Sherritt Q1 oil & gas profits rise, output falls

Canadian mining and energy company Sherritt International (TSX: S) posted first quarter operating profits from its oil and gas business in Cuba of Cdn$21.1mn (US$16.9mn), up 21.3% from Cdn$17.4mn in 1Q04, the company said in its first quarter earnings statement. Revenues rose to Cdn$49.7mn from Cdn$47.6mn in 1Q04 due to higher realized prices, partly offset by lower production volumes. The average price in Cuba rose to US$28.40/b in the quarter from US$24.21 in 1Q04. Sherritt's net oil sales in Cuba fell to 17,523b/d from 19,964b/d in 1Q04 and first quarter gross operated Cuban oil production fell 9.13% to 39,219b/d from 43,157b/d in 1Q04. This figure excludes production from Santa Cruz on block 7 because the field has not yet been declared commercial. "Following on from promising initial results from the Santa Cruz exploration well in December, 2004 [that tested at a rate of 1,300b/d], Sherritt has begun drilling two appraisal wells in this field," the statement said. "If initial results are borne out, commercialization of the field is anticipated around the end of the year." Estimated reserves are 100 million barrels of 18-degree API crude with associated natural gas. Four drilling rigs were active during the quarter, drilling a total of seven development wells and one exploratory well. Sherritt sells all heavy oil produced in Cuba to Cuban government agencies, generally at selling prices based on 79-83% of the Gulf Coast fuel oil no. 6 reference price. The impact of higher fuel oil prices was partially reduced by the strength of the Canadian dollar. GOING FORWARD Despite lower production in Q1, Sherritt aims to produce an average of 20,000b/d this year, comparable to 2004, which requires gross production to be about 43,000b/d, president and CEO Jowdat Waheed said in a conference call to discuss Q1 results on Tuesday. The company is producing in that range now and is "fairly confident" that this level can be maintained throughout the year, he said. "Sherritt expects that its development drilling program will result in modest increases in gross production volumes, offsetting natural production declines, with the potential for further increases in production volumes if additional fields are discovered," the statement said. Production is expected to increase in early 2006, when the company's appraisal wells in Santa Cruz come online, CFO Guy Bentinck said in the call. Sherritt has budgeted Cdn$128mn of capital expenditures for 2005, which includes development drilling of Seboruco and other existing fields, appraisal of the Santa Cruz discovery and exploration drilling on several prospects in blocks 9 (San Anton), 10 (Playa Larga) and 7 (Guanabo and Tarara). To provide additional drilling capacity, a fourth rig was activated in December 2004 and the Cuban government plans to import three additional rigs later in 2005, which may also be used by Sherritt, the statement said. Sherritt is not planning on drilling in deepwater until the area's potential is defined, Waheed said, referring to a non-commercial find in deepwater by Spanish oil giant Repsol (NYSE: REP) last year. Sherritt has some oil operations in Spain but almost all its oil revenues come from production on Cuba's Yumuri, Varadero, Canasi, and Puerto Escondido fields in block 7 between Havana and Matanzas on the island's northern coast.