TMX group

SANTA BARBARA, CA, May 24, 2012 /CNW/ - Underground Energy Corporation ("Underground", "UGE" or the "Company") (TSX VENTURE SYMBOL: UGE) today announced its financial results for the quarter ended March 31, 2012.  All amounts are in US dollars unless otherwise noted and these results have been prepared in accordance with International Financial Reporting Standards ("IFRS").

Recent Highlights

Highlights for the quarter ended March 31, 2012 include:

• Renewing permits for two drill pads and six well locations at the Zaca Field Extension Project;
• Entry into an agreement with Key Energy Services to secure a drilling rig for the initial portion of the Company's 2012 drilling program comprising a minimum of five wells with an option for an additional five wells; and
• Spudding and drilling the Chamberlin 4-2 well, the initial well drilled by the Company at its recently acquired 6,200 net acre Chamberlin lease in the Zaca Field Extension Project ("Zaca") in Santa Barbara County, California, to a total depth of 6,679 feet.

Highlights subsequent to quarter-end include:

• Encouraging initial results from the Chamberlin 4-2 well which encountered oil shows in a number of sections and, in particular, penetrated more than 900 feet of continuous, strong oil shows in a section of the Monterey Shale consistent with the most productive sections at the existing Zaca Oil Field and elsewhere in the Santa Maria Basin;
• Receipt of the year-end reserve evaluation conducted by GLJ Petroleum Consultants Ltd. ("GLJ") of Calgary, the Company's independent reserve engineers, dated April 12, 2012 and evaluating the Company's proved, probable, and possible reserves as at December 31, 2011 in accordance with the Canadian standards and requirements of National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities as detailed in the Company's press release dated April 10, 2012; and
• Spudding and drilling of the Chamberlin 3-2 well, a "twin" well offsetting the Chamberlin 4-2 well by 300 feet, directly targeting the newly discovered Chamberlin East Fault Block, to a total depth of 7,685 feet with similar results to the Chamberlin 4-2 well with more than 1,200 feet of oil saturated Monterey Shale formation as outlined in the Company's press release dated May 23, 2012.

"In the first quarter of 2011, we initiated a multi-well drilling program at the recently acquired Zaca Field Extension Project," said Michael Kobler, President and CEO of Underground. "Subsequent to quarter-end, we saw positive indications from our first well, the Chamberlin 4-2, which pointed to the discovery of the Chamberlin East Fault Block. We moved rapidly to drill a second well that specifically targeted this block and saw similar results including strong, continuous oil shows, leading us to initiate production testing on the Chamberlin 3-2 well. We continue to believe the Zaca Field Extension Project holds significant potential to drive a near-term increase in production and we remain focused on assessing its broader potential."

Adoption of Shareholder Rights Plan

Underground today also announced that its Board of Directors has approved the adoption by the Company of a Shareholder Rights Plan (the "Rights Plan").  The Rights Plan has been adopted by the Company to ensure the fair treatment of shareholders in connection with any take-over bid, and to provide the Board of Directors and shareholders additional time to fully consider any unsolicited take-over bid. The Rights Plan will also provide the Board of Directors more time to pursue, if appropriate, other alternatives to maximize shareholder value.  A copy of the Rights Plan is available under the Company's SEDAR profile at www.sedar.com.

The Rights Plan, which is effective as of May 23, 2012, has conditionally been approved by the TSX Venture Exchange and must be approved by shareholders at the annual and special general meeting of the shareholders of the Company currently scheduled for June 26, 2012.  Under the Rights Plan, rights have been issued and attached to all shares of the Company issued and outstanding as of the close of business on May 23, 2012.  Additional rights will be issued upon any future issuance of any shares of the Company that occur prior to the Separation Time (as defined in the Rights Plan).  If approved by shareholders, the Rights Plan will have an initial term of three years. If not approved, the rights will be redeemed in accordance with the terms of the Rights Plan.

The Company is not adopting the Rights Plan in response to any specific takeover bid or other proposal.  Additionally, the Rights Plan is not intended to prevent take-over bids and under the Rights Plan, those bids that meet certain requirements intended to protect the interests of all shareholders are deemed to be "Permitted Bids".  Permitted Bids must be made by way of a take-over bid circular prepared in compliance with applicable securities laws and remain open for sixty days.  In the event a take-over bid does not meet the Permitted Bid requirements of the Rights Plan, the Rights will entitle shareholders, other than any shareholder or shareholders making the take-over bid, to purchase additional shares in the Company at a substantial discount to the market value of the shares at the time.

Adoption of Code of Conduct

Effective May 23, 2012, Underground has adopted a Code of Business Conduct and Ethics (the "Code") for its directors, officers and employees which includes policies concerning ethical conduct, conflicts of interest, the keeping of financial records and procedures in relation to the foregoing.   A copy of the Code is available under the Company's SEDAR profile at www.sedar.com.

Cash and Cash Equivalents

As a development stage company, Underground constantly consumes cash for its operating activities and for its investing activities.  During the first quarter, shareholders provided financial support by exercising warrants to acquire additional common stock.  Proceeds to the Company were $438,750.

Property Plant and Equipment

Property Plant and Equipment ("PP&E") assets increased by approximately $2,483,000 during the quarter.  The net increase in PP&E assets was due primarily to drilling and geological & geophysical development at Zaca.

Exploration and Evaluation Assets

Exploration and Evaluation ("E&E") assets increased by approximately $640,000 during the quarter.  The $1,025,000 of additions to E&E assets during the quarter were due primarily to geological, geophysical investigations and seismic surveys at Devil's Den of $610,000 and $255,000 at other projects; lease acquisitions at AMI 1 of $90,000; and annual lease payments on various projects totaling $70,000.  The additions were offset by $385,000 of impairments recorded on leases the Company does not intend to renew.

Net Loss increased by $1,836,500 compared to last year due to the build-out of the Company as it developed its oil and gas prospects and increased its land acquisition activities, including:

• Oil and natural gas revenue and production and operating expense increased by $163,538 and $411,593, respectively, due to the acquisition of three producing wells that were included in the oil and gas lease acquisition that closed during the fourth quarter of 2011.  During the quarter, a recompletion on the single gas well was unsuccessful and was shut in.  Work was conducted on each of the two oil wells to maintain production;
• Exploration and evaluation expense increased by $290,000 compared to last year primarily due to $385,000 in impairments recorded on leases acquired in the package in the fourth quarter of 2011 that the Company does not intend to renew.  This increase was offset by decreases in exploration related expenditures as the Company's focus shifted from investigating new acquisitions to developing the properties under lease;
• Administrative expense increased by $1,252,000 compared to last year primarily due to a $600,000 increase in personnel cost of which approximately 50% was attributable to share-based compensation expense; $228,000 increase in legal, audit and other professional fees; $256,000 warrant liability mark-to-market adjustment; $80,000 in investor relations expenses and the balance of the increase, $88,000, due to the higher level of activity in 2012, compared with 2011.

Outlook

The Company is focused on the drilling program currently underway at its Zaca Field Extension Project, where its initial well (Chamberlin 4-2) encountered 900 feet of continuous strong oil shows in a new fault block (the "Chamberlin East Block").  The Company's second well (Chamberlin 3-2) directly targeted the newly discovered Chamberlin East Block and encountered more than 1,200 feet of continuous strong oil shows. Underground is currently preparing to production test the Chamberlin 3-2 well.  The Company intends to move the drilling rig to a second adjacent pad and drill the Chamberlin 2-2, a first well from this pad, and will look to add further production at Zaca as it continues to implement its 2012 drilling program.  Subsequent to drilling the Chamberlin 2-2, the Company will release this rig and plans to contract with a rig capable of drilling deeper to further exploit the deep structures identified on seismic.  At the same time, it will continue to process and acquire additional seismic at Zaca and its other core assets.

To view the Company's First Quarter 2012 Financial Statements, related Notes to the Financial Statements, and Management's Discussion and Analysis, please see the Company's quarterly filings which will be available on www.sedar.com.

About Underground Energy Corporation

Underground is focused on identifying, acquiring rights to, exploring for, developing and producing oil reserves from shale formations in North America using the latest exploration and recovery techniques and technologies.  Underground focuses on identifying and acquiring sizable land positions and prospects in historically prolific but under-explored shale formations as well as in emerging shale plays that, in both instances, hold large volumes of prospective resources. Underground currently holds hydrocarbon rights on approximately 70,000 net acres of highly prospective lands in California and Nevada with an initial focus on the Monterey shale in California. Underground is listed on the TSX Venture Exchange under the ticker symbol "UGE" and on the OTCQX trading platform under the ticker symbol "UGGYF".  For more information on Underground, including a copy of the Company's latest corporate presentation, 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 statements and forward-looking information within the meaning of applicable securities law (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 Company's plans to begin production testing the Chamberlin 3-2 well; (ii) the Company's plans to move a drilling rig to a drilling pad to the west of the Chamberlin 3-2 well and drill the Chamberlin 2-2; (iii) the Company's plans to contract a larger drilling rig; and (v) the Company's plans to acquire and process additional seismic. 

Although the Company believes 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.  Readers are cautioned that assumptions used in the preparation of forward-looking information may prove to be incorrect.  Consequently, there is no representation that the actual results achieved will be the same, in whole or in part, as those set out in the forward-looking information.

Forward-looking information is based on the opinions and estimates of management at the date the statements are made, and are 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: general economic conditions in Canada, the United States and globally, the risks associated with the oil and gas industry, commodity prices and exchange rate changes.  Industry related risks could 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 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 risks as detailed in the Company's annual information form dated April 25, 2012 and available on the Company's SEDAR profile at www.sedar.com.  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.

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.