CALGARY, ALBERTA--(Marketwire - March 19, 2009) - Open Range Energy Corp. ("Open Range" or the "Corporation") (TSX:ONR) is pleased to announce the financial and operating results for the year ended December 31, 2008. The Corporation has filed its audited financial statements and related management's discussion and analysis for the year ended December 31, 2008 on www.sedar.com.
FINANCIAL AND OPERATING HIGHLIGHTS
Three months Three months Year Year
ended ended ended ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2008 2007 2008 2007
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Petroleum and
natural gas
revenue(1) $ 10,237,575 $ 7,097,092 $ 40,330,084 $ 23,912,043
Funds from
operations(2) 6,612,614 4,582,484 24,734,399 15,158,721
Per basic share(2) 0.24 0.23 0.96 0.78
Per diluted
share(2) 0.24 0.23 0.95 0.78
Net earnings (loss) 1,066,890 (344,678) 2,797,673 523,139
Per basic and
diluted share 0.04 (0.02) 0.11 0.03
Net debt 27,624,976 12,832,107 27,624,976 12,832,107
Capital
expenditures, net $ 9,252,979 $ 9,353,992 $ 60,566,812 $ 42,003,632
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Production
Natural gas (mcf
per day) 13,164 8,862 11,064 7,733
Oil and NGL (bbls
per day) 257 171 226 167
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Total (@ 6:1) (boe
per day) 2,451 1,648 2,070 1,456
Realized average
sales prices
Natural gas ($ per
mcf) 7.35 7.29 8.23 7.13
Oil and NGL ($ per
bbl) 56.40 73.10 84.39 62.46
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Combined average ($
per boe) 45.41 46.80 53.22 45.00
Royalties ($ per boe) (8.05) (1.63) (10.71) (3.86)
Operating costs ($
per boe) (5.65) (8.69) (6.10) (6.72)
Transportation
costs ($ per boe) (0.70) (0.73) (0.74) (0.79)
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Operating netback
($ per boe) 31.01 35.75 35.67 33.63
G&A costs ($ per boe) (1.04) (4.41) (2.60) (4.65)
Net interest income
(expense) ($ per
boe) (0.64) (1.12) (0.43) (0.45)
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Corporate netback
($ per boe) 29.33 30.22 32.64 28.53
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(1) Includes realized gains (losses) on commodity contracts
(2) Calculated using cash flow from operations before non-cash working
capital, asset retirement expenditures and bad debts expense
CORPORATE HIGHLIGHTS
During the year ended December 31, 2008, Open Range:
- Produced an average of 2,070 boe per day (89 percent natural gas), a 42 percent increase from the 2007 average;
- Increased year-over-year reserves per share by 47 percent and production per share by 7 percent;
- Drilled 16 (7.8 net) successful natural gas wells at its core Ansell/Sundance property;
- Achieved finding and development costs, including the change in future development capital, of $16.79 per proved plus probable boe of reserves added, which generated a recycle ratio of 2.1 times;
- Increased funds from operations by 63 percent and funds from operations per diluted share by 22 percent over 2007, to $24.7 million and $0.95 per diluted share, respectively;
- Reduced cash costs by 22 percent over 2007, to $9.87 per boe;
- Raised $25 million through a flow-through and common equity financing agreement in April 2008; and
- Increased undeveloped land by 96 percent from 2007 to 50,812 net acres.
Subsequent to December 31, 2008, Open Range:
- Announced an initial $18 million capital investment program for 2009; and
- Drilled its first horizontal well at Ansell/Sundance targeting the Bluesky formation.
MESSAGE TO SHAREHOLDERS
Open Range delivered strong operating and financial results in the 2008 full year and fourth quarter, with continued drilling success, production growth, declining cash costs per boe of production, high netbacks and growing cash flows. The Corporation nearly doubled its proved plus probable reserves year-over-year, further solidifying the high quality of the Ansell/Sundance property. We also prepared to drill our first horizontal Deep Basin well at Ansell/Sundance, to be completed with multiple-stage hydraulic fracturing, an approach that is generating improved well performance for other area operators.
These positive results are now being overshadowed by externally-generated negatives. Declining commodity prices and financial market instability have restricted access to capital and required companies to focus intently on their balance sheet integrity. Having practised financial discipline since the Corporation's inception, Open Range entered this period with a strong balance sheet and acted proactively to further protect the Corporation. As previously announced, we reduced capital spending in the fourth quarter of 2008 to limit debt and prepared a very conservative cash-flow-only 2009 budget, based on a conservative commodity price outlook. As a result Open Range is in a strong financial position. We are prepared to weather an extended downturn should that occur.
2008 ANNUAL OVERVIEW
The year began with cautious optimism and quickly became bullish as natural gas prices soared. Open Range increased its capital budget to $70 million and engaged a second drilling rig at Ansell/Sundance with the plan to ramp up production and begin exploiting our multi-year inventory of low-risk infill development locations. The budget was supported by a combined flow-through and common equity financing that bolstered the balance sheet.
Drilling continued to deliver a high rate of success as wells consistently brought on four, five and even more productive zones. We continued to make new discoveries and by mid-year had increased to 16 the number of separate productive geological reservoirs at Ansell/Sundance. For the year we drilled a total of 16 (7.8 net) wells at Ansell/Sundance and encountered a combined 80 productive zones. We closed the year with 133 zones on production from our 34 gross producing wells. Exploratory drilling successes expanded the core property in three directions and built the combined inventory to over 100 seismically defined locations.
Growing experience and economies of scale - including commissioning and later expanding the Open Range-operated 20 mmcf per day Ansell/Sundance gas plant - continued to improve the Corporation's cost structure. Total cash costs averaged only $9.87 per boe for 2008 - including G&A that fell to $2.60 per boe and operating costs that have declined to $6.10 per boe. Low costs and the high quality of our liquids-rich production formed a solid foundation for netbacks. Netbacks reached record quarterly levels during the commodity price peak, and averaged $35.67 per boe for 2008. Open Range's production averaged 2,070 boe per day in 2008, an increase of 42 percent over 2007. Funds from operations was $24.7 million or $0.95 per diluted share, up by 63 percent and 22 percent, respectively, over 2007. Net earnings of $2.8 million or $0.11 per share was also achieved in 2008.
In addition to activities at Ansell/Sundance, in 2008 Open Range tested, evaluated and tied-in the Corporation's 3,800-metre, 70 percent working-interest Deep Basin discovery at Rough in the Alberta Foothills. Open Range spent approximately $6.2 million accumulating 38 sections of 94 percent working-interest lands in order to secure this potentially high-impact play. The Rough well encountered the full Glauconitic sand package with high porosity, extensive gas in place and a second productive zone uphole, but lower than expected permeability.
Over the winter we successfully tested the uphole Notikewin zone at Rough, which has been commingled with the Glauconitic and recently brought on-stream. Rough remains an exciting and promising play for the long term. We have a large land position, high working interest and no imminent land expiries. Another junior exploration company has an adjacent land position and drilled an exploratory well over the winter. Open Range's success at Rough will be followed-up once prevailing market conditions again encourage such capital investments.
FOURTH QUARTER 2008 OVERVIEW
Open Range's fourth quarter results were also strong, with 23 percent production growth over the third quarter to a fourth quarter rate of 2,451 boe per day, driving cash flow to a quarterly record of $6.6 million and cash costs to a new low of $8.03 per boe. We drilled five (2.5 net) wells at Ansell/Sundance and stepped out onto southerly land parcels, while preparing to drill our first horizontal well. The cost structure continued its downward trend thanks to economies of scale from rising production, with corporate operating costs coming in under $6 per boe and Ansell/Sundance operating costs of $4.98 per boe.
It also became apparent during the fourth quarter that crude oil and natural gas prices were set to weaken considerably in the near- to mid-term. Open Range reacted quickly, cutting the 2008 capital program from $70 million to $60 million, going back to one rig at Ansell/Sundance and developing a scaled-down 2009 budget of only $18 million. These steps were announced in November and were aimed squarely at preserving our balance sheet integrity.
Also in the fourth quarter we initiated a Normal Course Issuer Bid. By year-end we had purchased for cancellation almost 800,000 common shares at an average price of $1.45 per share, signalling our view that the stock is undervalued, at the same time increasing the proportionate net asset value for all remaining shareholders of Open Range at year-end. The Normal Course Issuer Bid is continuing in 2009.
2008 RESERVES
Ansell/Sundance has clearly grown into a large-reserve, long-life, sustainable tight gas resource play. When we began we knew it would take time to establish its quality and size. It is a critical point that our wells and overall model are performing as envisioned, in some aspects better. Three years of production history have made a material difference in the eyes of the independent reserve evaluators, confirming Ansell/Sundance as a true Deep Basin play, with repeatable and predictable multi-zone characteristics. We have had technical upward reserve revisions every year due to greater certainty provided by well performance.
Open Range's December 31, 2008 proved plus probable reserves are estimated at 10 million boe, of which 53.5 bcf is natural gas and the remainder natural gas liquids. This is up by 80 percent year-over-year. (We refer readers to Open Range's March 12, 2009 press release, which detailed our year-end 2008 reserves.) Drilling additions and upward revisions replaced the year's production by six times. Finding and development costs were $16.79 per boe proved plus probable in 2008, including future development costs, continuing a trend of efficient capital investment. With the 2008 netback of $35.67 per boe, Open Range generated a proved plus probable recycle ratio of 2.1 times. The Corporation's net asset value is estimated at $6.70 per share on proved plus probable reserves discounted at 10 percent at December 31, 2008.
These positive results really are a testament to the technical skills of the combined Open Range team. We believe there is much more to come. Ansell/Sundance covers 54.5 gross sections with an average 56 percent working interest. We have reserves assigned to only 7.7 gross sections of land - representing less than 15 percent of the Ansell/Sundance land base. At Rough, we have 38 gross sections of land at 94 percent working interest, with proved plus probable reserves of nearly 700,000 boe assigned over only 160 acres.
2009 ACTIVITY INCLUDING HORIZONTAL DRILLING AT ANSELL/SUNDANCE
To date this year, we have completed and tied in four vertical wells drilled in the fourth quarter of 2008 at Ansell/Sundance. By February, three were tied-in and on-stream. The fourth is an exploratory well that steps out into southern Ansell/Sundance, almost 10 miles from Open Range's initial discovery well at the property. This 100-percent Open Range well tested at more than 3 mmcf per day from four zones. It has been tied-into a nearby third-party system and will produce at a restricted rate of 1 mmcf per day until we ultimately build a pipeline to tie it into the Open Range system. Also in Q1, we drilled one 800-metre exploratory vertical well at Big Bend, which was dry and abandoned.
The quarter's key activity has been drilling our first horizontal well in the Bluesky formation at Ansell/Sundance. Open Range's vertical drilling model at Ansell/Sundance has delivered strong, repeated success over dozens of gross wells through multiple drilling seasons. We have recognized that some zones at Ansell/Sundance could be amenable to horizontal drilling with completion using multiple-stage hydraulic fractures. Successful wells of this type are being drilled into the Cretaceous sands by operators near Ansell/Sundance and are generating strong test rates.
The Bluesky is an extensive Deep Basin reservoir with gross pay mapped at 30 metres in portions of Ansell/Sundance, high porosity and original gas-in-place of typically 20-30 bcf per section, but low permeability, indicating horizontal drilling may more efficiently drain a large pool area. Accordingly, we decided to try achieving a bulk-shift in the economics of the Bluesky through horizontal drilling. The rationale is to accelerate reserves recovery and increase the overall recovery factor by gaining exponentially greater reservoir contact area through the multiple fractures emanating from the horizontal wellbore. Drilling horizontally also increases the likelihood of intersecting the Bluesky's highly productive coarse shoreface sands, which occur intermittently in the reservoir.
Our Ansell/Sundance horizontal well spudded in January and encountered the Bluesky at approximately 2,800 metres vertical depth, following which a 900-metre horizontal leg was extended through high-quality reservoir, resulting in a well of 4,048 metres total measured depth. The well was cased in late February and multi-stage hydraulic fracturing was initiated in mid-March. Following the second-stage of the planned eight-stage frac a casing failure was detected and as a result the completion operations have been delayed. Corrective measures are already underway and completion operations are expected to resume after spring break-up.
The horizontal well cost approximately $4.7 million to drill and its total measured depth qualifies it for the full $2.8 million in royalty credits available under Alberta's new Natural Gas Deep Drilling Program. This was an exceptional opportunity for Open Range, as the area's horizontal drilling potential continues to be revealed.
2009 OUTLOOK
We have taken a careful approach to current conditions. The $18 million in planned expenditures for 2009 amount to a "cash flow" budget. With the planned rate of drilling and tie-ins, we anticipate average production of 2,400 boe per day, providing year-over-year growth of approximately 15 percent. First-quarter production rates are looking strong, generating growth over Q4 2008 volumes. We will continue to look for opportunities for improved operating efficiencies, taking advantage of declining field service costs. Open Range has the flexibility - including the large 3D-supported drilling inventory, experienced technical team and balance sheet capacity - to resume some drilling should rising natural gas prices or declining drilling costs result in well economics once again meeting our expectation for internal rates of return.
Our short-term outlook for natural gas is bearish as we observe the "fix" that will be required to restore prices. The natural gas issue is mainly one of supply, following industrial demand destruction during higher price periods and an eroding economy and the noteworthy recent success of unconventional gas plays at increasing U.S. natural gas production. Under today's prices, U.S. and Canadian drilling rig fleet utilization is decreasing, budgets are being cut and well-counts are falling. One feature of the new unconventional plays is steep first-year production decline. As field activity falls, production should also fall. This effect may be mitigated by the industry's expertise at "high-grading" residual drilling, causing the production decline to lag somewhat. We may also see some demand increase for natural gas power generation at lower prices. In sum, we foresee a sustained natural gas price recovery following the near- to mid-term correction. We stand by our philosophy to stay the course on natural gas because the long-term fundamentals in North America continue to be positive.
Our balance sheet is strong. Year-end debt was $27.6 million, which left almost 50 percent of our bank lines unutilized, one of the most favourable debt ratios in our peer group. Our debt level will peak at the end of Q1 2009 to fund our winter drilling program, but will be reduced by cash flow over the rest of the year. Our $54 million bank line remains solid given strong growth in net asset value and reserves. We have also hedged approximately 40 percent of our remaining forecast 2009 production using costless collars. Average floor prices on these contracts are $4.64 per mcf with average ceiling prices of $6.83 per mcf. Although Open Range's history has been as an exploration corporation, we are well-positioned to take advantage of opportunities for acquisitions at cyclically appropriate valuations should they complement our quality asset base.
I would like to extend sincere thanks to all of Open Range's staff for continuing to execute the Corporation's drilling activities and achieve efficient operations. Our people have delivered steady success for Open Range, as is evident in our improving capital and operating efficiencies.
Please note that the Annual General Meeting for Open Range is scheduled to take place on Wednesday, May 13th at 10:00 AM MDT in the Strand-Tivoli Room of the Metropolitan Conference Centre, located at 333 - 4th Avenue S.W., Calgary, AB.
On behalf of the Board of Directors,
A. Scott Dawson
President, Chief Executive Officer 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 year ended December 31, 2008 compared to the year ended December 31, 2007. This MD&A should be read in conjunction with the audited annual financial statements for the year ended December 31, 2008 and comparative information for the year ended December 31, 2007, along with the MD&A for the quarters ended March 31, 2008, June 30, 2008 and September 30, 2008. This MD&A is dated March 19, 2009.
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
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
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Cash flow from
operating activities
(per GAAP) $ 6,037,292 $ 2,867,479 $ 24,086,852 $ 13,590,394
Change in non-cash
working capital 13,232 1,698,137 (615,364) 1,551,458
Asset retirement
expenditures 300,438 16,869 477,955 16,869
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Funds from operations $ 6,350,962 $ 4,582,485 $ 23,949,443 $ 15,158,721
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FORWARD-LOOKING STATEMENTS
This MD&A contains certain forward-looking statements, which relate to future events or our future performance, that include terms such as "will", "intend", "anticipate", "could", "should", "may", "might", "expect", "estimate", "forecast", "plan", "potential", "project", "assume", "contemplate", "believe", "shall" and similar terms. These statements involve known and unknown risks, uncertainties and other factors that are beyond the Corporation's control, which may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Open Range believes the expectations reflected in these forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in, or incorporated by reference into, this MD&A should not be unduly relied upon. These statements speak only as of the date of this MD&A or as of the date specified in the documents incorporated by reference into this MD&A.
This MD&A, and the documents incorporated by reference, contain forward-looking statements pertaining to the following: (a) future production volumes; (b) expected levels of royalty rates, operating expenses and G&A costs; (c) future capital expenditures and the method of financing thereof; (d) amount of asset retirement obligations; (e) future liquidity and the ability to raise capital to continually add to reserves through exploration and development; (f) the future tax horizon of the Corporation; (g) the timing and impact of the adoption of International Financial Reporting Standards and other accounting policies and standards; (h) the performance characteristics of the Corporation's oil and natural gas properties; (i) estimates of future cash flows from operations; (j) drilling plans and timing of drilling, completion and tie-in of wells; (k) commodity prices, exchange rates and interest rates; (l) the utilization and effectiveness of commodity price risk management techniques; (m) Open Range's ability to grow or sustain production and reserves through prudent management; (n) the Corporation's future operating and financial results; and (o) treatment under governmental and other regulatory regimes and tax, environmental and other laws.
With respect to forward-looking statements contained in this MD&A, the Corporation has made a number of assumptions. The key assumptions underlying the aforementioned forward-looking statements include assumptions that: (i) future oil and natural gas prices will not deteriorate significantly; (ii) capital, undeveloped lands and skilled personnel will continue to be available at the level Open Range has enjoyed to date; (iii) Open Range will be able to obtain equipment in a timely manner to carry out exploration, development and exploitation activities; (iv) Open Range will be able to obtain financing on acceptable terms; (v) Open Range will be able to continue to add production and reserves through exploration and development activities at a consistent rate; and (vi) the continuation of the current tax and regulatory regime will remain substantially unchanged. Certain or all of the forgoing assumptions may prove to be untrue.
Open Range's actual results could differ materially from those anticipated in these forward-looking statements as a result of 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, counterparty credit risk, 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 debt or 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. Readers are cautioned that the foregoing list of risks to Open Range's performance 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, 2008. 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.
FINANCIAL AND OPERATING SUMMARY
Years ended December 31, 2008 2007
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($ per boe @ ($ per boe @
($) 6:1) ($) 6:1)
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Oil and natural gas
liquids (NGL) revenue 6,996,263 9.23 3,806,176 7.16
Natural gas revenue 34,825,866 45.96 18,620,122 35.04
Realized gain (loss)
on commodity contracts (1,491,325) (1.97) 1,485,745 2.80
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Total 40,330,804 53.22 23,912,043 45.00
Royalties (8,116,524) (10.71) (2,053,158) (3.86)
Operating costs (5,184,930) (6.84) (3,990,860) (7.51)
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Operating netback 27,029,350 35.67 17,868,025 33.63
General and
administrative costs (1,970,527) (2.60) (2,472,439) (4.65)
Bad debt expense (784,956) (1.04) - -
Net interest expense (324,424) (0.43) (236,865) (0.45)
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Funds from operations 23,949,443 31.60 15,158,721 28.53
Unrealized loss on
commodity contracts (344,966) (0.45) (332,228) (0.63)
Depletion and
depreciation (18,959,381) (25.02) (13,295,728) (25.02)
Accretion of asset
retirement obligations (158,536) (0.21) (162,297) (0.31)
Stock-based
compensation (792,354) (1.05) (545,870) (1.03)
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Earnings before
income taxes 3,694,206 4.87 822,598 1.54
Future income tax
expense (896,533) (1.18) (299,459) (0.56)
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Net earnings 2,797,673 3.69 523,139 0.98
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DETAILED FINANCIAL ANALYSIS
PRODUCTION
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
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Production
Oil and NGL (bbls/d) 257 171 226 167
Natural gas (mcf/d) 13,164 8,862 11,064 7,733
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Total (boe/d) 2,451 1,648 2,070 1,456
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Total (boe) 225,450 151,660 757,793 531,371
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% natural gas 90 90 89 89
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Open Range's production for the three months and year ended December 31, 2008 increased significantly from the comparative periods in 2007. The increases in both periods resulted from the continued successful drilling activity throughout 2008. Production in the three months and year ended December 31, 2008 averaged 2,451 boe per day and 2,070 boe per day, respectively. These figures represented increases of 49 percent and 42 percent, respectively, from the average production of 1,648 boe per day and 1,456 boe per day for the respective three months and year ended December 31, 2007. Natural gas production in the three months and year ended December 31, 2008 increased to 13,164 mcf per day and 11,064 mcf per day, respectively, from 8,862 mcf per day and 7,733 mcf per day, respectively, for the three months and year ended December 31, 2007. Oil and natural gas liquids (NGL) production in the three months ended December 31, 2008 increased by 50 percent to 257 barrels per day from 171 barrels per day in the fourth quarter of 2007. For the year ended December 31, 2008, oil and NGL production increased by 35 percent to 226 barrels per day from 167 barrels per day in 2007. Open Range is forecasting average production of 2,400 boe per day in 2009.
OIL AND NATURAL GAS REVENUES
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
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Revenue
Oil and NGL $ 1,330,826 $ 1,153,343 $ 6,996,263 $ 3,806,176
Natural gas 8,707,704 5,236,167 34,825,866 18,620,122
Realized gains
(losses) on commodity
contracts 199,045 707,582 (1,491,325) 1,485,745
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Total $ 10,237,575 $ 7,097,092 $ 40,330,804 $ 23,912,043
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Average realized price
Oil and NGL ($/bbl) 56.40 73.10 84.39 62.46
Natural gas ($/mcf) 7.19 6.42 8.60 6.60
Realized gains
(losses) on commodity
contracts ($/mcf) 0.16 0.87 (0.37) 0.53
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Combined average
($/boe) 45.41 46.80 53.22 45.00
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Benchmark pricing
Edmonton Par
(Cdn$/bbl) 63.62 87.09 102.66 76.39
Alberta Spot
(Cdn$/mcf) 6.62 6.03 8.06 6.36
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Revenue, including realized gains (losses) on commodity contracts, for the three months ended December 31, 2008 increased by 44 percent to $10.2 million from $7.1 million in the comparative period in 2007. The increase in revenue was primarily a result of a 49 percent increase in production volumes partially offset by a 3 percent decrease in the combined average sales price from the fourth quarter of 2007. For the year ended December 31, 2008, revenue increased by 69 percent to $40.3 million from $23.9 million in 2007. The increase was again due to a 43 percent increase in production volumes and an 18 percent increase in the combined average sales price partially offset by a realized loss on commodity contracts. The changes in average sales prices for oil, NGL and natural gas realized by Open Range for the three months and the year ended December 31, 2008 from the comparative periods in 2007 are consistent with the fluctuations in benchmark oil and natural gas prices over the same periods. Open Range's average sales price for natural gas is 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 a gain on commodity contracts of $0.2 million for the three months ended December 31, 2008 and realized a loss on commodity contracts of $1.5 million for the year ended December 31, 2008. The realized gains and losses are related to natural gas commodity contracts and amounted to additional revenue of $0.16 per mcf for the fourth quarter of 2008 and a cost of $0.37 per mcf for the year ended December 31, 2008 on the Corporation's natural gas production.
UNREALIZED GAINS (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. During the fourth quarter, the Corporation recorded an unrealized loss on commodity contracts of $0.1 million. For the year ended December 31, 2008, the Corporation recorded an unrealized loss of $0.3 million. These amounts represented the change in the fair value of the commodity contracts held by the Corporation during the three months and year ended December 31, 2008.
Natural gas hedging contracts entered into as at December 31, 2008 are as
follows:
Average Average
AECO Spot AECO Spot
Volume Floor Ceiling
Period (GJ/d) Type (Cdn$/GJ) (Cdn$/GJ)
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Jan. to Dec. 2,500 Costless $ 7.00 $ 10.20
2007 Collar
Jan. to Dec. 1,250 Costless $ 7.00 $ 8.00-
2007 Collar 9.90
Apr. 2007 to 1,000 Costless $ 7.00 $ 10.16
Mar. 2008 Collar
Nov. 2007 to 1,500 Costless $ 7.50 $ 10.67
Mar. 2008 Collar
Jan. to Dec. 3,000 Costless $ 6.75 $ 7.50-
2008 Collar 9.12
Apr. to Oct. 1,500 Swap $ 6.46 $ 6.46
2008
Nov. to Dec. 1,500 Swap $ 7.26 $ 7.26
2008
Apr. to Oct. 1,500 Swap $ 6.50 $ 6.50
2008
Nov. 2008 to 1,500 Costless $ 6.75 $ 11.09
Mar. 2009 Collar
Jan. to Dec. 1,000 Costless $ 6.50 $ 10.65
2009 Collar
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Unrealized Unrealized Unrealized Unrealized
gain (loss) loss gain gain
for the three for the three (loss) for (loss) for
months ended months ended the year ended the year ended
Period Dec. 31, 2008 Dec. 31, 2007 Dec. 31, 2008 Dec. 31, 2007
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Jan. to Dec.
2007 - $ (332,449) - $ (750,940)
Jan. to Dec.
2007 - (166,150) - (294,363)
Apr. 2007 to
Mar. 2008 - (152,065) $ (68,534) 68,534
Nov. 2007 to
Mar. 2008 - (163,623) (164,411) 164,411
Jan. to Dec.
2008 $ (156,312) (121,987) (497,458) 497,458
Apr. to Oct.
2008 (20,236) (9,263) 9,263 (9,263)
Nov. to Dec.
2008 (54,599) (8,065) 8,065 (8,065)
Apr. to Oct.
2008 (22,087) - - -
Nov. 2008 to
Mar. 2009 3,998 - 102,614 -
Jan. to Dec.
2009 180,494 - 265,495 -
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$ (68,742) $ (953,602) $ (344,966) $ (332,228)
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For more details on these contracts refer to note 11, Financial Instruments,
in the audited financial statements for the year ended December 31, 2008.
ROYALTIES
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
Royalty expense
- oil & NGL $ 416,388 $ 247,016 $ 1,244,175 $ 885,761
Royalty expense
- natural gas 1,397,296 278 6,872,349 1,167,397
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Total $ 1,813,684 $ 247,294 $ 8,116,524 $ 2,053,158
$ per boe 8.05 1.63 10.71 3.86
% of revenues(1) 18% 4% 19% 9%
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(1)Revenue before realized gains on commodity contracts.
Royalties totalled $1.8 million and $8.1 million for the fourth quarter and year ended December 31, 2008, respectively, compared to $0.2 million and $2.1 million, respectively, for the comparative periods in 2007. Royalties as a percentage of revenue increased in the three months and year ended December 31, 2008 from the comparative periods in 2007, as the Corporation had a smaller proportion of newly tied-in wells receiving the beneficial effects of the deep well royalty holiday program. On a per unit of production basis, royalty costs for the three months and year ended December 31, 2008 were up by 393 percent and 177 percent, respectively, from the comparative periods in 2007, mainly due to higher commodity prices and the majority of wells at Ansell/Sundance having fully utilized their royalty holiday entitlement, thus commencing the payment of cash royalties. Royalties as a percentage of revenue for the year ended December 31, 2008 also increased to 19 percent from 9 percent in 2007.
Open Range estimates royalty rates for 2009 will increase to 20-22 percent as a result of Alberta's New Royalty Framework (NRF) that came into effect January 1, 2009. This anticipated increase does not reflect the potential positive impact to the Corporation of the one-year incentive program announced by the Alberta government on March 3, 2009. Further clarification on the one-year incentive program is needed to fully assess the potential positive impact to Open Range.
OPERATING COSTS AND NETBACK
Three Three
months months Year Year
ended ended ended ended
December December December December
31, 31, 31, 31,
($ per boe) 2008 2007 2008 2007
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Average realized sales price 45.41 46.80 53.22 45.00
Royalty expenses (8.05) (1.63) (10.71) (3.86)
Operating costs (5.65) (8.69) (6.10) (6.72)
Transportation costs (0.70) (0.73) (0.74) (0.79)
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Operating netback 31.01 35.75 35.67 33.63
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The Corporation's operating netback for the fourth quarter of 2008 decreased by 13 percent to $31.01 per boe from $35.75 per boe for the comparative quarter of 2007. This was mainly due to increased royalties, partially offset by lower operating costs. The operating netback for the year ended December 31, 2008 increased by 6 percent to $35.67 per boe from $33.63 per boe for 2007. This was mainly due to an increase in realized average sales price and a decrease in operating costs, partially offset by higher royalties.
Operating costs were $1.3 million and $4.6 million for the three months and year ending December 31, 2008, respectively, compared to $1.3 million and $3.6 million for the comparative periods in 2007. On a per unit of production basis, operating costs for the fourth quarter and full year of 2008 were $5.65 per boe and $6.10 per boe, respectively. These amounts represent a 35 percent and 9 percent respective decrease from $8.69 per boe and $6.72 per boe for the comparative periods in 2007. The reduction in the fourth quarter and full-year results was due primarily to operating efficiencies being realized at Ansell/Sundance as newly drilled wells are tied in to existing infrastructure and facilities. Transportation costs were $0.2 million or $0.70 per boe for the fourth quarter and $0.6 million or $0.74 per boe for the full year of 2008.
GENERAL AND ADMINISTRATIVE COSTS
Three Three
months months Year Year
ended ended ended ended
December December December December
31, 31, 31, 31,
2008 2007 2008 2007
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Gross $1,165,958 $1,236,125 $5,547,953 $5,135,453
Partner recovery (296,897) (108,907)(1,091,855) (482,996)
Capitalized (634,090) (457,725)(2,485,571)(2,180,018)
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Net G&A expense $ 234,971 $ 669,493 $1,970,527 $2,472,439
Per boe net ($) 1.04 4.41 2.60 4.65
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G&A costs for the three months ended December 31, 2008 totalled $0.2 million or $1.04 per boe after overhead recoveries and capitalization of $0.9 million. On a per boe basis G&A costs in the fourth quarter of 2008 declined by 76 percent from $4.41 per boe in the fourth quarter of 2007. For the year ended December 31, 2008, net G&A costs per boe decreased by 44 percent to $2.60 from $4.65 in 2007. The reduction per boe was mainly due to increased production in 2008 complementing the smaller but meaningful decreases to net G&A costs in both periods. Capitalized G&A costs represented 45 percent of gross G&A costs for the year ended December 31, 2008 as the Corporation continued to focus on exploration activities and capitalized its exploration, geological and geophysical expenses. Even the Corporation's gross G&A costs were nearly flat year-over-year, reflecting the Corporation having been founded with complete management and technical teams, followed by success at limiting overall G&A costs.
Open Range expects its net G&A for 2009 to be $2.50 to $3.00 per boe, reflecting the Corporation's continued forecast production growth combined with no significant planned increase in G&A spending.
INTEREST EXPENSE
Three Three
months months Year Year
ended ended ended ended
December December December December
31, 31, 31, 31,
2008 2007 2008 2007
----------------------------------------------------------------------------
Net interest expense $ 145,093 $ 169,881 $ 324,424 $ 236,865
$ per boe net 0.64 1.12 0.43 0.45
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Net interest expense for the three months and year ended December 31, 2008 was $0.1 million or $0.64 per boe and $0.3 million or $0.43 per boe, respectively. The interest earned on available cash balances through short-term interest-bearing instruments at the beginning of the year partially offset the interest expense paid on the Corporation's credit facility through the balance of 2008. The Corporation had no exposure to the Canadian Asset-Backed Commercial Paper liquidity issue during the year ended December 31, 2008.
The Corporation had $31.4 million drawn on its extendable revolving credit facility at December 31, 2008. The Corporation continues to manage debt levels prudently and expects net interest expense to be relatively low for the year as its continuing exploration and development activity will be funded from cash flow from operations in 2009.
STOCK-BASED COMPENSATION
Three Three
months months Year Year
ended ended ended ended
December December December December
31, 31, 31, 31,
2008 2007 2008 2007
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Total stock-based compensation $ 386,787 $ 277,708 $1,537,036 $1,056,071
Capitalized stock-based
compensation (200,851) (130,686) (744,682) (510,201)
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Stock-based compensation
expense $ 185,936 $ 147,022 $ 792,354 $ 545,870
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During the fourth quarter of 2008, stock-based compensation of $0.2 million was expensed and $0.2 million was capitalized. This compared to $0.1 million expensed and $0.1 million capitalized for the fourth quarter of 2007. For the year ended December 31, 2008 stock-based compensation of $0.8 million was expensed and $0.7 million was capitalized, compared to $0.5 million expensed and $0.5 million capitalized for 2007. The increases in stock-based compensation expense were due to the additional expense associated with the stock options granted in 2008. At December 31, 2008 there were 2,632,000 stock options outstanding compared to 1,926,500 outstanding at December 31, 2007.
DEPLETION, DEPRECIATION AND ACCRETION
Three Three
months months Year Year
ended ended ended ended
December December December December
31, 31, 31, 31,
2008 2007 2008 2007
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Depletion and depreciation $ 5,246,689 $4,083,311 $18,959,381 $13,295,728
Accretion 41,011 30,195 158,536 162,297
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Total $ 5,287,700 $4,113,506 $19,117,917 $13,458,025
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Depletion and
depreciation ($/boe) 23.27 26.92 25.02 25.02
Accretion ($/boe) 0.18 0.20 0.21 0.31
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Total ($/boe) 23.45 27.12 25.23 25.33
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Depletion and depreciation are calculated based upon cumulative capital expenditures, production rates and reserves. Open Range recorded $5.2 million or $23.27 per boe in depletion and depreciation for the three months ended December 31, 2008 compared to $4.1 million or $26.92 per boe for the comparative period in 2007. Depletion and depreciation for the year ended December 31, 2008 increased to $19.0 million or $25.02 per boe from $13.3 million or $25.02 per boe for 2007. The per boe decrease in the fourth quarter is due to significant reserve additions from the Corporation's successful 2008 drilling program.
Open Range estimates depletion on a quarterly basis throughout the year using independent inputs such as reserve and land reports when available. Undeveloped land and seismic and salvage value of $26.5 million have been excluded in the calculation and future development costs of $38.5 million have been included in the capital base used in the calculation.
INCOME TAXES
Open Range did not incur any cash tax expense in 2008. Open Range does not expect to pay any cash taxes in 2009 based on current oil and natural gas prices, existing tax pools, planned capital expenditures and forecast taxable income. For the year ended December 31, 2008, a future income tax expense of $0.9 million was recorded. The future income tax liability associated with the Corporation's $19 million in flow-through share issuance in 2007 was recorded during 2008.
The estimated tax pools of the Corporation are included in the table below:
Maximum
Annual December 31, December 31,
(millions) Deduction 2008 2007
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Canadian exploration expense 100% $ 43.4 $ 36.8
Canadian development expense 30% 4.8 6.1
Undepreciated capital cost 25% 16.7 12.2
Share issue costs 20% 2.5 1.8
Canadian oil and gas property expense 10% 36.0 27.1
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Total $ 103.4 $ 84.0
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Subsequent to December 31, 2008, Open Range renounced Canadian exploration expenditures related to its 2008 flow-through share obligations that will result in reductions of the above tax pool balances by $12 million. The tax effect of these renunciations will be recorded in the first quarter of 2009.
NET EARNINGS (LOSS)
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
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Net earnings (loss) $ 1,066,890 $ (344,678) $ 2,797,673 $ 523,139
Net earnings (loss)
per boe 4.73 (2.27) 3.69 0.98
Net earnings (loss)
per basic and diluted
share $ 0.04 $ (0.02) $ 0.11 $ 0.03
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The Corporation recorded net earnings of $2.8 million or $0.11 per basic and diluted share for the year ended December 31, 2008, compared to net earnings of $0.5 million or $0.03 per basic and diluted share for 2007. The net earnings for the three months ended December 31, 2008 were $1.1 million or $0.04 per basic and diluted share compared to a net loss of $0.3 million or $0.02 per basic and diluted share for the comparative period in 2007.
FUNDS FROM OPERATIONS AND CASH FLOW FROM OPERATING ACTIVITIES
Three months Three months Year Year
ended ended ended ended
December 31, December 31, December 31, December 31,
2008 2007 2008 2007
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Funds from operations $ 6,350,962 $ 4,582,484 $ 23,949,443 $ 15,158,721
Funds from operations
per boe 28.17 30.22 31.60 28.53
Funds from operations
per basic share 0.23 0.23 0.93 0.78
Funds from operations
per diluted share 0.23 0.23 0.92 0.78
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Cash flow from operating
activities (per GAAP) $ 6,037,292 $ 2,867,479 $ 24,086,852 $ 13,590,394
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In the fourth quarter and the year ended December 31, 2008, Open Range generated funds from operations of $6.4 million and $23.9 million, respectively, compared to $4.6 million and $15.2 million for the comparative periods in 2007. Fourth-quarter 2008 funds from operations increased by 39 percent and funds from operations per share increased by 4 percent from the comparative quarter in 2007. For the year ended December 31, 2008, funds from operations increased by 58 percent and funds from operations per share increased by 22 percent from 2007.
