oil ($/bbl) 66.70 126.37 58.95 112.34
----------------------------------------------------------------------------
----------------------------------------------------------------------------

/T/

Petroleum and natural gas sales which include realized gains and losses on commodity contracts, for the three months ended June 30, 2009 were $4,346,000 compared to $7,231,000 for the three months ended June 30, 2008, a decrease of 40 percent. This decrease is attributable to a 31 percent decrease in the combined average realized commodity price in the second quarter of 2009 from the second quarter of 2008 and a 13 percent decrease in sales volumes.

For the six months ended June 30, 2009, petroleum and natural gas sales were $9,552,000 compared to $12,868,000 for the six months ended June 30, 2008 - a decrease of 26 percent. This decrease is attributable to a 21 percent decrease in the combined average realized commodity price and a 6 percent decrease in sales volumes in the first half of 2009 when compared to the same period in 2008.

The average natural gas price realized by the Company for the second quarter of 2009 was $3.71/mcf compared to the AECO average price of $3.45/mcf. This compares to the average natural gas price realized in the second quarter of 2008 of $10.32/mcf and an AECO average price of $9.82/mcf. The average natural gas price realized by the Company for the six months ended June 30, 2009 was $4.53/mcf compared to the AECO average price of $4.18/mcf. This compares to the average natural gas price realized in six months ended June 30, 2008 of $9.33/mcf and an AECO average price of $8.90/mcf. The Company receives a slight premium to the AECO price of approximately 4 percent to 5 percent due to the higher heating value of its natural gas.

The Company uses commodity contracts to manage its exposure to fluctuations in the price of natural gas. For the three months ended June 30, 2009, the Company realized a gain on commodity contracts of $1,733,000, or $2.51/mcf, compared to a realized loss on commodity contracts of $1,072,000, or $1.34/mcf, in the three months ended June 30, 2008, which is included in petroleum and natural gas sales. The Company recorded an unrealized loss on commodity contracts in the three months ended June 30, 2009 of $922,000 compared to an unrealized gain on commodity contracts for the three months ended June 30, 2008 of $151,000.

For the six months ended June 30, 2009, the Company realized a gain on commodity contracts of $3,192,000, or $2.31/mcf, compared to a realized loss on commodity contracts of $1,185,000 or $0.80/mcf for the six months ended June 30, 2008. In addition, the unrealized gain on commodity contracts in the six months ended June 30, 2009 was $1,496,000 compared to an unrealized loss on commodity contracts of $2,990,000. The Company has sold forward approximately 60 percent of its natural gas production through to the end of the first quarter of 2010 giving the Company a degree of certainty over its cash flow. The estimated mark-to-market value of the Company's commodity contracts at June 30, 2009 was $3,983,000.

At June 30, 2009 the Company had the following commodity contracts in place:

/T/

----------------------------------------------------------------------------
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Period Volume (GJ/d) ($/GJ)
----------------------------------------------------------------------------
Swap April 1, 2009 to December 31, 2009 5,100 7.20
Swap January 1, 2010 to March 31, 2010 2,600 8.38
Swap January 1, 2010 to March 31, 2010 2,500 6.80
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Royalties

(1) Before realized gains and losses on commodity contracts.

/T/

Royalties decreased to $442,000 for the second quarter of 2009 from $1,293,000 for the second quarter of 2008. This decrease is due to a reduction in the natural gas price which fell from $10.32/mcf in the second quarter of 2008 to $3.71/mcf in the second quarter of 2009 - a decrease of 64 percent. Royalties are not attributed to realized gains and losses on commodity contracts. The effective royalty rate for the second quarter of 2009 was 16.9 percent compared to 15.6 percent for the second quarter of 2008. This increase reflects a charge in the second quarter of 2009 of $60,000 related to an audit and reassessment of Alberta Royalty Tax Credits of a predecessor company.

For the six months ended June 30, 2009, royalties were $920,000 compared to $2,263,000 for the six months ended June 30, 2008. This decrease is attributed to a 51 percent decrease in the natural gas price realized.

Operating Expenses

/T/

For the three months ended June 30, 2009, operating expenses were $1,855,000 or $15.95/boe compared to $2,051,000 or $15.40/boe for the three months ended June 30, 2008. Operating expenses decreased in the second quarter of 2009 due to a decrease in production volumes. Operating expenses increased on a per boe basis due to an increase in Square Creek production volumes in the second quarter of 2009 which records higher operating costs relative to the Company's other properties. The Company's Square Creek property is a remote winter-access property which contributes to its relatively high operating costs.

For the six months ended June 30, 2009, operating expenses were $3,670,000 compared to $3,426,000 for the six months ended June 30, 2008. Operating costs for the six months ended June 30, 2009 were higher than the six months ended June 30, 2008 because they included six months of Square Creek operations compared to only three months in the first six months of 2008.

The Company has taken several steps to reduce operating costs at Square Creek, including the purchase of a rented compressor, camp, rig mats and other rented equipment. In addition, the Company tendered the field operations contract for Square Creek and re-routed its Velma production to another third party processing plant which is expected to result in approximately $800,000 of annualized savings to the Company.

Transportation Expenses

/T/

Transportation costs for the three months ended June 30, 2009 were $249,000 compared to $237,000 for the second quarter of 2008. Transportation costs include the transportation and fuel costs associated with the usage of natural gas pipelines. Transportation costs for the six months ended June 30, 2009 were $495,000 compared to $449,000 for the six months ended June 30, 2008. The rate that the Company was charged for interruptible transportation services increased in October 2008. The Company also secured an additional firm transportation services contract at Owl Lake where all of its gas from the general Ladyfern area is sold.

General and Administrative Expenses

/T/

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Three months ended June 30, Six months ended June 30,
2009 2008 2009 2008
($000s) ($/boe) ($000s) ($/boe) ($000s) ($/boe) ($000s) ($/boe)
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General

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