NAL Oil & Gas Trust reports record first quarter results
CALGARY--(CCNMatthews - May 9) - NAL Oil & Gas Trust (TSX: NAE.UN) (the "Trust" or "NAL") today announced its financial and operational results for the first quarter of 2005. All amounts are in Canadian dollars unless otherwise stated.
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First Quarter Highlights
- Production amounted to 17,457 barrels of oil equivalent per day
("boed"(*)), a 29 percent increase over the first quarter of 2004
- Funds available for distribution in the quarter were a record
$43.4 million, up 65%, compared with $26.3 million for the prior-year
period. On a per unit basis, funds available for distribution were
$0.69, up 33% from last year.
- NAL completed the largest acquisition in its history when it
effectively acquired 70 percent of Addison Energy Inc. for
consideration of $388 million; the acquisition was partially funded by
a public offering of 17 million Trust units for gross proceeds of
$232.9 million
- Distributions paid totaled $0.48 per Trust unit, providing an
annualized cash-on-cash yield of 14 percent based on a quarter-end
closing price of $13.80
- Subsequent to the Addison acquisition, the Trust hedged close to
50 percent of total net daily production at historically very strong
prices (oil at Cdn$63.85 per barrel (bbl), natural gas at (Cdn$6.95
per Gigajoule Cdn$7.30 per Mcf)).
- NAL announced the appointment of Mr. Andrew Wiswell as President and
Chief Executive Officer effective May 31, 2005, the date of Mr. Donald
P. Driscoll's retirement
(*) When converting natural gas to equivalent barrels of oil within this
report, NAL uses the widely recognized standard of 6 thousand cubic feet
(Mcf) to one barrel of oil equivalent (boe). However, boes may be
misleading, particularly if used in isolation. A boe conversion ratio of
6 Mcf : 1 bbl is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead.
President's Message
In February 2005, the Trust closed the largest acquisition in its
history, when it acquired the shares of Addison Energy Inc. and concurrently
sold a 30 percent undivided interest in the Addison properties to Manulife
Financial Corporation. The net cost to the Trust for its 70% interest was
$387 million (the "Addison Acquisition"). This acquisition added approximately
7,200 boe per day of production, consisting mainly of natural gas, from
properties in central Alberta. The acquisition was financed with the issuance
of 17 million Trust units at $13.70 each, for net proceeds of $221 million,
and a $164 million draw on the Trust's credit facility.
A key strategy at NAL has consistently been disciplined balance sheet
management. As our debt level increased with the recent acquisition, we have
taken the following steps to protect Unitholders' distributions in the coming
months and to ensure that our balance sheet is returned to a position of
strength:
- entered into two separate hedging arrangements. NAL will receive
Cdn$63.85 per barrel of oil for the period April 1 to December 31,
2005 and Cdn$6.95 per Gigajoule of natural gas for the period April 1
to October 31, 2005. In total, these hedges cover close to 50 percent
of NAL's current net daily production.
- temporarily reinstated the Premium Distribution component of our
Distribution Reinvestment Plan that approximately 40 percent of our
Unitholders are enrolled in and which results in additional funding to
the Trust of approximately $5 million per month.
- decided, under guidance from the Board of Directors, to keep monthly
distributions at $0.16 per Trust unit for the second quarter of this
year. The first quarter's payout ratio amounted to approximately
72 percent of distributable cash flow.
Our current annualized post Addison debt-to-cash flow ratio at
approximately 1.4:1 is higher than the historic average and it is management's
priority to return to a preferred ratio of approximately one to one.
The majority of the Addison properties are in close proximity to NAL's
core operations. NAL Resources Management Limited, the manager of the Trust,
operates 90 percent of the new properties, which contain numerous development
opportunities, including Horseshoe Canyon coalbed methane ("CBM" or "NGC",
which stands for "natural gas from coal") prospects in the areas of Nevis and
Lacombe where plans are underway to commence a 20 to 25 well drilling program.
NAL produced a record 17,457 boe per day in the first quarter, primarily
as a result of the additional production from the Addison Acquisition for
50 days in this quarter. Net of the added Addison production, the Trust's
output was, again, essentially flat to the prior quarter despite a relatively
modest capital program of $7.1 million. The first quarter is traditionally not
a very active one for NAL. During the winter months, strong competition for
drilling and optimization services adversely affects development costs and
quality of service. Our all-weather access assets allow us to plan most
activities around this time.
In the Brent area, another Second White Speck shallow gas program will be
initiated, after the CBM project, likely early in the third quarter.
Development activities have already started in southeast Saskatchewan, where
drilling will be active through the third quarter of this year.
The number of non-resident Canadian Unitholders of NAL units currently
stands at 20 percent, a 29 percent increase over the level a year ago but well
below the 50 percent limit under Canadian law.
We regret to announce that Mr. Paul E. Belliveau, Vice President, Finance
and Chief Financial Officer, has tendered his resignation and will leave NAL
effective May 13, 2005. An executive search for his successor has been
initiated.
In early April, we announced the appointment of Mr. Andrew Wiswell as the
new President and Chief Executive Officer of NAL. Andrew will join NAL on
May 25 and formally assume his new position on May 31. As I look forward to
retirement, I leave NAL in very competent hands. I am confident that with the
guidance of our Board of Directors and continued hard work from our great
staff, Andrew will carry on NAL's success story for years to come.
Donald P. Driscoll
President and Chief Executive Officer
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Annual Meeting of Unitholders
NAL Oil & Gas Trust will hold its Annual Meeting of Unitholders on
Tuesday, May 31, at 9:30 a.m. Calgary time in the Imperial Ballroom of
the Hyatt Regency Hotel, 700 Centre Street S.E., Calgary, Alberta.
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Financial and Operating Highlights
(thousands of dollars, except per unit and boe data)
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Quarter Quarter Quarter
Ended Ended Ended
March 31, December 31, March 31,
2005 2004 2004
FINANCIAL
-----------------------------------------
Gross revenue, net of royalties $ 60,617 $ 43,110 $ 38,540
Net income 15,247 11,754 8,963
Funds from Operations
Deduct: 44,021 29,633 26,651
Contributions to
reclamation reserve (97) (28) (127)
Actual abandonment and
environmental costs (532) (787) (240)
-----------------------------------------
Funds available for
distribution before: 43,392 28,818 26,284
Funds applied to debt
and capital (12,365) (3,372) (3,378)
-----------------------------------------
Distributions declared 31,027 25,446 22,906
Distributions declared per unit 0.48 0.48 0.45
Debt repayment and capital per unit 0.20 0.06 0.07
Total assets $ 830,463 $ 415,645 $ 429,348
Long-term debt, net of
working capital 249,740 96,864 93,789
Unitholders' equity 472,759 261,037 277,478
Costs per boe (6:1):
Operating $ 6.67 $ 7.49 5.75
General and administrative 1.51 1.94 1.42
Management fees 0.99 0.86 1.51
OPERATING
Daily production
Oil (bbl) 9,206 8,273 8,303
Natural gas (mcf) 41,575 25,145 26,873
Natural gas liquids (bbl) 1,322 495 754
Oil equivalent (boe - 6:1) 17,457 12,958 13,536
Average pricing, net of
transportation charges
Liquids:
WTI (US$/bbl) 49.90 48.27 35.17
NAL average oil (Cdn$/bbl) 55.59 50.47 40.85
Natural gas liquids (Cdn$/bbl) 40.29 47.67 34.26
Natural gas:
AECO (Cdn$/mcf) 6.69 7.07 6.61
Natural gas Western Canada
(Cdn$/Mcf) 6.76 6.57 6.36
Natural gas Lake Erie
(Cdn$/Mcf) 8.50 7.82 7.77
NAL average natural gas
(Cdn$/Mcf) 6.93 6.82 6.60
Oil equivalent (Cdn$/boe - 6:1) 48.86 47.46 40.12
Average foreign exchange rate
Cdn$/US$ 1.2266 1.2210 1.3176
Operating netback ($/boe) 31.23 27.92 25.19
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Management's Discussion and Analysis
------------------------------------
Please read Management's Discussion and Analysis (MD&A) in conjunction
with the unaudited interim consolidated financial statements for the three
months ended March 31, 2005 and the audited consolidated financial statements
and MD&A for the year ended December 31, 2004.
Operating netbacks, funds from operations, funds available for
distribution and funds available for distribution per unit are not recognized
measures under Canadian generally accepted accounting principles (GAAP).
Management believes that in addition to net income, operating netbacks, funds
from operations, funds available for distribution and funds available for
distribution per unit are useful supplemental measures as they provide an
indication of the results generated by the Trust's principal business
activities prior to the consideration of how those activities are financed or
how the results are taxed. Investors should be cautioned, however, that these
measures should not be construed as an alternative to net income determined in
accordance with GAAP as an indication of NAL's performance. NAL's method of
calculating these measures may differ from other companies' and accordingly,
they may not be comparable to measures used by other companies. NAL calculates
funds from operations as prior to the change in non-cash working capital
related to operating activities. Funds available for distribution is
calculated based on funds from operations less contributions to the
reclamation reserve and actual abandonment and environmental costs, with the
per unit amount calculated using the weighted average units outstanding for
the period.
Distributions to Unitholders
Funds available for distribution in the first quarter amounted to
$43.4 million or $0.69 per unit, compared with $26.3 million or $0.52 per unit
for the same three-month period in 2004. A 22 percent rise in oil equivalent
pricing, combined with a 29 percent uplift in production, accounted for the
year-over-year increase. Compared with the fourth quarter of 2004, funds
available for distribution were up 51 percent or $0.15 per unit due in large
part to stronger oil pricing.
Unitholders' Distributions
(thousands of dollars, except per unit amounts) (unaudited)
-----------------------------------------
3 Months 3 Months 3 Months
Ended Ended Ended
March 31, December 31, March 31,
2005 2004 2004
-----------------------------------------
Funds from operations $ 44,021 $ 29,633 $ 26,651
Deduct:
Contributions to
reclamation reserve (97) (28) (127)
Actual abandonment costs (532) (787) (240)
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Funds available for
distribution before: 43,392 28,818 26,284
Funds applied to debt
repayment and capital (12,365) (3,372) (3,378)
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Distributions declared $ 31,027 $ 25,446 $ 22,906
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Distributable income
per unit(1) $ 0.69 $ 0.54 $ 0.52
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Distributions declared per unit $ 0.48 $ 0.48 $ 0.45
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Weighted average units
outstanding 62,670,875 52,988,079 50,793,465
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(1) Based on weighted average units outstanding
Production
----------
During the first quarter, the Trust's output averaged 17,457 boed, up
from 13,536 boed recorded in the first quarter of 2004 and up 35 percent from
12,958 boed in the fourth quarter of 2004. The increase in production over the
first quarter of 2004 is primarily a result of the February acquisition of
Addison Energy Inc. Net of Addison and certain prior-period adjustments,
production was slightly ahead of the previous quarter. Natural declines were
offset by production gains at Medicine River, Alida, Steelman and Elswick.
These areas contributed mostly oil production from new drills as well as
tie-ins of wells drilled late in the previous quarter. Excluding Addison,
first quarter production was slightly below the same period in 2004 when the
Joffre D-3 Unit - now shut in - was a significant contributor to that
quarter's production.
Addison production over the period February 10, 2005 to the end of the
quarter averaged 7,200 boed. This was lower than anticipated due to an
unscheduled maintenance at a third-party processor, which negatively impacted
production by approximately 400 boed, accounting for the majority of the
difference between actual production and our guidance of 7,700 boed.
Daily Production Volumes
------------------------
-----------------------------------------
Three months ended March 31, December 31, March 31,
2005 2004 2004
-----------------------------------------
Oil (bbl/d) 9,206 8,273 8,303
-----------------------------------------
Natural gas (mcf/d) 41,575 25,145 26,873
-----------------------------------------
NGL (bbl/d) 1,322 495 754
-----------------------------------------
Oil equivalent (boe/d) 17,457 12,958 13,536
-----------------------------------------
Commodity Prices
Crude Oil and Natural Gas Liquids (NGLs)
----------------------------------------
Throughout the first quarter, world oil prices remained strong. WTI
benchmark crude averaged US$49.90/bbl during this period, up 42 percent from
US$35.17 a year ago and three percent higher than in the fourth quarter of
2004 when it was US$48.27. NAL's first quarter crude price per barrel, after
the effect of transportation costs, averaged $55.59, up 36 percent from the
prior year period and up 10 percent from the previous quarter. NAL's fourth
quarter crude price was adversely affected by an industry influx of heavy sour
crude that put pressure on the differentials realized in the market for the
various grades of crude oil. The first quarter of 2005 saw crude differentials
return to more historical levels. A seven percent increase in the Canadian
dollar partially mitigated the rise in year-over-year oil pricing. There were
no oil-related hedging contracts in place during the first quarter of 2005.
Year-over-year, the price per barrel of NGLs rose by 18 percent to
$40.29/bbl from a first quarter 2004 level of $34.26. Compared to the previous
quarter, the NGL price was down 15 percent. NGL pricing generally tracks crude
pricing, which explains the year-over-year increase; however, excess supply of
propane and butane, as a result of a warmer-than-expected winter, placed
downward price pressure on first quarter 2005 liquids as compared to the first
quarter of 2004.
Natural Gas
-----------
Western Canadian average natural gas prices were up a modest one percent,
with the AECO reference price averaging $6.69/Mcf in the first quarter of
2005, compared with $6.61/Mcf in the comparable period of 2004. The first
quarter 2005 natural gas prices was down five percent versus the fourth
quarter of 2004 when the AECO monthly index price averaged $7.07/Mcf.
Natural gas from our Lake Erie production was sold at $8.50/Mcf in the
first quarter, up from $7.77/Mcf a year ago and up nine percent from the
fourth quarter of 2004. Lake Erie's gas represents 10 percent of NAL's total
year-to-date natural gas production and is premium priced because it is close
to both the Ontario and northeastern U.S. markets.
Overall, NAL received an average first quarter natural gas price, net of
transportation costs, of $6.93/Mcf, up from the $6.60/Mcf reported in the same
period last year and essentially flat compared to the prior quarter. There
were no natural gas-related hedging contracts in place during the first
quarter of 2005.
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Risk Management
NAL has entered into certain fixed price contracts for both oil and
natural gas as a measure to support cash flow and protect distributions. A
table detailing 2005 hedging positions is set out below:
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Percent
of net
Daily Daily
Time Type of Quantity Produc-
Year Period Commodity Contract Hedged Hedged Price tion
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2005 Apr - Dec Oil Financial 3,900 bbls Cdn$63.85/bbl 50
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2005 Apr - Oct Natural Gas Financial 17,000 GJ Cdn$6.95/GJ 50
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The estimated fair value of the pricing contracts in place at March 31,
2005 was an unrealized loss of $8.0 million. This value was based on the
difference between the respective financial contract price and the
market-based forward-pricing curve of the related commodity as at March 31,
2005.
Revenue and Funds from Operations
Gross revenue, net of transportation charges, from oil, natural gas and
natural gas liquids sales totaled $76.8 million in the three months ended
March 31, 2005, a 55 percent increase over the same period last year. A
29 percent rise in quarterly production stemming from the February 2005
acquisition and a 22 percent increase in oil equivalent pricing were the major
contributing factors. Corresponding funds from operations tracked revenues, up
49 percent over last year's fourth quarter, and 2005 year-to-date cash flows
eclipsed 2004 totals by 65 percent.
Net Income
Net income for the three months ended March 31, 2005 was $15.2 million,
$6.2 million higher than the $9.0 million recorded in the first quarter of
2004. Higher commodity prices and production, mitigated somewhat by higher
depletion and operating costs and a $1.3 million provision for future income
taxes, were the major contributing factors for the increase in net income.
Royalties
Crown, freehold and overriding royalties net of Alberta Royalty Tax
Credit ("ARTC") were $17.2 million for the three months ended March 31, 2005.
Expressed as a percentage of gross sales, before hedging and transportation
costs, the net royalty rate was 22.3 percent for the quarter, consistent with
the same period last year but down from 25.2 percent for the previous quarter
where certain one-time adjustments increased the overall royalty rate. The
first quarter of 2005 benefited from favorable royalty treatment on new
production from certain southeast Saskatchewan wells that lowered the overall
corporate royalty rate, despite higher commodity prices.
-----------------------------------------
Three months ended March 31, December 31, March 31,
2005 2004 2004
-----------------------------------------
Net royalties ($000s) 17,227 14,363 11,302
-----------------------------------------
As % of revenue 22.3 25.2 22.9
-----------------------------------------
$/boe 10.96 12.05 9.18
-----------------------------------------
Operating Costs
Production expenses per boe for the first quarter of 2005 were up 16
percent over first quarter of 2004, averaging $6.67 - compared with $5.75 -
but 11 percent lower than the previous quarter. The strong demand for services
and equipment because of high industry activity levels continued to exert
upward pressure on field operating costs when comparing year-over-year
results.
-----------------------------------------
Three months ended March 31, December 31, March 31,
2005 2004 2004
-----------------------------------------
Operating costs ($000s) 10,487 8,935 7,079
-----------------------------------------
As % of revenue 13.5 15.7 14.3
-----------------------------------------
$/boe 6.67 7.49 5.75
-----------------------------------------
Operating Netback
NAL's operating netback for the first quarter was $31.23 per boe, up
24 percent from the $25.19 recorded in the same period a year ago. Record high
crude oil pricing led to a 22 percent increase in oil equivalent pricing. This
increase was somewhat tempered by higher operating costs. In addition, the
benefit of higher crude prices was mitigated by the strengthening Canadian
dollar which on average was seven percent higher in 2005.
$/boe
-----------------------------------------
Three months ended March 31, December 31, March 31,
2005 2004 2004
-----------------------------------------
Revenue, net of
transportation costs 48.86 47.46 41.51
-----------------------------------------
Hedging effect - - (1.39)
-----------------------------------------
Royalties, net (10.96) (12.05) (9.18)
-----------------------------------------
Operating expenses (6.67) (7.49) (5.75)
-----------------------------------------
Operating netback 31.23 27.92 25.19
-----------------------------------------
General & Administrative (G&A)
G&A costs for the three months ended March 31, 2005 averaged $1.51 per
boe, up from $1.42 per boe recorded in the same period last year but down
considerably from the $1.94 per boe charged in the prior quarter. Compared to
the fourth quarter of 2004 the Trust benefited from the increased production
from the Addison acquisition, which more than offset the incremental
administrative costs. The higher year-over-year G&A costs per boe reflect the
increased costs resulting from greater regulatory and public company
compliance requirements. Also contributing to increased G&A costs are higher
costs for consulting and other services that are in great demand in the
current economic environment.
-----------------------------------------
Three months ended March 31, December 31, March 31,
2005 2004 2004
-----------------------------------------
G&A costs ($000s) 2,366 2,314 1,753
-----------------------------------------
As % of revenue 3.1 4.1 3.5
-----------------------------------------
$/boe 1.51 1.94 1.42
-----------------------------------------
Per Trust unit ($) 0.04 0.04 0.03
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Management Fees
Base management fees for the three months ended March 31, 2005 amounted
to $1.6 million, up from $0.9 million in the comparable period last year.
These base management fees fluctuate with net production revenues, which were
higher when comparing year-over-year results.
There was no performance fee recorded based on the Trust's first quarter
performance, which did not exceed that of its peers based on the S&P/TSX
Capped Energy Trust Index (the "Index"). NAL's total return for the three
months ended March 31, 2005 was 5.4 percent compared with a 8.5 percent return
for the Index. In the first quarter of 2004 the Trust paid a performance fee
of $0.9 million. Total year-to-date management fees were $1.6 million or
$0.99 per boe in 2005, compared with $1.8 million or $1.51 per boe for the
same period in 2004.
-----------------------------------------
Three months ended March 31, December 31, March 31,
2005 2004 2004
-----------------------------------------
Management fees ($000s) 1,554 1,020 1,858
-----------------------------------------
As % of revenue 2.0 1.8 3.8
-----------------------------------------
$/boe 0.99 0.86 1.51
-----------------------------------------
Per Trust unit ($) 0.02 0.02 0.04
-----------------------------------------
Interest
Interest expense for the quarter ended March 31, 2005 was $2.1 million.
Year-over-year first quarter interest charges increased by $1.0 million due to
a higher average debt load after the February 10, 2005 Addison acquisition.
Depletion, Depreciation and Accretion
In the first quarter of 2005, depletion on property, plant and equipment
and accretion on the asset retirement obligation increased over the comparable
period in 2004, primarily because of higher production volumes. First quarter
depletion and accretion charges amounted to $27.4 million in 2005 compared
with $17.9 million for 2004. Per boe, depletion rose 20 percent to $16.82 in
the first quarter from $14.00 a year ago.
Accretion expense for the three months totaled $1.0 million compared to
$0.7 million for the comparative period in the prior year.
Capital Resources and Liquidity
The capital structure of the Trust is comprised of Trust units and debt.
As at March 31, 2005, NAL had 70,574,842 units outstanding - 17,510,702
units more than on December 31, 2004, reflecting the 17,000,000 units issued
through the January 12, 2005 prospectus and additional units issued through
the Trust's Distribution Reinvestment Plan ("DRIP"). As at May 9, 2005 there
were 70,978,673 units outstanding. The DRIP generated net proceeds of
$6.9 million in the first quarter. The proceeds were used to fund existing
capital programs and to reduce debt. Beginning with the February 15
distribution payment, the premium component of NAL's DRIP has been operating
after being suspended effective October 15, 2004.
NAL maintains a $300 million fully secured, extendible revolving term
bank credit facility. The purpose of the facility is to fund property
acquisitions and capital expenditures. Principal repayments to the bank are
not required at this time. Should principal repayments become mandatory, the
cash flows otherwise available to Unitholders would be used to repay the
credit facility.
-----------------------------------------
($000s) March 31, December 31, March 31,
2005 2004 2004
-----------------------------------------
Trust unit equity 472,759 261,037 277,478
Long-term debt 259,600 93,700 98,500
Debt to equity 0.55 0.36 0.35
Net debt(1) 249,740 96,864 93,789
Net debt to trailing
12 month cash flow(2) 1.40 0.84 0.88
-----------------------------------------
(1) Net debt is long-term debt net of working capital
(2) Determination of first quarter 2005 ratio based on an annualized
first quarter cash flow to adjust for the Addison acquisition.
Contractual Obligations
NAL enters into many contract obligations as part of conducting day-to
day business. NAL has the following long-term commitments for the remaining
years indicated:
($000s)
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2005 2006 2007 2008 2009
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Office lease(1) 1,659 2,238 1,765 - -
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Transportation Agreement(2) 698 30 - - -
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(1) Represents the full amount of the office lease, both base rent and
operating costs, held by the Manager of which NAL is allocated a pro
rata share of the expense on a monthly basis. Included in office
lease is a $2.1 million commitment related to the Addison Energy
acquisition. The commitment started in February 2005 and extends
30 months. NAL has subsequently sublet the premise.
(2) Includes transportation commitments associated with the Addison
Energy acquisition.
Off-Balance Sheet Arrangements/Variable Interest Entities
NAL has no off-balance sheet arrangements or variable interest entities.
Capital Expenditures
Capital expenditures in the first quarter of 2005 amounted to
$7.5 million compared with $7.3 million a year ago. In the first quarter, NAL
spent $6.0 million on development drilling, $1.1 million on facilities and
equipment, and $0.4 million on geological and geophysical and other corporate
assets. In addition, in the three months ended March 31, 2005 NAL spent
$0.4 million on the purchase of minor land interests compared to $0.6 million
in 2004.
Effective February 9, 2005, NAL completed a corporate acquisition of
Addison Energy Inc., resulting in the acquisition of assets in Alberta for
$385.3 million dollars after purchase-price adjustments.
Development Activities
During the first quarter, the Trust participated in a total of 14 wells
(4.61 net) with a 100 percent success rate.
In southeast Saskatchewan, a total of 6 wells (2.70 net) were drilled
during the quarter. At Elswick, two (1.00 net) oil wells are on production and
one (0.5 net) is awaiting tie-in. One (0.5 net) oil well drilled last quarter
was also tied-in. At Alida, two oil wells (0.90 net) are on production. At
Steelman, one (0.31 net) oil well is on production as well as two (0.62 net)
wells drilled during the previous quarter.
In central Alberta, five wells (1.46 net) were successfully drilled
during the quarter. Two (1.10 net) gas wells are awaiting tie-in at Brent and
one (0.15 net) gas well is awaiting tie-in at Sylvan Lake. An additional four
(1.08 net) gas wells were tied in at Medicine River that were drilled during
the previous quarter.
In northern Alberta, three (0.45 net) gas wells were drilled in
Hangingstone just prior to break-up. Since this area is winter access only,
these wells will not be tied in until the first quarter of 2006.
Quarterly Information
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2005 2004
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Q1 Q4 Q3 Q2 Q1
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Financial
-------------------------------------------------------------------------
Revenue, net of royalties 60,617 43,110 43,989 40,674 38,540
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Per unit 0.97 0.81 0.84 0.79 0.76
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Funds from operations 44,021 29,633 30,809 28,789 26,651
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Per unit 0.69 0.56 0.59 0.56 0.52
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Distributions declared, per
unit 0.48 0.48 0.47 0.45 0.45
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Net income 15,247 11,754 13,279 10,871 8,963
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Per unit 0.24 0.22 0.25 0.21 0.18
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2003
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Q4 Q3 Q2
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Financial
-------------------------------------------------------
Revenue, net of royalties 37,697 33,378 28,615
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Per unit 0.75 0.79 0.75
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Funds from operations 24,413 23,615 19,844
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Per unit 0.48 0.56 0.52
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Distributions declared, per
unit 0.45 0.45 0.45
-------------------------------------------------------
Net income 3,252 8,701 24,381
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Per unit 0.06 0.21 0.64
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Critical Accounting Estimates
The significant accounting policies used by NAL are disclosed in the
notes to NAL's December 31, 2004 audited financial statements. Certain
accounting policies require that management make appropriate decisions when
formulating estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. The following discusses such
accounting policies and is included in Management's Discussion and Analysis to
assist investors in assessing the critical accounting policies and practices
of NAL, and the likelihood of materially different results being reported.
NAL's management reviews its estimates regularly. The emergence of new
information and changed circumstances may result in actual results or changes
to estimated amounts that differ materially from current estimates.
The following assessment of significant accounting estimates is not meant
to be exhaustive. NAL might realize different results from the application of
new accounting standards published, from time to time, by various regulatory
bodies.
Proved Oil and Gas Reserves
---------------------------
Under National Instrument 51-101 ("NI 51-101"), "proved" reserves are
those reserves that can be estimated with a high degree of certainty to be
recoverable (it is likely that the actual remaining quantities recovered will
exceed the estimated proved reserves). In accordance with this definition, the
level of certainty targeted by the reporting company should result in at least
a 90 percent probability at a company aggregate level that the quantities
actually recovered will equal or exceed the estimated reserves. There was no
such consideration of probability under previous reporting rules. In the case
of "probable" reserves, which are less certain to be recovered than proved
reserves, NI 51-101 states that it must be equally likely that the actual
remaining quantities recovered will be greater or less than the sum of the
estimated proved plus probable ("P+P") reserves. As for certainty, in order to
report reserves as P+P, the reporting company must believe that there is at
least 50 percent probability at a company aggregate level that the quantities
actually recovered will equal or exceed the sum of the estimated P+P reserves.
The implementation of NI 51-101 has resulted in a more rigorous and uniform
standardization of reserve evaluation.
The oil and gas reserve estimates are made using all available geological
and reservoir data as well as historical production data. Estimates are
reviewed and revised as appropriate. Revisions occur as a result of changes in
prices, costs, fiscal regimes, reservoir performance or a change in NAL's
plans. The effect of changes in proved oil and gas reserves on the financial
results and position of NAL is described under the heading "Full Cost
Accounting for Oil and Gas Activities ("Ceiling Test")".
Depletion Expense
-----------------
NAL uses the full cost method of accounting for exploration and
development activities. In accordance with this method of accounting, all
costs associated with exploration and development are capitalized whether or
not the activities funded were successful. The aggregate of net capitalized
costs and estimated future development costs, less estimated salvage values,
is amortized using the unit of production method based on estimated proved oil
and gas reserves.
An increase in estimated proved oil and gas reserves would result in a
corresponding reduction in depletion expense. A decrease in estimated future
development costs would result in a corresponding reduction in depletion
expense.
Impairment of Property, Plant & Equipment
-----------------------------------------
NAL is required to review the carrying value of all property, plant and
equipment, including the carrying value of oil and gas assets, for potential
impairment. Impairment is indicated if the carrying value of the long-lived
oil and gas asset is not recoverable by the future undiscounted cash flows. If
impairment is indicated, the amount by which the carrying value exceeds the
estimated fair value of the property, plant and equipment is charged to
earnings.
Fair Value of Derivative Instruments
------------------------------------
Periodically NAL utilizes financial derivatives to manage market risk.
The purpose of the hedge is to provide an element of stability to NAL's cash
flow in a volatile environment. NAL discloses the estimated fair value of open
hedging contracts as at the end of a reporting period.
Asset Retirement Obligation
---------------------------
NAL adopted the CICA Handbook, section 3110 on asset retirement
obligations on January 1, 2004. The application of this standard requires the
recognition and measurement of liabilities associated with capital assets. The
standard recognizes a liability equal to the discounted fair value of the
obligation in the period in which the asset is recorded with an equal offset
to the carrying amount of the asset. The liability then accretes to its fair
value with the passage of time. This standard requires management to estimate
the timing and future costs to settle liabilities.
Legal, Environmental Remediation and Other Contingent Matters
-------------------------------------------------------------
NAL is required to determine whether a loss is probable based on judgment
and interpretation of laws and regulations and whether the loss can reasonably
be estimated. When the loss is determined, it is charged to earnings. NAL's
management must continually monitor known and potential contingent matters and
make appropriate provisions by charges to earnings when warranted by
circumstance.
Income Tax Accounting
---------------------
The determination of NAL's income and other tax liabilities requires
interpretation of complex laws and regulations often involving multiple
jurisdictions. All tax filings are subject to audit and potential
reassessments after the lapse of considerable time. Accordingly, the actual
income tax liability may differ significantly from that estimated and recorded
by management.
Changes in Accounting Policies
------------------------------
There were no new accounting policies adapted during the three months
ended March 31, 2005.
Dated May 9, 2005
Consolidated Balance Sheets
(thousands of dollars)
---------------------------
As at As at
March 31, December 31,
2005 2004
(unaudited) (audited)
---------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 2,258 $ 1,111
Accounts receivable
and other 46,149 19,709
---------------------------------------------------------
48,407 20,820
Reclamation reserve 3,531 3,434
Future income tax asset 3,348 4,676
Property, plant and equipment,
net (Notes 1 and 2) 775,177 386,715
---------------------------------------------------------
$ 830,463 $ 415,645
---------------------------------------------------------
---------------------------------------------------------
Liabilities and
Unitholders'
Equity
Current liabilities
Accounts payable and
accrued liabilities $ 27,255 $ 15,494
Distributions payable to
Unitholders 11,292 8,490
Current portion of
long-term debt - 23,425
---------------------------------------------------------
38,547 47,409
Long-term debt (Note 4) 259,600 70,275
Asset retirement obligations
(Note 3) 59,557 36,924
---------------------------------------------------------
357,704 154,608
---------------------------------------------------------
Unitholders' equity
Unitholders' capital (Note 4) 704,122 476,620
Accumulated income 190,505 175,258
Accumulated distributions (421,868) (390,841)
---------------------------------------------------------
472,759 261,037
---------------------------------------------------------
$ 803,463 $ 415,645
---------------------------------------------------------
---------------------------------------------------------
Units outstanding 70,574,842 53,064,140
---------------------------------------------------------
---------------------------------------------------------
See accompanying notes
Consolidated Statements of Income and Accumulated Income
(thousands of dollars, except per unit amounts) (unaudited)
---------------------------
Quarter Quarter
ended ended
March 31, March 31,
2005 2004
-------------------------------------------------------------------------
Revenue
Oil, natural gas and liquids sales $ 77,419 $ 49,846
Transportation costs (651) (426)
Royalty and other income 1,076 422
Crown royalties, net of ARTC (12,730) (8,738)
Freehold and other royalties (4,497) (2,564)
-------------------------------------------------------------------------
60,617 38,540
-------------------------------------------------------------------------
Expenses
Operating 10,487 7,079
General and administrative 2,366 1,753
Management fees 1,554 1,858
Interest on long-term debt 2,108 1,114
Depletion, depreciation and amortization 26,423 17,243
Accretion on asset retirement obligations 1,023 698
-------------------------------------------------------------------------
43,961 29,745
-------------------------------------------------------------------------
Income before taxes 16,656 8,795
Income and capital taxes (81) (85)
Future income tax recovery (provision) (1,328) 253
-------------------------------------------------------------------------
Net income 15,247 $ 8,963
Accumulated income, beginning of period 175,258 130,391
-------------------------------------------------------------------------
Accumulated income, end of period $ 190,505 $ 139,354
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per Trust unit $ 0.24 $ 0.18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted average units outstanding 62,670,875 50,796,465
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
/T/
/T/
Consolidated Statements of Cash Flows
(thousands of dollars) (unaudited)
---------------------------
Quarter Quarter
ended ended
March 31, March 31,
2005 2004
-------------------------------------------------------------------------
Operating activities
Net income $ 15,247 $ 8,963
Items not involving cash:
Depletion, depreciation and amortization 26,423 17,243
Accretion on asset retirement obligations 1,023 698
Future income tax provision (recovery) 1,328 (253)
-------------------------------------------------------------------------
Funds from operations 44,021 26,651
Abandonment and environmental expenditures (532) (240)
Decrease (increase) in non-cash working capital (7,262) 9,219
-------------------------------------------------------------------------
36,227 35,630
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing Activities
Distributions to Unitholders (28,224) (22,807)
Issue of Trust units, net of issue costs 227,501 6,795
Advances from (repayment of) long-term debt 165,900 (5,000)
Decrease in non-cash working capital 160 -
-------------------------------------------------------------------------
365,337 (21,012)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investing Activities
Business Acquisition (383,157) (555)
Investment in property, plant and equipment (7,492) (7,288)
Proceeds from dispositions - 920
Reclamation reserve (97) (127)
Increase in non-cash working capital (9,671) (7,235)
-------------------------------------------------------------------------
(400,417) (14,285)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,147 333
Cash and cash equivalents, beginning of period 1,111 574
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,258 $ 907
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary disclosure of cash flow information:
Cash paid during the period for:
Interest $ 2,096 $ 1,083
Taxes $ 81 $ 85
-------------------------------------------------------------------------
See accompanying notes
Notes to Interim Consolidated Financial Statements
Three months ended March 31, 2005
(Unaudited) (Tabular amounts in thousands of dollars, except
per unit amounts)
Management prepared the interim consolidated financial statements of
NAL Oil and Gas Trust ("NAL" or the "Trust") in accordance with
accounting principles generally accepted in Canada and following the
same accounting policies and methods of computation as the
consolidated financial statements for the fiscal year ended
December 31, 2004. The following disclosure is incremental to the
disclosure included within the annual financial statements. Please
read the interim consolidated financial statements in conjunction
with the consolidated financial statements and notes thereto in NAL's
annual report for the year ended December 31, 2004.
1. Business Combination
--------------------
Effective February 9, 2005, the Trust acquired all of the issued and
outstanding shares of Addison Energy Inc. ("Addison") for
consideration of $387.5 million. The Addison acquisition was
accounted for using the purchase method of accounting with the
results of operations being included from the date of the
acquisition. The following table summarizes the allocation of the
purchase price to the net assets of Addison.
(000s)
-------------------------------------------------------
Purchase allocation of Addison
-------------------------------------------------------
Cash $ 385,847
Related fees and expenses 1,679
-------------------------------------------------------
Cost of acquisition $ 387,526
-------------------------------------------------------
-------------------------------------------------------
Cash $ 4,369
Working capital deficiency (2,094)
Asset retirement obligations (22,974)
Property, plant and equipment 408,225
-------------------------------------------------------
Total consideration $ 387,256
-------------------------------------------------------
-------------------------------------------------------
The fair value of property, plant and equipment and asset retirement
obligations reflects the Trust's 70 percent remaining interest in the
Addison properties following the disposal of a 30 percent interest to
Manulife Financial Corporation ("MFC"). The Trust received $165
million in cash from MFC, which has been offset against the cost of
the acquisition in the above purchase equation.
The above amounts are estimates made by management based on currently
available information. Amendments may be made to the purchase
equation as the cost estimates and tax balances are finalized.
2. Property, Plant and Equipment
------------------------------
Net book value as at:
March 31, December 31,
2005 2004
---------------------------------------------------------------------
Oil and natural gas properties, at cost $ 1,100,622 $ 685,737
Less: Accumulated depletion and
depreciation (325,445) (299,022)
---------------------------------------------------------------------
$ 775,177 $ 386,715
---------------------------------------------------------------------
---------------------------------------------------------------------
During the three months ended March 31, 2005, the Trust capitalized
$0.3 million (2004 - $0.5 million) of general and administrative
costs that were directly related to exploitation and development
programs.
3. Asset Retirement Obligations
----------------------------
NAL's asset retirement obligations result from net ownership
interests in oil and natural gas assets including well sites,
gathering systems and processing facilities. NAL estimates the total
undiscounted amount of cash flows required to settle its asset
retirement obligations is approximately $157.8 million that will be
incurred between 2005 and 2052. The majority of the costs will be
incurred between 2005 and 2020. A credit-adjusted risk-free rate of
eight percent was used to calculate the fair value of the asset
retirement obligations.
A reconciliation of the asset retirement obligations is provided
below:
---------------------------------------------------------------------
March 31, December 31,
2005 2004
---------------------------------------------------------------------
Balance, beginning of period $ 36,924 $ 34,914
Accretion expense 1,023 2,821
Liabilities incurred 22,142 887
Liabilities settled (532) (1,698)
---------------------------------------------------------------------
Balance, end of period $ 59,557 $ 36,924
---------------------------------------------------------------------
---------------------------------------------------------------------
4. Long-term Debt
--------------
The Trust has a revolving credit facility of $300 million. The credit
facility is fully secured by a floating debenture over the Trust's
assets, and a general assignment of book debts. Amounts advanced
under the credit facility bear interest at the bank's prime rate or
at Bankers' Acceptance rates plus a stamping fee charge.
The credit facility will revolve until April 27, 2006, whereupon it
may be renewed for a further 364 days, upon agreement between the
Trust and the bank. In the event that the credit facility is not
extended at the end of the 364-day period, it converts into a term
facility, repayable in four equal installments commencing on the day
that is one year and one day immediately following the term out date.
The effective interest rate on the outstanding amounts at March 31,
2005, was approximately 4.25 percent.
5. Trust Units
-----------
Issued at:
(000s) March 31, 2005 December 31, 2004
------------------------------------------------------
Units Amount Units Amount
---------------------------------------------------------------------
Balance, beginning
of period 53,064 $ 476,620 50,565 $ 448,683
Issued for cash 17,000 232,900 - -
Less: Issue expenses - (12,254) - -
Issued from
Distribution
Reinvestment Plan 511 6,856 2,499 27,937
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance, end
of period 70,575 $ 704,122 53,064 $ 476,620
---------------------------------------------------------------------
---------------------------------------------------------------------
6. Financial Instruments
---------------------
The Trust, from time to time, implements a price risk management
program whereby the commodity price associated with a portion of its
future production is fixed. The Trust sells forward a portion of its
future production through a combination of fixed-price sales
contracts with customers and commodity swap agreements with financial
counter parties. The forward and futures contracts are subject to
market risk from fluctuating commodity prices and exchange rates;
however, gains or losses on the contracts are offset by changes in
the value of the Trust's production.
As at March 31, 2005 the Trust had the following pricing contracts in
place:
---------------------------------------------------------------------
Daily
Time Type of Quantity Hedged
Year Period Commodity Contract Hedged Price
---------------------------------------------------------------------
2005 Apr-Dec Oil Financial 3,900 bbls Cdn$63.85
---------------------------------------------------------------------
2005 Apr-Oct Natural gas Financial 17,000 GJ Cdn$6.95
---------------------------------------------------------------------
The estimated fair value of the pricing contracts in place at
March 31, 2005 was an unrealized loss of $8.0 million. This value was
based on the difference between the respective financial contract
price and the market-based forward-pricing curve of the related
commodity as at March 31, 2005.
7. Commitments
-----------
NAL enters into many contract obligations as part of conducting day-
to day business. NAL has the following long-term commitments for the
years indicated:
($000s)
---------------------------------------------------------------------
2005 2006 2007 2008 2009
---------------------------------------------------------------------
Office lease(1) 1,659 2,238 1,765 - -
---------------------------------------------------------------------
Transportation Agreement(2) 698 30 - - -
---------------------------------------------------------------------
(1) Represents the full amount of the office lease, both base rent
and operating costs, held by the Manager of which NAL is
allocated a pro rata share of the expense on a monthly basis.
Included in office lease is a $2.1 million commitment related to
the Addison Energy acquisition. The commitment started in
February 2005 and extends 30 months. NAL has subsequently sublet
the premise.
(2) Includes transportation commitments associated with the Addison
Energy acquisition.
Forward-Looking Statements
This disclosure contains certain forward-looking statements that involve
substantial known and unknown risks and uncertainties, many of which are
beyond NAL's control, including: the impact of general economic conditions in
Canada and in 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, 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 approval of regulatory authorities.
NAL's actual results, performance or achievement could differ materially from
those expressed in, or implied by, these forward-looking statements and,
accordingly, no assurances can be given that any of the events anticipated by
the forward-looking statements will transpire or occur, or if any of them do
so, what benefits, including the amount of proceeds, that NAL will derive
there from.
Trading Performance
-----------------------------------------------------------
For the
quarter ended 31-Mar-05 31-Dec-04 30-Sep-04 30-Jun-04 31-Mar-04
-----------------------------------------------------------
PRICE
High $14.69 $15.29 $14.29 $12.05 $11.47
Low $12.82 $12.60 $11.68 $11.05 $9.79
Close $13.80 $13.55 $14.29 $11.73 $11.47
-----------------------------------------------------------
Volume 23,391,175 15,265,465 9,359,852 11,283,206 11,221,801
-----------------------------------------------------------
/T/
Contact Information:
NAL Oil & Gas Trust
Anne-Marie Buchmuller
Manager, Investor Relations
(403) 294-3620 or Toll Free: (888) 223-8792
Fax: (403) 294-3699
Email: Investor.Relations@nal.ca
Website: www.nal.ca