(Source: Marketwire)
CALGARY, ALBERTA--(Marketwire - Aug. 22, 2008) - EnerVest Natural Resource Fund Ltd. ("EnerVest") is pleased to announce the financial results for the six month period ended June 30, 2008. The following is an excerpt from the management report of fund performance and interim financial statements of EnerVest for the six month period ended June 30, 2008. The interim report, which includes the entire management report of fund performance and financial statements, can be found on our website at www.enervest.com or on SEDAR at www.sedar.com.
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
Results of Operations
WTI crude oil and AECO natural gas prices increased 49% and 76%, respectively, since the beginning of the year. The energy sector has enjoyed exceptional performance from the strength in commodities thus far in 2008. EnerVest's return was 42.1% for the period, outperforming its benchmark S&P/TSX Capped Energy Index return of 28.6% and the Globe Natural Resources Peer Index return of 19.0%. EnerVest's superior performance is attributable to the portfolio's concentration in small and mid-cap energy companies which outperformed the large cap exploration and production companies and integrated producers. The junior energy exploration and production companies were able to rebound from their depressed 2007 valuations caused by a host of issues which plagued the sector, notably the Alberta Royalty Regime and lower commodity prices.
Two new areas within the Western Canadian Sedimentary Basin ("WCSB"), the Montney tight gas play in northeastern British Columbia and the Bakken light oil discovery in southeastern Saskatchewan, have garnered much attention this year. These areas have received renewed interest as recent advancements in horizontal fracturing technology have produced good results and are demonstrating that companies may be able to unlock more potential from the declining WCSB. The fund holds a number of companies that are involved in these areas of development which have contributed excellent returns year to date.
There have been a number of takeovers in the first half of 2008, with smaller and mid-sized companies combining for better leverage, income trusts acquiring companies to increase production, and senior producers acquiring smaller companies to augment land position in key areas. The fund held a number of companies involved in takeovers, including Berkana Energy Corp. purchased by Quatro Resources Inc., Bulldog Resources Inc. acquired by TriStar Oil and Gas Ltd., Burmis Energy Inc. bought by Baytex Energy Trust, Cyries Energy Inc. acquired by Iteration Energy Ltd., ExAlta Energy Inc. acquired by Galleon Energy Inc., Pacific Stratus Energy Ltd. purchased by Pacific Rubiales Energy Corp., RSX Energy Inc. acquired by Talisman Energy Inc., and Rider Resources Ltd. purchased by NuVista Energy Ltd.
On April 30, 2008, EnerVest issued 1.7 million mutual fund shares totaling $25.8 million in exchange for the investments of EnerVest FTS Limited Partnership 2006 ("FTS 2006") and EnerVest FTS Limited Partnership 2006 II ("FTS 2006 II"), based on EnerVest's net asset value of $15.06 per share and the net asset values of FTS 2006 and FTS 2006 II on that date. The general partners of FTS 2006 and FTS 2006 II were owned by EnerVest Management Ltd., the owner of EnerVest's management company. The transaction with FTS 2006 and FTS 2006 II has been measured at fair value.
The fund experienced redemptions of $11.7 million during the period, largely the result of new shareholders seeking liquidity after the rollovers of FTS 2006 and FTS 2006 II into the fund. These redemptions required significant investment sales in order to fund, typically resulting in the disposition of more liquid assets such as the mid to large cap producers.
Portfolio
EnerVest focuses on well-managed companies that display strong balance sheets and flexible capital programs. EnerVest's investment portfolio is segregated by market capitalization. At June 30, 2008, large capitalized companies represented 26.4% of the portfolio, down from 32.4% at December 31, 2007 due to sales required to fund redemptions. Emerging and junior companies combined accounted for 42.8% of the portfolio, down from 53.3%. Intermediate mid-cap producers increased from 5.2% at December 31, 2007 to 22.2% at June 30, 2008, the combined effect of corporate actions and increasing valuations moving junior companies into this market cap. Private companies were 8.3% of the portfolio at period end.
Financial Performance
Investment revenues totalled $53,568 for the period, an increase of $21,416 over 2007 largely on distributions received from Canadian Oil Sands Trust which was not held during the comparative period. Total expenses were $600,121, of which management fees of $419,794 accounted for 70%. Management fees are based on EnerVest's daily net asset values, therefore an increase in net asset value results in an increase in management fees. The $72,728 increase in management fees is due to higher daily net asset values during the period as compared to 2007. All other expenses totalled $180,327 for the period. Since these expenses are capped at 0.7% of the daily net asset value of the fund, the increase over the prior year is also the result of higher daily net asset values.
EnerVest had net realized capital gains of $2.4 million, the largest gains coming from the acquisition of Bulldog Resource Inc. by TriStar Oil and Gas Ltd. and sales of Talisman Energy Inc. Unrealized gains in the portfolio increased by $11.8 million due to the significant appreciation in valuations, particularly in the emerging and junior holdings, resulting from the considerable increase in commodity prices.
The increase in net assets from operations for the period was $13.6 million, or $5.43 per share. Proceeds on the issuance of shares were $26.3 million, significantly greater than the $11.7 million in redemptions. As a result of the increase from operations and the net inflow of $14.6 million on shareholder transactions, net assets have increased $28.3 million since December 31, 2007. As at June 30, 2008, EnerVest's net assets totalled $55.1 million, or $17.29 per share.
Recent Developments
The natural resource industry has experienced material change during the period, with stronger commodity prices, lower finding and development costs and improved transaction costs contributing to bring valuations to a reasonable level, especially in the junior and mid-cap energy sectors.
The recent strength in crude oil prices has been greater than anticipated, however it remains consistent with long term supply and demand fundamentals. While there has been much talk of the crude oil/ US dollar hedge adding a speculative premium to the current commodity price levels, the longer term view will be focused on tight supply issues. With the crude oil market remaining tight, disappointing non-OPEC supply side response and no evidence to date of demand destruction, there is support for oil prices to remain at higher levels. There also remains the increased threat of potential military action between Iran and the United States. Given Iran is OPEC's second largest producer, any increased tension in the area will likely keep oil prices at an elevated level.
Natural gas prices remain strong even though US domestic supply increased while demand increased to a lesser degree. The growth in supply has been offset by a commensurate decrease in LNG imports as preferential pricing has being maintained in Europe and Asia. This has combined to create a more balanced market for natural gas than earlier in the year which may help to stabilize prices throughout the balance of the year. We expect continued growth in longer term natural gas demand for both electric power generation and oil sands extraction and upgrading and also expect these to be the primary drivers of pricing in North America.
Although volatility is likely to persist in oil and gas prices, strong cash flows, reasonable service costs, and solid balance sheets have all combined to form a favourable operating environment for energy companies. The recent pullback amid the broader economic concerns has led to a decline in prices while commodities have continued to remain high. This has occurred without any appreciable increase from the Canadian dollar which had previously mitigated the increases in the past year. This presents an opportunity to acquire good companies at reasonable prices.
Within the junior exploration and producing companies, continuing strength in commodity prices has resulted in strong cash flows for companies in the fund. We see these cash flows being applied to strengthen balance sheets, expand capital programs, and/or applied in asset or corporate acquisitions.
If higher commodity prices persist, it should translate into strong cash flows for the large cap integrated and exploration and production companies. As well, the junior and mid-cap sectors look poised to continue their recent advances due to the following key points:
- Financial strength - many small and mid-cap companies have reasonable debt levels which indicate good financial flexibility;
- Improving service costs and technology advancements - companies are having success using new horizontal drilling and multi-stage fracturing technologies in areas such as British Columbia's Montney and Saskatchewan's Bakken; and
- Undervalued prices - junior energy companies are currently being priced at commodity prices highly discounted to current strip prices, allowing valuations to increase along with improved cost structures, stronger cash flows and stronger commodity prices.
We continue to favour companies that are exposed to unconventional assets, strong near-term production growth rates or are likely targets for acquisition.
Sale of Manager
On July 2, 2008, Canoe Financial LP indirectly acquired all of the issued and outstanding shares of EnerVest Funds Management Inc., the manager of EnerVest, from EnerVest Limited Partnership, an indirect subsidiary of Avenir Diversified Income Trust. Cypress Capital Management Ltd. continues to act as EnerVest's investment manager.
FINANCIAL HIGHLIGHTS
The following tables show selected key financial information about EnerVest and are intended to help you understand EnerVest's financial performance for the periods shown.
EnerVest's Net Assets per Share (1) -------------------------------------------------------------------- -------- -------------------------------------------------------------------- -------- ______________________________ 2008____ 2007__ 2006____ 2005____2004__ 2003 -------------------------------------------------------------------- -------- -------------------------------------------------------------------- -------- Net assets, beginning of period______________________ 12.28____16.82__20.27____14.48__ 12.25__12.32 -------------------------------------------------------------------- -------- -------------------------------------------------------------------- -------- Increase (decrease) from operations: Total revenue________________ 0.02____ 0.03__ 0.03____ 0.08____0.04__ 0.06 Total expenses______________ (0.24)__ (0.42) (0.55)__ (0.52)__(0.41) (0.40) Realized gains for period____ 0.95____ 0.15__ 2.37____ 2.80____2.82__ 3.21 Unrealized gains (losses) for period________________________4.70____(2.33) (5.29)____4.46____1.67__(0.33) -------------------------------------------------------------------- -------- Total increase (decrease) from operations(2) : ______________________________ 5.43____(2.57) (3.44)____6.82____4.12__ 2.54 -------------------------------------------------------------------- -------- -------------------------------------------------------------------- -------- Distributions: From capital gains______________ -____(1.69)____ - ____(1.17)__(1.93) (2.72) -------------------------------------------------------------------- -------- Total distributions(3)____________-____(1.69)____ - ____(1.17)__(1.93) (2.72) -------------------------------------------------------------------- -------- -------------------------------------------------------------------- -------- Net assets, end of period (4) 17.29____12.28__16.82____20.27__ 14.48__12.25 -------------------------------------------------------------------- -------- -------------------------------------------------------------------- -------- (1) This information is derived from EnerVest's audited annual financial ____statements, except 2008 which is derived from the unaudited interim ____financial statements. The net assets per share presented in the ____financial statements differs from the net asset value calculated for ____fund pricing purposes. An explanation of these differences can be found ____in the notes to the financial statements. (2) Net assets and distributions are based on the actual number of shares ____outstanding at the relevant time. The increase/decrease from operations ____is based on the weighted average number of shares outstanding over the ____financial period. (3) Distributions were paid in cash or reinvested in additional shares of ____EnerVest. (4) This information is provided as at December 31 of the year shown, ____except 2008 which is provided as at June 30. (5) This schedule is not a reconciliation of net assets since it does not ____reflect shareholder transactions as shown on the Statement of Changes in ____Net Assets. Columns may therefore not add.
