CALGARY, ALBERTA--(Marketwire - Nov. 6, 2008) - Open Range Energy Corp. ("Open Range" or the "Corporation") (TSX:ONR) is pleased to announce its financial and operating results for the three and nine months ended September 30, 2008, to provide highlights from fourth-quarter operations undertaken to date, and to provide an operational outlook for the remainder of 2008.
FINANCIAL AND OPERATING HIGHLIGHTS
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Petroleum and
natural gas
revenue $ 10,282,831 $ 6,089,741 $ 31,783,599 $ 16,036,788
Funds from
operations 4,756,720 4,413,069 17,598,581 10,576,236
Per basic and
diluted share 0.17 0.22 0.69 0.55
Earnings 3,675,840 611,639 1,730,783 867,817
Per basic and
diluted share 0.13 0.03 0.07 0.05
Working capital
(net debt) (23,256,428) (6,072,922) (23,256,428) (6,072,922)
Capital expenditures,
net $ 25,804,243 $ 8,779,831 $ 51,313,833 $ 32,649,628
Weighted average
shares outstanding
basic 27,334,241 19,763,841 25,428,474 19,192,412
Weighted average
shares outstanding
diluted 27,557,113 19,763,841 25,540,076 19,192,412
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Production
Natural gas (mcf
per day) 10,696 9,545 10,358 7,353
Oil and NGL (bbls
per day) 209 225 216 165
----------------------------------------------------------------------------
Total (@ 6:1)
(boe per day) 1,992 1,815 1,943 1,391
Realized average
sales prices
Natural gas
($ per mcf) 8.47 5.49 9.20 6.67
Oil and NGL
($ per bbl) 101.51 61.32 95.52 58.74
----------------------------------------------------------------------------
Combined average
($ per boe) 52.64 40.85 56.53 44.28
Royalties ($ per boe) (13.90) (3.68) (11.84) (4.76)
Operating costs
($ per boe) (6.18) (5.99) (6.30) (5.93)
Transportation
costs ($ per boe) (0.75) (0.75) (0.75) (0.82)
----------------------------------------------------------------------------
Operating netback
($ per boe) 31.81 30.43 37.64 32.77
G&A costs ($ per boe) (3.14) (3.47) (3.26) (4.75)
Net interest
income (expense)
($ per boe) 0.15 (0.54) (0.34) (0.17)
----------------------------------------------------------------------------
Corporate netback
($ per boe) 28.82 26.42 34.04 27.85
----------------------------------------------------------------------------
----------------------------------------------------------------------------
MESSAGE TO SHAREHOLDERS
CORPORATE UPDATE
Open Range is taking measured steps to pass through this period of financial and commodity market instability keeping its balance sheet intact, avoiding dilution of its shareholders' equity and maintaining its core drilling program at Ansell/Sundance with continued growth in natural gas volumes and reserves. The Corporation has a track record of prudent financial management and capital discipline, and an asset base of high-quality, long-life natural gas production anchored in a low cost structure with strong netbacks and cash flow.
We are reducing 2008 capital expenditures from a planned $70 million to $60 million. The $10 million cutback affects fourth quarter activities and includes releasing one of two drilling rigs active at Ansell/Sundance plus deferring a third rig to drill the Corporation's first planned horizontal Deep Basin well until the first quarter of 2009. Open Range will conduct an active fourth quarter drilling program of five (2.5 net) wells plus several tie-ins of recent wells at Ansell/Sundance, using approximately $6-$7 million in forecast quarterly cash flow plus a planned $2-$3 million of additional debt.
To the end of the third quarter Open Range had net debt of only $23.3 million compared to recently expanded bank lines of $54 million. The Corporation will exit 2008 with moderate debt and extensive unused borrowing capacity while not requiring the issuance of new equity on dilutive terms. The reduced budget and drilling still enable Open Range to maintain its 2008 guidance for average production of 2,100 boe per day and an exit rate of 2,700 boe per day.
THIRD QUARTER RESULTS
Realized natural gas prices were down by more than $2.25 per mcf from the second quarter, while royalty rates were higher due to new wells coming on-stream late in the quarter, resulting in a smaller proportion of the Corporation's production base taking advantage of royalty holidays. Combined with flat quarter-over-quarter production due to wet lease conditions having delayed drilling and completions early in the quarter, plus recording a provision for potentially uncollectible SemCanada Energy and SemCanada Crude receivables, Open Range had somewhat reduced quarter-over-quarter financial results. Highlights from the quarter ended September 30, 2008:
- Production of 1,992 boe per day, an increase of 10 percent over the third quarter of 2007. Ansell/Sundance accounted for 1,535 boe per day or 77 percent of total production, secondary properties at Ferrier, Garrington and Big Bend supplied 428 boe per day or 21 percent with minimal capital outlays, while remaining production came from the Rough discovery well;
- An active drilling program, using two rigs, totalling six gross (2.7 net) wells, all at Ansell/Sundance, achieving a success rate of 100 percent and adding a combined 29 producing zones or an average 4.8 zones per well;
- Production commenced from the Rough discovery well in the last week of September and it is currently producing at a gross rate of approximately 1.4 mmcf per day plus 40 barrels of associated natural gas liquids per mmcf, or a combined 290 boe per day (200 boe per day net);
- Capital expenditures of $25.8 million, bringing nine-month 2008 spending to $51.3 million;
- Funds from operations of $4.8 million ($0.17 per share), an increase of 8 percent over the third quarter of 2007, bringing year-to-date funds from operations to $17.6 million, a 66 percent increase from $10.6 million for the comparable period in 2007;
- Average natural gas sales price of $8.47 per mcf (not including realized hedging losses), a decline of $2.26 per mcf from the second quarter of 2008;
- A continued low cost structure, with all-in cash costs averaging just under $10 per boe of production; and
- Continued strong netbacks of $31.81 per boe.
Successive tie-ins of new wells have been driving strong production growth exiting the quarter and through October. Ansell/Sundance is currently producing 1,900 boe per day from 15 net wells. Open Range's combined production was approximately 2,500 boe per day entering November, with several additional wells awaiting tie-in.
ANSELL/SUNDANCE
Open Range conducted an exploration-focused program at its key Ansell/Sundance Deep Basin property in the third quarter, drilling six gross (2.7 net) wells utilizing two drilling rigs. The quarter's activities focused on further delineating the expanding play's resource potential by stepping out to undeveloped lands to the south, west and north of central Ansell/Sundance. Open Range drilled its second well on a northerly block, a second well on earned land in the west, and two exploratory wells to validate the development potential of nine (six net) sections of contiguous land in southern Ansell/Sundance. The southern wells encountered a combined 10 pay zones and came on production in October and are currently producing at average gross rates of approximately 2.5 mmcf per day each. The third quarter's wells were all successful and added a combined 29 producing zones.
These latest exploration discoveries confirm that the consistent high-quality multi-zone characteristics of central Ansell/Sundance extend to the perimeter of our undeveloped land in three directions. The Corporation also acquired five (4.3 net) sections of undeveloped Crown lands offsetting recent drilling. Successful drilling and land acquisitions have increased Open Range's inventory from 50 to currently 100 3D-seismically-defined locations at increased average working interest (approximately 60 net locations). This inventory can support a multi-year low-risk production growth program that could enable Ansell/Sundance volumes to more than double.
The Corporation's $10 million capital budget cut affects fourth-quarter 2008 activity at Ansell/Sundance, where the year's drilling has been reduced to 16 gross (7.6 net) wells from the previously announced 21 gross (10.2 net) wells. The deferred wells augment our inventory and can be drilled at the appropriate time. The spending reduction includes shifting the Corporation's first horizontal well utilizing multiple-stage fractures targeting the Bluesky Formation to the first quarter of 2009. Open Range remains excited at the strong potential the horizontal approach offers to enhance production profiles and capital efficiencies and to increase the recovery factor of gas-in-place.
ROUGH
In late September the Corporation's 70 percent working interest, 3,800-metre-deep Rough 15-35-38-12W5 discovery well was completed and tied into a third-party facility, commencing production from the primary target Glauconitic sandstone. The well is currently producing 1.4 mmcf per day gross plus an estimated 40 bbls gross of natural gas liquids per mmcf. The uphole Notikewin zone was also completed and will be production-tested after the Glauconitic zone has produced for three to six months. The Company intends to commingle the Glauconitic and Notikewin production in the well bore.
The exciting Rough discovery holds strong upside, including potential for long-life reserves. Open Range has accumulated a long-term land base of 39 sections at an average 94 percent working interest, almost none of which face expiries. The Corporation's ongoing technical evaluation is aimed at determining the best approach to intersecting higher-permeability areas of reservoir to achieve faster reserve recovery. This could include drilling one or more horizontal wells using multi-stage fracture stimulation, likely following one or more additional vertical delineation wells. The first delineation location has been identified and Open Range continues to assess the appropriate timing of this substantial capital commitment.
OUTLOOK
Open Range is well positioned to navigate through this unique financial market situation. The reduction of expenditures to $9 million in the fourth quarter preserve the Corporation's core drilling program at Ansell/Sundance, enabling us to explore, validate new lands and grow production. The program includes tying in five gross (2.3 net) wells drilled in the third quarter and to date in this quarter, plus drilling another two gross (0.8 net) wells before year-end. Activities continue to focus on proving up the resource potential on newer undeveloped lands outside central Ansell/Sundance.
Recent exploration successes further demonstrate the high quality of the play and increase its overall prospectivity. The latest wells have added two new commercial zones, the Nordegg and the Second White Specks, increasing to 17 the total number of producing geological horizons at Ansell/Sundance. New wells have come on-stream at rates of 1.5-3 mmcf per day gross from up to seven productive zones per well. Volumes are growing steadily, with production averaging 2,300 boe per day in October and continuing to increase in November. We continue to evaluate the optimal timing for the installation of equipment to double capacity of the Ansell/Sundance gas plant to 40 mmcf per day.
The Corporation's prudent financial management and the strengths of its asset base, including its low cash costs, low-decline production base and extensive high-quality inventory, mean that Open Range can continue to grow at a modest rate even under relatively trying conditions. We have expended all of our previous flow-through commitments, maximizing our capital expenditure flexibility. Going forward our solid cash flow base and moderate debt will allow us to avoid taking on "expensive" equity. At the same time we are actively seeking opportunities to add high-quality assets or large farm-ins that reflect current market conditions.
Open Range's fourth quarter cash flow is forecast at $6-$7 million ($0.22-$0.26 per share), with year-end debt estimated at $25.5-$27.5 million. To date we have not hedged additional production for 2009. Alberta's New Royalty Framework is based on market prices, demanding careful price management to avoid higher effective royalty rates during times when market prices exceed contracted prices or costless collars.
In closing I would like to thank Open Range's dedicated team of employees and managers, who together have achieved our many operating and financial successes and have positioned the Corporation solidly to take on the current challenges. These uncertain times create stresses on a personal level, and I extend my personal gratitude to all of Open Range's people for their unwavering efforts.
On behalf of the Board of Directors,
A. Scott Dawson, President, C.E.O. and Director
Management's Discussion and Analysis
The following management's discussion and analysis (MD&A) is a review of operations, current financial position and outlook for Open Range Energy Corp. ("Open Range" or the "Corporation") for the three- and nine-month periods ended September 30, 2008 and 2007. This MD&A should be read in conjunction with the unaudited interim financial statements for the three and nine months ended September 30, 2008 and 2007, and the audited annual financial statements for the year ended December 31, 2007. This MD&A is dated November 6, 2008.
BOE PRESENTATION
The use of barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and is not intended to represent a value equivalency at the wellhead.
NON-GAAP MEASUREMENTS
The terms "funds from operations", "funds from operations per share" and "operating netback" in this discussion are not recognized measures under Canadian generally accepted accounting principles (GAAP). Open Range management believes that in addition to net earnings, funds from operations and operating netback are useful supplemental measurements. Open Range utilizes funds from operations to evaluate operating performance and assess leverage. The Corporation considers funds from operations to be an important measure of the results generated by its principal business activities before the consideration of how those activities are financed or how the results are taxed and before abandonment expenditures. Operating netback is a benchmark used in the oil and natural gas industry to measure the contribution of oil and natural gas sales following the deduction of royalties, operating expenses and transportation costs. Users are cautioned, however, that these measures should not be construed as an alternative to net earnings determined in accordance with GAAP as an indication of Open Range's performance.
RECONCILIATION OF CASH FLOW PER GAAP TO FUNDS FROM OPERATIONS
Open Range's method of calculating funds from operations may differ from that of other corporations and, accordingly, may not be comparable to measures used by other corporations. Open Range calculates funds from operations by taking cash flow from operating activities as determined under GAAP before the change in non-cash working capital related to operating activities and asset retirement expenditures incurred. The Corporation uses this method as it believes the uncertainty surrounding the timing of collection, payment or incurrence of these items makes them less useful in evaluating Open Range's operating performance. A summary of this reconciliation is as follows:
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Cash flow from
operating activities
(per GAAP) $ 4,583,228 $ 3,727,615 $ 18,049,560 $ 10,722,915
Change in non-cash
working capital 164,940 685,454 (628,596) (146,679)
Asset retirement
expenditures 8,552 - 177,517 -
----------------------------------------------------------------------------
Funds from operations $ 4,756,720 $ 4,413,069 $ 17,598,481 $ 10,576,236
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
This MD&A contains certain forward-looking statements, which are statements that include terms such as "will", "intend", "anticipate", "expect", "plan", "assume", "contemplate", "believe", "shall" and similar terms and such forward-looking statements include assumptions with respect to (i) production; (ii) future capital expenditures; (iii) funds from operations; (iv) expenses; (v) cash flow; and (vi) debt levels. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. While management believes the forward-looking statements are reasonable, all such forward-looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond the Corporation's control. Such risks and uncertainties include, without limitation, risks associated with oil and natural gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, increased competition from other producers, inability to retain drilling rigs and other services, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources, the impact of general economic conditions in Canada, the United States and overseas, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations) and changes in how they are interpreted and enforced, changes in federal and provincial tax laws and legislation (including the adoption of new royalty regimes), the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities.
The Corporation's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements (as a result of assumptions proving incorrect or due to the effect of risks) and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, that the Corporation will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive and reference is made to the items under "Risk Factors" in the Corporation's Annual Information Form (AIF) for the year ended December 31, 2007. All subsequent forward-looking statements, whether written or oral, attributable to the Corporation or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Furthermore, the forward-looking statements contained in this MD&A are made as at the date hereof and the Corporation 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 as may be required by applicable securities laws.
DETAILED FINANCIAL ANALYSIS
PRODUCTION
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Production
Oil and NGL (bbls/d) 209 225 216 165
Natural gas (mcf/d) 10,696 9,545 10,358 7,353
----------------------------------------------------------------------------
Total (boe/d) 1,992 1,815 1,943 1,391
----------------------------------------------------------------------------
Total (boe) 183,242 167,009 532,343 379,711
----------------------------------------------------------------------------
% natural gas 89 88 89 88
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Open Range's production for the three and nine months ended September 30, 2008 increased from the comparative periods in 2007. The increase resulted from the continued successful drilling activity in the fourth quarter of 2007 and the first nine months of 2008. Production in the three and nine months ended September 30, 2008 averaged 1,992 boe per day and 1,943 boe per day, respectively. This represented an increase of 10 percent and 40 percent, respectively, from the average production of 1,815 boe per day and 1,391 boe per day for the respective three and nine months ended September 30, 2007. Natural gas production in the three and nine months ended September 30, 2008 increased to 10,696 mcf per day and 10,358 mcf per day, respectively, from 9,545 mcf per day and 7,353 mcf per day, respectively, for the three and nine months ended September 30, 2007. Oil and natural gas liquids (NGL) production in the three months ended September 30, 2008 decreased by 7 percent to 209 barrels per day from 225 barrels per day in the third quarter of 2007. In the nine months ended September 30, 2008, oil and NGL production increased by 31 percent to 216 barrels per day from 165 barrels per day in the first nine months of 2007.
Open Range is forecasting average production of 2,100 boe per day in 2008 and expects to exit the year with production of approximately 2,700 boe per day.
OIL AND NATURAL GAS REVENUES
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
Revenue
Oil and NGL $ 1,953,087 $ 1,266,842 $ 5,665,437 $ 2,652,833
Natural gas 8,329,744 4,822,899 26,118,162 13,383,955
Realized gains (losses)
on commodity contracts (637,329) 733,410 (1,690,370) 778,163
----------------------------------------------------------------------------
Total $ 9,645,502 $ 6,823,151 $ 30,093,229 $ 16,814,951
----------------------------------------------------------------------------
Average realized price
Oil and NGL ($/bbl) 101.51 61.32 95.52 58.74
Natural gas ($/mcf) 8.47 5.49 9.20 6.67
Realized gains (losses)
on commodity contracts
($/mcf) (0.65) 0.84 (0.60) 0.39
----------------------------------------------------------------------------
Combined average ($/boe) 52.64 40.85 56.53 44.28
----------------------------------------------------------------------------
Benchmark pricing
Edmonton Par (Cdn$/bbl) 122.74 78.11 115.83 73.83
Alberta Spot (Cdn$/mcf) 7.69 5.06 8.52 6.47
----------------------------------------------------------------------------
Revenue, including realized gains and losses on commodity contracts, for the three months ended September 30, 2008 increased by 41 percent to $9.6 million from $6.8 million in the comparative period in 2007. The increase in revenue resulted from a 10 percent increase in daily average production and a 29 percent increase in the combined average sales price from the third quarter of 2007. In the first nine months of 2008, revenue increased by 79 percent to $30.1 million from $16.8 million in the comparative period in 2007. The increase was due to a 40 percent increase in production and a 28 percent increase in the average sales price. The period-over-period changes in average sales prices for oil, NGL and natural gas realized by Open Range were consistent with the fluctuations in benchmark oil and natural gas prices over the same periods. Open Range's average sales price for natural gas continued to be at a premium to the Alberta natural gas spot benchmark price due to the high energy content of the Corporation's natural gas production.
Open Range realized losses on commodity contracts of $0.6 million for the three months ended September 30, 2008. These realized losses related to natural gas commodity contracts and amounted to a reduction of $0.65 per mcf on the Corporation's natural gas production for the three months ended September 30, 2008. For the nine months ended September 30, 2008 the Corporations realized a loss on commodity contracts of $1.7 million, which amounted to a reduction of $0.60 per mcf on the Corporation's natural gas production for the first nine months of 2008.
UNREALIZED LOSSES ON COMMODITY CONTRACTS
Open Range's management utilizes commodity contracts as a risk management technique to protect exploration and development economics, reduce volatility in cash flows and mitigate the unpredictable commodity price environment. For the three months ended September 30, 2008, the Corporation recorded an unrealized gain on commodity contracts of $5.7 million and for the nine months ended September 30, 2008 the Corporation recorded an unrealized loss on commodity contracts of $0.3 million. These amounts represented the change in the fair value of the commodity contracts held by the Corporation during the three- and nine-month periods ended September 30, 2008.
Natural gas hedging contracts entered into as at September 30, 2008 and 2007
are as follows:
Average Average
AECO AECO
Spot Spot
Volume Floor Ceiling
Period (GJ/d) Type (Cdn$/GJ) (Cdn$/GJ)
----------------------------------------------------------------------------
Jan. to Dec. Costless
2007 2,500 Collar $ 7.00 $ 10.20
Jan. to Dec. Costless
2007 1,250 Collar $ 7.00 $ 8.00-9.90
Apr. 2007 to Costless
Mar. 2008 1,000 Collar $ 7.00 $ 10.16
Nov. 2007 to Costless
Mar. 2008 1,500 Collar $ 7.50 $ 10.67
Jan. to Dec. Costless
2008 3,000 Collar $ 6.75 $ 7.50-9.12
Apr. to Oct.
2008 1,500 Swap $ 6.46 $ 6.46
Nov. to Dec.
2008 1,500 Swap $ 7.26 $ 7.26
Apr. to Oct.
2008 1,500 Swap $ 6.50 $ 6.50
Nov. 2008 to Costless
Mar. 2009 1,500 Collar $ 6.75 $ 11.09
Jan. to Dec. Costless 9.00-
2009 1,000 Collar $ 6.50 $ 13.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unrealized
Unrealized gain (loss) Unrealized Unrealized
gain (loss) for the gain (loss) gain (loss)
for the three three for the nine for the nine
months months months months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Period 2008 2007 2008 2007
----------------------------------------------------------------------------
Jan. to Dec.
2007 - $ (125,284) - $ (418,492)
Jan. to Dec.
2007 - (53,383) - (128,213)
Apr. 2007 to
Mar. 2008 - 10,502 $ (68,534) 220,599
Nov. 2007 to
Mar. 2008 - 158,452 (164,411) 328,034
Jan. to Dec.
2008 $ 2,124,195 619,445 (341,146) 619,446
Apr. to Oct.
2008 925,852 - 29,499 -
Nov. to Dec.
2008 486,800 - 62,664 -
Apr. to Oct.
2008 920,381 - 22,087 -
Nov. 2008 to
Mar. 2009 584,091 - 98,616 -
Jan. to Dec.
2009 685,620 - 85,001 -
----------------------------------------------------------------------------
$ 5,726,939 $ 601,732 $ (276,224) $ 621,374
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For more details on these contracts refer to note 8, Financial Instruments,
in the interim financial statements for the three and nine months ended
September 30, 2008.
ROYALTIES
Three Three Nine Nine
months months months months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Royalty expense - oil &
NGL $ 346,838 $ 335,216 $ 827,787 $ 638,745
Royalty expense - natural
gas 2,200,851 279,376 5,475,053 1,167,119
----------------------------------------------------------------------------
Total $ 2,547,689 $ 614,592 $ 6,302,840 $ 1,805,864
$ per boe 13.90 3.68 11.84 4.76
% of revenues(1) 25 10 20 11
----------------------------------------------------------------------------
(1)Revenue before realized gains (losses) on commodity contracts.
Royalties totalled $2.5 million and $6.3 million for the third quarter and first nine months of 2008, respectively, compared to $0.6 million and $1.8 million, respectively, for the comparative periods in 2007. Royalties as a percentage of revenue increased in the third quarter and first nine months of 2008 from the comparative periods in 2007, as the Corporation had fewer newly tied-in wells receiving the beneficial effects of the deep well royalty holiday program. On a per unit of production basis, royalty costs for the three and nine months ended September 30, 2008 were up by 278 percent and 149 percent, respectively, from the comparative periods in 2007, mainly due to higher commodity prices and the majority of wells at Ansell/Sundance having fully utilized their royalty holiday entitlement, thus commencing the payment of cash royalties.
Open Range anticipates an average royalty rate for 2008 of approximately 15 percent to 20 percent of revenue. This increase in royalty rates from 2007 reflects the fact that as the Corporation continues to grow, a smaller proportion of its production base will receive the beneficial effects of the deep well royalty holiday program on royalty expenses.
On October 25, 2007 the Alberta government announced a New Royalty Framework (NRF) that will result in changes to royalties levied on natural gas and conventional oil produced in Alberta effective January 1, 2009. The Alberta government introduced several modifications to the NRF on April 10, 2008. The proposed changes to royalties will have a nominal impact on the Corporation's net earnings, funds from operations, cash flow from operating activities, operating netbacks, and reserve values.
OPERATING COSTS AND NETBACK
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
($ per boe) 2008 2007 2008 2007
----------------------------------------------------------------------------
Average realized sales
price 52.64 40.85 56.53 44.28
Royalty expenses (13.90) (3.68) (11.84) (4.76)
Operating costs (6.18) (5.99) (6.30) (5.93)
Transportation costs (0.75) (0.75) (0.75) (0.82)
----------------------------------------------------------------------------
Operating netback 31.81 30.43 37.64 32.77
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Corporation's operating netback for the third quarter and first nine months of 2008 increased to $31.81 per boe and $37.64 per boe, respectively, from $30.43 per boe and $32.77 per boe for the respective periods in 2007. The operating netback increased by 5 percent and 15 percent for the three and nine months ended September 30, 2008, respectively, from the comparative periods in 2007. This was mainly due to an increase in the realized average sales price, partially offset by an increase in royalties.
Operating costs were $1.1 million and $3.4 million for the three- and nine-month periods ending September 30, 2008, respectively, compared to $1.0 million and $2.3 million for the respective periods in 2007. On a per unit of production basis, operating costs for the third quarter and first nine months of 2008 were $6.18 per boe and $6.30 per boe, respectively. These amounts represent a 3 percent and 6 percent respective increase from $5.99 per boe and $5.93 per boe for the comparative periods in 2007. With production continuing to grow and the commissioning of the new 20-mmcf-per-day Open Range-operated gas plant at Ansell/Sundance near the end of the first quarter, the Corporation expects significant operating efficiencies to be realized at Ansell/Sundance for the balance of 2008 and continuing into 2009. Consequently, Open Range expects operating costs on a per unit of production basis to decrease over this period. Transportation costs were $0.1 million or $0.75 per boe for the third quarter of 2008 and $0.4 million or $0.75 per boe for the first nine months of 2008.
GENERAL AND ADMINISTRATIVE (G&A) COSTS
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Gross $ 1,486,965 $ 1,346,689 $ 4,381,995 $ 3,899,328
Partner recovery (286,038) (166,750) (794,958) (374,089)
Capitalized (625,350) (600,633) (1,851,481) (1,722,293)
----------------------------------------------------------------------------
Net G&A expense $ 575,577 $ 579,306 $ 1,735,556 $ 1,802,946
Per boe net ($) 3.14 3.47 3.26 4.75
----------------------------------------------------------------------------
G&A costs for the three months ended September 30, 2008 totalled $0.6 million or $3.14 per boe after overhead recoveries and capitalization totalling just over $0.9 million. On a per boe basis G&A costs in the third quarter of 2008 declined by 10 per cent to $3.14 per boe from $3.47 per boe in the third quarter of 2007. For the first nine months of 2008, net G&A costs per boe decreased by 31 percent to $3.26 from $4.75 in the first nine months of 2007. These substantial reductions per boe for both periods were mainly due to increased production in 2008. Capitalized G&A costs represented 42 percent of gross G&A costs for both the three and nine months ended September 30, 2008 as the Corporation continued to focus on exploration activities and capitalized its exploration, geological and geophysical expenses.
Open Range expects to continue to reduce its net G&A costs per boe in 2008, reflecting the Corporation's continued forecast production growth combined with no significant planned increase in quarterly G&A spending.
INTEREST INCOME AND EXPENSE
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Interest income $ 31,942 $ 12,046 $ 75,452 $ 101,743
Interest expense (4,562) (102,536) (254,783) (167,677)
----------------------------------------------------------------------------
Net interest income
(expense) $ 27,380 $ (90,490) $ (179,331) $ (65,934)
Per boe net ($) 0.15 (0.54) (0.34) (0.17)
----------------------------------------------------------------------------
Net interest expense for the first nine months of 2008 was $0.2 million or $0.34 per boe. The interest paid on the Corporation's revolving credit facility during the first nine months of 2008 was partially offset by the interest income earned on available cash balances through short-term interest-bearing instruments immediately following the equity financing in April 2008.
The Corporation had $7.1 million drawn on its extendable revolving credit facility at September 30, 2008. Open Range's continuing exploration activity will require incurring some debt during the balance of 2008. However, the Corporation continues to manage debt levels prudently and expects net interest expense to be relatively low for the year.
STOCK-BASED COMPENSATION
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Total stock-based
compensation $ 510,595 $ 277,591 $ 1,150,249 $ 778,363
Capitalized
stock-based
compensation (237,798) (130,631) (543,831) (379,515)
----------------------------------------------------------------------------
Stock-based
compensation
expense $ 272,797 $ 146,960 $ 606,418 $ 398,848
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the third quarter of 2008, stock-based compensation of $272,797 was expensed and $237,798 was capitalized. This resulted in total stock-based compensation for the three months ended September 30, 2008 of $510,595, compared to $277,591 for the third quarter of 2007. For the first nine months of 2008 stock-based compensation of $606,418 was expensed and $543,831 was capitalized, compared to $398,848 expensed and $379,515 capitalized for the comparative nine-month period in 2007. The increases in stock-based compensation expense were due to the additional expense associated with the stock options granted during the first nine months of 2008. At September 30, 2008 there were 2,700,000 stock options outstanding compared to 1,922,500 outstanding at September 30, 2007.
DEPLETION, DEPRECIATION AND ACCRETION
Three months Three months Nine months Nine months
ended ended ended ended
Sept.