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Fairborne Announces Third Quarter 2012 Results and First Half 2013 Outlook

CALGARY, ALBERTA -- (Marketwire) -- 11/07/12 -- Fairborne Energy Ltd. ("Fairborne" or the "Company") (TSX:FEL) is pleased to provide this summary of its financial and operating results for the third quarter of 2012. A complete copy of the Company's consolidated interim financial statements for the three and nine months ended September 30, 2012, along with management's discussion and analysis in respect thereof will be filed on SEDAR and is available on the Company's website at


                               THREE MONTHS ENDED         NINE MONTHS ENDED 
                                    SEPTEMBER 30,             SEPTEMBER 30, 
                                2012         2011         2012         2011 
Financial ($thousands,                                                      
 except per share amounts)                                                  
Petroleum and natural gas                                                   
 revenue                      25,506       53,350       95,542      156,323 
Funds generated from                                                        
 operations (1)               10,619       31,504       41,579       88,578 
 Per share - basic        $     0.11   $     0.31   $     0.41   $     0.87 
 Per share - diluted      $     0.11   $     0.31   $     0.41   $     0.86 
Cash flow from operations                                                   
 (including changes in         6,355       34,089       36,783       83,287 
 working capital) (1)                                                       
 Per share - basic        $     0.06   $     0.33   $     0.36   $     0.81 
 Per share - diluted      $     0.06   $     0.33   $     0.36   $     0.80 
Profit (loss) (2)           (121,840)       1,323     (173,801)      34,625 
 Per share - basic        $    (0.19)  $     0.01   $    (1.69)  $     0.34 
 Per share - diluted      $    (0.19)  $     0.01   $    (1.69)  $     0.33 
Exploration and                                                             
 development expenditures      9,698       45,191       55,214      142,886 
Proceeds from the sale of                                                   
 petroleum and natural gas      (474)           -       89,653      141,380 
Working capital deficit                                                     
 (excluding convertible        9,521       21,257        9,521       21,257 
 debentures) (3)                                                            
Convertible debentures             -       99,353            -       99,353 
Bank indebtedness            185,336      125,196      185,336      125,196 
Total debt, including                                                       
 working capital             194,857      245,806      194,857      245,806 
Average production                                                          
 Natural gas (Mcf per day)    68,416       72,303       71,894       67,040 
 Crude oil (bbls per day)        873        2,262        1,330        2,419 
 Natural gas liquids (bbls                                                  
  per day)                       799          845          877          876 
 Sulphur (tonnes per day)                                                   
  (4)                             27           48           27           57 
 Total (BOE per day)          13,102       15,206       14,216       14,525 
Average sales price (5)                                                     
 Natural gas ($ per Mcf)        2.28         4.27         2.20         4.36 
 Crude oil ($ per bbl)         87.19        85.96        93.91        86.99 
 Natural gas liquids ($                                                     
  per bbl)                     58.40        65.89        63.52        60.97 
 Sulphur ($ per tonne)        125.38       138.02       123.65       119.35 
Netback per BOE ($ per                                                      
 Petroleum and natural gas                                                  
  sales (5)                    21.72        37.35        24.18        38.94 
 Other income                  (0.06)           -         0.24            - 
 Royalties                     (1.92)       (2.98)       (2.15)       (4.05)
 Operating expenses            (6.80)       (8.33)       (7.52)       (8.85)
 Transportation                (0.98)       (1.19)       (1.06)       (1.10)
 Operating netback             11.96        24.85        13.69        24.94 
Wells drilled (gross)              2           15           14           40 
Undeveloped land (net                                                       
 acres)                      132,273      225,997      132,273      225,997 
(1) The calculation of funds generated from operations and cash flow from   
    operations for the three months ended September 30, 2012 excludes $2.3  
    million (2011 - $3.1 million) of interest expense which is classified as
    finance expense. Similarly, for the nine months ended September 30,     
    2012, $7.6 million (2011 - $8.7 million) of interest expense is         
    classified as finance expense.                                          
(2) Included in the net loss is an after tax impairment loss of $115.4      
    million for the three months ended September 30, 2012 and $149.8 million
    for the nine months ended September 30, 2012 (2011 - nil).              
(3) Excluding assets held for sale and associated liabilities.              
(4) A BOE conversion ratio has been calculated using a conversion rate of   
    one tonne of sulphur to one barrel.                                     
(5) Excludes the change in fair value of derivatives.                       

Third Quarter Highlights

--  Third quarter 2012 production of 13,102 BOE per day was reduced by
    approximately 1,450 BOE per day as a result of second quarter property
    dispositions and the continued shut in of higher operating cost
    production on the Company's Wild River property; 
--  Operating costs of $6.80 per BOE for the third quarter were 18% lower
    than the prior year, reflecting operational efficiencies achieved at the
    Company-built Marlboro gas plant and the disposition of above-average
    operating cost properties; 
--  Operating netback of $11.96 per BOE reflected low natural gas prices and
    the disposition of higher netback crude oil properties in the second
--  Funds generated from operations before interest expense, of $10.6
    million ($8.3 million after interest expense) were realized on $25.5
    million of third quarter revenue; 
--  Capital spending of $9.7 million was funded entirely from funds
    generated from operations; 
--  Third quarter drilling of two (2.0 net) wells included one (1.0 net)
    liquids rich natural gas well on the Company's core Harlech property,
    which came on production October 1, 2012; 
--  Bank debt of $185.3 million at September 30, 2012 was initially paid off
    with gross proceeds of $189 million received on October 1, 2012 from
    strategic property dispositions; 
--  A non-cash impairment loss of $154.3 million ($115.4 million after tax)
    was recognized on the reclassification of properties disposed of October
    1, 2012 as part of the Company's strategic reorganization. 

Strategic Review

Fairborne concluded its review of strategic alternatives with one property disposition completed in the second quarter of 2012 including 800 BOE per day for proceeds of $90 million and two additional property dispositions which closed October 1, 2012 with combined production of approximately 8,700 BOE per day for gross proceeds of $189 million. Upon completion of these transactions, the Company has the following characteristics:

--  An undrawn lending facility of $80 million; 
--  A working capital deficit of approximately $10 to $13 million, largely
    resulting from deal costs and corporate restructuring costs; 
--  Production of 4,500 BOE per day (20% light oil and condensate, 5% NGLs),
    an increase in total liquids percentage of almost 100% as compared to Q3
--  A stable corporate production base with an overall decline rate of 20%; 
--  312 (201 net) sections of land in the greater Harlech area; 
--  23.0 MMBOE of proven plus probable reserves at October 1, 2012 (based on
    the GLJ Petroleum Consultants Ltd. ("GLJ") reserve evaluation effective
    December 31, 2011, post all dispositions since then and mechanically
    updated to remove production from January 1, 2012 to October 1, 2012); 
--  An Economic Contingent Resource, as evaluated by GLJ for the Cardium
    Formation (best estimate), of 131 MMBOE attributable to the Company's
    working interest; 
--  A focused strategy to convert these Economic Resources to reserves while
    limiting capital expenditures to cash flow over the near term to
    maintain a strong balance sheet; 
--  In addition to the Cardium, a large inventory of undrilled prospects in
    the Viking, Notikewin, Wilrich and Gething; 
--  Expected exit production for 2012 of 5,000 BOE per day representing
    growth of 11% from the start of the fourth quarter. 

With the closing of the strategic review transactions, the Company also undertook a series of cost reduction initiatives in order to realign its cost structure commensurate with its reduced overall size. This will result in an overall cash G&A cost of approximately $3.75 per BOE for 2013 which is expected to decrease in the future as production grows. Cost reduction steps included staff reductions, pay reductions, office space consolidation and other scalable reductions based on the Company's smaller size, all of which reduced total cash G&A by approximately 50%.

Operations Update

Moving forward as a deep basin focused growth company, Fairborne will continue the delineation, development and exploitation of its large land base in the greater Harlech area. During the third quarter, the Company drilled one (1.0 net) multi zone liquids rich gas well at Harlech. The well was brought on production on October 1, 2012, has produced for over 30 days with no decline and is currently producing 1,000 Mcf per day of raw gas with 160 bbls of liquids per MMcf of gas, 75% of which is condensate. Fairborne has an inventory of 55 of these wells which offer compelling economics and an operating netback at current commodity prices of approximately $36.00 per BOE.

Fourth Quarter 2012

Fourth quarter 2012 drilling activities will include three (1.6 net) wells on the Company's core Harlech property; two Cardium horizontal wells and one Wilrich horizontal well. At the start of the fourth quarter, the Company also purchased an additional eight (2.7 net) sections of land within its core Harlech operating area all of which contains Cardium and Wilrich potential. Fourth quarter capital expenditures are budgeted at $11.2 million.

The Company has completed the drilling of its third Cardium horizontal well, in the Harlech area (76% WI). The 1-9-44-15W5 well, located two miles southwest of the Company's first two Cardium horizontal wells, reached target depth in mid-October and a 15 stage packer system has been run in the well. Completion operations are planned for early November.

The Company's two existing Cardium horizontals have continued to perform as expected and are summarized below:

                                 INITIAL             CUMULATIVE  PRODUCTION 
           LENGTH     NUMBER       ("IP")   30 DAYS         GAS    (66% C5+)
          (METRES)  OF FRACS    (BOE/DAY)  (BOE/DAY)      (MMCF)      (MBOE)
Well 1        800         10         400        330         204        11.6 
Well 2      1,200         20       1,000        880         466        24.2 

Both wells have maintained a liquids yield of 50 barrels per million cubic feet of gas (of which 35 barrels is condensate) throughout their production history to date, consistent with early reservoir models which predict consistent yields based on the reservoir characteristics of the Cardium in the Harlech area.


Completing the strategic review process, closing the property dispositions and initially eliminating outstanding bank debt, Fairborne is now able to concentrate on growth as a deep basin focused company with a strong balance sheet.

The Board of Directors has approved Fairborne's capital budget for the first half of 2013 at $13 million. First half activities will focus on the delineation and development of the Company's core Harlech property with a drilling program that includes one (0.8 net) horizontal well targeting the Cardium resource, and two (1.1 net) multi-zone vertical wells.

The first half of 2013 capital budget is expected to be financed from cash flow, based on the following key assumptions:

--  average production of 5,000 to 5,300 BOE per day; 
--  royalties between 10% and 12%; 
--  operating costs of $9.75 to $10.50 per BOE; 
--  G&A expenses of $3.75 per BOE; and 
--  Net debt of approximately $16 million at the end of the second quarter

Fairborne is a crude oil and natural gas exploration, development and production company headquartered in Calgary, Alberta, Canada. Fairborne's shares trade on the Toronto Stock Exchange under the symbol "FEL".

Forward Looking Statements: Certain information set forth in this press release, contain forward-looking statements including management's assessment of future plans and operations, drilling plans, expected activity levels, expected netbacks at Harlech, Q4/2012 capital expenditure budget and the nature of expenditures, expected decline rates, plans to limit capital expenditures to cash flow, expected 2012 exit production rate, 2013 G&A expenses, timing of completion of operations on the third Cardium horizontal well, first half of 2013 capital expenditure budget, the nature of activities, the method of funding thereof and the assumptions utilized in the expectation that the budget will be funded from cash flow, including average production, royalty rates, operating costs, G&A expenses and bank debt at end of the second quarter of 2013. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond Fairborne's control, including the impact of general economic conditions, industry conditions, volatility and changes in commodity prices, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, delays resulting from or the inability to obtain required regulatory approvals, inability to retain and delays in retaining drilling rigs and other services, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, and ability to access sufficient capital from internal and external sources. The foregoing list is not exhaustive. Additional information on these and other risks that could affect Fairborne's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (, or at Fairborne's website ( Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. The actual results, performance or achievement of Fairborne could differ materially from those expressed in, or implied by, these forward- looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Fairborne will derive therefrom. Fairborne disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws.

Non-GAAP and Additional GAAP Measures: This document contains funds generated from operations which is an additional GAAP measure presented in the consolidated financial statements. The Company uses funds generated from operations as a key measure to demonstrate the Company's ability to generate funds to repay debt and fund future capital investment. This document contains the terms "funds generated from operations per share", "cash flow from operations per share", "net debt" and "netbacks" which are non-GAAP financial measures. The Company uses these measures to help evaluate its performance. These non-GAAP financial measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. The Company uses net debt (bank indebtedness plus negative working capital or less positive working capital, excluding convertible debentures) as an alternative measure of outstanding debt. The Company considers corporate netbacks a key measure as it demonstrates its profitability relative to current commodity prices. Netbacks which have no GAAP equivalent are calculated on a BOE basis by deducting royalties, operating costs, and transportation from petroleum and natural gas sales. Fairborne also presents funds generated from operations per share and cash flow from operations per share and such per share amounts are calculated using weighted average shares outstanding consistent with the calculation of profit (loss) per share.

BOE Conversions: Barrel of oil equivalent ("BOE") amounts may be misleading, particularly if used in isolation. A BOE conversion ratio has been calculated using a conversion rate of one tonne of sulphur to one barrel and six thousand cubic feet of natural gas to one barrel. This conversion ratio of six thousand cubic feet of natural gas to one barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from energy equivalency of 6:1; utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

Contingent Resources: Contingent resources referred to herein are based on the resource study effective March 31, 2012, prepared by GLJ. Contingent resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but may not currently be considered commercially recoverable due to one or more contingencies. Contingent resources are in addition to reserves booked as proved, probable and possible. For low, best and high estimates of the contingent resources, further definitions related thereto, positive and negative factors related to the contingent resources and contingencies and risk factors related thereto, please refer to the press release of the Corporation dated May 2, 2012. There is no certainty that it will be commercially viable to produce any portion of the resources.

Reserves: The estimates of reserves for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation.

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