UGE UGE International Ltd

SANTA BARBARA, CA, Nov. 29, 2012 /CNW/ - Underground Energy Corporation ("Underground", "UGE" or the "Company") (TSX VENTURE SYMBOL: UGE; OTCQX:  UGGYF) today announced its financial results for the three and nine months ended September 30, 2012.  All amounts are in US dollars unless otherwise noted and these results have been prepared in accordance with International Financial Reporting Standards ("IFRS").

Financial Results

• Loss for the three months ended September 30, 2012 $2,943,867, $0.01 per share (three months ended September 30 2011 - $4,476,953, $0.03 per share)
• Loss for the nine months ended September 30, 2012 $10,401,820, $0.05 per share (nine months ended September 30, 2011 - $6,359,763, $0.06 per share)
• Working capital deficit at September 30, 2012 - $1,547,443 (December 31, 2011 working capital - $13,255,349)
• Cash investment in oil and natural gas interests of $10,994,841 for the nine months ended September 30, 2012
• Cash investment in exploration and evaluation assets of $1,615,674 for the nine months ended September 30, 2012

Recent Highlights

During Q3, we:

• Modified the facilities at Burrel to correct operational issues inherited from the prior operator.  Since Gabriel 1-35 went back on production, it has been pumping at an average rate of 50 barrels of oil per day ("bopd").
• Tested Chamberlin 2-2 at the Zaca Field Extension Project ('Zaca') resulting in production of 30 bopd during a 61-hour test period, from the bottom one-third of the productive zone.  We moved Chamberlin 2-2 off production, pending additional completion operations.
• Installed a higher capacity pump on Chamberlin 3-2 in order to handle the larger than expected amounts of fluid; and conducted a series of production tests.  During the initial ten-hour production test, the well pumped at daily rates of approximately 1,100 barrels of fluid, including 42 bopd.  We suspended the testing of the Chamberlin 3-2 well, pending the availability of cost effective water disposal.
• Received the results of a resource evaluation conducted by Netherland, Sewell and Associates, Inc. - Dallas-based independent petroleum consultants - the results of which are set forth in the Company's press release dated August 22, 2012

Highlights subsequent to quarter-end include:

• Executed a letter of intent ("LOI") to farm-out a portion of our Zaca project to Sovereign Resources LLC whereby Sovereign will joint venture on and have the right to earn up to a 75% working interest in 2,857 gross acres of the Northwest corner of Zaca.  Under the terms of the agreement, Sovereign will enter into a continuous drilling program to drill a maximum of seven wells to earn its full working interest.  UGE will be carried for wells one and two; thereafter UGE will have the right, but not the obligation, to pay their share of drilling and related costs for each subsequent well.  Closing of this arrangement will be through execution of a Farm out Agreement.  Discussions are underway on that agreement.
• Executed a LOI with AmRich Energy, Inc. ("AmRich') whereby AmRich will farm-in on and have the right to earn up to a 75% working interest in 1,062 gross acres of the Central Southern section of Zaca.  Under the terms of the agreement, AmRich will enter into a continuous drilling program of up to 3 wells to earn its full working interest and acreage position.  AmRich will carry UGE on the drilling and completion costs of these initial 3 wells and also the costs of installing facilities and infrastructure to support the wells.  A Farm out Agreement was executed November 21^st.  Final closing remains subject to certain conditions.
• Raised $691,000 via a financing of convertible secured debentures of the Company.

As a development stage company, we constantly consume cash for our operating activities and for our investing activities.  Subsequent to quarter-end, the Company's working capital has improved to an estimated deficiency $1,268,923 as of the date of this announcement.  Subsequent to September 30, 2012, the Company closed convertible secured debenture offerings totaling $621,000 on October 4^th with officers and directors and totaling $70,000 on November 16^th with independent investors.  The Company is actively seeking a buyer for one of its exploration and evaluation properties.  A non-refundable $100,000 deposit received in July was forfeited by a potential buyer on a transaction that failed to close.  There is doubt that without additional financing or the sale of non-core properties, that the Company possesses adequate cash to maintain its operations.  Accordingly, as required under applicable rules of IFRS, a going concern note has been included in the required form in Note 1 to the Company's unaudited condensed interim consolidated financial statements.

Oil & natural gas interests increased by approximately $11,000,000 since year-end and $1,335,000 during Q3, due primarily to Zaca drilling & completions.

Exploration and evaluation ("E&E") assets decreased by approximately $4,250,000 since year-end and decreased $1,220,000 during Q3.  The decrease in E&E assets during the quarter was due to $840,000 of impairment of prospects and $380,000 for the reclassification of the property under an option agreement to exploration assets held for sale.

Net Loss decreased by $1,535,000 compared to the same quarter last year due to the cost of the merger with Shenul Capital Inc. being included in 2011, offset by operating losses and impairments of exploration and evaluation assets.

• Oil and natural gas revenues increased by $220,000 compared to the same quarter last year due to oil production from the Gabriel 1-35 oil well at Burrel Deep.
• Other income increased by $100,000, due to a forfeited non-refundable deposit made on the purchase of certain oil and gas leases.
• Production and Operating Expense increased by $800,000 compared to the same quarter last year due to the commencement of operations.
• Exploration and Evaluation ("E&E") Expense increased by $1,085,000 compared to the same quarter last year primarily due to the impairment provision on exploration and evaluation assets of $840,000 in 2012 plus the charging of all exploration and evaluation expenditures in Q2 and Q3 of 2012 to E&E expense.  As exploration and evaluation properties are stated at the expected recoverable amount, expenditures on exploration are expensed in Q2 and Q3 2012, whereas they were added E&E Assets in 2011.
• Administrative Expense decreased by $3,110,000 compared to the same quarter last year primarily due to the costs of the merger in 2011 with Shenul Capital Inc. not repeating in 2012.

Outlook

Upon, and subject to, receipt of additional capital, we plan to:

• Permit and commission a water disposal well at Zaca, which we expect to reduce our water disposal costs from the current $9.75/barrel of water to $0.20/barrel of water.  This will allow us to flow the Chamberlin 3-2 well with an economic cost structure; and
• Stimulate and bring Chamberlin 1-2 back on line at Zaca (production of approximately 10 bopd was previously suspended to allow drilling of Chamberlin 2-2, off the same drilling pad).
• Apply additional completion operations on Chamberlin 2-2, which we expect to bring this well's production in line with the infill drilling done nearby in the 1970's through the 1990's when wells averaged optimized production rates of 70 bopd and 375,000 barrels cumulative oil recovery.

To view the Company's Third Quarter 2012 Unaudited Condensed Interim Financial Statements, related Notes to Unaudited Condensed Interim Financial Statements, and Management's Discussion and Analysis, please see the Company's quarterly filings which will be available on www.sedar.com. Further information is available on the Company's website www.ugenergy.com.

About Underground Energy Corporation

Underground is focused on developing its Zaca Field Extension Project in Santa Barbara County, California.  In total, Underground currently holds mineral rights on approximately 64,000 net acres of prospective lands in California and Nevada with an initial focus on the Monterey Shale in California. For more information on Underground, please visit www.ugenergy.com. Underground's regulatory filings are available under the Company's profile at www.sedar.com.

Cautionary Statements

Statements in this press release contain forward-looking information and forward-looking statements within the meaning of applicable securities laws (collectively, "forward-looking information").  Forward-looking information is frequently characterized by words such as "plan", "expect", "project", "intend", "believe", "anticipate", "estimate" and other similar words, or statements that certain events or conditions "may" or "will" occur.  In particular, forward-looking information in this press release includes, without limitation, statements with respect to: (i) the terms of and timing for the farm-out agreements to be entered into with AmRich Energy, Inc. and Sovereign Resources LLC; and (ii) the statements set forth under the heading titled "Outlook" in respect of the Company's planned future operations and results therefrom; and (iii) the Company's plans for raising additional capital and its further plans for the use of such capital. 

Although we believe that the expectations and assumptions reflected in the forward-looking information are reasonable, there can be no assurance that such expectations or assumptions will prove to be correct. In particular, assumptions have been made that: (i) Underground will be able to obtain equipment, qualified staff and regulatory approvals in a timely manner to carry out its planned exploration and development activities; (ii) Underground will have sufficient financial resources with which to conduct its planned capital expenditures; and (iii) the current regulatory and tax regime will remain substantially unchanged. Certain or all of the forgoing assumptions may prove to be untrue.

Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and is subject to a variety of risks and uncertainties and other factors (many of which are beyond the control of Underground) that could cause actual events or results to differ materially from those anticipated in the forward-looking information.  Some of the risks and other factors could cause results to differ materially from those expressed in the forward-looking information include, but are not limited to: operational risks in exploration, development and production; delays or changes in plans; competition for and/or inability to retain drilling rigs and other services; competition for, among other things, capital, acquisitions of reserves, undeveloped lands, skilled personnel and supplies; risks associated to the uncertainty of reserve and resource estimates; governmental regulation of the oil and gas industry, including environmental regulation; geological, technical, drilling and processing  problems and other difficulties in producing reserves; the uncertainty of estimates and projections of production, costs and expenses; unanticipated operating events or performance which can reduce production or cause production to be shut in or delayed; incorrect assessments of the value of acquisitions; the need to obtain required approvals from regulatory authorities; stock market volatility; volatility in market prices for oil and  natural gas; liabilities inherent in oil and natural gas operations; access to capital; and other factors.  Readers are cautioned that this list of risk factors should not be construed as exhaustive. 

The forward-looking information contained in this news release is expressly qualified by this cautionary statement.  Underground does not undertake any obligation to update or revise any forward-looking statements to conform such information to actual results or to changes in our expectations except as otherwise required by applicable securities legislation.  Readers are cautioned not to place undue reliance on forward-looking information.

The well test results set forth in this press release are not necessarily indicative of long-term performance or of ultimate recovery.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Financial Position

(in US dollars) | (unaudited)

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Comprehensive Loss

(in US dollars) | (unaudited)

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Changes in Equity

(in US dollars) | (unaudited)

Number of shares has been adjusted to reflect the corporate merger, which is described in note 13 of the Audited Consolidated Financial Statements for the year ended December 31, 2011.

UNDERGROUND ENERGY CORPORATION
Condensed Interim Consolidated Statements of Cash Flows

(in US dollars) | (unaudited)

SOURCE Underground Energy Corporation