President's Message
November 10, 2011
Highlights
The Company made significant progress towards increasing oil production rates during Q3 2011 as it drilled four new wells during the quarter in its ongoing development program with funds sourced from property sales. Diaz sold four non-core properties which generated approximately $1.6 million. Diaz did not need to draw on its bank line during the third quarter, which leaves the Company positioned to proceed with additional planned drilling in the fourth quarter.
Diaz drilled three wells in its ongoing Lloydminster development program – all of which were successful.
Of note, and more significant, was the Company’s participation in the drilling of a horizontal well at Macklin, Saskatchewan, which was placed on production September 18, 2011, and has steadily produced in excess of 100 barrels of oil per day (45 bopd net), to date. Diaz plans to drill two offset wells to this well in November and anticipates a continuous development program if results warrant.
Lloydminster Drilling Program
Lloydminster, Alberta
Section 18-48-1 W4 in the Lloydminster area, Diaz 50% working interest, is currently the primary development focus of the Company.
Production rates from the three newest wells on section 18 commenced at an average of 75 Bopd and are expected to gradually decline to approximately 30 Bopd after twelve months. Diaz will monitor the production characteristics of these wells and plans additional drilling following this review.
Diaz also participated in a horizontal well in section 7-48-1 W4. The well, in which Diaz has a 15% working interest, has been producing at approximately 25 Bopd, with no water, to date. This well is situated just south of a well located at 2-18-48-1 W4 which is still producing with cumulative production of 22,000 barrels. The Company anticipates further drilling adjacent to these wells in 2012.
Macklin, Saskatchewan
At Macklin, Saskatchewan, Diaz participated for a 45% interest in a Dina horizontal heavy oil well. The well has exhibited excellent production characteristics, having produced at over 100 Bopd, for the past 50 days.
Following the completion of the well Diaz acquired a 45% interest in section 33-39-28 W3 immediately to the north of the current pool, and has shot a two section 3D seismic program to delineate further locations.
Based on the success of the recent well, Diaz plans to drill two, 50 meter offset, horizontal wells during November of this year.
Ongoing Exploration Program – Alberta and Saskatchewan
To date, Diaz has acquired oil and gas leases on five prospects in Alberta (5,258 gross acres, 2,850 net acres) and eight prospects in Saskatchewan (19,758 gross acres, 11,371 net acres) for a total inventory of eleven heavy oil projects and two medium/light oil projects. The primary pay zones are Lloydminster in Alberta and the Dina, Shaunavon and Birdbear zones in Saskatchewan.
Of significance, Diaz holds two prospective leases on the active Birdbear oil development play in Saskatchewan, which are currently being closely offset by NuVista and Talisman drilling locations.
In addition, Diaz holds two leases on the developing Shaunovan oil play, at Gull Lake, immediately offsetting lands that were purchased for over $1 million per section and are currently being drilled by Arc Resources.
Below is a map of the current active exploration and development areas for the Company:
Financial
For the nine months ended September 30, 2011, revenue decreased to $3.7 million compared with $4.9 million for the prior year period. Cash flow from operations for the period decreased to $116,000 or nil per share compared with cashflow of $1.1 million or $0.01 per share for the prior year period. Diaz reported a loss for the nine month period of $2.8 million or ($0.03) per share versus a loss of $3.2 million or ($0.04) per share in the prior year period.
Capital expenditures for the first nine months of 2011 totalled $3.6 million compared with $3.6 million in the prior year period. Capital expenditures for Q3 2011 and the nine month period were financed primarily from working capital, disposition of non-core properties and the proceeds from an $8.0 million private placement financing.
Diaz exited the quarter with net current debt of $243,000 compared with $6.4 million at the beginning of the year. The Company’s bank line was reviewed subsequent to the quarter and was confirmed to be $3.1 million. The line is currently undrawn.
Production
The Company’s total production for Q3 2011 decreased 23% to average 390 BOEd compared with the prior year period average of 507 BOEd.
Of significance however, in September, the last month of the quarter, the impact of Diaz’s new oil production increased, with oil sales representing 68% of the company’s revenue compared with an average of 51% for the nine month period.
Business Outlook
Diaz expects oil prices to hold above $90 per barrel (WTI) for the remainder of 2011 as industrial activity in North America slowly recovers and demand for oil in developing countries continues to increase.
Due to the high level of activity on North American shale gas projects and increasing natural gas storage levels, it seems unlikely that natural gas prices will improve in the medium term. Consequently, Diaz is keeping its investments in natural gas to an absolute minimum.
The Company will continue to focus on its heavy oil development programs in the Lloydminster and Macklin areas and if successful, Diaz should exit 2011 with a significant increase in its oil production from current levels.
On behalf of the Board,
R.W. Lamond, Chairman
D.K. Clark, Chief Operating Officer