Canadian 88 Energy Corp. is selling off its 750,000-plus acreage along Canada’s East Coast to concentrate on exploration and production in the Western Sedimentary Basin. Although the company likes what it has in the less-developed region, Stephen J. Savidant, president, said, “we can’t afford it, it’s too big, it’s too much cost and it’s too far out” in terms of production timing.

“We developed a better understanding of what opportunities were within our reach, and what’s not possible,” said Savidant. The decision was made following a three-month strategic review. Long focused in Alberta’s Western Sedimentary Basin, Canadian 88 is trimming costs here and there, but remains trained on natural gas prospects in its core area. The strategy going forward, he said, will be to develop existing exploration and development prospects, acquire complementary assets when possible, and dispose of other assets that don’t fit. Especially high on the list is more exploration of its sour and sweet natural gas properties.

“We need to do more of what we do well,” he said. Although the company continues to believe that the East Cost offers long-term natural gas opportunities, it just didn’t fit with Canadian 88’s three-year objectives and priorities. Savidant added that the company also is identifying some “minor” properties in Alberta that may be sold, all part of a plan to capitalize on Canadian 88’s already strong production and facilities base, and leverage its sour gas exploration and production expertise. A major factor in the changes, he added, is that there are already “extensive unexplored lands and undrilled reserves in Alberta” that can be converted into producing properties.

“There’s a lot of natural gas left to be discovered in western Canada, our exploration fairway,” said Savidant. “We will continue to be a natural gas-focused company, operating primarily in W5 Alberta, and exploration will remain the principal cornerstone of Canadian 88’s strategy, and acquisitions that fit and build value will be pursued.”

The three-month scrutiny of Canadian 88 operations did find some disappointing numbers on its proved reserve base in Alberta, however, with 25 Bcfe of proved undeveloped reserves within the Olds area, its primary production region, changing to “probable.” The impact on the company’s established reserves will be -4%, but there are no other changes to the reserve-base numbers, said Savidant. The reduction was higher on a volume basis and significantly less on a value basis, because the assets had not been drilled or tied in to facilities, he added.

Despite the loss, Canadian 88’s full-year 2002 production forecast was increased to 11,000 boe/d from 10,700 boe/d on Monday, reflecting the company’s newest acquisition, RMX Exploration Ltd. The deal adds about 9% (950 boe/d) to Canadian 88’s production once it closes, and will add another 1.9 MMboe/d of proved reserves. The natural gas rich junior, which cost Canadian 88 C$26.1 million, has more than 90% of its production in gas, some in liquids and “virtually none” in oil, and closing is expected by Oct. 1. Most of the new assets are in Canadian 88’s existing operating areas.

Even though there are cutbacks, capital spending will be going up, with nearly half of the spending in 2002 spent on drilling programs in Strachan, Olds, High River, Medallion and Swalwell. Next year, capital spending will increase to C$75 million, excluding acquisitions, which will be 85% higher than 2002. However, with the increased spending, production volumes will jump 20%, to 13,250 boe/d, including full-year volumes from RMX.

Drilling prospects will take most of the cash — about 60% of the capital program will be spent there. And in its Olds assets, Canadian 88 expects to spend 35% of the C$75 million. Another 40% will be spent on higher-risk projects in the Foothills and Swan Hills, and 25% will be spent on lower risks, such as Medallion and Swalwell.

Elsewhere, and considered a “critical” part of the new strategy, will be to achieve a “much lower overall cost base,” Savidant said. Already, the company has reduced expenses by C$3 million, or one-third, this year, and more cuts are expected in 2003. Reductions came through staff reductions and several other measures, he said. Canadian 88 also has taken steps to immediately be delisted from the American Stock Exchange to further reduce overhead costs.

“An important objective is to add value by optimizing the throughput at Canadian 88’s under-utilized processing facility at Olds,” said Savidant, and the capital program plans to extensively use the company’s large 3D seismic database.”The future for Canadian 88,” he said, “will be all about how well we execute our strategy.”

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