Record Oil Prices Lift Ivory's Prospects in Western Canada

By Andrew K. Burger

http://www.resourceinvestor.com/

08/06/07

PRETORIA, South Africa (ResourceInvestor.com) -- With oil prices hitting record highs earlier this month, the value of oil and gas produced here at home in North America becomes only that much more valuable - and the shares of small, publicly listed explorer-producers that much more attractive.

Ivory Energy [TSX-V:IV] is pumping a daily average 840 barrels of oil equivalent (BOE) out of wells on four properties in Alberta and Saskatchewan and is making headway in its efforts to increase daily oil production by 400% and increase existing plus probable reserves 150% through a combination of acquisition and development.

Two Acquisitions

Ivory on July 18 announced that for US$25.1 million in cash, common shares and warrants it had purchased all outstanding shares and closed on the acquisition of 101091129 Saskatchewan Ltd., known as Saskco, and Zenith Petroleum Corp., both of which were producing heavy oil out of wells in western Saskatchewan and eastern Alberta.

Adding to the company’s human resources, Zenith’s management team agreed to join Ivory. Zenith’s James R. Quillian has been appointed senior vice-president of engineering and chief operating officer and joins Ivory’s board of directors. W. Wayne Shepheard has been appointed senior vice-president of exploration, Zenith’s David E. Smiddy has been appointed Ivory’s chief financial officer and vice-president of finance and David J.S. Keefe has been appointed vice-president of land.

The wholly owned and operated properties acquired through the Sascko and Zenith acquisitions include are producing approximately 840 BOE/day of heavy oil and have proven and probable reserves valued at US$35.7 million discounted at 10% and with reserve life average of 11 years based on independent engineering and forecasted pricing reports in accordance with Canada’s NI51-101.

Ivory also acquired oil treatment facilities valued at US$8 million and tax pools of US$22.7 million, management reported in a media release.

Development Program

The acquisition falls right in line with Ivory management’s strategy of acquiring low risk assets with proven or high-probability prospective and production value. According to management they have “extensive development potential in low risk re-completions, in-fill and step-out drilling with multi-zone potential.”

The Ivory management team has put together and started a 14-month development program. On July 24, they reported that the first service rig is now on-site at one of the newly acquired properties in west-central Saskatchewan.

Overall, the resource development program entails drilling 36 development wells, re-completing 26 existing wells, drilling five new exploration wells, pipelining most of the wells to the company’s central processing facility and beginning the expansion of its existing water flood operation. The program will result in a 2,500-3,900 BOE/day production increase and cost approximately C$20 million - funded almost entirely out of cash flow from the properties - if all goes according to plan.

Pipelining existing wells and reducing trucking expenses will increase cash flow by reducing operating costs, management reported. Expanding its existing water flood and initiating a new one on a second property will increase well-head pressure and lead to increased oil recovery. Ivory has begun water flood modelling on three other properties, aiming to water flood wells in the near future.

Projects & Forecasts

Ivory went public on Toronto’s venture exchange in June last year with three original projects in western Canada that included three wells producing 200 BOE/day. A C$6.1 million private placement and the acquisition of Golden Spike Limited Partnership in January added to its interests and portfolio in western Canada, which now cover some 51,168 gross acres of prospective and option land.

Management shortly thereafter, in March, acquired the 8,600-acre Freemont-Silverdale Project in western Alberta, which added 840 BOE/day and gave the company what management views as a low-cost purchase with substantial development upside.

In addition to Freemont-Silverdale, Ivory’s portfolio includes the Holburn Project, west of Edmonton, where it has a 50%-100% interest in 16.5 sections of land with multi-zone oil and gas potential. Two gas discoveries there are currently under development, according to management.

Ivory also has a 95% interest before capital payout in the Moonshine exploration project northeastern Alberta and an exclusive seven-year option on an additional adjoining 14,080 acres. The property is currently home to three producing gas wells.

The Totnes development project in southwestern Saskatchewan currently has six producing oil wells, another in development and testing for natural gas in another part of the property. Ivory has a 12.5% interest in an Area of Mutual Interest spanning more than 500,000 acres in 780 sections with an average 22% interest in 3,840 acres currently under lease.

Finances

Management forecasts a big increase in positive cash flow for this year’s third quarter from less than C$1 million to near C$4 million and another boost upwards to more than C$5 million in Q4.

On July 18, management announced that it had raised US$28.5 million through an offering of convertible debenture units with Wellington West Capital Management acting as agent. Each unit consists of US$1,000 principal amount of convertible debentures with a 9.5% per annum interest rate and 200 common share purchase warrants.

Each debenture is convertible into 1,000 common shares at the option of the holder any time prior to maturity and will be redeemable for cash at Ivory’s option at a redemption price of US$1,020 each and US$1,010 each any time after the third and fourth anniversary of the closing of the offering, respectively. Each warrant entitles the holder to purchase one Ivory Energy common share at an exercise price of US$1.00 for a five-year period following the closing of the offering.

Ivory has 42 million common shares outstanding and 58.7 million on a fully diluted basis. Management owns 25% of the total in three-year escrow with institutional investors holding another.

Andrew K. Burger