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Far East Energy Announces 138% Rise in Q1 Revenues, Updated PRMS Reserves Show 39% Uplift in 2P Value, Management Focused on Funding Next Phase of Operations

2014-05-08 19:00
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HOUSTON, May 8, 2014 /PRNewswire/ -- Far East Energy Corporation (OTCBB:FEEC), the U.S. listed company that operates the Shouyang Coalbed Methane (CBM) Production Sharing Contract (PSC) in Shanxi Province, People's Republic of China, today announced that it has filed its results for the quarter ending March 31, 2014 on Form 10-Q with the SEC.  The company also announced the release of an updated independent engineering report prepared by Resource Investment Strategy Consultants (RISC), as of December 31, 2013.  The reserves estimates in the updated RISC report were prepared in accordance with the standards recognized by the Society of Petroleum Engineers (SPE) in the Petroleum Resources Management System (PRMS).

Gas sales volumes in the first quarter of 2014 were up 73% compared to the same period in 2013, following the multi-well drilling and fracing program completed during 2013.  At the same time, and as previously announced, the gas contract price for 2014 has increased following negotiation with our off-taker, Shanxi Provincial Guoxin.  For first quarter 2014, the company received a gas price averaging the equivalent of $8.90/Mcf, up 38% from the same period in 2013.  The actual base price paid for our gas prior to subsidies rose by 42% on January 1, 2014, from 1.2 RMB per cubic meter to 1.7 RMB per cubic meter.  As a result of these two factors, operating revenue in Q1 2014 was up 138% compared to the same period in 2013.

Commenting, CEO and President Michael McElwrath said, "It's rewarding to see that the work put into the Shouyang Block in 2013 drilling and fracing new wells has resulted in a significant increase in production and revenues during the first quarter of 2014."

Separately, the company has released an updated reserves report conforming to the PRMS standards as defined by the SPE engineers and prepared by RISC, as of December 31, 2013.  The updated report indicates that the estimated future net cash flow, on an NPV10 basis, for the 2P (Proved plus Probable) reserves has increased to $2.85 billion, up 39% from the figure at December 31, 2012, reflecting an 104% increase in the Proved Developed reserves category.  Reserves have been upgraded from the Proved Undeveloped category to the Proved Developed category, to leave overall 1P and 2P reserves at similar levels, of 301 Bcf and 439 Bcf, respectively.

Category SEC Net Reserves NPV 10* PRMS Net Reserves NPV 10
Proved 67.5 Bcf $167.3 million 301.0 Bcf $1.6 billion
Proved + Probable 439.9 Bcf $1.4 billion 439.1 Bcf $2.8 billion
Proved + Probable + Possible 549.3 Bcf $2.0 billion 547.7 Bcf $3.8 billion
* The standardized measure of discounted future net cash flows of SEC proved gas reserves is $151.8 million

In March 2014, RISC had released its reserve report prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC).  The primary difference in the two reports is in regard to the calculation of proved reserves.  The PRMS guidelines allow for more Proved Undeveloped locations to be assigned (that would otherwise be assigned as Probable reserves under the rules and regulations of the SEC) when an area is known to have certain geologic connectivity in a region.  This difference is particularly relevant to CBM projects where the coal seam characteristics are well known.

CEO Michael McElwrath said, "Our development drilling in 2013 and our 42% increase in gas price are both reflected in this report, which continues to underscore the value of our Shouyang project."

The full updated RISC report can be found at http://www.fareastenergy.com.

The Overall Development Plan (ODP) for the 1H production area is expected to be submitted to the NDRC shortly and the company expects to receive the "road-pass" ODP by this summer.

With a strong 2013 program now showing results in terms of higher gas production, the key focus for management is to secure the funds required to broaden the production well pattern in the core 1H area, and to continue the appraisal of the southern portion of the Shouyang Block. 

Commenting further, McElwrath said, "We are devoting substantial time to securing the funding required to continue the development of the Shouyang PSC.  The extension to the Standard Chartered Bank facility agreement provides time to progress further.  Field activity continues, with the next round of drilling and fracing subject to the ability to secure new funding.  We are mindful of our shareholders, are very grateful for your continued support of the company and are committed to providing you further updates as we continue to make progress toward our shared goals."

Additional Information Regarding Estimates of PRMS Reserves

PRMS reserves do not constitute SEC reserves.  The estimates in the RISC report were prepared in accordance with the definitions and guidelines set forth in the 2007 Petroleum Resources Management System approved by the Society of Professional Engineers.  The resources shown in the RISC report are estimates only and should not be construed as exact quantities. Readers are urged to read the report in its entirety.

NPV10 for PRMS 1P, 2P and 3P reserves may be considered a non-GAAP financial measure as defined by the SEC.  Because the standardized measure of discounted future net cash flows applies only to SEC proved reserves, there are no directly comparable US GAAP financial measures to NPV10 for PRMS 1P, 2P and 3P reserves.  NPV10 is computed on the same basis as the standardized measure of discounted future net cash flows for SEC proved reserves but using the specified amount of PRMS reserves, as applicable, without deducting future income taxes and using estimates of future gas prices.  We believe NPV10 for PRMS 1P, 2P and 3P reserves is a useful measure for investors for evaluating the relative monetary significance of our CBM properties.  We further believe investors may utilize NPV10 for PRMS 1P, 2P and 3P reserves as a basis for comparison of the relative size and value of our PRMS reserves to other companies that report similar information.  Our management uses this measure when assessing the potential return on investment related to our CBM properties and acquisitions.  However, NPV10 for PRMS 1P, 2P and 3P reserves is not a substitute for the standardized measure of discounted future net cash flows for SEC proved reserves. NPV10 for PRMS 1P, 2P and 3P reserves does not purport to present the fair value of our proved CBM gas reserves or our PRMS reserves.

NPV10 for the PRMS 1P, 2P and 3P reserves amounts above represent the present value of estimated future revenues to be generated from the production of the specified amounts of PRMS reserves, calculated using the assumptions set forth in the RISC report, without giving effect to non-property related expenses such as general and administrative expenses, debt service and depreciation, depletion and amortization, or future income taxes and discounted using an annual discount rate of 10%.

Far East Energy Corporation cautions that the disclosures shown above are based on estimates of PRMS reserves and future production schedules which are inherently imprecise and subject to revision, and the 10% discount rate is arbitrary.  In addition, costs and prices as of the measurement date are used in the determinations, and no value may be assigned to PRMS reserves.  Estimates of economically recoverable PRMS reserves and of future net cash flows are based upon a number of variable factors and assumptions, all of which are to some degree subjective and may vary considerably from actual results.  Therefore, actual production, revenues, development and operating expenditures may not occur as estimated.  The PRMS reserves data are estimates only, are subject to many uncertainties, and are based on data gained from production histories and on assumptions as to geologic formations and other matters.  Actual quantities of CBM may differ materially from the amounts estimated.

The SEC permits oil and gas companies, in their filings with the SEC, to disclose only proved, probable and possible reserves as defined in SEC Regulation S-X Section 210.4-10(a). We use certain terms in this news release, such as "PRMS reserves" and "NPV10," that are not permitted to be included in filings with the SEC.  Investors are urged to consider closely the disclosure in our Form 10-K, File No. 0-32455, available over the Internet at the SEC's website at http://www.sec.gov.

Source: Far East Energy Corporation

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