Increases capital investment; Record cash flow
CALGARY, July 31 /CNW/ - Progress Energy Trust ("Progress" or the
"Company") today increased its production guidance for 2008 by four percent,
or 1,000 barrels of oil equivalent ("boe") per day to an annual average of
approximately 24,500 boe per day as a result of successful drilling. Second
quarter production averaged 23,805 boe per day including 121 million cubic
feet ("mmcf") per day of natural gas and 3,643 barrels per day of light and
medium oil and natural gas liquids.
The Company also reported record cash flow of $78 million or $0.69 per
unit diluted, for the second quarter of 2008, a 30 percent increase compared
to the second quarter of 2007. Cash distributions declared totaled $29.5
million resulting in a payout ratio of 38 percent excluding exchangeable
shares which do not receive cash distributions, or 43 percent including
exchangeable shares.
"Very strong natural gas prices and the success of our winter drilling
program are driving our cash flow growth," said Michael Culbert, President and
CEO of Progress. "We are generating strong cash flow which we are deploying to
build our balance sheet and to further expand our asset base to generate
production and reserve growth."
Capital investment grows
Progress has expanded its capital investment program for 2008 and expects
to invest approximately $140 million in 2008, before the impact of
dispositions. The 2008 capital investment program is split evenly between the
Company's two primary regions in the Deep Basin and the Foothills.
Approximately 50-55 net wells will be drilled in its core regions and will
continue its aggressive pace of land capture in Progress' key operating areas.
"Our first priority has been to build upon our balance sheet strength,"
said Mr. Culbert. "The current commodity price environment and the disposition
of our Saskatchewan assets have allowed us to do this."
Drilling activity in the Deep Basin of northwest Alberta and the
northeast British Columbia Foothills has recently accelerated after spring
break-up with five rigs currently operating. The Company drilled only one well
in the second quarter due to field conditions associated with break-up.
Moving forward in 2008, Progress will test the merits of horizontal
drilling and multi-stage fracture stimulations in the northeast British
Columbia Foothills by recompleting one existing horizontal well and drilling
up to three horizontal wells in the prolific Halfway formation. Progress has
jointly drilled over 150 successful vertical wells in the Halfway formation
since 2002 and has monitored the advancements in horizontal drilling and
completions technologies and resulting cost improvements over this period. It
is anticipated that Progress will have results from these initial horizontal
wells in the fourth quarter.
Production ahead of expectation
In the second quarter, Progress' production averaged 23,805 boe per day.
Production was lower than the comparable quarter in 2007 due to the 22 day
maintenance turnaround at the Spectra-owned McMahon gas processing plant in
northeast British Columbia which is scheduled every third year. It was
anticipated that substantially all of Progress' British Columbia production
would be off-line during this period but the Company negotiated the processing
of natural gas production from its Bubbles property through the Spectra-owned
Jedney gas processing plant.
As a result of the Company's successful drilling program, higher than
originally anticipated second quarter production and increased capital
investment, Progress has revised its 2008 average production guidance to
approximately 24,500 boe per day and expects to exit 2008 at approximately
26,000 boe per day.
Operating expenses averaged $6.39 per boe in the second quarter of 2008
compared to $6.59 per boe in the second quarter of 2007. Second quarter
operating costs reflect the impact of the McMahon turnaround and active
maintenance activity at Progress-owned facilities. Operating costs are
expected to average approximately $6.00 per boe for the remainder of the year.
Growing land inventory
During the second quarter, Progress acquired over 26,000 net undeveloped
acres of land through a series of crown land sales, acquisitions and farm-ins.
The acquired lands are contiguous with existing Progress lands in the Deep
Basin and Foothills. In aggregate, Progress holds over 600,000 acres of
undeveloped land.
In the second quarter, Progress completed the sale of its Saskatchewan
assets to Seaview Energy Inc. (CVU.A) in exchange for $5.4 million of cash and
8.3 million Class A common shares of Seaview. Progress currently holds
approximately 16 percent of the outstanding shares of Seaview.
Natural gas prices and low cost structure generate strong cash flows
Progress' average gas price in the second quarter was $9.35 per thousand
cubic feet ("mcf") including losses on its commodity risk management positions
and was $10.21 per mcf before realized hedging losses. Progress' natural gas
production achieves a premium price to the prices quoted at AECO because of
its high heat content nature.
"Natural gas prices have strengthened considerably during the first six
months of 2008 as compared to 2007 primarily resulting from the growing
year-over-year natural gas storage deficit, significantly lower imports of
liquefied natural gas and persistently high prices for competing fuels," said
Mr. Culbert. "In this environment we continue to actively hedge our natural
gas production to protect our distribution and capital investment."
Progress maintains a consistent price risk management program to mitigate
price risk volatility and provide greater certainty of its revenue stream. For
the period from April 1, 2008 to October 31, 2008, the Company has hedges on
approximately 70 million cubic feet ("mmcf") per day at a net floor price of
$7.77 per mcf and a net ceiling of $8.62 per mcf. For the period from
November 1, 2008 to March 31, 2009, the Company has hedges on approximately
30 mmcf per day at a net floor price of $10.44 per mcf and a net ceiling of
$13.85 per mcf.
Maintaining financial strength
Capital investment in the second quarter was $17.6 million before
dispositions. At the end of the second quarter, bank debt outstanding was
$282 million on total credit facilities of $375 million. Total debt (long term
bank debt, convertible debentures and working capital surplus) to annualized
first half 2008 cash flow was 1.3 times.
Progress has in excess of $1.1 billion in tax pools which can be used to
shelter income well into the future.
Outlook
Progress expects 2008 production to average approximately 24,500 boe per
day while investing approximately $140 million on land, seismic, drilling and
facilities, before dispositions.
The North American natural gas picture remains strong relative to the
comparable period in 2007. Although year-to-date US natural gas production has
risen significantly as a result of onshore production growth from resource
plays, it has been offset by lower imports of LNG, lower Canadian production
and a rise in residential, commercial and gas-fired electrical generation
demand. Natural gas demand should also benefit from the movement towards the
use of more environmentally friendly fuels. Natural gas produces significantly
less carbon dioxide than burning alternative fossil fuels and is becoming a
fuel of choice in North America.
Weather will remain a key component of the natural gas demand picture in
North America. Demand for natural gas is largely driven by natural gas
consumed to generate electricity for air conditioning load in the summer and
for residential and commercial heating in the winter. In aggregate, the
natural gas supply/demand balance remains tight over the medium to longer
term.
Progress will continue to focus its tight gas exploration and development
expertise on non-conventional resource plays within the Deep Basin of
northwest Alberta and the Foothills of northeast British Columbia.
Improvements in drilling and completions technology will continue to unlock
the potential within these multi-zone regions creating the opportunity to
significantly expand the Company's inventory of opportunities. Moving toward
2011, the Company believes that its high-quality asset base, operating
expertise and substantial tax pool coverage create maximum optionality for the
transition period.
In memoriam
On May 1, 2008, Progress lost an important member of its Board of
Directors. Mr. Fred Coles passed away after a long and courageous battle with
cancer. He was a member of Progress' Board since inception and contributed his
wealth of knowledge and experience to Progress and the community at large. He
will be missed.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis ("MD&A") of financial results is
dated July 31, 2008 and is to be read in conjunction with the accompanying
unaudited consolidated interim financial statements and related notes for the
period ended June 30, 2008 and the audited consolidated financial statements
and related notes and MD&A of Progress Energy Trust ("Progress" or the
"Trust") for the year ended December 31, 2007. The financial data presented
has been prepared in accordance with Canadian generally accepted accounting
principles ("GAAP"). The reporting and the measurement currency is the
Canadian dollar.
Non-GAAP Measurements
Management uses certain industry benchmarks such as operating netback and
total debt to cash flow ratio to analyze financial and operating performance.
These benchmarks 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. Operating netback and total debt to cash
flow ratio are used by research analysts to compare operating performance and
a trust's ability to maintain current distributions. Operating netback is the
net result of the Trust's revenue net of realized gains and losses on
financial instruments, and royalty, operating and transportation expenses as
found in the accompanying interim financial statements. The total debt to cash
flow ratio is calculated by dividing total debt at the end of the period
(comprised of the working capital deficit or surplus, outstanding bank debt
and the debt portion of the Trust's convertible unsecured debentures) by the
12 month trailing cash flow from operating activities before changes in
non-cash working capital.
Forward-Looking Statements
Certain information regarding Progress set forth in this document,
including Management's assessment of the Trust's future plans and operations,
contains forward-looking statements that involve substantial known and unknown
risks and uncertainties. The use of any of the words "anticipate", "continue",
"estimate", "expect", "may", "will", "project", "should", "believe" and
similar expressions are intended to identify forward looking statements. Such
statements represent Progress' internal projections, estimates or beliefs
concerning, among other things, an outlook on the estimated amounts and timing
of capital investment, anticipated future debt, revenues or other
expectations, beliefs, plans, objectives, assumptions, intentions or
statements about future events or performance. These statements are only
predictions and actual events or results may differ materially. Although
Progress believes that the expectations reflected in the forward-looking
statements are reasonable, it cannot guarantee future results, levels of
activity, performance or achievement since such expectations are inherently
subject to significant business, economic, competitive, political and social
uncertainties and contingencies. Many factors could cause Progress' actual
results to differ materially from those expressed or implied in any
forward-looking statements made by, or on behalf of, Progress.
In particular, forward-looking statements included in this MD&A include,
but are not limited to, statements with respect to the size of, and future net
revenues from, crude oil and natural gas reserves; the focus of capital
expenditures; expectations regarding the ability to raise capital and to
continually add to reserves through acquisitions and development; projections
of market prices and costs and the related sensitivity of distributions; the
performance characteristics of the Trust's crude oil and natural gas
properties; crude oil and natural gas production levels; Progress' future
operating and financial results; capital investment programs; supply and
demand for crude oil and natural gas; average royalty rates; grassroots
development drilling and development drilling in its operating regions; amount
of general and administrative expenses; treatment under governmental
regulatory regimes and tax laws; and levels of cash distributions paid to
unitholders. In addition, statements relating to "reserves" or "resources" are
deemed to be forward looking statements, as they involve the implied
assessment, based on certain estimates and assumptions, that the resources and
reserves described can be profitably produced in the future.
These forward-looking statements are subject to numerous risks and
uncertainties, certain of which are beyond the Trust's control, including the
impact of general economic conditions; volatility in market prices for crude
oil and natural gas; industry conditions; volatility of commodity prices;
currency fluctuation; imprecision of reserve estimates; liabilities inherent
in crude oil and natural gas operations; environmental risks; incorrect
assessments of the value of acquisitions and exploration and development
programs; competition from other producers; the lack of availability of
qualified personnel or management; changes in income tax laws or changes in
tax laws and incentive programs relating to the oil and gas industry and
income trusts; hazards such as fire, explosion, blowouts, cratering, and
spills, each of which could result in substantial damage to wells, production
facilities, other property and the environment or in personal injury; stock
market volatility; ability to access sufficient capital from internal and
external sources and the other risks considered under "Risk Factors" in our
annual information form for the year ended December 31, 2007 which is
available on www.sedar.com.
With respect to forward-looking statements contained in this MD&A,
Progress has made assumptions regarding: current commodity prices and royalty
regimes; availability of skilled labour; north American sulphur prices; timing
and amount of capital expenditures; future exchange rates; the price of oil
and natural gas; the impact of increasing competition; conditions in general
economic and financial markets; availability of drilling and related
equipment; effects of regulation by governmental agencies; royalty rates and
future operating costs.
Management has included the above summary of assumptions and risks
related to forward-looking information provided in this MD&A in order to
provide unitholders with a more complete perspective on Progress' future
operations and such information may not be appropriate for other purposes.
Progress' actual results, performance or achievement could differ materially
from those expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any of the events anticipated by
the forward-looking statements will transpire or occur, or if any of them do
so, what benefits that the Trust will derive there from. Readers are cautioned
that the foregoing lists of factors are not exhaustive. These forward-looking
statements are made as of the date of this MD&A and the Trust disclaim any
intent or obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or results or otherwise,
other than as required by applicable securities laws.
Description of Business
Progress is an open-ended, unincorporated investment trust governed by
the laws of the province of Alberta. The principal undertaking of the Trust is
to indirectly explore for, develop and hold interests in petroleum and natural
gas properties. Progress Energy Ltd., a wholly owned subsidiary of Progress,
carries on the business of the Trust and directly owns the petroleum and
natural gas properties and assets related thereto. The Trust's unitholders and
exchangeable shareholders are the sole beneficiaries of the Trust. Under the
Trust Indenture, the Trust may declare payable to unitholders all or any part
of the income of the Trust which is primarily comprised of interest earned on
debt notes issued to Progress Energy Ltd., as well as, amounts attributed to a
net profits interest agreement entered into with Progress Energy Ltd. The
aggregate amounts received by the Trust each period are based on the
consolidated cash flow each period, as adjusted on a discretionary basis, for
cash withheld to fund capital investment.
Progress is a Calgary based, natural gas focused, trust targeting
sustainable production and reserves per trust unit through utilization of its
technical capability and capital investment efficiencies. Primary operating
regions include the Deep Basin of northwest Alberta and the northeast British
Columbia Foothills and Fort St. John Plains regions. Trust units of Progress
trade on the Toronto Stock Exchange ("TSX") under the symbol PGX.UN.
Exchangeable shares and the 6.75 percent and 6.25 percent convertible
unsecured subordinated debentures (the "Debentures") of Progress trade on the
TSX under the symbols PGE, PGX.DB and PGX.DB.A, respectively.
Relationship with ProEx Energy Ltd.
The Trust provides personnel and certain administrative and technical
services to ProEx Energy Ltd. ("ProEx") in connection with the management,
development, exploitation and operation of the assets of ProEx and the
marketing of its production. The Trust provides these services in accordance
with the technical services agreement ("Technical Services Agreement") entered
into with ProEx as described below. ProEx has granted stock options and shares
to employees and executives of Progress as service providers and has also
participated in a long term incentive plan by granting ProEx common shares to
employees of Progress, excluding the executives. To facilitate this plan,
Progress purchases ProEx common shares and is reimbursed by ProEx for the cost
incurred. As at June 30, 2008 184,489 ProEx shares (2007 - nil) have been
purchased for future distribution under the plan. The ProEx common shares will
be held until the vesting date, two years from the date of grant. Any
forfeited shares will revert back to ProEx.
The Trust and ProEx have joint interest in certain properties and
undeveloped land in the northeast British Columbia Foothills and Fort St. John
Plains regions. These joint interest properties are governed by standard
industry agreements and in addition the Trust has entered into a protocol
arrangement ("Protocol Arrangement") with ProEx that specifies how each
company will manage the joint lands in specifically identified areas of
interest. To ensure good governance practices, both the Trust and ProEx have
each created independent committees of their Board of Directors to monitor
compliance with the Technical Services Agreement and the Protocol Arrangement.
On April 2, 2007, Progress acquired all of the issued and outstanding
shares of a private company for $527.4 million, net of certain assets retained
by the vendor. In conjunction with the acquisition, on April 2, 2007, Progress
disposed of certain assets of the private company to ProEx for $134.4 million.
When considering the bid process for the acquisition, each of Progress and
ProEx identified assets that they were interested in acquiring and values that
they were willing to pay to acquire such assets. Progress made a single bid on
behalf of ProEx and Progress and the ultimate purchase price was based on the
prices that each of Progress and ProEx were willing to pay for the assets that
they had selected to acquire. The resale of assets from Progress to ProEx was
based on these allocations. The technical services committee reviewed the
details of the transaction prior to the purchase and sale agreement being
signed. All lands are managed in accordance with the Protocol Arrangement.
On November 30, 2007, Progress and ProEx jointly acquired certain assets
in the Foothills region of British Columbia. The total cost of the acquisition
of $17.9 million was split in accordance with working interests currently held
in the surrounding area. As a result, Progress acquired a 20 percent interest
in the assets ($3.6 million) and ProEx an 80 percent interest ($14.3 million).
CORPORATE ACQUISITION
On April 2, 2007, Progress acquired all of the issued and outstanding
shares of a private company for $527.4 million, net of certain assets retained
by the vendor ("Corporate Acquisition"). In conjunction with the Corporate
Acquisition, on April 2, 2007, Progress disposed of certain assets of the
private company to ProEx for $134.4 million. The resulting net cash
consideration of $393.0 million was financed by the issuance of 21,000,000
trust units at a price of $12.00 per trust unit for proceeds of $252.0 million
($238.7 million net of issue costs) and through increased bank debt. Included
in the Corporate Acquisition was approximately $720.9 million of tax pools
which are available to Progress to shelter future taxable income resulting in
the recognition of a $137.2 million future income tax asset.
The Corporate Acquisition included approximately 6,400 boe per day of
production, 95 percent natural gas and approximately 240,000 net acres of
undeveloped land.
OPERATING SUMMARY
In accordance with Canadian industry practice, production volumes,
reserve volumes and revenues are reported on a Trust interest basis (working
interest plus royalty interest), before deduction of Crown and other
royalties, unless otherwise indicated. The Trust's results of operations are
dependent on production volumes of natural gas, crude oil and natural gas
liquids and the prices received for this production. Prices for these
commodities have shown significant volatility during recent years and are
determined by supply and demand factors, including weather, general economic
conditions and changes in the Canadian/United States ("US") currency exchange
rate.
In this MD&A, production and reserves information may be presented on a
"barrel of oil equivalent" or "boe" basis with six thousand cubic feet ("mcf")
of natural gas being equivalent to one barrel ("bbl") of crude oil or natural
gas liquids. Boe's may be misleading, particularly if used in isolation. A boe
conversion ratio of 6 mcf:1 bbl 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
Three Months Ended Six Months Ended
June 30 June 30
2008 2007 2008 2007 Change
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Average Daily Production
Natural gas (mcf/d) 120,971 127,255 124,319 110,894 12%
Crude oil (bbls/d) 1,976 2,134 2,081 2,126 (2)%
Natural gas liquids
(bbls/d) 1,667 1,485 1,859 1,432 30%
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Total daily production
(boe/d) 23,805 24,828 24,660 22,040 12%
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Sulphur sales (tons/d) 49 39 40 32 25%
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For the three months ended June 30, 2008 (the "Quarter"), Progress'
production averaged 23,805 boe per day consisting of 120,971 mcf per day of
natural gas, 1,976 bbls per day of crude oil and 1,667 bbls per day of natural
gas liquids. Production during the Quarter was four percent lower than the
same period in 2007 of 24,828 boe per day due to the 22 day scheduled plant
turnaround of the Spectra-owned McMahon gas processing facility in June 2008.
The turnaround reduced production for the Quarter by approximately 1,300 boe
per day. Production for the Quarter was ahead of expectations as the Trust
anticipated that substantially all of its British Columbia production would be
shut-in during the turnaround but Progress was able to negotiate the
processing of its Bubbles area natural gas production in the Foothills region
through the Spectra-owned Jedney gas processing plant. The Trust's production
portfolio for the Quarter was weighted 85 percent to natural gas, eight
percent to crude oil and seven percent to natural gas liquids.
Natural gas production decreased five percent to 120,971 mcf per day for
the Quarter compared to 127,255 mcf per day for the same period in 2007 due to
the McMahon turnaround in June 2008. Crude oil and natural gas liquids
production for the Quarter of 3,643 bbls per day was consistent with the same
period in 2007 of 3,619 bbls as the McMahon turnaround also resulted in
reduced natural gas liquids production for the Quarter.
Year-to-date 2008 production was 24,660 boe per day consisting of
124,619 mcf per day of natural gas, 2,081 bbls per day of crude oil and
1,859 bbls per day of natural gas liquids. This production was 12 percent
higher than the same period in 2007 of 22,040 boe per day due to the Corporate
Acquisition on April 2, 2007, as well as successful drilling results. The
Trust's production portfolio for the six months ended June 30, 2008 was
weighted 84 percent to natural gas, eight percent to crude oil and eight
percent to natural gas liquids.
Management has increased its production guidance for 2008 by four
percent, or 1,000 boe per day to an annual average of approximately 24,500 boe
per day mainly due to successful winter drilling results.
Natural gas produced by Progress in certain areas of the Fort St. John
Plains and Foothills regions of northeast British Columbia contain varying
levels of hydrogen sulphide. The processing of this gas results in sulphur as
a by-product. For the three and six months ended June 30, 2008, the Trust sold
49 tons per day and 40 tons per day of sulphur, respectively (2007 - 39 tons
per day and 32 tons per day, respectively).
Production by Region
Three Months Ended Six Months Ended
June 30 June 30
2008 2007 2008 2007 Change
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Average Daily Production
(boe/d)
Foothills 5,923 6,538 6,396 5,350 20%
Fort St. John Plains 1,456 2,027 1,681 1,983 (15)%
Deep Basin - Ojay 806 1,026 859 516 66%
Milo 212 324 233 344 (32)%
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Total British Columbia 8,397 9,915 9,169 8,193 12%
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Deep Basin 12,893 12,154 12,956 11,002 18%
Central Alberta 1,708 1,873 1,708 1,933 (12)%
Other 551 643 571 671 (15)%
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Total Alberta 15,152 14,670 15,235 13,606 12%
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Saskatchewan 256 243 256 241 6%
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Total daily production 23,805 24,828 24,660 22,040 12%
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Excludes sulphur production
Pricing
Natural Gas Markets
Progress' realized natural gas price for the Quarter was 10.21 per mcf
(2007 - $7.52 per mcf) compared to the AECO daily index average of $9.69 per
gigajoule ("gj") and the AECO monthly index average of $8.86 per gj (2007 -
$6.63 per gj and $6.99 per gj, respectively). Progress markets its natural gas
at a mix of daily and monthly pricing.
For the six months ended June 30, 2008 Progress' realized natural gas
price was $9.05 per mcf (2007 - $7.66 per mcf), compared to the AECO daily
index average of $8.59 per gj and the AECO monthly index average of
$7.81 per gj (2007 - $6.83 per gj and $7.03 per gj, respectively).
Natural gas prices in all markets in North America rose continuously
through the Quarter based on bullish sector news. Factors supportive of the
higher prices include: lower liquefied natural gas ("LNG") imports given the
strong Asian and European demand; lower Canadian production; an extended
outage at the Independence Hub natural gas processing facility in the Gulf of
Mexico; and, the growing year-over-year natural gas storage deficit. As well,
natural gas prices have been supported by rising prices for competing fuels as
the price of West Texas Intermediate ("WTI") crude oil reached unprecedented
levels during the Quarter.
The outlook for natural gas prices remains strong although natural gas
production in the US has been rising, the supply-demand balance remains tight
as a result of lower imports of LNG, falling Canadian production and rising
industrial demand. Weather will continue to be a key determining factor in
consumption patterns for electric power generation for air conditioning load
in the summer.
Oil Markets
Progress' realized prices for its liquids streams for the Quarter were
$117.72 per bbl (2007 - $68.37 per bbl) for crude oil and $95.17 per bbl (2007
- $60.51 per bbl) for natural gas liquids. For the six months ended June 30,
2008 Progress realized $103.09 per bbl (2007 - $65.29 per bbl) for crude oil
and $78.61 per bbl (2007 - $57.91 per bbl) for natural gas liquids.
Crude oil prices remained volatile and experienced wide fluctuations
while setting record prices throughout the Quarter. Prompt month WTI crude oil
traded at approximately US$100.00 per bbl at the beginning of the Quarter and
closed the Quarter at approximately US$140.00 per bbl and reached an all-time
high of US$145.85 per bbl subsequent to the Quarter on July 3, 2008. Key
factors contributing to the volatility were the fluctuating US dollar, unrest
in the Middle East and rebel strikes on petroleum infrastructure in Nigeria.
Global oil supply continues to be driven by geo-political events in the
Middle East and Africa, two key light oil producing regions. Although OPEC and
non-OPEC countries have moved to increase supply, it is typically a heavier,
sour grade of crude which requires upgrading while upgrading capacity
continues to be very tight in the consuming areas of the world. It is
anticipated that persistently high oil prices will have a dampening effect on
global economic growth.
Sulphur Markets
Progress' net realized sulphur price for the Quarter and six months ended
June 30, 2008 was $388.97 per ton and $324.05 per ton, respectively (2007 -
$15.35 per ton net loss and $18.75 per ton net loss, respectively). Progress
markets its sulphur through an arrangement with a sulphur marketing company
and pays all costs and fees associated with transportation, loading, storage
and marketing of its sulphur.
North American sulphur prices have risen sharply over the past year,
supported by rising global demand for agricultural products such as
fertilizers and other chemicals. Benchmark Florida sulphur prices averaged
US $71.00 per ton since 1990 but have risen to over US$450 per ton this year.
Canadian prices have been even stronger this year with Vancouver prices
reaching over $600 per ton, largely as a result of strong Asian demand.
Canadian sulphur production represents approximately 16 percent of global
production. The majority of the Canadian production comes from the oil and gas
industry where sulphur may be a by-product during the processing of crude oil
and natural gas.
Commodity Prices
Three Months Ended Six Months Ended
June 30 June 30
2008 2007 2008 2007 Change
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Average Benchmark Prices
Natural gas - AECO
(daily) ($/gj) 9.69 6.63 8.59 6.83 26%
Natural gas - AECO
(monthly) ($/gj) 8.86 6.99 7.81 7.03 11%
Crude oil - WTI (US$/bbl) 123.98 65.04 111.00 61.44 81%
Crude oil - Edmonton par
price (Cdn$/bbl) 126.22 71.90 111.72 69.52 61%
Exchange rate (US$/Cdn$) 1.0100 1.0981 1.0070 1.1349 (11)%
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Average Realized Prices
Natural gas ($/mcf) 10.21 7.52 9.05 7.66 19%
Crude oil ($/bbl) 117.72 68.37 103.09 65.29 58%
Natural gas liquids
($/bbl) 95.17 60.51 78.61 57.91 36%
Sulphur - net ($/ton) 388.97 (15.35) 324.05 (18.75)
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Price Risk Management
The Trust has entered into several natural gas financial contracts for
the purpose of protecting its cash flow from the volatility of natural gas
prices. For the Quarter, the Trust's natural gas price risk management program
had a net realized loss of $9.4 million (2007 - $0.2 million net gain). For
the six months ended June 30, 2008, the Trust's natural gas price risk
management program had a realized loss of $9.4 million (2007 - $7.2 million
net gain).
On January 1, 2007 the Trust adopted the new accounting standards
regarding the accounting for financial instruments. In addition to the
adoption of the new standards, Management elected not to use hedge accounting
and therefore, records the fair value of its natural gas financial contracts
at each reporting period with the change in the fair value being classified as
unrealized gains or losses on the statement of earnings.
On adoption, the Trust recognized a current asset of $15.6 million for
the fair value of its natural gas derivative contracts with a corresponding
increase to the future income tax liability and accumulated other
comprehensive income of $5.1 million and $10.5 million, respectively. The
$10.5 million in accumulated other comprehensive income was amortized through
other comprehensive income and unrealized gain or loss on the statement of
earnings over the term of the contracts. For the three months ended June 30,
2007, $1.8 million, net of tax, was amortized through other comprehensive
income with a corresponding pre-tax unrealized gain of $2.7 million and a
charge to future income tax expense of $0.9 million. For the six months ended
June 30, 2007 $8.1 million, net of tax, was amortized through other
comprehensive income with a corresponding pre-tax unrealized gain of
$12.0 million and a charge to future income tax expense of $3.9 million.
At June 30, 2008 the fair value of the natural gas financial contracts
was a liability of $44.3 million (2007 - $5.8 million asset). The decrease in
value for the Quarter of $19.6 million (2007 - $7.8 million increase) was due
to the increase in forward natural gas prices compared to a decrease in
forward natural gas prices for the same period in 2007. The decrease in value
of $44.3 million for the six months ended June 30, 2008 was due to the
increase in forward natural gas prices (2007 - $9.7 million decrease).
The Trust's risk management activities are conducted pursuant to the
Trust's Risk Management Policy approved by the Board of Directors. Progress
uses financial derivative instruments designed to establish a minimum floor
price while retaining exposure to upside price movements. The Risk Management
Policy has the following objectives:
- To reduce risk exposure to budgeted annual cash flow projections
resulting from uncertainty or changes in commodity prices, interest
rates or foreign exchange.
- To provide greater certainty and stability to monthly distributions.
- To limit the permissible structures to ensure hedging effectiveness.
- To limit hedging up to a maximum of 50 percent of budgeted annual
production before royalties.
- To limit hedging activity to counter-parties that provide sufficient
collateral in support of payment or have investment grade credit
ratings.
Progress' commodity risk management positions are described in Note 11 in
the unaudited interim consolidated financial statements.
Contract Natural Gas % of
Volumes ('000 gj/d) Estimated Production
-------------------------------------------------------------------------
Third quarter of 2008 80 50
Fourth quarter of 2008 50 30
First quarter of 2009 35 20
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Revenue
For the Quarter, petroleum and natural gas revenue increased 38 percent
to $149.7 million from $108.5 million for the same period in 2007 due to
higher commodity prices. Production revenue for the Quarter consisted of
$112.4 million from natural gas sales, $21.2 million from crude oil sales,
$14.4 million from the sale of natural gas liquids and $1.7 million from the
sale of sulphur.
For the six months ended June 30, 2008, revenues increased 41 percent to
$272.8 million from $194.0 million for the same period in 2007 due to higher
natural gas production and higher commodity prices.
Three Months Ended Six Months Ended
June 30 June 30
($ thousands) 2008 2007 2008 2007 Change
-------------------------------------------------------------------------
Natural gas sales 112,348 87,106 204,756 153,957 33%
Crude oil sales 21,168 13,278 39,043 25,125 55%
Natural gas liquids sales 14,437 8,176 26,601 15,012 77%
Sulphur sales (net) 1,746 (57) 2,374 (114)
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Petroleum and natural
gas revenue 149,699 108,503 272,774 193,980 41%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Crude
Natural Oil &
($ thousands) Gas NGLs Sulphur Total
-------------------------------------------------------------------------
Three months ended June 30, 2007
petroleum and natural gas revenue 87,106 21,454 (57) 108,503
Price variance 29,543 14,009 1,818 45,775
Production variance (4,301) 142 (15) (4,174)
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Three months ended June 30, 2008
petroleum and natural gas revenue 112,348 35,605 1,746 149,699
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Crude
Natural Oil &
($ thousands) Gas NGLs Sulphur Total
-------------------------------------------------------------------------
Six months ended June 30, 2007
petroleum and natural gas revenue 153,957 40,137 (114) 193,980
Price variance 32,161 21,198 2,517 55,876
Production variance 18,638 4,309 (29) 22,918
-------------------------------------------------------------------------
Six months ended June 30, 2008
petroleum and natural gas revenue 204,756 65,644 2,374 272,774
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Royalties
For the Quarter, royalties increased 50 percent to $35.6 million from
$23.7 million for the same period in 2007 due to higher revenues, as a result
of higher commodity prices. Royalty expense consists of royalties paid to
provincial governments, freehold landowners and overriding royalty owners. The
Trust's average royalty rate for the Quarter was 23.8 percent compared to
21.9 percent in 2007. The increase in the royalty rate is due to the higher
commodity prices.
For the six months ended June 30, 2008 royalties increased 43 percent to
$63.0 million compared to $43.9 million for the same period in 2007. The
Trust's average royalty rate was 23.1 percent compared to 22.6 percent in
2007, the increase being due to higher commodity prices.
Management anticipates, based on current commodity prices and royalty
regimes, the average royalty rate for 2008 will be consistent with the Quarter
at approximately 24.0 percent of petroleum and natural gas revenue.
On October 25, 2007 the Alberta government announced the New Royalty
Framework ("framework"), which is proposed to take effect on January 1, 2009.
Progress has reviewed the information currently provided by the government and
believes that the changes to Alberta royalties may increase Progress' Alberta
royalty rate from 27 percent to between 31.5 to 36.0 percent based on current
production and a realized natural gas price of between $7.00 to $9.00 per gj.
Using the same production and price assumptions, Progress' corporate royalty
rate is estimated to increase from 24 percent to between 27.5 to 29.0 percent.
The framework proposes a new simplified royalty formula for natural gas
that will operate on a sliding scale determined by commodity prices, well
productivity and drilling depth. Progress' Deep Basin well depths range
between 2,300 to 2,700 meters which will be eligible for the new measured
depth drilling formula. Progress is attracted to the Deep Basin region because
of the quality and pedigree of the region with its higher than average well
productivity and multi zone drilling targets. The new royalty formula will
increase Progress' royalties payable but is not expected to materially impact
the economics of development drilling in the Deep Basin. Generally, it is
expected to have a negative impact on full cycle exploration drilling in
Alberta due to the inadequate consideration of exploration risk. In the
Quarter, 65 percent of Progress' revenue was from the province of Alberta and
approximately 50 percent of its capital program was in Alberta.
Operating Expenses
Operating expenses during the Quarter decreased seven percent to
$13.8 million from $14.8 million for the same period in 2007 due to higher
costs in 2007 as a result of the Corporate Acquisition on April 2, 2007. Since
that time efficiencies have been obtained on the assets acquired to reduce
operating costs. For the six months ended June 30, 2008 operating expenses
increased six percent to $27.5 million compared to $25.9 million for the same
period in 2007. The increase is the result of higher production in 2008
compared to the same period in 2007, reflecting the impact of the Corporate
Acquisition and successful drilling. On a boe basis, operating expenses for
the Quarter decreased three percent to $6.39 from $6.57 in the same period in
2007 while year-to-date operating expenses decreased six percent to $6.13 from
$6.49 in the same period in 2007 as a result of efficiencies obtained on the
assets acquired in the Corporate Acquisition.
Management anticipates operating expense for the remainder of 2008 will
be consistent with year-to-date operating expenses per boe and average
approximately $6.00 per boe.
Transportation Expenses
Transportation expenses for the Quarter increased 22 percent to
$5.1 million compared to $4.2 million for the same period in 2007. The
increase was the result of tolls paid to divert natural gas production from
the Bubbles area in the Foothills region of British Columbia through the
Spectra-owned Jedney facility during the McMahon turnaround and overall higher
transportation and treatment tolls as compared to the same period in 2007. For
the six months ended June 30, 2008 transportation expenses increased
40 percent to $9.7 million compared to $6.9 million for the same period in
2007. The increase is due to higher production in 2008 compared to the same
period in 2007, as well as higher transportation and treatment tolls
associated with the Corporate Acquisition. On a boe basis, transportation
expenses during the Quarter increased 25 percent to $2.36 compared to $1.85
for the same period in 2007 while year-to-date transportation expenses
increased 25 percent to $2.17 compared to $1.74 for the same period in 2007.
In British Columbia, there is an infrastructure owned by mid-stream processing
companies that enables gas producers to avoid facility construction in
exchange for regulated gathering, processing and transmission fees. This
all-in charge is included in transportation expenses.
Operating Netbacks
Although many wells produce both crude oil and natural gas, a well is
categorized as a natural gas well or an oil well based upon the higher
proportion of natural gas or crude oil production. The following table
summarizes the operating netbacks for natural gas and oil properties for the
three and six months ended June 30, 2008 compared to the same periods in 2007:
Three Months Ended Six Months Ended
June 30 June 30
2008 2007 2008 2007
-------------------------------------------------------------------------
Natural Gas Properties ($/mcf)
Sales price 10.86 7.65 9.51 7.85
Realized gain (loss) on financial
instruments (0.80) 0.01 (0.39) 0.34
Royalties (2.64) (1.70) (2.26) (1.80)
Operating expenses (0.97) (1.01) (0.91) (0.99)
Transportation expenses (0.40) (0.30) (0.37) (0.29)
-------------------------------------------------------------------------
Operating netback - natural gas
properties 6.05 4.65 5.58 5.11
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oil Properties ($/bbl)
Sales Price 105.04 63.60 92.52 61.47
Royalties (22.22) (12.58) (18.27) (12.83)
Operating expenses (11.56) (10.99) (12.14) (10.83)
Transportation expenses (1.92) (1.97) (1.90) (1.96)
-------------------------------------------------------------------------
Operating netback - oil properties 69.34 38.06 60.21 35.83
-------------------------------------------------------------------------
-------------------------------------------------------------------------
All Properties ($/boe)
Sales Price(1) 69.10 48.03 60.78 48.62
Realized gain (loss) on financial
instruments (4.35) 0.08 (2.10) 1.80
Royalties (16.44) (10.51) (14.04) (11.01)
Operating expenses (6.39) (6.57) (6.13) (6.49)
Transportation expenses (2.36) (1.85) (2.17) (1.74)
-------------------------------------------------------------------------
Operating netback - all properties 39.56 29.18 36.34 31.18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes sulphur net revenue with no associated production as no
conversion exists for tons to boe.
General and Administrative Expenses
For the Quarter, general and administrative expenses net of overhead
recoveries, ("G&A") matched the same period in 2007 of $2.3 million. On a boe
basis G&A was $1.05 compared to $1.02 for the same period in 2007. For the six
months ended June 30, 2008, G&A expenses increased 27 percent to $5.4 million
($1.21 per boe) compared to $4.3 million ($1.07 per boe) for the same period
in 2007. The increase in G&A year-to-date is due to the increased size of the
Trust, as well as higher costs incurred to retain employees.
In accordance with the Technical Services Agreement with ProEx, the Trust
provides personnel and certain administrative and technical services in
connection with the management, development, exploitation and operation of the
assets of ProEx and the marketing of its production. The Trust provides these
services to ProEx on an expense reimbursement basis, based on ProEx's monthly
capital activity and production levels relative to the combined capital
activity and production levels of both the Trust and ProEx. Total expenses
reimbursed by ProEx for the Quarter were $2.1 million (2007 - $1.3 million)
and for the six months ended June 30, 2008 were $4.4 million
(2007 - $2.8 million).
The Trust capitalized approximately $0.5 million of G&A during the
Quarter (2007 - $0.4 million) and $0.8 million for the six months ended June
30, 2008 (2007 - $0.8 million). The majority of these costs represent
geological and geophysical salaries.
Management anticipates G&A for the remainder of 2008 will be consistent
with the Quarter at $1.00 to $1.10 per boe.
Unit Based Compensation Expenses
Performance Units
The Progress performance unit plan (the "Plan") provides for employees
and directors to be granted performance units which vest at the end of a three
year performance period at which time they will be converted to trust units,
or the cash equivalent, and include the accumulated distributions over the
three year period.
