CALGARY, ALBERTA -- (Marketwire) -- 08/13/09 -- All values are in Canadian dollars and conversion of natural gas volumes to barrels of oil equivalent (boe) are at 6:1 unless otherwise indicated.
Provident Energy Trust (Provident) (TSX: PVE.UN) (NYSE: PVX) today announced its 2009 second quarter interim financial and operating results, the acquisition of additional fractionation capacity at Sarnia, its decision to sell 6,320 boed of non-strategic oil-weighted assets (primarily in Saskatchewan) and the August cash distribution of $0.06 per unit.
"Provident's second quarter results were as expected given weak commodity prices and the challenging economic climate," said Provident President and Chief Executive Officer, Tom Buchanan. "During the quarter, the Trust announced the conclusion of the strategic review process and its decision to remain structured as a cash-distributing, diversified energy enterprise and implemented a cost-saving internal reorganization to better position Provident to enhance value in both the Upstream and Midstream business units."
Second Quarter Summary
- Consolidated funds flow from operations during the second quarter of 2009 was $49 million ($0.19 per unit), a decrease of 71 percent when compared to $165 million ($0.65 per unit) in the second quarter of 2008, primarily attributable to the sharp year-over-year decline in commodity prices.
- Unitholder distributions in the second quarter of 2009 were $0.18 per unit resulting in a payout ratio of 97 percent, compared to the 55 percent payout in the second quarter of 2008 when Provident distributed $0.36 per unit. For the six months ended June 30, 2009, Provident had a payout ratio of 76 percent compared to 62 percent for the first half of 2008.
- Provident Midstream sold approximately 102,800 barrels per day (bpd) of natural gas liquids (NGL) during the quarter, a decrease of 7 percent from approximately 110,800 bpd in the second quarter of 2008 caused by weaker petrochemical demand for natural gas liquids and the impact of reduced fractionation at Sarnia due to the recent expiry of leased capacity.
- Provident Midstream continues to achieve growth in stable fee-for-service margin, primarily related to condensate storage and handling activities at its Redwater condensate hub. Gross operating margin from the commercial services business line for the six months ended June 30, 2009 was $30 million, an increase of 37 percent from $22 million in the first half of 2008.
- Provident Midstream generated earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA) of $24 million in the second quarter, down 60 percent from $62 million in the second quarter of 2008 due to lower propane-plus sale prices and product margins, lower sales volumes, non-recurring restructuring costs and a $19 million realized loss from the commodity price risk management program.
- Provident Upstream produced approximately 23,800 barrels of oil equivalent per day (boed) in the second quarter of 2009, down 15 percent from approximately 28,000 boed in the second quarter of 2008. This decrease is due to the reduced 2009 capital program (compared to prior years) and the focus of capital spending in both 2008 and the first half of 2009 on the Dixonville and Pekisko plays where production gains will not be immediately realized.
- Provident Upstream generated funds flow from operations of $30 million in the second quarter of 2009, down 73 percent from $113 million in the same quarter of 2008. This decline reflects substantially lower oil and natural gas prices, lower production volumes and non-recurring restructuring costs, partially offset by a $3 million realized gain from the commodity price risk management program.
- Provident Upstream has received conditional approval from the Alberta Energy Resources Conservation Board (ERCB) to proceed with pilot project expansion and the first phase of the waterflood enhanced oil recovery program in the Dixonville area.
- Provident maintained its financial flexibility during the second quarter with senior bank debt of $511 million, while total net debt was $770 million including subordinated convertible debentures and net working capital (excluding current portion of financial derivative instruments). Provident has a revolving term credit facility with a total borrowing base of $1.125 billion of which approximately $1.0 billion is expected to be accessible in the third quarter due to terms of the facility that limit potential borrowings to a multiple of trailing twelve month Midstream EBITDA, calculated on a quarterly basis.
- Provident concluded its strategic review process and determined that in the context of the current environment, it is in the best interest of unitholders for Provident to remain a cash-distributing, diversified energy enterprise. In conjunction with the conclusion of the review, Provident completed an internal reorganization intended to improve the efficiency and competitiveness of the businesses by streamlining the structure of the organization and reducing costs by approximately $12 million per year. A charge of $9.5 million ($0.04 per unit) occurred during the second quarter as a result of this internal reorganization.
Acquisition of Sarnia Fractionation Capacity
Provident is pleased to announce it has reached an agreement with BP Canada (BP) under which Provident Midstream has agreed to purchase an additional 6.15 percent interest in the Sarnia fractionation facility operated by BP for an immediate payment of $14.8 million and a deferred payment of $3.7 million for a facility enhancement planned for 2010. This agreement is effective August 1, 2009 and will increase Provident's ownership in the Sarnia fractionator to approximately 16.5 percent, enhancing propane-plus fractionation capacity in the Empress East System by approximately 7,400 bpd to approximately 20,000 bpd in total. The outright purchase of this fractionation capacity immediately replaces the 6,000 bpd of formerly leased capacity at Sarnia that expired on April 1, 2009. As a result of this transaction, Provident will defer construction of its previously announced depropanizer facility in Michigan. The opportunity remains to construct this facility at a later date if circumstances warrant.
The purchase of additional Sarnia fractionation capacity is of substantial benefit to Provident and its unitholders. This acquisition results in the immediate addition of incremental sales volume and operating margin in the Empress East business line, several months earlier than the originally scheduled commissioning of the Michigan depropanizer. As a direct result of this transaction, Provident is increasing its EBITDA guidance for 2009.
Sale of Saskatchewan Upstream Assets
Provident intends to sell up to 6,320 boed of non-strategic oil and natural gas production assets, primarily located in Saskatchewan.
"The decision to sell our assets in Saskatchewan is an important step towards repositioning Provident Upstream for long term sustainability and growth," said Tom Buchanan. "We believe now is the right time to crystallize the value we have created in these legacy properties and refocus our capital and technical resources on high-impact growth initiatives in both business units."
During the second quarter of 2009 these assets produced 6,320 boed, consisting of approximately 84 percent crude oil and 16 percent natural gas. Proved plus probable (P+P) oil and gas reserves included in this disposition package totaled 15 million barrels of oil equivalent (mmboe) as of June 30, 2009. The disposition package will include the following operating areas:
- Southeast Saskatchewan: Primarily light oil assets that produced approximately 2,680 boed in the second quarter of 2009 with 7.4 mmboe P+P reserves and a P+P reserve life index (RLI) of approximately 7.5 years.
- Southwest Saskatchewan: Primarily shallow natural gas assets that produced approximately 966 boed in the second quarter of 2009 with 2.8 mmboe P+P reserves and a P+P RLI of approximately 7.9 years.
- Lloydminster (Saskatchewan and Alberta): Primarily conventional heavy crude oil assets that produced approximately 2,674 boed in the second quarter of 2009 with 4.8 mmboe P+P reserves and a P+P RLI of approximately 5.0 years.
Net disposition proceeds will be reinvested in high-impact long term growth initiatives such as Provident's Pekisko and Dixonville oil plays as well as growth projects in the Midstream business unit. In the short term, the sale proceeds will be applied to Provident's revolving term credit facility.
2009 Guidance Update
Management is increasing its 2009 EBITDA guidance for Provident Midstream to a range of $190 to $215 million (from $180 to $205 million previously), subject to market conditions. This increase is a result of the acquisition of additional Sarnia fractionation capacity effective August 1, 2009.
Management is making a slight adjustment to 2009 production guidance for Provident Upstream to a range of 23,000 to 24,000 boed from the previous range of 23,500 to 25,000 boed. This reduction in expected production volumes is primarily a result of unplanned downtime related to weather and third-party gas pipeline outages. This guidance incorporates a full year of production and does not include any adjustments for asset sales. Provident Upstream plans to spend the remaining $27 million of its $88 million capital budget, primarily in the Dixonville area.
August Cash Distribution
The August cash distribution of $0.06 per unit is payable on September 15, 2009 and will be paid to unitholders of record as of August 24, 2009. The ex-distribution date will be August 20, 2009. The Trust's current annualized cash distribution rate is $0.72 per trust unit. Based on the current annualized cash distribution rate and the closing price on August 12, 2009 of $5.60, Provident's yield is approximately 13 percent.
For unitholders receiving their cash distribution in U.S. funds, the August 2009 cash distribution will be approximately US$0.06 per unit based on an exchange rate of 0.9195. The actual U.S. dollar cash distribution will depend on the Canadian/U.S. dollar exchange rate on the payment date and will be subject to applicable withholding taxes.
Provident Energy Trust is a Calgary-based, open-ended energy income trust that owns and manages an oil and gas exploitation and production business and a natural gas liquids midstream services and marketing business. Provident's energy portfolio is located in some of the most stable and predictable producing regions in Western Canada. Provident provides monthly cash distributions to its unitholders and trades on the Toronto Stock Exchange and the New York Stock Exchange under the symbols PVE.UN and PVX, respectively.
This document contains certain forward-looking statements concerning Provident, as well as other expectations, plans, goals, objectives, information or statements about future events, conditions, results of operations or performance that may constitute "forward-looking statements" or "forward-looking information" under applicable securities legislation. Such statements or information involve substantial known and unknown risks and uncertainties, certain of which are beyond Provident's control, including the impact of general economic conditions in Canada and the United States, 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, increased competition, the lack of availability of qualified personnel or management, pipeline design and construction, fluctuations in commodity prices, foreign exchange or interest rates, stock market volatility and obtaining required approvals of regulatory authorities.
Such forward-looking statements or information are based on a number of assumptions which may prove to be incorrect. In addition to other assumptions identified in this news release, assumptions have been made regarding, among other things, commodity prices, operating conditions, capital and other expenditures, and project development activities.
Although Provident believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because Provident can give no assurance that such expectations will prove to be correct. Forward-looking statements or information are based on current expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by Provident and described in the forward-looking statements or information.
The forward-looking statements or information contained in this news release are made as of the date hereof and Provident undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise unless so required by applicable securities laws. The forward-looking statements or information contained in this news release are expressly qualified by this cautionary statement.
Consolidated financial highlights
Consolidated
($ 000s except per Three months ended Six months ended
unit data) June 30, June 30,
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% %
2009 2008 Change 2009 2008 Change
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Revenue (net of
royalties and
financial derivative
instruments) from
continuing
operations $305,923 $ 420,220 (27)$ 776,692 $1,122,435 (31)
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Funds flow from
Provident
Upstream
operations(1) $ 30,022 $ 112,869 (73)$ 52,849 $ 184,011 (71)
Funds flow
from Provident
Midstream
operations(1) 18,494 52,601 (65) 79,948 111,853 (29)
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Funds flow
from
continuing
operations(1) $ 48,516 $ 165,470 (71)$ 132,797 $ 295,864 (55)
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Per weighted
average unit
- basic and
diluted (2) $ 0.19 $ 0.65 (71)$ 0.51 $ 1.17 (56)
Distributions
to unitholders $ 47,012 $ 91,662 (49)$ 101,523 $ 182,779 (44)
Per unit $ 0.18 $ 0.36 (50)$ 0.39 $ 0.72 (46)
Percent of
funds flow
from continuing
operations
paid out as
declared
distributions 97% 55% 76 76% 62% 23
Net loss $(80,061)$(184,081) (57)$(120,345) $ (150,465) (20)
Per weighted
average unit
- basic and
diluted (2) $ (0.31)$ (0.72) (57)$ (0.46) $ (0.59) (22)
Capital
expenditures
(continuing
operations) $ 26,548 $ 34,210 (22)$ 83,054 $ 118,792 (30)
Oil and gas
property
acquisitions,
net (continuing
operations) $ 119 $ 10,432 (99)$ 493 $ 19,451 (97)
Weighted
average trust
units
outstanding
(000s)
- basic 261,003 254,404 3 260,199 253,659 3
- diluted (2) 261,003 254,468 3 260,199 253,723 3
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Consolidated
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As at As at
June 30, December 31,
($ 000s) 2009 2008 % Change
----------------------------------------------------------------------------
Capitalization
Long-term debt (including current
portion) $ 774,632 $ 765,679 1
Unitholders' equity $ 1,428,557 $ 1,636,347 (13)
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(1) Represents cash flow from continuing operations before changes in
working capital and site restoration expenditures. Effective in the
first quarter of 2008, Provident's USOGP business was accounted for as
discontinued operations.
(2) Includes dilutive impact of unit options and convertible debentures.
Operational highlights
Three months ended Six months ended
June 30, June 30,
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% %
2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Oil and Gas
Production -
continuing
operations
Daily production -
Provident Upstream
Crude oil (bpd) 10,035 12,494 (20) 10,371 12,390 (16)
Natural gas
liquids (bpd) 1,105 1,178 (6) 1,121 1,243 (10)
Natural gas (mcfd) 75,735 86,130 (12) 75,996 85,050 (11)
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Provident Upstream
oil equivalent
(boed) (1) 23,763 28,027 (15) 24,158 27,808 (13)
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Average realized
price from
continuing
operations
(before realized
financial
derivative
instruments)
Crude oil blend
($/bbl) $ 59.03 $ 105.13 (44) $ 47.33 $ 90.22 (48)
Natural gas
liquids ($/bbl) $ 38.14 $ 94.59 (60) $ 39.65 $ 83.15 (52)
Natural gas
($/mcf) $ 3.40 $ 9.98 (66) $ 4.08 $ 8.81 (54)
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Oil equivalent
($/boe) (1) $ 37.55 $ 81.50 (54) $ 34.98 $ 70.86 (51)
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Field netback from
continuing
operations (before
realized financial
derivative
instruments)
($/boe) $ 18.88 $ 52.39 (64) $ 15.71 $ 44.54 (65)
Field netback from
continuing
operations
(including
realized financial
derivative
instruments)
($/boe) $ 20.25 $ 48.76 (58) $ 18.52 $ 42.12 (56)
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Midstream
Provident
Midstream NGL
sales volumes
(bpd) 102,799 110,826 (7) 122,126 123,573 (1)
EBITDA (000s) (2) $ 24,416 $ 61,769 (60) $ 94,343 $ 137,756 (32)
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(1) Provident reports oil equivalent production converting natural gas to
oil on a 6:1 basis.
(2) EBITDA is earnings before interest, taxes, depletion, depreciation,
accretion and other non-cash items - see "Reconciliation of non-GAAP
measures".
Management's discussion and analysis
The following analysis dated August 12, 2009 provides a detailed explanation of Provident Energy Trust's ("Provident's") operating results for the three and six months ended June 30, 2009 compared to the same time period in 2008 and should be read in conjunction with the consolidated financial statements of Provident, found later in the interim report.
Provident Energy Trust has diversified investments in certain segments of the energy value chain. Provident currently operates in two key business segments: Canadian crude oil and natural gas production ("COGP" or "Provident Upstream"), and Provident Midstream. Provident's Upstream business produces crude oil and natural gas from seven core areas in the western Canadian sedimentary basin. The Midstream business unit operates in Canada and the U.S.A. and extracts, processes, markets, transports and offers storage of natural gas liquids within the integrated facilities at Younger in British Columbia, Redwater and Empress in Alberta, Kerrobert in Saskatchewan, Sarnia in Ontario, Superior in Wisconsin and Lynchburg in Virginia. Effective in the first quarter of 2008, Provident's United States oil and natural gas production ("USOGP") business was accounted for as discontinued operations. The USOGP business was sold in two transactions, the first in June and the second in August, 2008.
This analysis commences with a summary of the consolidated financial and operating results followed by segmented reporting on the Upstream business unit and the Midstream business unit. The reporting focuses on the financial and operating measurements management uses in making business decisions and evaluating performance.
This analysis contains forward-looking information and statements. See "Forward-looking information" at the end of the analysis for further discussion.
Second quarter and six months ended June 30, 2009 highlights
The second quarter highlights section provides commentary for the second quarter and for the six months ended June 30, 2009 and for corresponding periods in 2008.
Consolidated funds flow from operations and cash distributions
Three months ended Six months ended
Consolidated June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except per % %
unit data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Funds Flow from
Operations and
Distributions
Funds flow from
continuing
operations $ 48,516 $165,470 (71) $132,797 $ 295,864 (55)
Funds flow from
discontinued
operations (1) - 76,017 (100) - 125,853 (100)
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Total funds flow
from operations $ 48,516 $241,487 (80) $132,797 $ 421,717 (69)
Per weighted
average unit from
continuing
operations
- basic and
diluted (2) $ 0.19 $ 0.65 (71) $ 0.51 $ 1.17 (56)
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Declared
distributions $ 47,012 $ 91,662 (49) $101,523 $ 182,779 (44)
Per unit $ 0.18 $ 0.36 (50) $ 0.39 $ 0.72 (46)
Percent of funds
flow from
continuing
operations paid out
as declared
distributions 97% 55% 76 76% 62% 23
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(1) Effective in the first quarter of 2008, Provident's USOGP business was
accounted for as discontinued operations.
(2) Includes dilutive impact of unit options and convertible debentures.
Management uses funds flow from operations to analyze operating performance. Funds flow from operations represents cash flow from operations before changes in non-cash working capital and site restoration expenditures. Provident also reviews funds flow from operations in setting monthly distributions and takes into account cash required for debt repayment and/or capital programs in establishing the amount to be distributed.
Funds flow from operations as presented does not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP) and therefore it may not be comparable with the calculations of similar measures for other entities. Funds flow from operations as presented is not intended to represent operating cash flow from operations or operating profits for the period nor should it be viewed as an alternative to cash provided by operating activities, net earnings or other measures of financial performance calculated in accordance with Canadian GAAP. All references to funds flow from operations throughout this report are based on cash provided by operating activities before changes in non-cash working capital and site restoration expenditures.
Second quarter 2009 funds flow from continuing operations was $48.5 million, 71 percent below the $165.5 million recorded in the second quarter of 2008. For the six months ended June 30, 2009 funds flow from continuing operations was $132.8 million, 55 percent below the $295.9 million in the same period of 2008. Provident Upstream provided 62 percent of second quarter 2009 funds flow from continuing operations and Provident Midstream added 38 percent. For the six months ended June 30, 2009, Provident Upstream provided 40 percent of funds flow from continuing operations and Provident Midstream added 60 percent.
Provident Upstream second quarter 2009 funds flow from operations was $30.0 million, a 73 percent decrease from the $112.9 million recorded in the comparable 2008 quarter. For the six months ended June 30, 2009 Provident Upstream funds flow from operations was $52.8 million, a 71 percent decrease from the $184.0 million recorded in the comparable 2008 period. For the quarter and six months ended June 30, 2009, the decrease was a result of significantly lower realized commodity prices combined with reduced production. The lower production is primarily due to natural production declines. Provident Upstream's capital spending in 2008 and the first half of 2009 has been concentrated on long term development initiatives in Northwest Alberta with spending on facilities and pipeline assets as well as the waterflood program in Dixonville. These expenditures will not have immediate production gains to offset the natural production declines, but are intended to position Provident Upstream for future growth. Compared to the first quarter of 2009, Provident Upstream's funds flow from operations increased by $7.2 million or 32 percent primarily driven by improved crude oil pricing.
The Provident Midstream business unit contributed $18.5 million to the second quarter of 2009 funds flow from operations, down from the $52.6 million recorded in the comparable 2008 quarter. For the six months ended June 30, 2009, Provident Midstream contributed $80.0 million to funds flow from operations, a 29 percent decrease from the $111.9 million in the comparable 2008 period. For the quarter and six months ended June 30, 2009, lower operating margins in Empress East and Redwater West primarily driven by weak NGL market prices.
Declared distributions in the second quarter of 2009 totaled $47.0 million, or $0.18 per unit, compared to $91.7 million, or $0.36 per unit, of declared distributions in the same period in 2008. This represented 97 percent of funds flow from continuing operations in the second quarter of 2009 and 55 percent in 2008. Declared distributions for the six months ended June 30, 2009 totaled $101.5 million, or $0.39 per unit, compared to $182.8 million, or $0.72 per unit.
Outlook
Forward-looking information:
Provident has reached an agreement effective August 1, 2009 to purchase an additional 6.15 percent interest in the Sarnia fractionation facility, increasing Provident's ownership in the Sarnia fractionator to 16.5 percent and enhancing propane-plus fractionation capacity in the Empress East System by approximately 7,400 barrels per day (bpd). This acquisition immediately replaces the 6,000 bpd of formerly leased capacity at Sarnia that expired on April 1, 2009. As a result of this transaction, Provident will defer construction of its previously announced depropanizer facility in Michigan, however the opportunity remains to construct this facility at a later date if circumstances warrant. This acquisition results in the immediate addition of incremental sales volume and operating margin in the Empress East business line, several months earlier than the originally scheduled commissioning of the Michigan depropanizer.
At the Provident Empress extraction plant, truck loading facilities have been installed to provide an additional local alternative for take-away of propane-plus volumes. In addition, the first of three new 500,000 barrel storage caverns at Redwater entered condensate service in July. The second cavern is expected to be commissioned during the third quarter of 2009 and the third is slated for completion in 2011.
In Provident Midstream, the 2009 second quarter results reflect lower NGL product margins resulting from substantially lower NGL prices. However, year to date results are inline with internal expectations. As a result of the acquisition of additional Sarnia fractionation capacity, management is increasing its 2009 EBITDA guidance for Provident Midstream to a range of $190 to $215 million (from $180 to $205 million previously), subject to market conditions. Provident is very well-positioned to benefit from the strong outlook for condensate demand, through delivery of fee-based services from the NGL infrastructure assets at its Redwater condensate hub coupled with its marketing and logistics capability.
Provident Upstream is working to advance the Dixonville waterflood program after receiving key regulatory approval from the Alberta Energy Resources Conservation Board for pilot project expansion and the first phase of the full-field waterflood. Management believes the waterflood program has the potential to increase total recovery rates to between 15 and 20 percent of the estimated 228 million barrels of original oil in place on Provident lands. If successful, waterflood response is expected within 12 to 18 months. Provident Upstream plans to spend the remaining $27 million of its $88 million capital budget, primarily in the Dixonville area.
Management is making a slight adjustment to 2009 production guidance for Provident Upstream to a range of 23,000 to 24,000 boed from the previous range of 23,500 to 25,000 boed. This reduction in expected production volumes is primarily a result of unplanned downtime related to weather and third-party facility outages. This guidance incorporates a full year of production and does not include any adjustments for asset sales.
Provident intends to sell certain non-strategic oil and natural gas production assets, primarily located in Saskatchewan. The disposition is a key step toward repositioning Provident Upstream for long term sustainability and growth. These assets produced 6,320 barrels of oil equivalent per day (boed) during the second quarter of 2009, consisting of approximately 84 percent crude oil and 16 percent natural gas. The disposition package will include the operating areas of Southeast Saskatchewan, Southwest Saskatchewan and Lloydminster. Net proceeds from any disposition will be reinvested in high-impact long term growth initiatives such as Provident's Pekisko and Dixonville oil plays as well as key growth projects in the Midstream business unit. In the short term, sale proceeds will be applied to Provident's revolving term credit facility.
Net loss
Three months ended Six months ended
Consolidated June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except % %
per unit data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Net loss $(80,061) $(184,081) (57) $(120,345) $(150,465) (20)
Per weighted
average unit
- basic (1) and
diluted (2) $ (0.31) $ (0.72) (57) $ (0.46) $ (0.59) (22)
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(1) Based on weighted average number of trust units outstanding.
(2) Based on weighted average number of trust units outstanding including
the dilutive impact of the unit option plan and convertible debentures.
Net loss for the second quarter of 2009 was $80.1 million compared to $184.1 million in the comparable 2008 quarter. The improvement in net loss is primarily due to a $319.0 million decrease in the unrealized loss on financial derivative instruments and lower interest expense. The impact of the net loss also incorporates a $121.4 million, or 68 percent, decrease in earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA), a reduction in future tax recoveries and income from discontinued operations in 2008 of $77.2 million.
The Upstream business reported a net loss of $29.9 million for the second quarter of 2009, compared to the 2008 second quarter net income of $28.9 million. The decrease in net income was mainly due to lower EBITDA primarily driven by a 44 percent decrease in realized crude oil prices and a 66 percent decrease in realized natural gas prices as well as a 15 percent decline in production. Compared to the first quarter of 2009, Provident Upstream EBITDA has improved by $8.0 million or 32 percent as crude oil prices have recovered.
The Midstream business reported a net loss of $50.2 million in the second quarter of 2009 compared to a $290.2 million net loss in the second quarter of 2008. The improvement over the prior period was primarily due to a $304.2 million decrease in the unrealized loss on financial derivative instruments and lower interest expense. The impact of the net loss also includes a $37.4 million decrease in EBITDA and a reduction in tax recoveries.
Provident's net income figures are impacted by the requirement to "mark-to-market" all unrealized gains and losses associated with financial derivative instruments at a point in time and report these against current period income. Because Provident's commodity price risk management program extends up to five years into the future in the Midstream segment, net earnings can show substantial quarterly variation that is not necessarily related to current operations.
Reconciliation of non-GAAP measures
The Trust calculates earnings before interest, taxes, depletion, depreciation, accretion and other non-cash items (EBITDA) within its segment disclosure. EBITDA is a non-GAAP measure. A reconciliation between EBITDA and loss from continuing operations before taxes follows:
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
% %
($ 000s) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
EBITDA $ 57,530 $178,901 (68) $152,576 $ 330,236 (54)
Adjusted for:
Cash interest (6,760) (13,727) (51) (15,130) (29,176) (48)
Unrealized loss
on financial
derivative
instruments (87,497) (406,537) (78) (176,790) (468,810) (62)
Depletion,
depreciation and
accretion and
other non-cash
expenses (86,605) (91,487) (5) (159,023) (166,477) (4)
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Loss from
continuing
operations
before
taxes $(123,332) $(332,850) (63)$(198,367) $ (334,227) (41)
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The following table reconciles funds flow from operations with cash provided
by operating activities and distributions to unitholders:
Reconciliation of
funds flow from
operations Three months ended Six months ended
to distributions June 30, June 30,
----------------------------------------------------------------------------
($ 000s, except per % %
unit data) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Cash provided by
operating
activities $ 54,107 $ 46,473 16 $186,775 $ 347,326 (46)
Change in non-cash
operating working
capital (6,801) 193,913 - (58,162) 71,753 -
Site restoration
expenditures 1,210 1,101 10 4,184 2,638 59
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Funds flow from
operations 48,516 241,487 (80) 132,797 421,717 (69)
Distributions to
non-controlling
interests - (26,568) (100) - (51,433) (100)
Cash retained for
financing and
investing
activities (1,504) (123,257) (99) (31,274) (187,505) (83)
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Distributions to
unitholders 47,012 91,662 (49) 101,523 182,779 (44)
Accumulated cash
distributions,
beginning of
period 1,666,979 1,351,294 23 1,612,468 1,260,177 28
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Accumulated cash
distributions,
end of
period $1,713,991 $1,442,956 19 $1,713,991 $1,442,956 19
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Cash
distributions
per unit $ 0.18 $ 0.36 (50) $ 0.39 $ 0.72 (46)
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Taxes
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------
% %
($ 000s) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Capital tax
expense $ 1,374 $ 1,210 14 $ 1,692 $ 1,692 -
Current tax expense
(recovery) 926 (1,211) - 3,047 3,824 (20)
Future income tax
recovery (45,571) (71,554) (36) (82,761) (103,555) (20)
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$(43,271) $(71,555) (40) $(78,022) $ (98,039) (20)
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The current tax expense of $0.9 million in the second quarter of 2009 compares to a recovery of $1.2 million in the second quarter of 2008. The increase in current taxes was due to higher income subject to tax in the midstream operations. For the six months ended June 30, 2009, current tax expense was a $3.0 million, compared to $3.8 million in 2008.
The 2009 second quarter future income tax recovery of $45.6 million compares to $71.6 million in the second quarter of 2008. For the six months ended June 30, 2009, future income tax recovery was $82.8 million compared to $103.5 million in 2008. The recoveries are primarily a result of unrealized losses on financial derivative instruments and non-capital losses created in the Trust's subsidiaries as a result of interest and royalties charged by the Trust to its subsidiaries.
Interest expense
Three months ended Six months ended
Continuing operations June 30, June 30,
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($ 000s, except % %
as noted) 2009 2008 Change 2009 2008 Change
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Interest on bank
debt $ 2,212 $ 10,834 (80) $ 6,034 $ 23,393 (74)
Interest on
convertible
debentures 4,548 4,984 (9) 9,096 9,968 (9)
Discontinued
operations portion - (2,091) (100) - (4,185) (100)
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Total cash interest $ 6,760 $ 13,727 (51) $ 15,130 $ 29,176 (48)
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Weighted average
interest rate on
all long-term debt 3.4% 5.1% (33) 3.8% 5.4% (30)
Debenture accretion
and other non-cash
interest expense 1,287 1,106 16 2,621 2,312 13
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Total interest
expense $ 8,047 $ 14,833 (46) $ 17,751 $ 31,488 (44)
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Interest on bank debt decreased in 2009 compared to 2008 due to significantly lower debt levels and lower market interest rates.
During the second quarter of 2009, Provident executed interest rate swap agreements to May, 2011 that effectively fix the underlying component of the interest rate that is based on Canadian Bankers Acceptance (BA) CDOR rate on $250 million of outstanding bank debt (see "Commodity price risk management program").
Commodity price risk management program
Provident's commodity price risk management program utilizes derivative instruments to provide protection against lower commodity prices and margins. The program reduces exposure to downside commodity price volatility and provides support for cash distributions, bank lending capacity, capital programs and acquisition and project economics. The program protects a percentage of Provident's oil and natural gas production against a decline in commodity prices while, with some products, allowing the Trust to participate in a rising commodity price environment. For the Midstream business unit the program provides price stabilization and protection of a percentage of inventory values and fractionation spread margin. The Program also reduces foreign exchange risk due to the exposure arising from the conversion of U.S. dollars into Canadian dollars, interest rate risk and fixes a portion of Provident's input costs.
The commodity price derivative instruments the Trust uses include puts, calls, costless collars, participating swaps, and fixed price products that settle against indexed referenced pricing.
Provident's credit policy governs the activities undertaken to mitigate non-performance risk by counterparties to financial derivative instruments. Activities undertaken include regular monitoring of counterparty exposure to approved credit limits, financial reviews of all active counterparties, utilizing International Swap Dealers Association (ISDA) agreements and obtaining financial assurances where warranted. In addition, Provident has a diversified base of available counterparties.
In the Midstream business, production margins are affected by the spread between the purchase cost of natural gas and sales price of propane, butane and condensate. Market conditions have not provided sufficient or adequate opportunity to directly manage propane, butane and condensate prices over the longer term. Prices for propane, butane and condensate historically have correlated with prices for crude oil. As a consequence, Provident has entered into natural gas, crude oil and foreign exchange financial derivative contracts through March 2013 in order to protect operating margins in the Midstream business. Short term financial derivative instruments directly fixing propane, butane, natural gasoline and electricity prices have also been executed.
Activity in the Second Quarter
A summary of Provident's risk management contracts executed during the second quarter of 2009 is contained in the following tables:
COGP
Volume
Year Product (Buy)/Sell Terms Effective Period
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2009 Natural 9,500 Gjpd Puts Cdn $5.00 per November 1 - December 31
Gas gj (3)
2010 Natural 9,500 Gjpd Puts Cdn $5.00 per January 1 - December 31
Gas gj (3)
Crude 1,200 Bpd Puts US $60.00 per January 1 - December 31
Oil bbl (5)
Foreign Sell US $1,691,667 January 1 - December 31
Exchange per month @ 1.115 (11)
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Midstream
Volume
Year Product (Buy)/Sell Terms Effective Period
----------------------------------------------------------------------------
2009 Natural (4,600) Gjpd Cdn $5.13 per gj July 1 - December 31
Gas
Crude (1,182) Bpd US $66.31 per bbl (9) July 1 - September 30
Oil
135 Bpd Cdn $72.55 per bbl July 1 - December 31
Propane 1,288 Bpd US $0.75 per gallon July 1 - September 30
(6)(9)
978 Bpd US $0.80 per gallon July 1 - September 30
(6)(10)
1,304 Bpd US $0.90 per gallon October 1 - December 31
(6) (10)
875 Bpd US $0.75 per gallon July 1 - December 31
(7)
Normal 489 Bpd US $1.126 per gallon July 1 - September 30
Butane (8) (9)
Foreign Sell US $842,625 per July 1 - December 31
Exchange month @ 1.1578(11)
2010 Natural (4,600) Gjpd Cdn $5.13 per gj January 1 - March 31
Gas
Crude 135 Bpd Cdn $72.55 per bbl January 1 - March 31
Oil
Propane 875 Bpd US $0.75 per gallon January 1 - March 31
(7)
Foreign Sell US $826,875 per January 1 - March 31
Exchange month @ 1.1578(11)
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Corporate
Volume
Year Product (Buy)/Sell Terms Effective Period
----------------------------------------------------------------------------
Interest
Rate $200,000,000 Pay Average May 8, 2009 - May 31, 2011
Notional (Cdn$) Fixed rate of
1.1885%(12)
$ 50,000,000 Pay Average June 8, 2009 - May 31, 2011
Notional (Cdn$) Fixed rate of
1.1950%(13)
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(1) The above table represents a number of transactions entered into over
the second quarter 2009.
(2) Natural gas contracts are settled agains AECO monthly index.
(3) Natural gas put options provide a "floor" price for the gas quantites
contracted. Floor price is strike less premium. Provident receives
market price above the "floor".
(4) Crude Oil contracts are settled against NYMEX WTI calendar average.
(5) Crude Oil put options provide a "floor" price for the oil quantites
contracted. Floor price is strike less premium. Provident receives
market price above the "floor".
(6) Propane contracts are settled against Belvieu C3 TET.
(7) Propane contracts are settled against Conway In-Well C3.
(8) Normal Butane contracts are settled against Belvieu NC4 TET.
(9) Conversion of Crude Oil BTU contracts to liquids.
(10) Midstream inventory price stabilization contracts.
(11) US Dollar forward contracts are settled against the Bank of Canada noon
rate average. Selling notional US dollars for Canadian dollars at a
fixed exchange rate results in a fixed Canadian dollar WTI price.
(12) Interest rate forward contract settles quarterly against 1M CAD BA CDOR
interest rate.
(13) Interest rate forward contract settles quarterly against 3M CAD BA CDOR
interest rate.
A summary of all of Provident's derivative contracts in place at June 30, 2009 is available on Provident's website at www.providentenergy.com/bus/riskmanagement/commodity.cfm.
Settlement of financial derivative contracts
The following is a summary of the net funds flow from operations to settle financial derivative contracts during the second quarter and first six months of 2009. For comparative purposes the 2008 amounts are also summarized.
(i) Provident Upstream
a) Crude oil
For the quarter ended June 30, 2009, Provident received $1.5 million (2008 - paid $7.3 million) to settle various crude oil market based contracts and related foreign exchange contracts, with an aggregate volume of 0.2 million barrels (2008 - 0.4 million barrels).
For the six months ended June 30, 2009, Provident received $7.3 million (2008 - paid $11.2 million) to settle various crude oil market based contracts and related foreign exchange contracts, with an aggregate volume of 0.5 million barrels (2008 - 0.8 million barrels).
It is estimated that if all contracts in place had been settled at June 30, 2009 an opportunity cost of $2.2 million (June 30, 2008 - $41.3 million) would have been realized.
b) Natural Gas
For the quarter ended June 30, 2009, Provident received $1.5 million (2008 - paid $2.0 million) to settle various natural gas market based contracts on an aggregate volume of 1.2 million gj's (2008 - 2.7 million gj's).
For the six months ended June 30, 2009, Provident received $5.0 million (2008 - paid $1.0 million) to settle various natural gas market based contracts on an aggregate volume of 2.7 million gj's (2008 - 6.3 million gj's).
It is estimated that if contracts in place had been settled at June 30, 2009 a gain of $1.4 million (June 30, 2008 - opportunity cost $10.0 million) would have been realized.
(ii) Provident Midstream
For the quarter ended June 30, 2009 Provident received $9.9 million (2008 - paid $55.4 million) to settle Midstream crude oil market based contracts on net volume of 1.0 million barrels (2008 - 1.2 million barrels) and paid $26.6 million (2008 - received $3.3 million) to settle Midstream natural gas market based contracts on net volume of 5.7 million gj's (2008 - 6.6 million gj's). In addition, for the second quarter of 2009, Provident paid $0.3 million (2008 - $3.2 million) to settle Midstream NGL market based contracts on net volume of 0.1 barrels (2008 - 0.1 million barrels).
For the six months ended June 30, 2009, Provident received $35.4 million (2008 - paid $69.8 million) to settle Midstream crude oil market based contracts on net volume of 2.2 million barrels (2008 - 1.4 million barrels) and paid $43.9 million (2008 - $7.7 million) to settle Midstream natural gas market based contracts on an aggregate volume of 11.4 million gj's (2008 - 13.4 million gj's). In addition, Provident received $5.5 million (2008 - paid $8.6 million) to settle Midstream NGL market based contracts on net volume of 0.2 million barrels (2008 - 2.0 million barrels).
For the quarter ended June 30, 2009, Provident also paid $1.3 million (2008 - received $2.7 million) to settle midstream-related foreign exchange contracts, and paid $0.5 million (2008 - received $1.4 million) to settle various electricity-based contracts. For the six months ended June 30, 2009, Provident paid $4.3 million (2008 - received $5.5 million) to settle midstream-related foreign exchange contracts, and paid $0.7 million (2008 - received $1.4 million) to settle various electricity-based contracts.
It is estimated that if contracts in place had been settled at June 30, 2009 an opportunity cost of $230.2 million (June 30, 2008 - $692.7 million) would have been incurred. These unrealized "mark-to-market" opportunity costs relate to positions with effective periods ranging from July 1, 2009 through, March 31, 2013 and are required to be recognized in the financial statements under generally accepted accounting principles. These unrealized opportunity costs relate to financial derivative instruments which were entered into in order to manage commodity prices and protect future Midstream product margins. Fluctuations in the market value of these instruments have no impact on funds flow from operations until the instrument is settled.
(iii) Corporate
a) Foreign exchange contracts
For the quarter and six months ended June 30, 2009 Provident received $0.1 million to settle various corporate-related foreign exchange contracts (2008 - nil). Realized gains and losses on corporate-related foreign exchange contracts are included in foreign exchange loss (gain) and other on the consolidated statement of operations and are allocated to the reporting segments for segmented reporting purposes. The estimated value of contracts in place if settled at foreign exchange rates at June 30, 2009 would have resulted in an opportunity gain of nil (June 30, 2008 - $0.1 million).
b) Interest rate swaps
For the quarter and six months ended June 30, 2009 Provident paid $0.1 million (2008 - $0.1 million) to settle various interest rate based contracts. Realized gains and losses on corporate-related interest rate contracts are included in realized (loss) gain on financial derivative instruments on the consolidated statement of operations and are allocated to the reporting segments for segmented reporting purposes. The estimated value of contracts in place if settled at June 30, 2009 would have resulted in an opportunity cost of $0.5 million (June 30, 2008 - nil).
Liquidity and capital resources
Consolidated
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($ 000s) June 30, 2009 December 31, 2008 %Change
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Long-term debt - revolving term
credit facility $ 511,244 $ 504,685 1
Long-term debt - convertible
debentures (including current
portion) 263,388 260,994 1
Working capital surplus (1) (4,976) (39,041) (87)
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Net debt $ 769,656 $ 726,638 6
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Unitholders' equity (at book
value) 1,428,557 1,636,347 (13)
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Total capitalization at book
value $ 2,198,213 $ 2,362,985 (7)
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Total net debt as a percentage
of total book value capitalization 35% 31% 13
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(1) The working capital surplus excludes balances for the current portion
of financial derivative instruments.
Provident operates two business units with similar but not identical monthly cash settlement cycles. Midstream revenues are received at various times throughout the month. Provident's working capital position is affected by seasonal fluctuations that reflect commodity price changes, drilling cycles in its oil and gas operations and inventory balances in its Midstream business unit. Provident relies on funds flow from operations, external lines of credit and access to equity markets to fund capital programs and acquisitions.
As a result of the weakening of the global economy, oil and gas industry participants, including Provident, are experiencing more restricted access to capital and anticipate increased borrowing costs. Although Provident's business and asset base have not changed, risk premiums have increased. Management believes that cash flows from operating activities and availability under existing bank facilities will be adequate to allow Provident to continue with its 2009 capital program. However, these issues will affect Provident as it reviews financing alternatives for future capital expenditures and potential acquisition opportunities in the current lower commodity price environment.
Substantially all of Provident's accounts receivable are due from customers and joint venture partners in the oil and gas and midstream services and marketing industries and are subject to credit risk. Provident partially mitigates associated credit risk by limiting transactions with certain counterparties to limits imposed by Provident based on management's assessment of the creditworthiness of such counterparties. In certain circumstances, Provident will require the counterparties to provide payment prior to delivery, letters of credit and/or parental guarantees. The carrying value of accounts receivable reflects management's assessment of the associated credit risks.
Long-term debt and working capital
As at June 30, 2009 Provident had drawn on 45 percent of its Canadian term credit facility of $1.125 billion. This compares to 45 percent drawn as at December 31, 2008.
At June 30, 2009 Provident had $24.7 million in letters of credit outstanding (December 31, 2008 - $35.2 million) that guarantee Provident's performance under certain commercial and other contracts, increasing bank line utilization to 48 percent.
Based on the terms and conditions of the credit facility, Provident will have access to approximately $1.0 billion of the total facility in the third quarter of 2009. The borrowing potential of the facility is limited to a multiple of trailing twelve month midstream EBITDA. The borrowing capacity of the term credit facility is re-measured quarterly.
Provident's working capital from continuing operations decreased by $142.6 million as at June 30, 2009 relative to December 31, 2008. This amount includes a $3.7 million decrease in cash, a $77.4 million decrease in accounts receivable, a $7.4 million decrease in inventory, and a $108.4 million increase in the current portion of financial derivative instruments, partially offset by a $48.5 million decrease in accounts payable and accrued liabilities and a $6.4 million decrease in cash distribution payable.
The ratio of net debt (as calculated under "Liquidity and capital resources") to funds flow from continuing operations for the twelve months ended June 30, 2009 was 2.2 to one, as compared to annual 2008 net debt to funds flow from continuing operations of 1.4 to one. On a segmented basis, using allocated debt balances as disclosed in note 11 to the interim consolidated financial statements, the Provident Upstream business had a ratio of net debt to funds flow from operations for the twelve months ended June 30, 2009 of 1.1 to one (2008 - 0.7 to one). The ratio for the Provident Midstream business unit was 3.7 to one, compared to 2.7 to one in 2008.
Trust units
Under Provident's Premium Distribution, Distribution Reinvestment (DRIP) and Optional Unit Purchase Plan program 1.2 million units were elected in the second quarter and were issued or are to be issued representing proceeds of $6.4 million (2008 - 1.3 million units for proceeds of $14.5 million).
At June 30, 2009, management and directors held less than one percent of the outstanding units.
Capital related expenditures and funding
Continuing Three months ended Six months ended
operations June 30, June 30,
----------------------------------------------------------------------------
% %
($ 000s) 2009 2008 Change 2009 2008 Change
----------------------------------------------------------------------------
Capital related
expenditures
Capital
expenditures $(26,548) $(34,210) (22) $(83,054) $(118,792) (30)
Site restoration
expenditures (1,210) (1,101) 10 (4,184) (2,638) 59
Property
acquisitions, net (119) (10,432) (99) (493) (19,451) (97)
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Net capital
related
expenditures $ (27,877) $(45,743) (39) $(87,731) $(140,881) (38)
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Funded by
Funds flow from
continuing
operations net of
declared
distributions to
unitholders $ 1,504 $ 73,808 (98) $ 31,274 $ 113,085 (72)
Increase
(decrease) in
long-term debt 15,194 (264,011) - 6,333 (298,576) -
Issue of trust
units, net of
cost; excluding DRIP - 1,197 (100) - 1,204 (100)
DRIP proceeds 6,394 14,484 (56) 14,034 28,674 (51)
Change in working
capital, including
cash, sale of assets
and change in
investments 4,785 220,265 (98) 36,090 296,494 (88)
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Net capital
related
expenditure
funding $ 27,877 $ 45,743 (39) $ 87,731 $ 140,881 (38)
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Provident has funded its net capital expenditures with cash flow from operations and long-term debt.
Unit based compensation
Provident made payments in respect of unit based compensation of $3.0 million in the second quarter of 2009 (2008 - nil), of which $0.1 million is included in cash general and administrative expense and $2.9 million is included in strategic review and restructuring expenses. Typically, cash payments are made annually for these programs in the first quarter of each year, however due to the conclusion of Provident's strategic review, a payment was made relating to staff reductions. At June 30, 2009, the current portion of the liability totaled $7.6 million (December 31, 2008 - $9.4 million) and the long-term portion totaled $6.4 million (December 31, 2008 - $8.6 million).
Unit based compensation includes expenses associated with Provident's restricted and performance unit plan. Unit based compensation is recorded at the estimated fair value of the notional units granted. Compensation expense associated with the plans is recognized in earnings over the vesting period of each plan. Provident recorded unit based compensation expense of $6.9 million for the quarter ended June 30, 2009 (2008 - $4.9 million), $2.9 million included in strategic review and restructuring expenses, $3.8 million in general and administrative expense and $0.2 million included in production, operating and maintenance expense. The expense is higher in the second quarter of 2009 compared to the second quarter of 2008 due to an increase in the trading price of Provident trust units from March 31, 2009 to June 30, 2009. In the second quarter of 2009, the number of outstanding units was reduced due to staff reductions, however the comparable 2008 period has a similar reduction due to a reduction in the multiplier of one of the PTU grants. For the six months ended June 30, 2009, Provident recorded unit based compensation expense of $7.6 million (2008 - $10.2 million) and related cash payments of $11.2 million (2008 - $8.3 million), of which $2.9 million is included in strategic review and restructuring expenses.
Strategic review and restructuring expenses
The strategic review process was announced in February of 2008 with the objectives of optimizing business performance, facilitating business growth, improving overall access to and cost of capital, enhancing the valuation of Provident's component businesses and optimizing structure in response to the federal government decision to tax income trusts beginning in 2011. During this review, it was determined that the sale of the United States oil and natural gas production (USOGP) business was an important step in the process. Following the sale of USOGP, management and the board of directors evaluated the complete spectrum of strategic options available for Provident's remaining Canadian oil and gas production (Provident Upstream) and midstream (Provident Midstream) business units.
