Business News

Pengrowth Energy Trust Announces Second Quarter 2008 Results

2008-08-06 02:52:00

Pengrowth Energy Trust Announces Second Quarter 2008 Results

CALGARY, ALBERTA–(EMWNews – Aug. 6, 2008) – Pengrowth Corporation, administrator of Pengrowth Energy Trust (TSX:PGF.UN) (NYSE:PGH) (collectively “Pengrowth”), is pleased to announce the interim unaudited operating and financial results for the three month and six month periods ended June 30, 2008.

During the second quarter of 2008, Pengrowth generated record cash flow from operating activities of approximately $267.9 million ($1.08 per trust unit) as compared with $216.2 million ($0.87 per trust unit) in the first quarter of 2008 and $250.0 million ($1.02 per trust unit) in the same period last year. The increase in cash flow from operations quarter over quarter and compared to the prior year is due to higher commodity prices offset by realized commodity risk management losses, lower production volumes, higher royalties expense and higher operating costs.

Net loss of $118.7 million for the second quarter of 2008 increased by $62.1 million from the net loss recorded in the first quarter of 2008. Included in the net loss are unrealized losses on mark-to-market commodity risk management contracts of $352.6 million before taxes ($247.3 million after tax) compared to a $165.7 million before tax ($116.2 million after tax) unrealized loss in the first quarter of 2008. The net loss represents a $390.3 million reduction from net income recorded for the second quarter of 2007. The increase in net loss was partially offset by higher operating netbacks.

Distributions declared in the second quarter totaled $168.2 million versus $167.2 million during the first quarter of 2008 and $184.3 million in the second quarter last year. During the second quarter, Pengrowth distributed $0.675 per trust unit to its unitholders which is 63 percent of cash flow from operating activities. Pengrowth’s distributions remained stable at $0.225 per trust unit per month, up to and including the most recently announced August 15, 2008 distribution.

Daily production decreased two percent in the second quarter of 2008 to 80,895 boe per day when compared to the first quarter of 2008 and approximately ten percent when compared to the second quarter of 2007. The decrease in the second quarter 2008 compared to the first quarter is mainly attributable to scheduled and unscheduled maintenance shutdowns. In addition to the maintenance shutdowns, the decrease from the same period last year is primarily due to the completion of the disposition program in the second half of 2007. Pengrowth anticipates full year average daily production in the range of 80,000 boe per day to 82,000 boe per day excluding any potential impact from the Accrete transaction and any other potential future acquisitions or dispositions.

Development capital for the second quarter of 2008 totaled $74.7 million, with approximately 77 percent spent on drilling and completions. Pengrowth participated in drilling 37 gross wells (23.8 net wells) with a success rate of 96 percent. In addition to the development capital, $3.4 million was spent at the Lindbergh oil sands project and $5.0 million spent on building improvements and information technology.

Subsequent to the end of the quarter, on July 23, 2008, Pengrowth entered into an agreement to acquire Accrete’s interest in the Harmattan Area with associated production of 1,900 boe per day and reserves of 8.7 million boe on a proven and probable basis for gross proceeds of $120 million including liabilities.

Note regarding currency: all figures contained within this report are quoted in Canadian dollars unless otherwise indicated.

President’s Message

To our valued unitholders,

I am pleased to announce the unaudited quarterly results for the three months and six months ended June 30, 2008.

During the second quarter the oil and gas sector, including Pengrowth, continued to enjoy robust commodity prices. Pengrowth realized an average price, after commodity risk management of $73.21 per boe, a 21 percent increase over first quarter average realized prices and a 35 percent increase over the same period last year. Pengrowth’s operating netbacks increased 28 percent to $43.11 per boe compared to $33.65 per boe in the first quarter of 2008 and 46 percent compared to $29.56 in the second quarter of 2007.

Pengrowth generated record cash flow from operating activities during the second quarter of $267.9 million, a 24 percent increase over the previous quarter and a seven percent increase over the second quarter of 2007. The strong increase in cash flow from operating activities resulted from the continued strength in crude oil and natural gas prices, which more than offset the slightly lower production volumes and higher royalties.

Pengrowth’s exposure to the higher crude oil prices is tempered somewhat by our risk management strategy and by the continued strength of the Canadian dollar in relation to the U.S. dollar. Crude oil prices are typically quoted in U.S. dollars and as such, Pengrowth’s average realized crude oil price did not fully reflect the record high U.S. dollar benchmark crude oil prices set in the second quarter of the year. In addition, Pengrowth uses forward price swaps to manage its exposure to commodity price fluctuations, to provide a measure of stability to monthly cash distributions and to partially secure returns on significant new acquisitions at prices at or above levels which are implied in the analysis and negotiation of the transactions. Pengrowth was a particularly active acquisitor of assets during the second half of 2006 and early 2007 and as a result our hedging strategy was augmented at that time. Pengrowth’s fixed price strategy is not intended to “beat the markets” but rather to reduce volatility. Light oil and natural gas hedging losses for the second quarter amounted to $96.0 million. For the remainder of 2008, Pengrowth has approximately 46 percent of liquids hedged at Cdn $77.71 per boe and 41 percent of natural gas hedged at Cdn $8.41 per mcf.

Strong price realizations on our heavy oil and NGLs somewhat offset the weaker realized prices on light crude oil. Realized prices on heavy oil and NGLs averaged $100.34 per bbl and $92.25 per bbl respectively, an increase of 60 percent and 38 percent from the first quarter 2008. Heavy oil continues to grow as a focus area for Pengrowth as heavy oil production increased six percent in the second quarter compared to the first quarter of 2008 and 14 percent compared to the second quarter 2007.

Distributions to unitholders during the quarter totaled $0.675 per trust unit. Pengrowth maintained the monthly distribution at $0.225 per trust unit up to and including the recently declared August 15, 2008 distribution. Distributions are mainly derived from producing and selling oil, natural gas and related products and as such, distributions are highly dependent on commodity prices. Pengrowth’s board of directors continues to examine distributions on a monthly basis while considering overall market conditions and capital spending requirements when setting the distribution level each month.

Pengrowth aims to continue paying stable distributions while executing a prudent development program. As oil and gas assets are subject to natural production declines, it becomes necessary to invest capital to offset these declines through drilling and optimization activities. Capital expenditures are partially funded through withholding a portion of the cash flow from operating activities. The ratio of distributions declared over cash flow from operating activities, commonly referred to as payout ratio, in the second quarter was 63 percent. This ratio is significantly lower than the first quarter 2008 value of 77 percent mainly due to the higher cash flows resulting from stronger commodity prices.

Pengrowth has traditionally grown production through acquisitions, being one of the more active acquisitors in its sector. Subsequent to the end of the quarter, on July 23, 2008, Pengrowth entered into an agreement pursuant to which Pengrowth is scheduled to or will acquire all of the common shares of Accrete Energy Inc. for gross proceed of $120 million, which includes the assumption of $25 million of liabilities. Under the terms of the agreement, Pengrowth will assume Accrete’s interest in the Harmattan Area with the remaining properties being acquired by a new growth company. The acquisition remains subject to regulatory approval and the approval of two-thirds of Accrete shareholders and is expected to close in the third quarter 2008.

Through the purchase of Accrete, Pengrowth will acquire

– Reserves of approximately 8.4 million barrels of oil equivalent (boe) on a proven and probable basis,

– Associated production of 1,900 boe per day (boe/d) of liquids rich natural gas and light oil.

– High working interest (75 percent), high netbacks and relatively low (approximately $6.00 per boe) operating costs

The metrics of the acquisition are very favorable and inline with the industry averages. The deal results in a price of $63,158 per boe per day on a flowing barrel basis and $14.29 per boe on a proven and probable reserve basis. The acquisition is Pengrowth’s third in the area within the last two years and represents an excellent tuck in opportunity within the existing properties. Management is continuing to evaluate opportunities to add value on behalf of unitholders in the current unsettled conditions in world financial markets.

Daily production decreased two percent quarter over quarter to 80,895 boe per day. The two percent decrease is attributable to scheduled and unscheduled maintenance shutdowns at our operated and non-operated properties during the quarter. Compared to the same period last year, production levels reflect the impact from the disposition program completed in the second half of 2007, partially offset by ongoing development activities. Pengrowth continues to forecast full year 2008 production of 80,000 to 82,000 boe per day, excluding volumes from the Accrete transaction discussed earlier and any potential future acquisitions or dispositions.

Operating expenses increased ten percent from the first quarter of 2008 and 13 percent on a per boe basis due to the previously mentioned scheduled and unscheduled maintenance shutdowns. Expenses are further impacted by higher realized utility expenses resulting from a 25 percent increase in Alberta power prices during the quarter. Despite the higher operating expenses during the quarter, Pengrowth continues to anticipate full year operating expenses of $392 million or $13.20 per boe.

Development capital expenditures totaled $74.7 million during the quarter, with the majority of the expenditures being dedicated to development and optimization activities. For the first half of the year, capital expenditures amounted to $159.6 million, with approximately 81 percent of the expenditures dedicated to drilling, completions and facilities. Currently, Pengrowth anticipates a full year capital program of $367 million, an increase of $12 million from the previous estimate, with the majority of the additional capital being dedicated to land acquisitions. In addition to the development program, during the second quarter, Pengrowth made a $3.4 million investment at Lindbergh to continue the evaluation of its oil sands assets. Pengrowth expects to invest $20 million in 2008 to evaluate the Lindbergh oil sands assets. The focus of the capital program is to maximize unitholder returns through the allocation of capital on select high return projects, the active pursuit of improved reserve recovery including the CO2 pilot project at Judy Creek, continued improvements in ongoing operations and the development of new core focus areas such as our CBM program.

On July 14, 2008, the department of Finance released proposed amendments to the Income Tax Act (Canada) to facilitate the conversion of existing income trusts and other public flow through entities into corporations on a tax deferred basis for both a trust and its Canadian unitholders. The conversion rules would provide an existing income trust with tax efficient structuring options to convert to a corporate form. The conversion rules would be available to Pengrowth if Pengrowth determines to convert to a corporation. The transition provisions are only available to trusts that convert prior to 2013. Accordingly, Pengrowth has 4 1/2 more years before a final course of action would have to be adopted and Pengrowth can continue to have the benefit of its tax structure through December 31, 2010. Commencing in 2011, Pengrowth would be subject to the SIFT tax and would utilize existing tax pools to mitigate a portion of the SIFT tax, should it remain a trust for any period.

I am very pleased with the accomplishments our team achieved during the second quarter and I believe we are well positioned both operationally and financially for continued success in 2008. We look forward to the remainder of 2008 and will continue to strive forward with our mandate to provide exceptional growth and value to our unitholders.

James S. Kinnear, Chairman, President and Chief Executive Officer

August 6, 2008



Summary of Financial and Operating Results

Three Months ended Six Months ended
(thousands, June 30 June 30
except per unit % %
amounts) 2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
INCOME STATEMENT
Oil and gas sales $ 550,623 $443,977 24 $1,008,229 $ 876,085 15
Net (loss) income $(118,650) $271,659 (144) $ (175,233) $ 201,825 (187)
Net (loss) income
per trust unit $ (0.48) $ 1.11 (143) $ (0.71) $ 0.82 (187)
----------------------------------------------------------------------------
CASH FLOW
Cash flows from
operating
activities $ 267,874 $249,960 7 $ 484,112 $ 386,389 25
Cash flows from
operating
activities per
trust unit $ 1.08 $ 1.02 6 $ 1.95 $ 1.58 23

Distributions
declared $ 168,159 $184,327 (9) $ 335,393 $ 367,861 (9)
Distributions
declared per
trust unit $ 0.675 $ 0.75 (10) $ 1.350 $ 1.50 (10)

Ratio of
distributions
declared over
cash flows from
operating
activities 63% 74% 69% 95%

Capital
expenditures $ 83,060 $ 49,467 68 $ 176,594 $ 148,252 19
Capital
expenditures per
trust unit $ 0.33 $ 0.20 65 $ 0.71 $ 0.61 16
Weighted average
number of trust
units outstanding 248,489 245,127 1 247,873 244,745 1
----------------------------------------------------------------------------
BALANCE SHEET
Working
capital (1) $ (460,191) $ (451,579) 2
Property, plant
and equipment $4,199,258 $4,633,861 (9)
Long term debt $1,243,674 $1,038,328 20
Trust
unitholders'
equity $2,284,095 $2,913,152 (22)
Trust
unitholders'
equity per trust
unit $ 9.17 $ 11.86 (22)

Currency
(U.S.$/Cdn$)
(closing rate at
period end) 0.9990 0.8812

Number of trust
units outstanding
at period end 248,993 245,560 1
----------------------------------------------------------------------------
AVERAGE DAILY
PRODUCTION
Crude oil
(barrels) 25,052 27,083 (7) 25,077 27,271 (8)
Heavy oil
(barrels) 8,242 7,254 14 7,991 7,015 14
Natural gas (mcf) 234,028 280,667 (17) 237,618 278,096 (15)
Natural gas
liquids (barrels) 8,596 8,519 1 9,131 9,215 (1)
Total production
(boe) 80,895 89,633 (10) 81,803 89,850 (9)

TOTAL PRODUCTION
(mboe) 7,361 8,157 (10) 14,888 16,263 (8)
----------------------------------------------------------------------------
PRODUCTION
PROFILE
Crude oil 31% 30% 31% 30%
Heavy oil 10% 8% 10% 8%
Natural gas 48% 52% 48% 52%
Natural gas
liquids 11% 10% 11% 10%
----------------------------------------------------------------------------
AVERAGE REALIZED
PRICES(after
commodity
risk management)
Crude oil (per
barrel) $ 83.88 $ 71.81 17 $ 81.63 $ 69.52 17
Heavy oil (per
barrel) $ 100.34 $ 43.52 131 $ 82.13 $ 42.57 93
Natural gas (per
mcf) $ 9.40 $ 7.61 24 $ 8.55 $ 7.76 10
Natural gas
liquids (per
barrel) $ 92.25 $ 56.42 64 $ 78.86 $ 52.81 49
Average realized
price per boe $ 73.21 $ 54.39 35 $ 66.68 $ 53.85 24
----------------------------------------------------------------------------
(1) Prior year restated to conform to presentation adopted in current year.


Summary of Trust Unit Trading Data

Three Months ended Six Months ended
June 30 June 30
(thousands,
except per
trust unit
amounts) 2008 2007 2008 2007
TRUST UNIT
TRADING
PGH (NYSE)
High $ 21.90 U.S. $ 19.84 U.S. $ 21.90 U.S. $ 19.84 U.S.
Low $ 18.86 U.S. $ 16.45 U.S. $ 13.67 U.S. $ 15.82 U.S.
Close $ 20.11 U.S. $ 19.09 U.S. $ 20.11 U.S. $ 19.09 U.S.
Value $392,743 U.S. $428,571 U.S. $ 650,299 U.S. $ 877,712 U.S.
Volume 19,425 23,668 33,718 50,301

PGF.UN (TSX)
High $ 21.56 $ 21.04 $ 21.56 $ 21.04
Low $ 19.17 $ 18.82 $ 14.16 $ 18.62
Close $ 20.50 $ 20.27 $ 20.50 $ 20.27
Value $569,706 $561,471 $1,127,595 $1,306,290
Volume 28,004 28,348 58,759 66,090

 

The following discussion of financial results should be read in conjunction with the interim unaudited consolidated Financial Statements for the three months and six months ended June 30, 2008 of Pengrowth Energy Trust and is based on information available to August 5th, 2008.

Frequently Recurring Terms

For the purposes of this discussion, we use certain frequently recurring terms as follows: the “Trust” refers to Pengrowth Energy Trust, the “Corporation” refers to Pengrowth Corporation, “Pengrowth” refers to the Trust and its subsidiaries and the Corporation on a consolidated basis and the “Manager” refers to Pengrowth Management Limited.

Pengrowth uses the following frequently recurring industry terms in this discussion: “bbls” refers to barrels, “boe” refers to barrels of oil equivalent, “mboe” refers to a thousand barrels of oil equivalent, “mcf” refers to thousand cubic feet, “gj” refers to gigajoule and “mmbtu” refers to million British thermal units.

Advisory Regarding Forward-Looking Statements

This discussion contains forward-looking statements within the meaning of securities laws, including the “safe harbour” provisions of Canadian securities legislation and the United States Private Securities Litigation Reform Act of 1995. Forward-looking information is often, but not always, identified by the use of words such as “anticipate”, “believe”, “expect”, “plan”, “intend”, “forecast”, “target”, “project”, “guidance” “may”, “will”, “should”, “could”, “estimate”, “predict” or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking statements in this discussion include, but are not limited to, statements with respect to: reserves, 2008 production, production additions from Pengrowth’s 2008 development program, royalty obligations, 2008 operating expenses, future income taxes, goodwill, asset retirement obligations, taxability of distributions, remediation and abandonment expenses, capital expenditures, general and administration expenses, proceeds from the disposal of properties and the impact of the changes to the Canadian tax legislation as details have yet to be provided. Statements relating to “reserves” are forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the reserves described exist in the quantities predicted or estimated and can profitably be produced in the future.

Forward-looking statements and information are based on Pengrowth’s current beliefs as well as assumptions made by, and information currently available to, Pengrowth concerning anticipated financial performance, business prospects, strategies, regulatory developments, future oil and natural gas commodity prices and differentials between light, medium and heavy oil prices, future oil and natural gas production levels, future exchange rates, the proceeds of anticipated divestitures, the amount of future cash distributions paid by Pengrowth, the cost of expanding our property holdings, our ability to obtain equipment in a timely manner to carry out development activities, our ability to market our oil and natural gas successfully to current and new customers, the impact of increasing competition, our ability to obtain financing on acceptable terms and our ability to add production and reserves through our development and exploitation activities. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. Management reviews its assumptions for reasonableness at least quarterly and updates the “Outlook” section in our discussion as required.

By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: the volatility of oil and gas prices; production and development costs and capital expenditures; the imprecision of reserve estimates and estimates of recoverable quantities of oil, natural gas and liquids; Pengrowth’s ability to replace and expand oil and gas reserves; environmental claims and liabilities; incorrect assessments of value when making acquisitions; increases in debt service charges; the loss of key personnel; the marketability of production; defaults by third party operators; unforeseen title defects; fluctuations in foreign currency and exchange rates; inadequate insurance coverage; compliance with environmental laws and regulations; changes in tax and royalty laws; the failure to qualify as a mutual fund trust; and Pengrowth’s ability to access external sources of debt and equity capital. Further information regarding these factors may be found under the heading “Business Risks” herein and under “Risk Factors” in Pengrowth’s most recent Annual Information Form (AIF), and in Pengrowth’s most recent consolidated financial statements, management information circular, quarterly reports, material change reports and news releases. Copies of the Trust’s Canadian public filings are available on SEDAR at www.sedar.com. The Trust’s U.S. public filings, including the Trust’s most recent annual report form 40-F as supplemented by its filings on form 6-K, are available at www.sec.gov.

Pengrowth cautions that the foregoing list of factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Pengrowth, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Furthermore, the forward-looking statements contained in this discussion are made as of the date of this discussion and Pengrowth does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent events and circumstances have occurred that are reasonably likely to cause actual results to differ materially from material forward-looking information for a period that is not yet complete or as otherwise required by law.

The forward-looking statements contained in this discussion are expressly qualified by this cautionary statement.

Critical Accounting Estimates

As discussed in Note 1 to the financial statements, the financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period ended.

The amounts recorded for depletion, depreciation and amortization of injectants, the provision for asset retirement obligations, goodwill and future taxes are based on estimates. The ceiling test calculation is based on estimates of proved reserves, production rates, oil and natural gas prices, future costs and other relevant assumptions. The amounts recorded for the fair value of risk management contracts and the unrealized gains or losses on the change in fair value are based on estimates. These estimates can change significantly from period to period. As required by National Instrument 51-101 (NI 51-101) Standards of Disclosure for Oil and Gas Activities, Pengrowth uses independent qualified reserve evaluators in the preparation of reserve evaluations. By their nature, these estimates are subject to measurement uncertainty and changes in these estimates may impact the consolidated financial statements of future periods.

Non-GAAP Financial Measures

This discussion refers to certain financial measures that are not determined in accordance with GAAP in Canada or the United States. These measures do not have standardized meanings and may not be comparable to similar measures presented by other trusts or corporations. Measures such as operating netbacks do not have standardized meanings prescribed by GAAP.

Historically, we used non-GAAP measures such as funds generated from operations, funds generated from operations per trust unit, distributable cash, distributable cash per trust unit and payout ratio because we believe they facilitate the understanding of the results of our operations and financial position. In response to guidance from the Canadian Institute of Chartered Accountants (CICA) and the Canadian Securities Administrators (CSA), we are now using the GAAP measure cash flow from operating activities instead of funds generated from operations. The principal difference is that cash flow from operating activities includes changes in non-cash working capital. We have discontinued the use of the terms distributable cash and distributable cash per trust unit.

Distributions can be compared to cash flow from operating activities in order to determine the amount, if any, of distributions financed through debt, short term borrowing or the issue of trust units. The current level of capital expenditures funded through retained cash, the issue of debt, short term borrowing or the issue of trust units can also be determined when it is compared to the difference in cash flow from operating activities and distributions paid in the financing section of the Statement of Cash Flows.

Management monitors the capital structure of the corporation using non-GAAP financial metrics, primarily net debt to the trailing twelve months Earnings Before Interest, Taxes, Depletion, Depreciation, Amortization, Accretion, and other non-cash items (EBITDA). Management believes that targeting a prudent ratio of net debt to trailing EBITDA is reasonable given the size of the company, its capital management objectives, growth strategy, uncertainty of oil and gas commodity prices and additional margin required from the debt covenants. If the ratio of net debt to trailing EBITDA reaches or exceeds certain levels, management would consider steps to reduce the ratio of net debt to trailing EBITDA. Those steps could include, but are not limited to, raising equity, selling assets, reducing capital expenditures or reducing distributions. Details of this measure are included in note 12 to the consolidated financial statements.

Conversion and Currency

When converting natural gas to equivalent barrels of oil within this discussion Pengrowth uses the industry standard of six thousand cubic feet to one barrel of oil equivalent. Barrels of oil equivalent may be misleading, particularly if used in isolation; a conversion ratio of six mcf of natural gas to one boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Production volumes, revenues and reserves are reported on a company interest gross basis (before royalties) in accordance with Canadian practice. All amounts are stated in Canadian dollars unless otherwise specified.

OVERVIEW

Pengrowth generated cash flow from operating activities for the second quarter of 2008 of $267.9 million, a 24 percent increase over the first quarter of 2008 and a seven percent increase over the second quarter of 2007. This increase in cash flow from operating activities is a result of higher realized commodity prices for oil, gas and natural gas liquids (NGLs) which more than offset the impact of lower volumes and higher royalty expenses. The higher commodity prices also contributed to a 28 percent increase in the operating netback from the first quarter of 2008 and a 46 percent increase from the second quarter of 2007.

Net loss of $118.7 million for the second quarter of 2008 increased by $62.1 million from the net loss recorded in the first quarter of 2008. Included in the net loss are unrealized losses on mark-to-market commodity risk management contracts of $352.6 million before taxes ($247.3 million after tax) compared to a $165.7 million before tax ($116.2 million after tax) unrealized loss in the first quarter of 2008. The net loss represents a $390.3 million reduction from net income recorded for the second quarter of 2007. The increase in net loss was partially offset by higher operating netbacks.

The commodity risk management activities, which are utilized to partially secure returns from significant acquisitions and provide a level of stability to the trust’s cash flow from operating activities, has limited to some extent the trust’s ability to fully realize higher commodity prices. The strengthening of the Canadian dollar has also offset some of the effects of rising commodity prices.

RESULTS OF OPERATIONS

This discussion contains the results of Pengrowth Energy Trust and its subsidiaries.

Production

Average daily production decreased slightly in the second quarter of 2008 compared to the first quarter of 2008. The two percent decrease is attributable to scheduled and unscheduled maintenance shutdowns. In comparison to the second quarter of 2007, average daily production decreased ten percent as a result of non-core property divestments completed in the second half of 2007 partially offset by ongoing development activities. Daily production for the first half of 2008 decreased approximately nine percent compared to the same period of 2007. This is primarily due to the previously mentioned divestment of non-core properties.

At this time, Pengrowth anticipates 2008 full year production of 80,000 to 82,000 boe per day. This estimate excludes volumes resulting from the pending Accrete Energy Inc. transaction discussed further in Subsequent Events, as well as the impact from any potential future acquisitions or dispositions.



Daily Production

Three months ended Six months ended
----------------------------------------------------------------------------

June 30, Mar 31, June 30, June 30, June 30,
2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Light crude oil (bbls) 25,052 25,103 27,083 25,077 27,271
Heavy oil (bbls) 8,242 7,740 7,254 7,991 7,015
Natural gas (mcf) 234,028 241,208 280,667 237,618 278,096
Natural gas liquids (bbls) 8,596 9,666 8,519 9,131 9,215
----------------------------------------------------------------------------
Total boe per day 80,895 82,711 89,633 81,803 89,850
----------------------------------------------------------------------------

 

Light crude oil production volumes remained relatively stable in the second quarter of 2008 compared to the first quarter of 2008. Production volumes decreased seven percent in the second quarter of 2008 compared to the second quarter of 2007 and approximately eight percent for the first half on 2008 compared to the same period of 2007. The decreases are primarily attributable to the absence of volumes from divested properties of approximately 1,100 bbls per day and natural production decline, partly offset by successful development activity.

Heavy oil production increased six percent in the second quarter of 2008 compared to the first quarter of 2008 and 14 percent compared to the second quarter of 2007. Additional volumes came from development activity primarily at the Tangleflags property. These additional volumes were partially offset by production declines.

Natural gas production decreased three percent compared to the first quarter of 2008. Lower sales volumes at Judy Creek due to higher gas volumes used for miscible flood injections, planned maintenance shutdowns at the Olds Gas and the Fenn Big Valley Plants and a temporary production curtailment at Sable Offshore Energy Project (SOEP) were the main reasons for the decrease. Production volumes decreased 17 percent in the second quarter 2008 compared to the same period of 2007 and 15 percent for the first half of 2008 from the first half of 2007. These decreases are mainly attributable to maintenance shutdowns and the absence of approximately 21,000 mcf per day from divested properties.

Natural gas liquids (NGLs) production decreased approximately 11 percent in the second quarter of 2008 versus the first quarter of 2008. The decrease is attributable to lower NGL production sold at Judy Creek because additional volumes were used to meet miscible flooding requirements and maintenance shutdowns previously described. Offsetting the decrease was an additional condensate lift at SOEP. Second quarter production was stable when compared to the second quarter 2007 as well as for the first half of 2008 compared to the first half of 2007.

Pricing and Commodity Risk Management

Compared to the prior quarter, benchmark prices continued to increase; however, the company did not fully benefit due to the limiting effects of the risk management strategy and, in the case of second quarter 2008 compared to the second quarter of 2007, the stronger Canadian dollar.

As part of our risk management strategy, Pengrowth uses forward price swaps to manage its exposure to commodity price fluctuations to provide a measure of stability to monthly cash distributions and to partially secure returns on significant new acquisitions. As of June 30, 2008, Pengrowth has contracts for the remainder of 2008 and 2009 for approximately 19,000 bbls per day and 10,000 bbls per day of crude oil and 99,000 mcf per day and 63,000 mcf per day of natural gas, respectively. Each Cdn $1 per barrel change in future oil prices would result in approximately Cdn $7.1 million change in the value of the crude contracts. Similarly, each Cdn $0.50 per mcf change in future natural gas prices would result in approximately Cdn $20.6 million change in the value of the natural gas contracts. The changes in the fair value of the forward contracts directly affects net income through the unrealized amounts booked to the statement of income during the period. The effect on cash flows will be recognized separately only upon realization of the contracts, which could vary significantly from the unrealized amount recorded due to timing and prices when each contract is settled. However, if each contract were to settle at the contract price in effect at June 30, 2008, future revenue would be reduced by the $604 million unrealized commodity risk management losses that have been recorded. Pengrowth has fixed the Canadian dollar exchange rate at the same time that it swaps any U.S. dollar denominated commodity in order to protect against changes in the foreign exchange rate.

Pengrowth has not designated any outstanding commodity contracts as hedges for accounting purposes and therefore must record these contracts on the balance sheet at their fair value and recognize changes in fair value on the statement of income as unrealized commodity risk management gains or losses. There will continue to be volatility in earnings to the extent that the fair value of commodity contracts fluctuate however, these non-cash amounts do not impact Pengrowth’s operating cash flows. Realized commodity risk management gains or losses are recorded in oil and gas sales on the statement of income.



Average Realized Prices

Three months ended Six months ended
----------------------------------------------------------------------------
June 30, Mar 31, June 30, June 30, June 30,
(Cdn$) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Light crude oil (per bbl) 119.96 93.73 69.61 106.84 66.59
after realized commodity
risk management 83.88 79.38 71.81 81.63 69.52
Heavy oil (per bbl) 100.34 62.74 43.52 82.13 42.57
Natural gas (per mcf) 10.05 7.52 7.41 8.77 7.50
after realized commodity
risk management 9.40 7.72 7.61 8.55 7.76
Natural gas liquids (per bbl) 92.25 66.96 56.42 78.86 52.81
----------------------------------------------------------------------------
Total per boe 86.26 64.07 53.10 75.04 52.17
after realized commodity
risk management 73.21 60.30 54.39 66.68 53.85
----------------------------------------------------------------------------
Benchmark prices
WTI oil (U.S.$ per bbl) 123.98 97.81 64.98 110.94 61.63
AECO spot gas (Cdn$ per gj) 8.86 6.76 6.99 7.81 7.03
NYMEX gas (U.S.$ per mmbtu) 10.93 8.03 7.55 9.48 7.16
Currency (U.S.$/Cdn$) 0.99 1.00 0.90 0.99 0.88
----------------------------------------------------------------------------


Realized Commodity Risk Management Gains (Losses)

Three months ended Six months ended
----------------------------------------------------------------------------
June 30, Mar 31, June 30, June 30, June 30,
2008 2008 2007 2008 2007
----------------------------------------------------------------------------

Light crude oil ($ millions) (82.2) (32.8) 5.5 (115.0) 14.5
Light crude oil ($ per bbl) (36.08) (14.35) 2.20 (25.21) 2.93

Natural gas ($ millions) (13.8) 4.4 5.1 (9.4) 12.9
Natural gas ($ per mcf) (0.65) 0.20 0.20 (0.22) 0.26
----------------------------------------------------------------------------
Combined ($ millions) (96.1) (28.4) 10.6 (124.4) 27.4
Combined ($ per boe) (13.06) (3.77) 1.29 (8.36) 1.68
----------------------------------------------------------------------------

 

Commodity price contracts in place at June 30, 2008 are detailed in Note 13 to the consolidated financial statements. Additionally, the fair value of the outstanding contracts has been recorded on the balance sheet as a total net liability of $604 million at quarter end of which the majority is a current liability of $460 million. In the second quarter of 2007, the total net asset was $33 million, of which $25 million was current. An unrealized loss of $518 million resulting from the change in fair value from January 1 to June 30, 2008 has been recognized in the statement of income compared to an unrealized loss of $4 million for the same time period in 2007.

Oil and Gas Sales – Contribution Analysis

The following table includes the impact of realized commodity risk management activity.



($ millions) Three months ended
----------------------------------------------------------------------------
June 30, % of Mar 31, % of June 30, % of
Sales Revenue 2008 total 2008 total 2007 total
----------------------------------------------------------------------------
Light crude oil 191.2 35 181.3 40 177.0 40
Natural gas 200.3 36 169.4 37 194.3 44
Natural gas liquids 72.2 13 58.9 13 43.8 10
Heavy oil 75.3 14 44.2 10 28.6 6
Brokered sales/sulphur 11.6 2 3.8 - 0.3 -
----------------------------------------------------------------------------
Total oil and gas sales 550.6 457.6 444.0
----------------------------------------------------------------------------


($ millions) Six months ended
----------------------------------------------------------------------------
June 30, % of June 30, % of
Sales Revenue 2008 total 2007 total
----------------------------------------------------------------------------
Light crude oil 372.6 37 343.2 39
Natural gas 369.7 37 390.5 45
Natural gas liquids 131.1 13 88.1 10
Heavy oil 119.5 12 54.0 6
Brokered sales/sulphur 15.3 1 0.3 -
----------------------------------------------------------------------------
Total oil and gas sales 1,008.2 876.1
----------------------------------------------------------------------------

 

Oil and Gas Sales – Price and Volume Analysis

The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales, including the impact of realized commodity risk management activity, for the second quarter of 2008 compared to the first quarter of 2008.



----------------------------------------------------------------------------
($ millions) Light oil Natural gas NGLs Heavy oil Other Total
----------------------------------------------------------------------------
Quarter ended March 31,
2008 181.3 169.4 58.9 44.2 3.8 457.6
Effect of change in
product prices 59.8 54.1 19.8 28.2 - 161.9
Effect of change in
sales volumes (0.4) (4.9) (6.5) 2.9 - (8.9)
Effect of change in
realized commodity
risk management activities (49.5) (18.3) - - - (67.8)
Other - - - - 7.8 7.8
----------------------------------------------------------------------------
Quarter ended June 30, 2008 191.2 200.3 72.2 75.3 11.6 550.6
----------------------------------------------------------------------------

 

The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales including the impact of realized commodity risk management activity, for the first half of 2008 compared to the same period of 2007.



----------------------------------------------------------------------------
($ millions) Light oil Natural gas NGLs Heavy oil Other Total
----------------------------------------------------------------------------
Period ended June 30,
2007 343.2 390.5 88.1 54.0 0.3 876.1
Effect of change in
product prices 183.7 54.7 43.3 57.5 - 339.2
Effect of change in
sales volumes (24.8) (53.2) (0.3) 7.9 - (70.4)
Effect of change in
realized commodity
risk management
activities (129.5) (22.3) - - - (151.8)
Other - - - 0.1 15.0 15.1
----------------------------------------------------------------------------
Period ended June 30,
2008 372.6 369.7 131.1 119.5 15.3 1,008.2
----------------------------------------------------------------------------


Processing and Other Income

Three months ended Six months ended
----------------------------------------------------------------------------

June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------

Processing & other income 10.8 4.5 5.0 15.3 9.7
$ per boe 1.47 0.59 0.62 1.02 0.60
----------------------------------------------------------------------------

 

Processing and other income is primarily derived from interest earned, fees charged for processing and gathering third party gas, road use and oil and water processing. Second quarter 2008 included $4.3 million of interest income related adjustments to 2007 non-core property dispositions, $1.1 million related to a prior period Enhanced Oil Recovery (EOR) settlement and $1.2 million in equity income from Monterey Exploration Ltd.

This income represents the partial recovery of operating expenses reported separately.



Royalties

Three months ended Six months ended
----------------------------------------------------------------------------

June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------

Royalty expense 125.6 98.2 84.0 223.8 165.6
$ per boe 17.05 13.05 10.30 15.03 10.18
----------------------------------------------------------------------------
Royalties as a percent
of sales 22.8% 21.5% 18.9% 22.2% 18.9%

 

Royalties include crown, freehold and overriding royalties as well as mineral taxes. The royalty rate for the second quarter of 2008 is slightly higher than the first quarter 2008, primarily a reflection of higher average market prices used for the calculation of the royalty expense. Included in the second quarter of 2008 is a $4.8 million favourable adjustment for EOR settlement related to 2005. Additionally, sales include losses from realized commodity risk management contracts that have the effect of increasing royalty rates as a percentage of sales since royalty payments are based on revenue prior to commodity risk management activities. Royalty expense would represent 19.4 percent of sales for the second quarter of 2008 and 2007, excluding the effects of realized commodity risk management contracts.

The outlook for 2008 is that royalties will be slightly higher as a result of higher commodity prices. Royalties are expected to average approximately 23 percent of Pengrowth’s sales.



Operating Expenses

Three months ended Six months ended
----------------------------------------------------------------------------

June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------

Operating expenses 109.7 99.5 112.1 209.2 213.1
$ per boe 14.89 13.22 13.74 14.05 13.10
----------------------------------------------------------------------------

 

Operating expenses increased ten percent from the first quarter of 2008 or thirteen percent on a per boe basis. During the second quarter, maintenance costs increased by $4.5 million due to turnaround work at the Olds Gas Plant; and utility costs increased by $4.2 million from a 25 percent increase in Alberta power prices over the first quarter. Second quarter operating expenses are two percent lower in 2008 versus 2007. Turnaround work at Olds and the 31 percent increase in utility costs were more than offset by the absence of expenses relating to properties disposed of in 2007. Operating expenses for the first half of 2008 compared to the first half of 2007 decreased by $4.0 million. In addition to the Olds turnaround, higher utility costs, and offsetting expenses from the ConocoPhillips properties (the “CP properties”) acquisition; reduced injection expenses at Weyburn, and lower maintenance at Judy Creek, Carson Creek and Red Earth offset higher maintenance at Swan Hills and Sable.

Pengrowth expects total operating expenses for 2008 of approximately $392 million or $13.20 per boe.



Net Operating Expenses

Three months ended Six months ended
----------------------------------------------------------------------------

June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------

Net operating expenses 98.9 95.0 107.1 193.9 203.4
$ per boe 13.42 12.63 13.12 13.03 12.50
----------------------------------------------------------------------------


Included in the table above are operating expenses net of the previously
reported processing and other income.

Transportation Costs

Three months ended Six months ended
----------------------------------------------------------------------------

June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------

Light oil transportation 1.1 1.2 0.8 2.3 1.2
$ per bbl 0.50 0.51 0.34 0.50 0.25
Natural gas transportation 2.1 2.1 2.3 4.2 4.5
$ per mcf 0.10 0.10 0.09 0.10 0.09
----------------------------------------------------------------------------

 

Pengrowth incurs transportation costs for its product once the product enters a feeder or main pipeline to the title transfer point. The transportation cost is dependant upon third party rates and distance the product travels on the pipeline prior to changing ownership or custody. Oil transportation costs increased year-over-year due to the additional transportation incurred related to the CP properties; which Pengrowth began marketing in June 2007. Pengrowth has the option to sell some of its natural gas directly to premium markets outside of Alberta by incurring additional transportation costs. Pengrowth sells most of its natural gas without incurring significant additional transportation costs. Similarly, Pengrowth has elected to sell approximately 65 percent of its crude oil at market points beyond the wellhead but at the first major trading point, requiring minimal transportation costs.



Amortization of Injectants for Miscible Floods

Three months ended Six months ended
----------------------------------------------------------------------------

June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------
Purchased and capitalized 7.0 3.8 5.9 10.8 10.6
Amortization 5.7 7.8 8.6 13.5 18.1
----------------------------------------------------------------------------

 

The cost of injectants (primarily natural gas and ethane) purchased for injection in the miscible flood program is amortized equally over the period of expected future economic benefit. The cost of injectants purchased in 2007 and 2008 is amortized over a 24 month period. As of June 30, 2008, the balance of unamortized injectant costs was $24.6 million.

The amount of injectants purchased and capitalized in the second quarter 2008 was higher than the first quarter of 2008 due to the timing and the requirement of this ongoing program. It is expected that the program will require additional injectants in upcoming quarters and therefore higher amounts will be purchased. The value of Pengrowth’s proprietary injectants is not recorded as an asset or a sale; the cost of producing these injectants is included in operating expenses.

Operating Netbacks

There is no standardized measure of operating netbacks and therefore operating netbacks, as presented below, may not be comparable to similar measures presented by other companies. Certain assumptions have been made in allocating operating expenses, other production income, other income and royalty injection credits between light crude, heavy oil, natural gas and natural gas liquids production.

Pengrowth recorded an average operating netback of $43.11 per boe in the second quarter of 2008 compared to $33.65 per boe in the first quarter of 2008 and $29.56 per boe for the second quarter of 2007. The increase in the netback in the second quarter compared to the first quarter of 2008 was a result of higher heavy oil and liquids price realizations partially offset by royalties. The increase from the second quarter of 2007 is a result of higher combined commodity prices and realized sulphur sales which are partially offset by higher royalties and operating costs.

The sales price used in the calculation of operating netbacks is after realized commodity risk management.



-------------------------------------------------
-------------------------------------------------
Three months ended Six months ended
Combined Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per boe) 2008 2008 2007 2008 2007
-------------------------------------------------
Sales price 73.21 60.30 54.39 66.68 53.85
Other production income 1.59 0.50 0.04 1.04 0.02
-------------------------------------------------
74.80 60.80 54.43 67.72 53.87
Processing and other income 1.47 0.59 0.62 1.02 0.60
Royalties (17.05) (13.05) (10.30) (15.03) (10.18)
Operating expenses (14.89) (13.22) (13.74) (14.05) (13.10)
Transportation costs (0.45) (0.44) (0.39) (0.44) (0.35)
Amortization of injectants (0.77) (1.03) (1.06) (0.90) (1.11)
-------------------------------------------------
Operating netback 43.11 33.65 29.56 38.32 29.73
-------------------------------------------------

-------------------------------------------------
-------------------------------------------------
Three months ended Six months ended
Light Crude Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per bbl) 2008 2008 2007 2008 2007
-------------------------------------------------
Sales price (after
commodity risk management) 83.88 79.38 71.81 81.63 69.52
Other production income 0.76 0.01 0.08 0.38 0.06
-------------------------------------------------
84.64 79.39 71.89 82.01 69.58
Processing and other income 1.87 0.71 0.34 1.29 0.34
Royalties (17.52) (15.44) (11.90) (16.48) (10.89)
Operating expenses(1) (16.39) (15.52) (14.54) (15.96) (13.58)
Transportation costs (0.50) (0.51) (0.34) (0.50) (0.25)
Amortization of injectants (2.50) (3.40) (3.51) (2.95) (3.67)
-------------------------------------------------
Operating netback 49.60 45.23 41.94 47.41 41.53
-------------------------------------------------

-------------------------------------------------
-------------------------------------------------
Three months ended Six months ended
Heavy Oil Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per bbl) 2008 2008 2007 2008 2007
-------------------------------------------------
Sales price 100.34 62.74 43.52 82.13 42.57
Processing and other income 0.70 0.27 0.18 0.49 0.19
Royalties (15.07) (9.18) (5.33) (12.22) (5.29)
Operating expenses(1) (11.60) (12.34) (14.45) (11.96) (13.75)
-------------------------------------------------
Operating netback 74.37 41.49 23.92 58.44 23.72
-------------------------------------------------

-------------------------------------------------
-------------------------------------------------
Three months ended Six months ended
Natural Gas Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per mcf) 2008 2008 2007 2008 2007
-------------------------------------------------
Sales price (after
commodity risk management) 9.40 7.72 7.61 8.55 7.76
Other production income 0.47 0.17 - 0.32 -
-------------------------------------------------
9.87 7.89 7.61 8.87 7.76
Processing and other income 0.28 0.12 0.16 0.20 0.16
Royalties (2.06) (1.64) (1.47) (1.85) (1.57)
Operating expenses(1) (2.39) (2.03) (2.23) (2.21) (2.15)
Transportation costs (0.10) (0.10) (0.09) (0.10) (0.09)
-------------------------------------------------
Operating netback 5.60 4.24 3.98 4.91 4.11
-------------------------------------------------

-------------------------------------------------
-------------------------------------------------
Three months ended Six months ended
NGLs Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per bbl) 2008 2008 2007 2008 2007
-------------------------------------------------
Sales price 92.25 66.96 56.42 78.86 52.81
Royalties (38.77) (23.45) (17.53) (30.66) (15.67)
Operating expenses(1) (16.36) (12.28) (12.54) (14.20) (12.21)
-------------------------------------------------
Operating netback 37.12 31.23 26.35 34.00 24.93
-------------------------------------------------
(1) Prior Period restated to conform to presentation in the current period


Interest

Three months ended Six months ended
----------------------------------------------------------------------------
June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2008 2008 2007 2008 2007
----------------------------------------------------------------------------

Interest Expense 19.0 15.8 21.6 34.8 45.0
----------------------------------------------------------------------------

 

Interest expense increased 20 percent in the second quarter of 2008 compared to the first quarter of 2008. Renewal fees for revolving credit facilities combined with unrealized mark-to-market losses on the Sable Remediation Trust Fund contributed to the increase. Interest expense decreased 23 percent in the first half of 2008 compared to the same time period

For more information, please contact

Pengrowth
Investor Relations
(403) 233-0224 or Toll Free: 1-888-744-1111
(403) 693-8889 (FAX)
Email: [email protected]
Website: www.pengrowth.com

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Blake Masterson

Freelance Writer, Journalist and Father of 5

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