President's Message
Message to Shareholders
Diaz’s financial and operating results for the six months ended June 30, 2007, were lower than the first half of 2006, due to lower commodity prices and reduced production volumes.
North American natural gas pricing has been hampered by moderate weather allowing natural gas storage inventories to recover to the previous year’s levels. Conversely, world oil pricing has strengthened due to supply concerns.
In the longer term, Canadian gas drilling rates, which are significantly below the five year average, will lower Canadian gas deliverability and when coupled with an increasing demand for natural gas for oil sands development should reduce the Canadian natural gas volumes available for export to the United States. Ultimately, this should help North
American gas prices to recover back to energy parity with oil prices.
In the near term, Diaz will focus on developing its Canadian oil properties and its deep Wilcox gas properties in Texas.
United States
In the first half of 2007, Diaz’s focus has been on developing the Cheney prospect which should be tested in the third quarter of 2007. In Texas, Diaz has identified up to 16 locations for wells on lands currently under lease and will rank and prioritize these wells for drilling during the second half of 2007 and 2008.
Cheney, Colorado County, Texas – Working Interest 20%
In Texas, the Cheney #1 well began drilling in April and reached a total depth of 18,400 feet in early July 2007. Based on the Company’s log analysis, the well encountered 40 feet of gross pay and 30 feet of net pay in the Wilcox #18 zone which was the primary horizon in the well.
Completion operations are expected to be carried out in the third quarter of 2007 when Diaz plans to conduct a fracture stimulation and production test of the zone.
Canada
During the first 6 months of 2007 in Canada, Diaz participated in drilling and or reentering four wells ( 2.2 net) resulting in two gas wells (1.2 net), one oil well (0.2 net) and one dry hole (0.8 net).
Hays, Alberta, Canada – Working Interest 80%
In November 2006, Diaz drilled an Arcs oil discovery which encountered two productive zones.
During the second quarter of 2007 Diaz completed installation of a battery and sales gas line. Testing of both zones indicated lower than anticipated rates of oil production and increasing volumes of gas. The lower zone is currently being produced and evaluated and commingling of the zones may be conducted during the third quarter.
Additional development drilling will be required to properly test this structure.
Parkman, Saskatchewan, Canada – Diaz Working Interest 37.5%
In the third quarter of 2007, Diaz drilled a horizontal Tilston oil well on its Parkman property located in South East Saskatchewan. Completion operations are underway. This well has the potential to significantly increase the Company’s current oil production.
Financial
Revenue for the three and six month periods ended June 30, 2007, totaled $3.0 million and $6.3 million respectively compared with $3.9 million and $8.5 million respectively for the same periods in 2006.
Cash flow from operations for Q2 2007 decreased to $1.5 million, or $0.02 per share compared with $2.2 million or $0.03 per share in Q2 2006. Cash flow from operations for the six month period ended June 30, 2007, was $3.1 million or $0.05 per share compared with $5.5 million or $0.09 per share in the previous year.
Diaz reported a loss for Q2 2007 of $488,000, or $(0.01) per share compared with earnings of $1.4 million, or $0.02 per share, reported in Q2 2006. For the six month period ended June 30, 2007, the Company had a loss of $766,000 or $(0.01) per share versus income of $2.4 million or $0.04 per share in the prior year six month period.
Capital expenditures for the first half of 2007 totaled $5.2 million compared with $6.8 million for the same period in 2006 and were financed from cash flow, capital dispositions and a convertible debenture financing completed in the 1st quarter 2007.
Diaz completed the second quarter with net debt of $13.6 million versus $11.2 million at the beginning of the year. Diaz’s net debt includes $7.1 million of convertible debentures.
Production
Natural gas production for Q2 2007 decreased to 4.7 MMcfd from 6.5 MMcfd for Q2 2006 and oil production declined to average 78 Bopd for the quarter compared with 141 Bopd for the same period in 2006. For the six month period ended June 30, 2007, natural gas production decreased 19% to 5.1 MMcfd from 6.3 MMcfd for 2006 and oil production declined 44% to average 84 Bopd compared with 149 Bopd for the same period in 2006. Over 50% of the natural gas production decline is the result of the Hancock #2 well which has been shut-in during most of the year.
Business Outlook
The Company will continue with its planned exploration and development activities during the second half of the year. Highlights for the second half will be the completion of the horizontal oil well at Parkman, Saskatchewan, and the Cheney #1 well in Colorado County, Texas, and multiple exploration wells both in Canada and in the United States.
On behalf of the Board,
D.K. Clark, Chief Operating Officer
R.W. Lamond, Chairman
August 14, 2007
