Sep 11 - Connacher Provides Operational Update

Source Press Release
Company Connacher Oil and Gas Limited 
Tags Asset Deals, Technology, Project Economics, Project Timings, Great Divide, Algar, Corporate Updates, Oilsands
Date September 14, 2011

We continue to be encouraged by the stability and improving reliability of our production at Great Divide.  Daily bitumen production in July 2011 and August 2011 was in the 13,000 bbl/d-14,000 bbl/d range, as anticipated.   Current levels remain within this range.

Heavy oil differentials, which were wider earlier in the summer months, have since shown signs of contracting to lower and more acceptable levels in September 2011, which is positive for the bitumen pricing outlook.

Our SAGD+(TM) pilot project on two wells at Algar has been proceeding favourably with recorded evidence of attendant reductions in steam/oil ratios and also of a positive response in terms of well productivity.   Additionally, we have recently been successful in recovering, in liquid form, a high percentage of the solvent being injected with the steam into these two wells, critical for the longer term economic viability of the process.  Based on results to date, we are now evaluating the merits of expanding this pilot to four wells of the seven wells situated on  Algar Pad 203. A more detailed technical assessment will be forthcoming to shareholders prior to year end 2011.

Our project to establish a joint venture for the Great Divide Expansion Project is proceeding on schedule.  The initial "teaser" document and related confidentiality agreement ("CA") has been provided to a large number of interested parties by our exclusive advisor.  Our data room has been established and activated and following completion of the relevant CA, is available to interested parties prior to their proposal submission. These proposals will be assessed and our objective is to finalize a transaction late this year.  This would align the establishment of the joint venture  with the approximate timetable we envisage for the receipt of regulatory approval of our Environmental Impact Assessment and the expansion application to increase  Algar's capacity by 24,000 bbl/d.  A significant capital commitment will be required from the successful joint venturer to finance the plant, facilities and wells required to realize this new capacity, thereby earning an interest in Connacher's established undeveloped probable reserves in the region.  Connacher intends to  retain operatorship of the project.  This opportunity to participate in near-term production by as early as 2014 from already-established reserves has thus far attracted a positive reaction from potential joint venturers.  It also introduces the prospect of participation by parties with different objectives from those which solely focused on resource volumes.  There can be no assurance, however, that a joint venture will be completed on terms acceptable to Connacher or in the time frame contemplated herein, or at all.

Our conventional drilling and completion program in Central Alberta at Twining and Penhold was affected by wet weather conditions throughout July and into early August of this year, but conditions have improved markedly since that time. We now have drilled two new Pekisko wells and are drilling a third Pekisko well at Twining, which will bring our total well count to six wells.  After our 2011 drilling at Twining, we will complete the wells, tie them in to our facilities and then plan to assess the results.   We have also drilled and completed our first well at Penhold and are drilling a second well at this writing.  Further detailed information will be provided after Penhold production is underway.

Our refinery is having a near-record year thus far, with excellent crack spreads, a high level of throughput and sales, low asphalt inventories headed into the winter months and a healthy outlook which appears to be evolving for 2012.  The widening of heavy oil differentials assists us in the achievement of better downstream results which is evident in developing third quarter results.

Our asset rationalization program has resulted in over $80 million of sales thus far in 2011 and we are nearing completion of a process related to our Halfway Creek interests in the oil sands.  These interests are comprised of land and resources and proceeds, if and when received, will further strengthen Connacher's cash balances and liquidity.

On September 12, 2011 we initiated a formal process to dispose of our extensive 100 percent-owned lands and assets at Latornell in Alberta's Deep Basin.  The first round of bidding closes on October 13, 2011.

We anticipate further monetization of other non-cash generating assets during the balance of 2011, leaving the company with excellent expectations for strong cash balances and liquidity at year-end 2011, without the incurrence of any additional indebtedness or sourcing any additional external funds, other than as might be related to the Algar joint venture discussions.  Earlier this year, we successfully refinanced our long term debt at improved rates, extending term to maturity until 2018 and 2019 for the Canadian pay and U.S. pay issues, respectively.  These long-term debt instruments have no principal repayments until the scheduled maturity of the bond issues and we pay interest on a semi-annual basis in August and February of each year.  The new bonds were primarily sold to long-term institutional holders.  This refinancing further strengthened Connacher's financial condition and prospective cash flow would accordingly be available to finance our  future growth.

We are in the early stages of compiling our 2012 capital budget and operating plans.  Subject to review and approval by our Board of Directors in November 2011, we anticipate implementing a sustaining and growth capital budget for 2012 that would be entirely financed by available cash and anticipated cash flow in the year.  Our commodity hedging program, details of which can be found on our website at www.connacheroil.com, provides a solid base in terms of commodity price support for our business activities and plans.  We also anticipate repaying our $100 million unsecured subordinated convertible debenture (now recorded as a current maturity in our accounts) when due in June 2012, utilizing some combination of cash, available bank lines or through access to incremental high yield secured indebtedness, as permitted under our existing long term debt indenture.  We do not anticipate any increase in our net debt position should we proceed in this manner.

Connacher has a strong and well-defined asset base, primarily comprised of approximately half a billion barrels of proved and probable ("2P") heavy oil reserves, including 180 million barrels of proved ("1P) reserves.  The 10 percent present value of the future net revenue from these 2P reserves, as estimated by GLJ Petroleum Consultants Ltd.  in their year-end 2010 reserve report, was approximately $3 billion, based on forecast prices and costs as at January 1, 2011.  Connacher also had positive working capital and significant cash balances at June 30, 2011 and the company retains an essentially unutilized and available $100 million term credit facility.  Additional asset sales contemplated for completion before year-end 2011, involving properties or investments which do not generate current cash and which do not appear to be recognized in the underlying share value in the marketplace, are anticipated to provide considerable additional cash to  enhance corporate liquidity and financial flexibility.

Connacher Oil and Gas Limited is a Calgary-based developer of unconventional heavy crude oil and light gravity crude oil resources in the oil sands of Alberta and in central Alberta at Twining, Penhold and Gilby.   We own and operate two SAGD bitumen production projects at  Great Divide Pod One and  Algar and anticipate further expansion of capacity at  Algar in 2012 and beyond.   We also own and operate a profitable heavy oil refinery in Great Falls, Montana.

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