2008-08-05 18:55:00
NuVista Energy Ltd.: Second Interim Report 2008
CALGARY, ALBERTA–(EMWNews – Aug. 5, 2008) – NuVista Energy Ltd. (TSX:NVA) is pleased to announce its financial and operating results for the three and six months ended June 30, 2008 as follows:
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Corporate Highlights
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Three months Six months
ended June 30, % ended June 30, %
2008 2007 Change 2008 2007 Change
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Financial
($ thousands, except
per share)
Production revenue 161,794 56,832 185 258,858 110,457 134
Funds from operations (1) 89,582 30,416 194 143,016 58,227 146
Per share - basic 1.14 0.59 93 2.05 1.16 77
Per share - diluted 1.11 0.58 91 2.02 1.14 77
Net earnings 2,905 9,678 (70) 10,054 14,510 (31)
Per share - basic 0.04 0.19 (79) 0.14 0.29 (52)
Per share - diluted 0.04 0.18 (78) 0.14 0.28 (50)
Total assets 1,356,172 642,400 111
Long-term debt, net of
working capital 365,282 158,154 131
Long-term debt, net of
adjusted working
capital (1) 338,900 158,154 115
Shareholders' equity 728,591 354,143 106
Net capital
expenditures 16,213 57,624 (72) 67,114 93,572 (28)
Corporate acquisition
(non-cash) - - - 594,944 - -
Weighted average common shares
outstanding (thousands):
Basic 78,830 51,405 53 69,754 50,230 39
Diluted 80,368 52,335 54 70,753 51,085 39
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Operating
(boe conversion - 6:1
basis)
Production:
Natural gas (mmcf/d) 113.0 69.9 62 99.2 68.1 46
Natural gas liquids
(bbls/d) 2,609 417 526 1,857 313 493
Oil (bbls/d) 4,714 2,080 127 4,349 2,121 105
Total oil equivalent
(boe/d) 26,153 14,147 85 22,746 13,780 65
Product prices: (2)
Natural gas ($/mcf) 9.44 7.28 30 8.74 7.38 18
Natural gas liquids
($/bbl) 81.88 60.00 36 80.65 58.43 38
Oil ($/bbl) 91.82 48.36 90 84.95 49.36 72
Operating expenses:
Natural gas and
natural gas liquids
($/mcfe) 1.16 1.07 8 1.15 1.04 10
Oil ($/bbl) 13.76 10.83 27 12.34 13.37 (7)
Total oil equivalent
($/boe) 8.19 7.05 16 7.95 7.34 8
General and
administrative
expenses ($/boe) 1.52 0.98 55 1.40 0.93 51
Funds from operations
netback ($/boe) (1) 37.63 23.63 59 34.55 23.35 47
NOTES:
(1) Funds from operations, funds from operations per share, funds from
operations netback, and adjusted working capital are not defined by GAAP
in Canada and are referred to as non-GAAP measures. Funds from
operations are based on cash flow from operating activities before
changes in non-cash working capital and abandonment expenditures. Funds
from operations per share is calculated based on the weighted average
number of common shares outstanding consistent with the calculation of
net income per share. Funds from operations netback equals the total of
revenues including realized commodity derivative gains/losses, less
royalties, transportation, general and administrative, restricted share
units, interest and cash taxes calculated on a boe basis. Adjusted
working capital excludes the current portion of future income tax and
commodity derivative liabilities. Total boe is calculated by multiplying
the daily production by the number of days in the period.
(2) Product prices include realized gains/losses on commodity derivatives.
MESSAGE TO SHAREHOLDERS
NuVista Energy Ltd. (“NuVista”) is pleased to report to shareholders the financial and operating results for the three and six months ended June 30, 2008. On March 4, 2008 NuVista completed the most significant transaction in its history, the business combination with Rider Resources Ltd. (“Rider”) and the associated financing with the Ontario Teachers’ Pension Plan. The business combination solidifies NuVista’s position as a premium intermediate oil and gas company with a five year track record of adding shareholder value, while adding a high impact deep gas exploration component to our existing shallow gas and heavy oil opportunity inventory. NuVista’s Board of Directors and management are pleased with how NuVista has integrated the Rider operations, reduced debt levels and the steps taken to continue our growth as an intermediate oil and gas company.
The second quarter results include a full three months of combined operations and are therefore more representative of NuVista today than results presented in the first quarter of 2008. The accretion resulting from this business combination, coupled with increasing commodity prices, has resulted in record production levels of 26,153 boe/d for the second quarter and the highest reported funds from operations per share of $1.14 per share. Over the past six months, the outlook for commodity prices has increased dramatically with our average funds from operations netbacks increasing from the range of $20 to $25/boe to the current levels of $35 to $40/boe. The increased netbacks beyond levels originally budgeted, has resulted in NuVista achieving its debt reduction targets well ahead of schedule. With a net debt to funds from operations ratio of less than 1.0:1 at the end of the second quarter, NuVista now has significant financial flexibility to increase its capital budget to take advantage of strategic acquisition opportunities.
NUVISTA-RIDER BUSINESS COMBINATION
The business combination with Rider has resulted in NuVista becoming an intermediate natural gas focused company with both an asset base and technical teams to continue creating shareholder value through production per share and reserves per share growth. The Rider asset base is well suited to NuVista’s existing business strategy which emphasizes long-term sustainability and growth based upon an acquire and develop business model in multi-zone areas with a focus on low operating costs and high working interests. The business combination added three new core areas in liquid rich, natural gas prone regions of Alberta that are characterized by high netbacks and longer reserve life production.
NuVista’s production is now balanced between the west of the third and fourth meridian (“W3M/W4M”), and the west of the fifth and sixth meridian (“W5M/W6M”) producing regions. Nuvista is now poised for growth in these regions, both organically and through acquisitions. With the business combination, NuVista increased its undeveloped land inventory to over 730,000 acres while maintaining a high working interest of 77% in the undeveloped lands and top quartile operating costs targeting $7.75/boe. The asset base remains highly concentrated with only 300 boe/d of production outside existing core areas. The combination was completed at attractive acquisition metrics, at a time when natural gas was out of favour, and is accretive to NuVista on net asset value, reserves, production, and funds from operations on a per share basis.
Significant highlights for NuVista in the second quarter of 2008 include:
– Increased year over year production by 85% to 26,153 boe/d, with a corresponding production per share increase of 21%;
– Record funds from operations per share of $1.14 compared to $0.59 during the same period in 2007 and compared to $0.88 per share in the first quarter of 2008;
– Increased our crude oil and liquids exposure to 28% of boe production;
– Invested $16.2 million in exploration and development activities which resulted in 17 (12.9 net) wells and an overall success rate of 88%;
– Strong funds from operations allowed us to achieve our year end target of net debt to funds from operations of 1:1 by June 30, 2008.
SECOND QUARTER CAPITAL PROGRAM
NuVista completed a capital expenditure program of $16.2 million during the second quarter of 2008. NuVista’s capital program was lower in the second quarter due to spring break-up and scheduled turnaround activities. Approximately one third of the capital expenditures were directed towards land and seismic activities to set up our active exploration and development program for the second half of 2008. All of our capital expenditures were related to exploration and development activities including participation in 17 wells resulting in 12 gas wells, 3 oil wells, and 2 dry holes.
SECOND HALF 2008 CAPITAL PROGRAM
For the second half of 2008, NuVista has currently budgeted capital expenditures of approximately $105 million, with all of the expenditures focused on exploration and development activities. Approximately 50% of the budget will be spent in the W5M/W6M region where NuVista and Rider achieved considerable success in last winter’s drilling programs. NuVista anticipates participating in approximately 25 wells in this region. The remaining 50% of capital expenditures will be focused in the W3M/W4M region which is expected to result in participation in about 80 wells. NuVista has completed over 22 wells to date in the third quarter and currently has five drilling rigs operating in Oyen, Provost, Saskatchewan, Wapiti and Pembina. NuVista will continue to monitor commodity prices and will evaluate opportunities to increase its exploration and development program and make acquisitions.
COMMODITY PRICE RISK MANAGEMENT ACTIVITIES
When NuVista announced the acquisition of Rider, NuVista took advantage of the rising natural gas price environment in February and March to hedge a significant portion of its natural gas production from April to October 2008, at a level which would allow NuVista to return financial flexibility to the balance sheet by the fourth quarter of 2008. In addition, NuVista entered into natural gas price management contracts for the period November 2008 to March 2009 as part of its on going price risk management program. NuVista has also hedged crude oil prices as part of its ongoing crude oil price risk management program. Subsequent to entering into these price risk management contracts, natural gas and crude oil prices have increased and as NuVista has not adopted hedge accounting, it is required to mark-to-market all financial commodity derivatives outstanding that relate to future periods. During the second quarter NuVista recorded an unrealized commodity derivatives loss of $40.0 million ($28.8 million after tax), significantly reducing second quarter earnings but not impacting funds from operations. NuVista’s adjusted net earnings excluding the impact of this unrealized loss is $31.7 million.
FINANCIAL EXPOSURE TO SEMGROUP LP
On July 22, 2008, SemGroup LP filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code and two of SemGroup LP’s Canadian subsidiaries, SemCAMS ULC and SemCanada Crude Company, filed for creditor protection under the Companies’ Creditors Arrangement Act in Canada. NuVista sold natural gas to SemCAMS ULC and crude oil to SemCanada Crude Company. NuVista has a financial exposure to these two entities totaling approximately $4.5 million. Of this amount, $2.6 million relates to sales for the month ended June 30, 2008 and $1.9 million for the period July 1 to 21, 2008. NuVista is taking steps to mitigate this financial exposure and any ongoing financial exposure. At this time we are unable to ascertain the amount of June revenues that will be recoverable but have recorded a provision in our second quarter financial statements equal to 25% of the amount owed at June 30, 2008. In the third quarter, we will reassess the recoverability of the June revenues and also assess the recoverability of the July revenues.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s discussion and analysis (“MD&A”) of financial conditions and results of operations should be read in conjunction with NuVista’s interim consolidated financial statements for the three and six months ended June 30, 2008 and the audited consolidated financial statements for the year ended December 31, 2007. The following MD&A of financial condition and results of operations was prepared at and is dated, August 5, 2008. Our audited consolidated financial statements, Annual Report, Annual Information Form and other disclosure documents for 2007 are available through our filings on SEDAR at www.sedar.com or can be obtained from our website at www.nuvistaenergy.com.
Basis of presentation – The financial data presented below has been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”). The reporting and the measurement currency is the Canadian dollar. For the purpose of calculating unit costs, natural gas is converted to a barrel of oil equivalent (“boe”) using six thousand cubic feet of natural gas equal to one barrel of oil unless otherwise stated. In certain circumstances natural gas liquid volumes have been converted to thousand cubic feet equivalent (“mcfe”) on the basis of one barrel of natural gas liquids to six thousand cubic feet. Boe’s and mcfe’s may be misleading, particularly if used in isolation. A conversion ratio of one barrel to six thousand cubic feet of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Forward-looking statements – Certain information set forth in this document, including management’s assessment of NuVista’s future plans and operations, forecast production rates, forecast funds from operations and targeted operating costs, contain forward-looking statements, which are provided to allow investors to better understand our business. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond NuVista’s control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management and services, stock market volatility, changes in environmental regulations, tax laws and royalties and the ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. NuVista’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, or if any of them do so, what benefits that NuVista will derive therefrom. NuVista disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Non-GAAP measurements – Within MD&A, references are made to terms commonly used in the oil and natural gas industry. Management uses funds from operations to analyze operating performance and leverage. Funds from operations as presented, does not have any standardized meaning prescribed by Canadian GAAP and therefore it may not be comparable with the calculation of similar measures for other entities. Funds from operations as presented is not intended to represent operating cash flow or operating profits for the period nor should it be viewed as an alternative to cash flow from operating activities, net income or other measures of financial performance calculated in accordance with Canadian GAAP. All references to funds from operations throughout this report are based on cash flow from operating activities before changes in non-cash working capital and abandonment expenditures. Funds from operations per share is calculated based on the weighted average number of common shares outstanding consistent with the calculation of net income per share. Funds from operations netbacks equal total revenue including realized commodity derivative gains/losses less royalties, transportation, operating costs, general and administrative, restricted share units, interest expense and cash taxes. Management also uses field netbacks to analyze operating performance and adjusted working capital to analyze leverage. Field netbacks and adjusted working capital as presented, do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures for other entities. Field netbacks equal the total of revenue including realized commodity derivative gains/losses less royalties, transportation and operating costs. Adjusted working capital equals working capital excluding the current portions of commodity derivative liability and future income taxes. Total boe is calculated by multiplying the daily production by the number of days in the period.
A reconciliation of funds from operations is presented in the
following table:
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For the three months For the six months
ended June 30, ended June 30,
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($ thousands) 2008 2007 2008 2007
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Cash provided by operating activities 67,453 22,482 102,619 39,479
Add back:
Asset retirement expenditures 483 155 537 465
Change in non-cash working capital 21,646 7,779 39,860 18,283
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Funds from operations 89,582 30,416 143,016 58,227
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Change in presentation of MD&A disclosure – natural gas liquids – Prior to 2008, our MD&A disclosures have combined crude oil volumes and natural gas liquid volumes, as natural gas liquid volumes were not significant. With the Rider Acquisition, Nuvista has significantly increased its production of natural gas liquids and has determined that it is more appropriate in certain circumstances to include these volumes with natural gas volumes on a mcfe basis. Comparative MD&A disclosure has been restated to reflect this change. This change only impacts the classification of natural gas liquids and does not impact reported results.
Plan of arrangement with Rider Resources Ltd.
On March 4, 2008, NuVista closed a business combination with Rider Resources Ltd. (“Rider”) (the “Rider Acquisition”) and a private placement financing with the Ontario Teachers’ Pension Plan Board (“OTPP”). The Rider Acquisition resulted in the combination of NuVista and Rider, pursuant to which all of the issued and outstanding Rider shares were exchanged for common shares of NuVista. Rider shareholders received, for each Rider share held, 0.3540 of a NuVista share. The results of operations from the Rider assets have been included effective March 4, 2008. The three months ended June 30, 2008 is the first reported period to include a full three months of operations of the Rider assets.
Operating activities – During the second quarter of 2008, NuVista participated in 17 (12.9 net) wells, including 16 operated wells, with an average working interest of 76%. Of these wells, nine were drilled in the Oyen core area, four in the Provost core area, two in our Pembina core area and one in each of the West Central Saskatchewan and Northwest Saskatchewan core areas. The success rate of 88% in this drilling program resulted in 12 natural gas wells and three oil wells. For the six months ended June 30, 2008, NuVista drilled 36 (26.7 net) wells resulting in 19 natural gas wells and 10 oil wells. NuVista has approximately 65 wells planned for the third quarter, primarily in the Oyen, Wapiti and in our Saskatchewan core areas.
Production For the three months ended June 30,
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2008 2007 % Change
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Natural gas (mcf/d) 112,979 69,897 62
Liquids (bbls/d) 2,609 417 526
Oil (bbls/d) 4,714 2,080 127
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Total oil equivalent (boe/d) 26,153 14,147 85
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Production For the six months ended June 30,
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2008 2007 % Change
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Natural gas (mcf/d) 99,238 68,078 46
Liquids (bbls/d) 1,857 313 493
Oil (bbls/d) 4,349 2,121 105
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Total oil equivalent (boe/d) 22,746 13,780 65
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For the three months ended June 30, 2008 NuVista’s average production was 26,153 boe/d, comprised of 113.0 mmcf/d of natural gas, 2,609 bbls/d of natural gas liquids (“liquids”) and 4,714 bbls/d of oil, which represents a 85% increase over the same period in 2007 and a 35% increase over the first quarter of 2008. During the second quarter NuVista’s production was reduced due to plant turnarounds in its Wapiti and Ferrier core areas. The increase in natural gas and liquids revenue is due primarily to the inclusion of a full quarter of production from the Rider properties acquired in March 2008 and the success of our drilling program. Oil production increased for the three months ended June 30, 2008, compared to the same period in 2007, due to increased heavy oil production at our Auburndale property and in our Saskatchewan core areas, and the heavy oil production acquired in our Provost core area on January 8, 2008. Oil and liquids production as a percentage of total production on a boe basis, increased to 28% in the second quarter compared to 18% in the same period in 2007.
Production rates peaked in the month of April 2008 as significant new flush production was brought on-stream in our Wapiti core area. Production capability declined throughout the second quarter due to normal production declines associated with both our new and existing wells, and limited activity during the spring break-up period. Plant turnarounds were completed in June but NuVista continued to have shut-in production during July 2008 due to the timing and priority of bringing wells on production and continuing operational issues associated with start-up after a major turnaround at a third party facility. NuVista expects the impact of this delay and other scheduled outages to impact average third quarter production by approximately 600 boe/d. New production additions from NuVista’s aggressive post spring break-up drilling program are now being connected and NuVista anticipates production to increase gradually throughout the second half of 2008 due to the implementation of our capital program.
NuVista’s production for the six months ended June 30, 2008 averaged 22,746 boe/d comprised of 99.2 mmcf/d of natural gas, 1,857 bbls/d of natural gas liquids (“liquids”) and 4,349 bbls/d of oil, which represents a 65% increase over the same period in 2007. Production increases for the six month period, compared to the same period in 2007, are primarily due to the same reasons that production increased in the second quarter.
Revenues For the three months ended June 30,
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($ thousands) 2008 2007 % Change
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Natural gas: $ $/mcf $ $/mcf $ $/mcf
Production revenue 98,140 9.54 45,610 7.17 115 33
Realized gains (losses) on
commodity derivatives (1,026) (0.10) 702 0.11 - -
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Total 97,114 9.44 46,312 7.28 110 30
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For the three months ended June 30,
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($ thousands) 2008 2007 % Change
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Oil: $ $/bbl $ $/bbl $ $/bbl
Production revenue 44,214 103.07 8,944 47.78 394 117
Realized gains (losses) on
commodity derivatives (4,828) (11.25) 108 0.58
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Total 39,386 91.82 9,052 48.36 335 90
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For the three months ended June 30,
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($ thousands) 2008 2007 % Change
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Liquids: $ $/bbl $ $/bbl $ $/bbl
Production revenue 19,440 81.88 2,280 60.00 753 36
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Total 19,440 81.88 2,280 60.00 753 36
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For the six months ended June 30,
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($ thousands) 2008 2007 % Change
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Natural gas: $ $/mcf $ $/mcf $ $/mcf
Production revenue 158,992 8.80 88,455 7.18 80 22
Realized gains (losses) on
commodity derivatives (1,026) (0.06) 2,541 0.20 - -
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Total 157,966 8.74 90,996 7.38 74 18
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For the six months ended June 30,
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($ thousands) 2008 2007 % Change
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Oil: $ $/bbl $ $/bbl $ $/bbl
Production revenue 72,610 91.73 18,691 48.70 288 88
Realized gains (losses) on
commodity derivatives (5,368) (6.78) 253 0.66 - -
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Total 67,242 84.95 18,944 49.36 255 72
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For the six months ended June 30,
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($ thousands) 2008 2007 % Change
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Liquids: $ $/bbl $ $/bbl $ $/bbl
Production revenue 27,256 80.65 3,311 58.43 723 38
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Total 27,256 80.65 3,311 58.43 723 38
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For the three months ended June 30, 2008, revenues including realized commodity derivative gains and losses were $155.9 million, a 171% increase from $57.6 million, for the same period in 2007. The increase in revenues for the three months ended June 30, 2008 compared to the same period of 2007, is primarily due to the 85% increase in production and 54% increase in realized prices. These revenues were comprised of $97.1 million of natural gas revenue, $39.4 million of oil revenue, and $19.4 million of liquids revenue. The increase in average realized commodity prices is comprised of a 30% increase in the natural gas price to $9.44/mcf from $7.28/mcf, a 90% increase in the oil price to $91.82/bbl from $48.36/bbl, and an increase of 36% in the liquids price to $81.88/bbl from $60.00/bbl. The increase in the average realized commodity price in the quarter compared to the same period in 2007 was due to significantly higher WTI crude oil and NYMEX natural gas prices that impact Edmonton Par and heavy crude oil prices and AECO natural gas prices.
For the six months ended June 30, 2008, revenues including realized commodity derivative gains and losses were $252.5 million, a 123% increase from $113.3 million, for the same period in 2007. The increase in revenues for the first six months of 2008 compared to the same period of 2007, is primarily due to the 65% increase in production and 41% increase in realized prices. These revenues were comprised of $158.0 million of natural gas revenue, $67.2 million of oil revenue, and $27.3 million of liquids revenue. The increase in average realized commodity prices is comprised of a 18% increase in the natural gas price to $8.74/mcf from $7.38/mcf, a 72% increase in the oil price to $84.95/bbl from $49.36/bbl, and an increase of 38% in the liquids price to $80.65/bbl from $58.43/bbl.
Commodity price risk management
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For the three months ended June 30,
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2008 2007
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($ thousands) Realized Unrealized Total Realized Unrealized Total
Gains Gains Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses) (Losses) (Losses)
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Natural gas (1,026) (5,826) (6,852) 702 2,356 3,058
Oil (4,828) (34,205) (39,033) 108 1,127 1,235
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Total gains
(losses) (5,854) (40,031) (45,885) 810 3,483 4,293
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For the six months ended June 30,
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2008 2007
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($ thousands) Realized Unrealized Total Realized Unrealized Total
Gains Gains Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses) (Losses) (Losses)
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Natural gas (1,026) (9,710) (10,736) 2,541 2,480 5,021
Oil (5,368) (40,065) (45,433) 253 927 1,180
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Total gains
(losses) (6,394) (49,775) (56,169) 2,794 3,407 6,201
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As part of our financial management strategy, NuVista has adopted a disciplined commodity price risk management program. The purpose of this program is to reduce volatility in the financial results, protect acquisition economics and stabilize cash flow against the unpredictable commodity price environment. NuVista’s Board of Directors has approved a price risk management limit of up to 60% of forecast production, net of royalties for a two year period, using fixed price and costless collar contracts. NuVista’s Board of Directors has approved an increase to the limit of 60% for the period April 2008 to October 2008. For this period the Board has approved natural gas hedges in the amount of 70,000 gj/day.
NuVista conducts its price risk management activities through both financial commodity derivatives and physical sales contracts. While NuVista’s price risk management transactions are economic hedges, NuVista does not use hedge accounting for these transactions. As a result, NuVista is required to mark-to-market all financial commodity derivatives outstanding. NuVista is not required to mark-to-market it’s physical sales price risk management contracts.
For the three months ended June 30, 2008, the commodity derivative price risk management program resulted in a loss of $45.9 million consisting of realized losses of $5.9 million and unrealized losses of $40.0 million. The gain of $4.3 million for 2007 consisted of $0.8 million of realized gains and $3.5 million of unrealized gains. For the six months ended June 30, 2008, the commodity derivative price risk management program resulted in a loss of $56.2 million consisting of realized losses of $6.4 million and unrealized losses of $49.8 million. The gain of $6.2 million for 2007 consisted of $2.8 million of realized gains and $3.4 million of unrealized gains.
At June 30, 2008, the mark-to-market of our financial commodity derivatives was a loss of $51.5 million and the market-to-market of our physical sales contract was a loss of $37.5 million. The significant unrealized loss in the three and six months ended June 30, 2008 relate primarily to the mark-to-market of crude oil commodity derivatives that relate to production in the second half of 2008 and in 2009. Since June 30, 2008, crude oil and natural gas prices have declined and our unrealized financial commodity derivative and physical sales contract losses have declined as well.
The following is a summary of commodity price risk management contracts in
place as at June 30, 2008:
a) Financial commodity derivatives
As at June 30, 2008, NuVista has entered into the following crude oil
price risk management contracts:
Volume Average Price (Cdn$/bbl) Term
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500 bbls/d CDN. $66.50-Bow River April 1, 2008 -
December 31, 2008
750 bbls/d CDN. $70.01-CDN. $86.68-WTI July 1, 2008 -
December 31, 2008
1,000 bbls/d CDN. $64.00-Bow River January 1, 2009 -
December 31, 2009
1,000 bbls/d CDN. $95.01-CDN. $110.01-WTI January 1, 2009 -
December 31, 2009
As at June 30, 2008, NuVista has entered into the following natural gas
price risk management contracts:
Volume Average Price (Cdn$/gj) Term
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20,000 gj/d CDN. $7.50-$8.42-AECO April 1, 2008 -
October 31, 2008
10,000 gj/d CDN. $8.00-$10.13-AECO November 1, 2008 -
March 31, 2009
(b) Physical sale contracts
As at June 30, 2008, NuVista has entered into direct sale price risk
management contracts to sell natural gas as follows:
Volume Average Price (Cdn$/gj) Term
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50,000 gj/d CDN. $7.27-$7.43-AECO April 1, 2008 -
October 31, 2008
40,000 gj/d CDN. $8.59-$10.38-AECO November 1, 2008 -
March 31, 2009
Royalties
For the three months For the six months
ended June 30, ended June 30,
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Royalty rates (%) 2008 2007 2008 2007
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Natural gas and liquids 25 25 26 27
Oil 18 13 16 13
Weighted average rate 22 23 22 25
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Royalties for the three months ended June 30, 2008 were $35.9 million, as compared to $13.3 million reported for the three months ended June 30, 2007. Royalties for the six months ended June 30, 2008 were $58.2 million, as compared to $27.7 million reported for the six months ended June 30, 2007. The increase in royalties results from higher revenues in both the second quarter and first half of 2008 compared to the same period in 2007.
As a percentage of revenues, the average royalty rate for the second quarter of 2008 was 22% compared to 23% for the same period of 2007. Royalty rates by product for the second quarter of 2008 were 25% for natural gas and liquids and 18% for oil compared to 25% for natural gas and liquids and 13% for oil for the same period in 2007. For the six months ended June 30, 2008, the average royalty rate as a percentage of revenue was 22% compared to 25% for the same period in 2007. Royalty rates by product were 26% for natural gas and liquids and 16% for oil compared to 27% for natural gas and liquids and 13% for oil for the same period in 2007.
Royalty rates are based on government market reference prices and not our average realized prices that includes price risk management activities. As a result, the losses from our price risk management activities included in revenue result in a higher royalty rate as a percentage of revenue than if we had no price risk management activities had taken place. Average royalty rates in the second quarter of 2008 excluding price risk management activities were 25% for natural gas and liquids and 15% for oil.
Netbacks - The following table summarizes field netbacks by product for the
three months ended June 30, 2008:
Natural gas Oil Total
and liquids
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($ thousands) 128.6 mmcfe/d 4,714 bbl/d 26,153 boe/d
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$ $/mcfe $ $/bbl $ $/boe
Production
revenues 117,580 10.04 44,214 103.07 161,794 67.98
Realized gains on
commodity (losses)
derivatives (1,026) (0.09) (4,828) (11.25) (5,854) (2.46)
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116,554 9.95 39,386 91.82 155,940 65.52
Royalties (28,959) (2.47) (6,967) (16.24) (35,926) (15.10)
Transportation
costs (1,499) (0.13) (797) (1.85) (2,296) (0.96)
Operating costs (13,580) (1.16) (5,901) (13.76) (19,481) (8.19)
----------------------------------------------------------------------------
Field netbacks 72,516 6.19 25,721 59.97 98,237 41.27
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----------------------------------------------------------------------------
The following table summarizes field netbacks by product for the six months
ended June 30, 2008:
Natural gas Oil Total
and liquids
----------------------------------------------------------------------------
($thousands) 110.4 mmcfe/d 4,349 bbl/d 22,746 boe/d
----------------------------------------------------------------------------
$ $/mcfe $ $/bbl $ $/boe
Production
revenues 186,248 9.27 72,610 91.73 258,858 62.53
Realized gains
on commodity (losses)
derivatives (1,026) (0.05) (5,368) (6.78) (6,394) (1.54)
----------------------------------------------------------------------------
185,222 9.22 67,242 84.95 252,464 60.99
Royalties (47,337) (2.36) (10,816) (13.66) (58,153) (14.05)
Transportation costs (2,439) (0.12) (1,298) (1.63) (3,737) (0.90)
Operating costs (23,133) (1.15) (9,765) (12.34) (32,898) (7.95)
----------------------------------------------------------------------------
Field netbacks 112,313 5.59 45,363 57.32 157,676 38.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes funds from operations netbacks for the three
and six months ended June 30, 2008, compared to the three and six months
ended June 30, 2007:
For the three months ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
$ $/boe $ $/boe $ $/boe
Production revenues 161,794 67.98 56,832 44.15 185 54
Realized gains
(losses) on
commodity derivatives (5,854) (2.46) 810 0.63 (823) (490)
----------------------------------------------------------
155,940 65.52 57,642 44.78 171 46
Royalties (35,926) (15.10) (13,332) (10.35) 169 46
Transportation costs (2,296) (0.96) (977) (0.76) 135 26
Operating costs (19,481) (8.19) (9,076) (7.05) 115 16
----------------------------------------------------------
Field netbacks 98,237 41.27 34,267 26.62 187 55
General and
administrative (3,606) (1.52) (1,258) (0.98) 187 55
Restricted share
units (865) (0.36) - - - -
Interest (4,184) (1.76) (2,593) (2.01) 61 (12)
----------------------------------------------------------
Funds from
operations netbacks 89,582 37.63 30,416 23.63 1.94 0.59
----------------------------------------------------------
----------------------------------------------------------
For the six months ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
$ $/boe $ $/boe $ $/boe
Production revenues 258,858 62.53 110,457 44.29 134 41
Realized gains (losses)
on commodity
derivatives (6,394) (1.54) 2,794 1.12 (329) (238)
----------------------------------------------------------
252,464 60.99 113,251 45.41 123 34
Royalties (58,153) 14.05 (27,741) (11.12) 110 26
Transportation costs (3,737) (0.90) (2,062) (0.83) 81 8
Operating costs (32,898) (7.95) (18,299) (7.34) 80 8
----------------------------------------------------------
Field netbacks 157,676 38.09 65,149 26.12 142 46
General and
administrative (5,811) (1.40) (2,323) (0.93) 150 51
Restricted share units (1,118) (0.27) - - - -
Interest (7,731) (1.87) (4,599) (1.84) 68 2
----------------------------------------------------------
Funds from operations
netbacks 143,016 34.55 58,227 23.35 146 52
----------------------------------------------------------
----------------------------------------------------------
Transportation – Transportation costs were $2.3 million ($0.96/boe) for the three months ended June 30, 2008 as compared to $977,000 ($0.76/boe) for the same period of 2007. Transportation costs were $3.7 million ($0.90/boe) for the six months ended June 30, 2008 compared to $2.1 million ($0.83/boe) for the same period in 2007. The increase in transportation costs in 2008 compared to 2007 is primarily due to an increase in oil and liquids production as a percentage of overall production and their higher associated transportation costs.
Operating – Operating expenses were $19.5 million ($8.19/boe) for the three months ended June 30, 2008 as compared to $9.1 million ($7.05/boe) for the three months ended June 30, 2006. This increase resulted from the 85% increase in production volumes and a 16% increase in per unit costs. For the three months ended June 30, 2008 natural gas and natural gas liquid operating costs averaged $1.16/mcfe and oil operating expenses were $13.76/bbl as compared to $1.07/mcfe and $10.83/bbl respectively for the same period in 2007.
Operating expenses were $32.9 million ($7.95/boe) for the six months ended June 30, 2008 as compared to $18.3 million ($7.34/boe) for the six months ended June 30, 2007. This increase resulted from the 65% increase in production volumes and an 8% increase in per unit costs. For the six months ended June 30, 2008 natural gas and natural gas liquid operating expenses averaged $1.15/mcfe and oil operating expenses were $12.34/bbl as compared to $1.04/mcfe and $13.37/bbl respectively, for the same period of 2007.
The increase in per unit costs resulted primarily from higher electricity costs and the increase in oil production as a percentage of our overall production. NuVista is forecasting 2008 operating costs for the remainder of the year to average approximately $7.75/boe.
General and administrative – General and administrative expenses, net of overhead recoveries, for the three months ended June 30, 2008 were $3.6 million ($1.52/boe) compared to $1.3 million ($0.98/boe) in the same period of 2007. General and administrative expenses, net of overhead recoveries, for the six months ended June 30, 2008 were $5.8 million ($1.40/boe) as compared to $2.3 million ($0.93/boe) for the six months ended June 30, 2007. This increase in general and administrative expenses is directly attributable to the higher production base in NuVista associated with the Rider Acquisition and increased costs associated with less reliance on the Technical Services Agreement (“TSA”) with Bonavista Petroleum Ltd. (“Bonavista”). Higher per unit costs reflect increased staffing costs and general cost increases experienced by the industry. For the three months ended June 30, 2008 NuVista experienced costs associated with moving to new leased premises, terminating existing NuVista and Rider office lease arrangements and integration costs associated with the Rider Acquisition. NuVista is forecasting 2008 general and administrative costs for the remainder of the year to average approximately $1.25/boe.
For the three months For the six months
ended June 30, ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Gross general and administrative
expenses 5,384 2,473 8,947 4,939
Overhead recoveries (1,778) (1,215) (3,136) (2,616)
----------------------------------------------------------------------------
Net general and administrative expenses 3,606 1,258 5,811 2,323
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per boe 1.52 0.98 1.40 0.93
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bad debt provision – On July 22, 2008, SemGroup LP filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code and two of SemGroup LP’s Canadian subsidiaries, SemCAMS ULC and SemCanada Crude Company, filed for creditor protection under the Companies’ Creditors Arrangement Act in Canada. NuVista sold natural gas to SemCAMS ULC and crude oil to SemCanada Crude Company. NuVista has a financial exposure to these two entities totaling approximately $4.5 million. Of this amount, $2.6 million relates to sales for the month ended June 30, 2008 and $1.9 million for the period July 1 to 21, 2008. NuVista is taking steps to mitigate this financial exposure and any ongoing financial exposure. At this time we are unable to ascertain the amount of June revenues that will be recoverable but have recorded a provision in our second quarter financial statements equal to 25% of the amount owed at June 30, 2008. In the third quarter, we will reassess the recoverability of the June revenues and assess the recoverability of the July revenues.
Stock-based compensation – NuVista recorded a stock-based compensation charge of $1.9 million for the three month period ended June 30, 2008 compared to $739,000 for the same period in 2007. For the six month period ended June 30, 2007 NuVista recorded a stock-based compensation charge of $3.1 million compared to $1.5 million for the same period in 2007. The increase in the expense in 2008 relates primarily to the institution of the Restricted Share Unit (“RSU”) Incentive Plan. NuVista’s Board of Directors approved a RSU Incentive Plan in January, 2008. Each RSU entitles participants to receive cash equal to the market value of the equivalent number of shares of NuVista. The RSU’s become payable as they vest, typically over three years. For the three and six months ended June 30, 2008, the RSU related stock-based compensation expense was $0.9 million and $1.1 million, respectively.
Interest – For the three months ended June 30, 2008, interest expense was $4.2 million as compared to $2.6 million in the same period of 2007. For the six months ended June 30, 2008, interest expense was $7.7 million compared to $4.6 million in the same period of 2007. Higher interest costs in the second quarter and the first half of 2008 are due to higher average debt levels and higher average interest rates. Currently, our average borrowing rate is approximately 4%.
Depreciation, depletion and accretion – Depreciation, depletion and accretion expenses were $43.1 million for the second quarter of 2008 as compared to $22.1 million for the same period in 2007. The average per unit cost was $18.11/boe in the second quarter of 2008 as compared to $17.16/boe for the same period in 2007. Depreciation, depletion and accretion expenses for the six months ended June 30, 2008 were $75.8 million as compared to $41.5 million for the same period in 2007. The average per unit cost was $18.31/boe in the first half of 2008 as compared to $16.65/boe in the same period in 2007. The increase in the depreciation, depletion and accretion expenses for the three months and six months ended June 30, 2008 when compared to the same periods in 2007 was due to higher production volumes and also reflects an increase in unit costs. Per unit costs have increased in 2008 due to the higher costs associated with the Rider Acquisition and higher exploration and development costs.
Income taxes – For the three months ended June 30, 2008, the provision for income and other taxes was $1.9 million compared to $1.4 million for the same period in 2007. For the six months ended June 30, 2008, the provision for income and other taxes was $4.7 million compared to $4.1 million in the same period of 2007. The provisions for income and other taxes for the three and six months ended June 30, 2007 include a reduction of $2.3 million related to legislated reductions in income tax rates, enacted in the second quarter of 2007. For the six months ended June 30, 2008, the effective tax rate was 32% for the six months ended June 30, 2007.
Capital expenditures – Capital expenditures were $16.2 million during the second quarter of 2008 and related to exploration and development activities. This compares to $57.6 million during the second quarter of 2007, consisting of $35.1 million for acquisitions and $22.6 million for exploration and development. Capital expenditures for the six months ended June 30, 2008 were $67.1 million, consisting of $41.7 million for exploration and development spending and $25.4 million for acquisitions. This compares to $93.6 million incurred for the same period of 2007, consisting of $35.1 million of acquisitions and exploration and development spending of $58.5 million.
For the three months For the six months
ended June 30, ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Exploration and development
Land and retention costs 4,451 1,228 5,123 3,116
Seismic 2,385 2,258 4,986 8,211
Drilling and completion 6,176 13,024 17,881 30,519
Facilities and equipment 2,278 5,703 12,386 15,932
Corporate and other 1,188 356 1,340 739
----------------------------------------------------------------------------
Subtotal 16,478 22,569 41,716 58,517
Acquisitions
Property (265) 35,055 25,398(1) 35,055
----------------------------------------------------------------------------
Subtotal (265) 35,055 25,398 35,055
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total capital expenditures 17,863 57,624 68,771 93,572
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate acquisition - non-cash - - 594,944 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes a $2.6 million deposit paid in the fourth quarter of 2007
Funds from operations and net earnings – In the second quarter of 2008, funds from operations were $89.6 million ($1.14/share, basic), a 194% increase over the $30.4 million ($0.59/share, basic) for the same period in 2007. For the six months ended June 30, 2008, NuVista’s funds from operations was $143.0 million ($2.05/share, basic), a 146% increase from $58.2 million ($1.16/share, basic) for the six months ended June 30, 2007. The increase in funds from operations in both the three and six months ended June 30, 2008 compared to the same periods in 2007 was primarily due to higher production volumes and commodity prices.
Net earnings decreased during the second quarter of 2008 to $2.9 million ($0.04/share, basic) from $9.7 million ($0.19/share, basic) for the same period in 2007. For the six months ended June 30, 2008, net earnings were $10.0 million ($0.14/share, basic) compared to $14.5 million ($0.29/share, basic) for the same period in 2007. The decrease in net earnings in both the three and six months ended June 30, 2008, compared to the same periods in 2007, was primarily due to the unrealized loss on commodity derivates of $28.8 million on an after tax basis.
Liquidity and capital resources – As at June 30, 2008, net bank debt, defined as the bank loan plus adjusted working capital was $338.9 million, resulting in a net debt to annualized second quarter funds from operations ratio of 1.0:1. At June 30, 2008, NuVista had a working capital deficiency of $1.3 million. Adjusted working capital excludes the current portion of the commodity derivatives mark-to-market of $36.6 million and a current future income tax asset of $10.3 million. We believe it is appropriate to exclude these amounts when determining net debt. At June 30, 2008, NuVista had approximately $86.0 million of unused bank borrowing capability based on the current line of credit of $450.0 million.
NuVista anticipates that 2008 funds from operations will provide NuVista with the flexibility to fund its planned 2008 capital program and provide for debt reduction. NuVista has achieved its targeted 2008 net debt to annualized quarterly funds from operations target of less than 1.0 times. NuVista’s capital program will be monitored and adjusted based on the outlook for commodity prices and opportunities to increase capital spending.
As at August 5, 2008, there were 79.1 million common shares and 3.0 million common share purchase warrants outstanding. In addition, there were 5.4 million stock options outstanding, with an average exercise price of $14.48 per share.
Related party activities – In 2003, as part of the Plan of Arrangement with Bonavista Petroleum Ltd. (“Bonavista”), NuVista entered into a Technical Services Agreement (“TSA”). Under the TSA, Bonavista received payment for certain services provided by it to NuVista. Effective January 1, 2007, the terms of the TSA were amended to reflect the reduced level of services provided by Bonavista. On August 31, 2007, the TSA was terminated and replaced with a new services agreement that reflects the remaining ongoing services that will be provided by Bonavista. NuVista and Bonavista are considered related as two directors of NuVista, one of whom is NuVista’s chairman, are also directors and officers of Bonavista and a director and an officer of NuVista are also officers of Bonavista.
For the three months ended June 30, 2008, NuVista paid Bonavista $0.4 million (2007 – $0.2 million) in fees relating to general and administrative services provided by Bonavista, and NuVista charged Bonavista management fees for jointly owned partnerships totaling $0.3 million (2007 – $0.3 million). In addition, during the second quarter of 2008, Bonavista charged NuVista $63,000 (2007 – $62,500) for costs that are outside of the new services agreement relating to NuVista’s share of direct charges from third parties.
For the six months ended June 30, 2008, NuVista paid Bonavista $0.8 million (2007 – $0.7 million) in fees relating to general and administrative services provided by Bonavista, and NuVista charged Bonavista management fees for jointly owned partnerships totaling $0.6 million (2007 – $0.6 million). In addition Bonavista charged NuVista $72,000 (2007 – $0.6 million) for costs that are outside of the new services agreement relating to NuVista’s share of direct charges from third parties. As at June 30, 2008, the amount receivable from Bonavista was $2.9 million.
Contractual obligations and commitments – NuVista enters into many contractual obligations as part of conducting day-to-day business. As NuVista continues to spend money as part of its capital program we will draw on our bank facility and will have the related contractual obligation. In the event that NuVista’s credit facility is not extended at any time before the maturity date, the loan balance of outstanding will become payable on the maturity date which is March 4, 2010.
The following is a summary of the Company's contractual obligations and
commitments as at June 30, 2008:
Total 2008 2009 2010 2011 Thereafter
----------------------------------------------------------------------------
Transportation $ 1,027 $ 426 $ 444 $ 123 $ 34 $ -
Office lease 9,076 1,199 2,055 2,055 2,055 1,712
--------
For more information, please contact
NuVista Energy Ltd.
Alex G. Verge
President and CEO
(403) 538-8501
or
NuVista Energy Ltd.
Robert F. Froese
Vice President, Finance and CFO
(403) 538-8530
or
NuVista Energy Ltd.
Suite 3500, 700 - 2nd Avenue SW
Calgary, AB T2P 2W2
(403) 538-8500
(403) 538-8505 (FAX)
Email: [email protected]
Website: www.nuvistaenergy.comMajor Newsire & Press Release Distribution with Basic Starting at only $19 and Complete OTCBB / Financial Distribution only $89
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