Miller Energy Resources Increases Expected Oil Revenue
Miller Energy Resources (Miller) (NYSE: MILL) announced that the rate it pays to move crude oil on to market on the Cook Inlet Pipeline system (CIPL) will be lowered from $6.17 per barrel to $3.21 per barrel beginning January 2013. While Miller's wholly-owned Alaskan subsidiary, Cook Inlet Energy (CIE) plans to significantly increase throughput through the CIPL system in 2013 as a result of its ongoing drilling program, this tariff reduction would result in savings in excess of $1 million even if the company's production remained flat through 2013. With this price reduction on CIPL shipping charges and the lower per barrel charges to ship oil to the Tesoro refinery as a result in increased production, from 2010 to the present we have reduced our per barrel transportation charges by more than $14 per barrel. These reductions, including the most recent one, have had and will continue to have a significant positive impact on our cash flow and the PV-10 values of our reserves, as well as expanding the economic lives of our oil reserves.
CIPL operates a 42-mile pipeline system, a tank farm, and a shipping terminal on the west side of Cook Inlet, which currently provides the sole route to market for company's oil production. When CIE began operations in 2010, CIPL hiked its shipping rate from $4.06 per barrel to $14.57 per barrel. CIE felt this increase was excessive and brought a complaint in front of the Regulatory Commission of Alaska (RCA). CIPL and CIE ultimately negotiated a settlement agreement which allowed CIE to pay a rate calculated from a maximum total revenue requirement of $17.3 million per year through 2014 and immediately reduced CIE's rate to $6.57 bbl. This number is revised annually to adjust for variations in system throughput.
“The published rate for 2012 is $4.07 per barrel, but we'll be paying $3.21 because of the maximum revenue requirement in our settlement,” explained David Hall, CEO of CIE. “That means their spending has continued to balloon, and that the rate is lowering due to the recent extended amortization put in place by Hilcorp and projections of increased throughput.” Hall went on to explain that the increased expenditures were primarily the result of projects undertaken by CIPL to partially reactivate the crude oil tank farm at Drift River.
Those projects included $18.5 million spent this summer to raise the 20-foot berm designed to protect the tanks from volcanic mudslides an additional 15 feet. The Drift River tank farm sits in the flow path of an active volcano, Mt. Redoubt, which erupted violently in 1991 and 2009. The 2009 eruption halted oil movements through the system for 6 months. The facility then reopened, but operated without the tank farm, which caused much higher shipping costs because tankers could not be fully loaded.
Hilcorp had hoped to reactivate two of the seven, 270,000-barrel tanks by October. However, the company will likely only be able to use one tank for the time being due to concerns by Alaskan environmental regulators and the public.
Meanwhile, Miller continues to pursue the construction of a new pipeline which would bypass the Drift River Terminal and directly link the oil production facilities to their ultimate customer, Tesoro's (NYSE: TSO) refinery in Kenai. Miller filed its right-of-way application for the Trans-Foreland Pipeline in November, and engineering efforts are currently underway for a projected 2014 installation.
“Even with the reduced CIPL tariff, we believe there is a compelling business case to be made for the Trans-Foreland Pipeline,” said Scott Boruff, CEO of Miller. “Even if that tariff went to a buck, you still have to add on the cost of a tanker to move the oil to market, and that is another $2 - $5 a barrel. Then you've got the business interruption risk of the volcano, and the environmental risks. The Trans-Foreland Pipeline will be a safer, more reliable and more cost effective way to move crude, and I'm pleased that Miller is leading the charge on making the Cook Inlet a better place to operate.”
About Miller Energy Resources
Miller Energy Resources, Inc. is a high growth oil and natural gas exploration, production and drilling company operating in multiple exploration and production basins in North America. Miller's focus is in Cook Inlet, Alaska and in the heart of Tennessee's prolific and hydrocarbon-rich Appalachian Basin including the Chattanooga Shale. Miller is headquartered in Knoxville, Tennessee with offices in Anchorage, Alaska and Huntsville, Tennessee. The company's common stock is listed on the NYSE under the symbol MILL.
Statements Regarding Forward-Looking Information
Certain statements in this press release and elsewhere by Miller Energy Resources¸ Inc. are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve the implied assessment that the resources described can be profitably produced in the future, based on certain estimates and assumptions. Forward-looking statements are based on current expectations, estimates and projections that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those anticipated by Miller Energy Resources, Inc. and described in the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, the potential for Miller Energy to experience additional operating losses; high debt costs under its existing senior credit facility; potential limitations imposed by debt covenants under its senior credit facility on its growth and ability to meet business objectives; the need to enhance management, systems, accounting, controls and reporting performance; uncertainties related to the filing of its Form 10-K for 2011; litigation risks; its ability to perform under the terms of its oil and gas leases, and exploration licenses with the Alaska DNR, including meeting the funding or work commitments of those agreements; its ability to successfully acquire, integrate and exploit new productive assets in the future; its ability to recover proved undeveloped reserves and convert probable and possible reserves to proved reserves; risks associated with the hedging of commodity prices; its dependence on third party transportation facilities; concentration risk in the market for the oil we produce in Alaska; the impact of natural disasters on its Cook Inlet Basin operations; adverse effects of the national and global economic downturns on our profitability; the imprecise nature of its reserve estimates; drilling risks; fluctuating oil and gas prices and the impact on results from operations; the need to discover or acquire new reserves in the future to avoid declines in production; differences between the present value of cash flows from proved reserves and the market value of those reserves; the existence within the industry of risks that may be uninsurable; constraints on production and costs of compliance that may arise from current and future environmental, FERC and other statutes, rules and regulations at the state and federal level; the impact that future legislation could have on access to tax incentives currently enjoyed by Miller; that no dividends may be paid on its common stock for some time; cashless exercise provisions of outstanding warrants; market overhang related to restricted securities and outstanding options, and warrants; the impact of non-cash gains and losses from derivative accounting on future financial results; and risks to non-affiliate shareholders arising from the substantial ownership positions of affiliates. Additional information on these and other factors, which could affect Miller's operations or financial results, are included in Miller Energy Resources, Inc.'s reports on file with United States Securities and Exchange Commission including its Annual Report on Form 10-K, as amended, for the fiscal year ended April 30, 2012. Miller Energy Resources, Inc.'s actual results could differ materially from those anticipated in these forward- looking statements as a result of a variety of factors, including those discussed in its periodic reports that are filed with the Securities and Exchange Commission and available on its Web site (www.sec.gov). All forward-looking statements attributable to Miller Energy Resources or to persons acting on its behalf are expressly qualified in their entirety by these factors. Investors should not place undue reliance on these forward-looking statements, which speak only as of the date of this press release. We assume no obligation to update forward-looking statements should circumstances or management's estimates or opinions change unless otherwise required under securities law.