To take advantage of falling service costs and the expectation of higher natural gas prices, Calgary-based junior Compton Petroleum Corp. has set a course to triple its gas-directed drilling in the Western Canadian Sedimentary Basin for the rest of the year.

“2007 is the year during which all the elements necessary for the company’s next phase of growth will be put in place,” said CEO Ernie Sapieha. “We view 2007 as a transition year for Compton, a year in which the stage is set for the large well counts that are necessary for production growth and the realization of the value inherent in our natural gas resource plays.”

Based on supply-and-demand fundamentals, Compton expects to see “longer-term strengthening of natural gas prices” through the rest of the year.

To accomplish its exploration goals, Compton hiked its 2007 capital spending by a third to C$450 million from C$375 million, and it plans to drill 350 wells through December, which would put the full-year count at 435 wells.

“Our longer-term plans call for approximately 600 wells in 2008, increasing to 800 in 2009 and up to 1,000 wells in 2010, given favorable industry conditions and commodity prices,” Sapieha told investors and financial analysts during a conference call. “We plan to aggressively implement these plans, which will result in Compton becoming a pure natural gas company, with activities focused on four natural gas resource plays in two core areas in southern and central Alberta.”

To become a “pure natural gas resource play story,” the company plans to continue to sell its noncore oil properties. Most of the sales are expected to be completed by the end of the third quarter, and an additional C$50 million of “minor” properties will be up for sale “late this year,” said the CEO.

Most of Compton’s drilling activity for the rest of the year will be focused in southern Alberta, targeting the Belly River formation. Compton plans to drill 338 Plains Belly River wells, including 33 Belly River/Edmonton wells at Ghost Pine in Central Alberta, which is an increase of 123 wells from its original budget of 215 wells.”

Energy analysts and most producers lowered their expectations for the Canadian oil patch this year following a brutal period beginning in late 2006 that slammed the industry with foul weather, rising service costs and lower commodity prices (see NGI, June 25; May 28). Compton did not escape.

Weather-related issues in the first six months made it a “very difficult operating period for the industry as a whole and Compton in particular,” said Sapieha. “An early spring break-up followed by wet weather lasting through May and June resulted in extremely poor field conditions that seriously delayed operations. We drilled 84 of a planned 153 wells during the first half of 2007, and field conditions prevented us from completing any well tie-ins during April and May. Additionally, field conditions limited well access delaying routine maintenance necessary to maintain and optimize production.”

However, “with improving field conditions and readily available services, we are confident that we will be able to complete our second half drilling program,” he said. “The current operating environment in Canada is an excellent time for us to launch this initiative. The repeatability of our drilling programs is based upon our ever-increasing understanding and confidence in our natural gas resource plays and our geological and geophysical models.” He also pointed to the strength of the company’s technical teams and its ability to attract talented professionals.

“Our plans for the remainder of 2007 and beyond have been developed based upon our strong competitive position and include a longer-term procurement of goods and services at favorable fixed costs,” said the CEO. “Currently, we are securing drilling rigs at rates that are similar to those experienced in 2004 and are 10-20% less than 2006 rates. Recently, we entered into a one-year contract for tubulars at prices that are 10-13% less than 2006. Other service costs including rig moves, fracturing and cementing have decreased 15-20% and have essentially returned to 2004 levels.”

Most of the wells drilled in the final quarter are scheduled to be placed on production after year-end, which would provide added momentum going into 2008. However, average production for 2007 is expected to be 31,000-32,000 boe/d, which is lower than earlier forecast. The average output estimate includes the property sales and its recent acquisition of Stylus Energy Inc., a small producer also based in Calgary. The property sales and the Stylus acquisition are expected to be completed by the end of the third quarter.

Morningstar energy analysts, who rate Compton at their highest status with five stars, said, “We “think Compton can boost production at an annual rate in the midteens over the next five years. Two positive rulings from the Alberta Energy and Utilities Board in 2006 should help provide a tailwind for Compton’s drilling program. The rulings allow tighter well spacing and commingling, which should increase the quantity and size of the wells Compton can drill.”

However, analysts with SunTrust Robinson Humphrey/the Gerdes Group (STRH) lowered their full-year production expectation by 3% following Compton’s guidance. Relative to the exploration and production sector, Compton (CMZ) “trades at a 30% premium, has 25% better capital productivity, nearly 35% lower margins and average growth, though the company spends 75% in excess of cash generation to achieve this growth,” said STRH analysts. “Consequently, CMZ offers 9% upside to our target price.”

Moody’s Investors Service analysts also were cautious about Compton’s plans, and they revised their rating downward to “negative.”

Moody’s said it recognized that Compton has been able to grow its reserves organically over the past several years and that it has a fairly durable core reserve base. However, “Compton’s financial leverage has been rising over the last couple of years, mainly as a result of an aggressive drilling program centered on unconventional gas plays in Southern and Central Alberta funded with a significant amount of debt.”

Compton, said Moody’s, “will continue to face cash flow shortfalls, which could be fairly substantial if the company were to experience a shortfall below its production growth plan, a moderation in natural gas prices on unhedged volumes, or a rise in oilfield service costs.”

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