Advantage Announces 2nd Quarter Results 2008
(TSX: AVN.UN, NYSE: AAV)
CALGARY, Aug. 14 /CNW/ - Advantage Energy Income Fund ("Advantage" or the
"Fund") is pleased to announce its unaudited operating and financial results
for the second quarter ended June 30, 2008.Financial and Operating Highlights
Three months ended Six months ended
June 30 June 30
2008 2007 2008 2007
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Financial ($000, except
as otherwise indicated)
Revenue before
royalties(1) $ 208,868 $ 125,075 $ 397,373 $ 260,577
per Trust Unit(2) $ 1.51 $ 1.10 $ 2.88 $ 2.35
per boe $ 71.69 $ 50.69 $ 67.03 $ 51.31
Funds from operations $ 103,754 $ 62,634 $ 198,372 $ 128,279
per Trust Unit(3) $ 0.74 $ 0.54 $ 1.42 $ 1.13
per boe $ 35.62 $ 25.38 $ 33.46 $ 25.26
Distributions declared $ 50,364 $ 52,096 $ 100,385 $ 102,302
per Trust Unit(3) $ 0.36 $ 0.45 $ 0.72 $ 0.90
Expenditures on property
and equipment $ 21,632 $ 25,678 $ 88,535 $ 75,374
Working capital
deficit(4) $ 42,201 $ 11,512 $ 42,201 $ 11,512
Bank indebtedness $ 547,946 $ 377,812 $ 547,946 $ 377,812
Convertible debentures
(face value) $ 224,587 $ 180,725 $ 224,587 $ 180,725
Trust Units outstanding
at end of period (000) 140,271 116,091 140,271 116,091
Basic weighted average
Trust Units (000) 138,612 113,854 138,105 111,108
Operating
Daily Production
Natural gas (mcf/d) 123,104 108,978 124,109 111,636
Crude oil and NGLs
(bbls/d) 11,498 8,952 11,890 9,452
Total boe/d at 6:1 32,015 27,115 32,575 28,058
Average prices
(including hedging)
Natural gas ($/mcf) $ 9.18 $ 7.52 $ 8.70 $ 7.80
Crude oil and NGLs
($/bbl) $ 101.34 $ 61.93 $ 92.81 $ 60.21
(1) includes realized derivative gains and losses
(2) based on basic weighted average Trust Units outstanding
(3) based on Trust Units outstanding at each distribution record date
(4) working capital deficit excludes derivative assets and liabilities
MESSAGE TO UNITHOLDERS
Record Second Quarter Funds from Operations and Payout Ratio:
- Strong natural gas and crude oil pricing combined with solid
operational results generated a record level of funds from operations
during the second quarter of 2008 resulting in a payout ratio of 49%.
This is the lowest payout ratio in the history of Advantage and
reinforces our strategy to finance our highly efficient capital
program from operating cash flow.
- Funds from operations for the second quarter of 2008 increased 66% to
$103.8 million and 37% to $0.74 per Trust Unit compared to
$62.6 million or $0.54 per Trust Unit for the same period of 2007.
- The Fund declared three distributions during the quarter totaling
$0.36 per Trust Unit. Since inception, the Fund has distributed
$980.2 million or $16.98 per Trust Unit.
- Production volumes in the second quarter of 2008 increased 18% to
32,015 boe/d compared to 27,115 boe/d in the second quarter of 2007.
Second quarter 2008 production volumes were negatively impacted by a
significant number of third party turnaround maintenance outages
which amounted to approximately 1,400 boe/d for the quarter.
- Natural gas production for the second quarter of 2008 increased 13%
to 123.1 mmcf/d, compared to 109.0 mmcf/d reported in the second
quarter of 2007. Crude oil and natural gas liquids production
increased 28% to average 11,498 bbls/d compared to 8,952 bbls/d in
the second quarter of 2007.
Drilling Underway at our Glacier Montney Natural Gas Resource Play
Following increased Capital Budget
- On June 27, 2008, Advantage's Board of Directors approved an increase
of $55 million to the 2008 capital budget, which has resulted in an
annual budget total of $200 million.
- Approximately $39 million will be spent on the next phase of
development at Glacier that includes drilling an additional 5 gross
horizontal wells, 5 gross vertical delineation wells, and initial
infrastructure activities. During the first quarter of 2008, the Fund
drilled 5 vertical delineation wells at Glacier which helped confirm
geological formations, reservoir productivity and pool continuity.
- Drilling has commenced with three drilling rigs on the property and
initial commitments toward facilities expansion plans have been made.
We anticipate longer term development plans to be further defined by
year-end based on the timing of well information.
- Advantage's extensive 83 section land block, which may support in
excess of 150 horizontal wells, is located directly adjacent and on-
trend to EnCana's Swan Lake and Murphy's Tupper project developments
which are continuing to exhibit successful results.
Strong Results Continue with our Conventional Assets
- Capital spending for the quarter was $21.6 million net which included
$9.4 million on drilling and completion activities. During the second
quarter, 4 gross (3 net) wells were drilled at 100% success rate with
the balance of capital activity directed at well completions carried
over from the first quarter, facilities expansions and maintenance
capital. Year to date drilling activity has resulted in 57 gross
(41 net) wells at a 98% success rate.
- At Nevis in Central Alberta, horizontal light oil wells are exceeding
initial budgeted productivities and additional oil facilities
expansion work is required. Further to our phase 1 Horseshoe Canyon
coal bed methane program, which included 22 wells in the first
quarter, an additional 15 well phase 2 program has commenced on the
lands acquired in connection with the acquisition of Sound Energy
Trust. The wells have excellent initial productivities ranging from
125 to 250 mcf/d. Several years of future light oil and natural gas
drilling opportunities are available at our Nevis property.
- At Martin Creek in Northwest British Columbia, new well production
information from our highly successful first quarter drilling program
is confirming the significant upside potential that exists in this
property.
- At Willesden Green in Central Alberta, follow-up drilling locations
are being pursued on a light oil discovery that was made in the first
quarter of 2008.
- With continued drilling success and a highly attractive suite of
assets, Advantage has over 5 years of conventional drilling inventory
and is well positioned to additionally capitalize on the significant
natural gas resource play in the Montney formation at our Glacier and
Stoddart properties.
Improved Commodity Prices & Hedging Update
- With improved natural gas and crude oil pricing realized through the
first six months of 2008 and including our commodity risk management
positions for this year, we anticipate generating cash flow in excess
of our $200 million revised capital budget and current distribution
requirements. Surplus cash flow provides security to our current
distribution level, flexibility to fund our highly efficient capital
program, and the ability to capitalize on acquisition opportunities
or reduce debt.
- Advantage maintains a hedging program to reduce cash flow volatility
and to ensure that our capital program can be funded out of cash
flow. Additional natural gas pricing hedges have been secured for
April to December of 2009 for approximately 23% of our gross
production at an average AECO price of $8.76 Canadian per mcf or
equivalent to approximately NYMEX $9.64 US per mmbtu. Details on our
hedging program are available in our MD&A for the quarter and on our
website.
Looking Forward
- Our 2008 annual guidance includes capital expenditures of
$200 million and production of 32,000 to 34,000 boe/d with a 63%
weighting to natural gas. Royalty rates are estimated to range
between 18% to 20%. Operating costs are now forecasted to be $13.40
to $13.90/boe due to cost escalations resulting from increased third
party processing fees especially at our Lookout Butte property. The
higher commodity price environment has also increased electrical
power costs and the cost of supplies derived from crude oil and
natural gas as feedstocks.
- Production at our Lookout Butte property in Southern Alberta will be
impacted during the third quarter by an extended third party facility
outage at Shell's Waterton gas plant where a significant modification
project is underway. Estimates provided by Shell indicate a potential
outage of approximately 55 to 75 days that begins August 13, 2008.
- Advantage's current intention is to continue to be a cash
distributing entity after 2010. We will continue to closely monitor
industry dynamics and are considering a number of alternative
structures. Advantage's significant tax pools of $1.7 billion affords
us flexibility to evaluate many options in this regard.MANAGEMENT'S DISCUSSION & ANALYSIS
The following Management's Discussion and Analysis ("MD&A"), dated as of
August 14, 2008, provides a detailed explanation of the financial and
operating results of Advantage Energy Income Fund ("Advantage", the "Fund",
"us", "we" or "our") for the three and six months ended June 30, 2008 and
should be read in conjunction with the consolidated financial statements
contained within this interim report and the audited financial statements and
MD&A for the year ended December 31, 2007. The consolidated financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles ("GAAP") and all references are to Canadian dollars
unless otherwise indicated. All per barrel of oil equivalent ("boe") amounts
are stated at a conversion rate of six thousand cubic feet of natural gas
being equal to one barrel of oil or liquids.
Non-GAAP Measures
The Fund discloses several financial measures in the MD&A that do not
have any standardized meaning prescribed under GAAP. These financial measures
include funds from operations, funds from operations per Trust Unit and cash
netbacks. Management believes that these financial measures are useful
supplemental information to analyze operating performance, leverage and
provide an indication of the results generated by the Fund's principal
business activities prior to the consideration of how those activities are
financed or how the results are taxed. Investors should be cautioned that
these measures should not be construed as an alternative to net income, cash
provided by operating activities or other measures of financial performance as
determined in accordance with GAAP. Advantage's method of calculating these
measures may differ from other companies, and accordingly, they may not be
comparable to similar measures used by other companies.
Funds from operations, as presented, is based on cash provided by
operating activities before expenditures on asset retirement and changes in
non-cash working capital. Funds from operations per Trust Unit is based on the
number of Trust Units outstanding at each distribution record date. Cash
netbacks are dependent on the determination of funds from operations and
include the primary cash revenues and expenses on a per boe basis that
comprise funds from operations. Funds from operations reconciled to cash
provided by operating activities is as follows:Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
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Cash provided by
operating
activities $ 93,882 $ 49,932 88% $175,475 $100,452 75%
Expenditures on
asset retirement 982 (302) (425)% 5,947 3,707 60%
Changes in non-cash
working capital 8,890 13,004 (32)% 16,950 24,120 (30)%
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Funds from
operations $103,754 $ 62,634 66% $198,372 $128,279 55%
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-------------------------------------------------------------------------Forward-Looking Information
The information in this report contains certain forward-looking
statements. These statements relate to future events or our future
performance. All statements other than statements of historical fact may be
forward-looking statements. Forward-looking statements are often, but not
always, identified by the use of words such as "seek", "anticipate", "plan",
"continue", "estimate", "expect", "may", "will", "project", "predict",
"potential", "targeting", "intend", "could", "might", "should", "believe",
"would" and similar expressions. These statements involve substantial known
and unknown risks and uncertainties, certain of which are beyond Advantage's
control, including: the impact of general economic conditions; 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; fluctuations in commodity prices and foreign exchange and interest
rates; stock market volatility and market valuations; volatility in market
prices for oil and natural gas; liabilities inherent in oil and natural gas
operations; uncertainties associated with estimating oil and natural gas
reserves; competition for, among other things, capital, acquisitions of
reserves, undeveloped lands and skilled personnel; incorrect assessments of
the value of acquisitions; changes in income tax laws or changes in tax laws,
royalty regimes and incentive programs relating to the oil and gas industry
and income trusts; geological, technical, drilling and processing problems and
other difficulties in producing petroleum reserves; obtaining required
approvals of regulatory authorities; and other risk factors set forth in
Advantage's Annual Information Form which is available at
www.advantageincome.com and www.sedar.com. Additionally, references to test
production rates and test rates for recently drilled wells are useful in
confirming the presence of hydrocarbons, however, such rates are not
determinative of the rates at which such wells will commence production and
decline thereafter. While encouraging, readers are cautioned not to place
reliance on such rates in calculating the aggregate production for the Fund.
Advantage's actual results, performance or achievement could differ materially
from those expressed in, or implied by, such 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,
what benefits that Advantage will derive from them. Except as required by law,
Advantage undertakes no obligation to publicly update or revise any
forward-looking statements.Overview
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
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Cash provided by
operating
activities
($000) $ 93,882 $ 49,932 88% $175,475 $100,452 75%
Funds from
operations
($000) $103,754 $ 62,634 66% $198,372 $128,279 55%
per Trust
Unit(1) $ 0.74 $ 0.54 37% $ 1.42 $ 1.13 26%
(1) Based on Trust Units outstanding at each distribution record date.Cash provided by operating activities and funds from operations have
increased significantly as compared to 2007 due to considerably higher
revenue. The increased revenue has been primarily due to improved commodity
prices that continue to exceed the prior year. Our financial results have also
substantially benefited from the Sound Energy Trust ("Sound") acquisition,
which closed on September 5, 2007. The financial and operating results from
the acquired Sound properties are included in all 2008 figures but are not
included in the three and six month periods ended June 30, 2007. Funds from
operations per Trust Unit have also increased significantly, but not in the
same proportion as funds from operations due to the higher number of Trust
Units outstanding for 2008. Trust Units outstanding has increased due to Trust
Units issued in exchange for the Sound acquisition and our distribution
reinvestment plan that allows Unitholders to purchase Trust Units in exchange
for their regular monthly distributions. The number of Trust Units has
increased 21% from June 30, 2007.
The primary factor that causes significant variability of Advantage's
cash provided by operating activities, funds from operations, and net income
is commodity prices. Refer to the section "Commodity Prices and Marketing" for
a more detailed discussion of commodity prices and our price risk management.Distributions
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
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Distributions
declared ($000) $ 50,364 $ 52,096 (3)% $100,385 $102,302 (2)%
per Trust
Unit(1) $ 0.36 $ 0.45 (20)% $ 0.72 $ 0.90 (20)%
(1) Based on Trust Units outstanding at each distribution record date.Total distributions for both the three and six months ended June 30, 2008
are comparable to 2007. Although the Fund has more Trust Units outstanding
during 2008, there has been a 20% reduction in the monthly distribution per
Trust Unit. In December 2007, we decreased the monthly distribution from the
$0.15 per Trust Unit paid for January to November 2007 to $0.12 per Trust Unit
due to the weak natural gas prices at that time. The monthly distribution
currently remains at $0.12 per Trust Unit. Commodity prices have strengthened
in 2008 such that the current environment, in combination with our hedging
program, provides strong support for continuation of the current distribution
level and our expanded 2008 capital program.
Distributions from the Fund to Unitholders are entirely discretionary and
are determined by Management and the Board of Directors. We closely monitor
our distribution policy considering forecasted cash flows, optimal debt
levels, capital spending activity, working capital requirements, and other
potential cash expenditures. Distributions are announced monthly and are based
on the cash available after retaining a portion to meet such spending
requirements. The level of distributions are primarily determined by cash
flows received from the production of oil and natural gas from existing
Canadian resource properties and will be susceptible to the risks and
uncertainties associated with the oil and natural gas industry generally. If
the oil and natural gas reserves associated with the Canadian resource
properties are not supplemented through additional development or the
acquisition of additional oil and natural gas properties, our distributions
will decline over time in a manner consistent with declining production from
typical oil and natural gas reserves. Therefore, distributions are highly
dependent upon our success in exploiting the current reserve base and
acquiring additional reserves. Furthermore, monthly distributions we pay to
Unitholders are highly dependent upon the prices received for such oil and
natural gas production. Oil and natural gas prices can fluctuate widely on a
month-to-month basis in response to a variety of factors that are beyond our
control. Declines in oil or natural gas prices will have an adverse effect
upon our operations, financial condition, reserves and ultimately on our
ability to pay distributions to Unitholders. The Fund attempts to mitigate the
volatility in commodity prices through our hedging program. It is our
long-term objective to provide stable and sustainable distributions to the
Unitholders, while continuing to grow the Fund. However, given that funds from
operations can vary significantly from month-to-month due to these factors,
the Fund may utilize various financing alternatives, including our credit
facility, as an interim measure to maintain stable distributions.Revenue
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
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Natural gas
excluding
hedging $115,687 $ 74,760 55% $205,681 $153,093 34%
Realized
hedging gains
(losses) (12,861) (136) 9,357% (9,151) 4,484 (304)%
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Natural gas
including
hedging $102,826 $ 74,624 38% $196,530 $157,577 25%
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Crude oil and
NGLs excluding
hedging $115,266 $ 50,371 129% $211,370 $101,310 109%
Realized
hedging gains
(losses) (9,224) 80 (11,630)% (10,527) 1,690 (723)%
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Crude oil and
NGLs including
hedging $106,042 $ 50,451 110% $200,843 $103,000 95%
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Total revenue $208,868 $125,075 67% $397,373 $260,577 52%
-------------------------------------------------------------------------Revenues have increased significantly for 2008 due to additional
production, primarily from the Sound acquisition, as well as stronger
commodity prices. The higher revenue has been partially offset by our realized
hedging losses that have also resulted from the higher commodity price
environment. The Fund enters derivative contracts whereby realized hedging
gains and losses partially offset commodity price fluctuations, which can
positively or negatively impact revenues.Production
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
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Natural gas
(mcf/d) 123,104 108,978 13% 124,109 111,636 11%
Crude oil
(bbls/d) 9,311 6,615 41% 9,581 7,083 35%
NGLs (bbls/d) 2,187 2,337 (6)% 2,309 2,369 (3)%
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Total (boe/d) 32,015 27,115 18% 32,575 28,058 16%
-------------------------------------------------------------------------
Natural gas (%) 64% 67% 64% 67%
Crude oil (%) 29% 24% 29% 25%
NGLs (%) 7% 9% 7% 8%The Fund's total daily production averaged 32,015 boe/d for the three
months and 32,575 boe/d for the six months ended June 30, 2008, an increase of
18% and 16%, respectively. Production increases were realized primarily due to
the Sound acquisition. Natural declines and third party facility turnarounds
have caused total production in the second quarter of 2008 to decrease 3% from
33,133 boe/d realized in the first quarter of 2008. Wet weather delays in the
second quarter of 2008 prevented some of our new wells from being put into
production that would have offset such declines. For 2008, we expect
production to average approximately 32,000 to 34,000 boe/d, weighted 63% to
natural gas.Commodity Prices and Marketing
Natural Gas
Three months ended Six months ended
June 30 June 30
($/mcf) 2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Realized natural
gas prices
Excluding
hedging $ 10.33 $ 7.54 37% $ 9.11 $ 7.58 20%
Including
hedging $ 9.18 $ 7.52 22% $ 8.70 $ 7.80 12%
AECO monthly
index $ 9.35 $ 7.37 27% $ 8.24 $ 7.42 11%Realized natural gas prices, excluding hedging, were considerably higher
for the three and six months ended June 30, 2008 with a significant
improvement from the first quarter of 2008. The 2007/2008 winter season in
North America has caused inventory levels that had been high prior to winter,
to decline to approximately the five-year average. In addition, reduced
liquefied natural gas imports into the US and the slowdown in natural gas
drilling in Western Canada has provided upward price support. We believe that
longer-term pricing fundamentals for natural gas will be supported due to: (i)
the continued strength of crude oil prices, which has eliminated the economic
advantage of fuel switching away from natural gas, (ii) significantly less
natural gas drilling in Canada projected for 2008, which will reduce
productivity to offset declines, (iii) the increasing focus on resource style
natural gas wells, which have high initial declines and require a higher
threshold economic price than conventional gas drilling and (iv) the demand
for natural gas for the Canadian oil sands projects.Crude Oil and NGLs
Three months ended Six months ended
June 30 June 30
($/bbl) 2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Realized crude
oil prices
Excluding
hedging $ 113.71 $ 64.23 77% $ 100.57 $ 61.48 64%
Including
hedging $ 102.83 $ 64.37 60% $ 94.53 $ 62.79 51%
Realized NGLs
prices
Excluding
hedging $ 95.02 $ 55.05 73% $ 85.67 $ 52.47 63%
Realized crude
oil and NGLs
prices
Excluding
hedging $ 110.15 $ 61.84 78% $ 97.68 $ 59.22 65%
Including
hedging $ 101.34 $ 61.93 64% $ 92.81 $ 60.21 54%
WTI ($US/bbl) $ 124.00 $ 65.02 91% $ 110.98 $ 61.59 80%
$US/$Canadian
exchange rate $ 0.99 $ 0.91 9% $ 0.99 $ 0.88 13%Advantage's crude oil prices are based on the benchmark pricing of West
Texas Intermediate Crude ("WTI") adjusted for quality, transportation costs
and $US/$Canadian exchange rates. For the three and six months ended June 30,
2008, WTI increased 91% and 80%, respectively. Advantage's realized crude oil
price has not changed to the same extent as WTI, owing to the Canadian dollar
achieving parity with the US dollar, and changes in Canadian crude oil
differentials relative to WTI. The price of WTI fluctuates based on worldwide
supply and demand fundamentals. There has been significant price volatility
experienced over the last several years whereby WTI has reached historic high
levels. Many developments have resulted in the current price levels, including
significant continuing geopolitical issues, general market speculation and
ongoing supply concerns. As a result, prices have continued to increase, with
WTI recently surpassing US$140/bbl. However, we have recently seen a
correction in the price levels as demand has appeared to decline, with WTI
decreasing to approximately US$115/bbl. Regardless whether the current price
level is sustainable or a short-term anomaly, we believe that the pricing
fundamentals for crude oil remain strong with many factors affecting the
continued strength including (i) supply management and supply restrictions by
the OPEC cartel, (ii) ongoing civil unrest in Venezuela, Nigeria, and the
Middle East, (iii) strong relative world wide demand, particularly in China,
India and the United States and (iv) North American refinery capacity
constraints.
Commodity Price Risk
The Fund's operational results and financial condition will be dependent
on the prices received for oil and natural gas production. Oil and natural gas
prices have fluctuated widely during recent years and are determined by
economic and, in the case of oil prices, political factors. Supply and demand
factors, including weather and general economic conditions as well as
conditions in other oil and natural gas regions, impact prices. Any movement
in oil and natural gas prices could have an effect on the Fund's financial
condition and therefore on the distributions to holders of Advantage Trust
Units. As current and future practice, Advantage has established a financial
hedging strategy and may manage the risk associated with changes in commodity
prices by entering into derivatives. Although these commodity price risk
management activities could expose Advantage to losses or gains, entering
derivative contracts helps us to stabilize cash flows and ensure that our
capital expenditure program is substantially funded by such cash flows. To the
extent that Advantage engages in risk management activities related to
commodity prices, it will be subject to credit risk associated with
counterparties with which it contracts. Credit risk is mitigated by entering
into contracts with only stable, creditworthy parties and through frequent
reviews of exposures to individual entities. Currently, the Fund has fixed the
commodity price on anticipated production as follows:Approximate Production Average
Commodity Hedged, Net of Royalties Price
-------------------------------------------------------------------------
Natural gas - AECO
July to September 2008 70% Cdn$7.22/mcf
October to December 2008 65% Cdn$7.64/mcf
-----------------------------------------------------------------------
Total 2008 56% Cdn$7.52/mcf
-----------------------------------------------------------------------
January to March 2009 64% Cdn$7.87/mcf
April to June 2009(1) 29% Cdn$8.76/mcf
July to September 2009(1) 29% Cdn$8.76/mcf
October to December 2009(1) 29% Cdn$8.76/mcf
-----------------------------------------------------------------------
Total 2009 38% Cdn$8.38/mcf
-----------------------------------------------------------------------
Crude Oil - WTI
July to September 2008 49% Cdn$94.39/bbl
October to December 2008 47% Cdn$94.39/bbl
-----------------------------------------------------------------------
Total 2008 40% Cdn$94.07/bbl
-----------------------------------------------------------------------
January to March 2009 33% Cdn$95.84/bbl
(1) Derivative contracts entered into after June 30, 2008.For the six month period ended June 30, 2008, we recognized in income a
realized derivative loss of $19.7 million (June 30, 2007 - $6.2 million
realized derivative gain). As at June 30, 2008, the fair value of the
derivatives outstanding and to be settled from July 2008 to March 2009 was a
net liability of approximately $121.7 million (December 31, 2007 -
$2.2 million net asset). For the six months ended June 30, 2008, $123.9
million was recognized in income as an unrealized derivative loss due to
changes in the fair values of these contracts since December 31, 2007. The
valuation of the derivatives is the estimated fair value to settle the
contracts as at June 30, 2008 and is based on pricing models, estimates,
assumptions and market data available at that time. As such, the unrealized
amounts are not cash and the actual gains or losses realized on eventual cash
settlement can vary materially due to subsequent fluctuations in commodity
prices as compared to the valuation assumptions. These fair values are
extremely sensitive to assumptions regarding forward commodity prices and such
prices have declined significantly since June 30, 2008. As a result, at August
14, 2008, it is estimated that the net liability of our derivatives at June
30, 2008, have reduced by approximately $70 million. The Fund does not apply
hedge accounting and current accounting standards require changes in the fair
value to be included in the consolidated statement of income and comprehensive
income as an unrealized derivative gain or loss with a corresponding
derivative asset and liability recorded on the balance sheet. These derivative
contracts will settle from July 2008 to March 2009 corresponding to when
Advantage will receive revenues from production.Royalties
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Royalties
($000) $ 46,173 $ 22,749 103% $ 80,054 $ 48,914 64%
per boe $ 15.85 $ 9.22 72% $ 13.50 $ 9.63 40%
As a percentage
of revenue,
excluding
hedging 20.0% 18.2% 1.8% 19.2% 19.2% -Advantage pays royalties to the owners of mineral rights from which we
have leases. The Fund currently has mineral leases with provincial
governments, individuals and other companies. Royalties have increased in
total due to the increase in revenue from higher production and commodity
prices. Royalties as a percentage of revenue, excluding hedging, have
increased as higher prices generally attract a higher royalty rate. Royalty
rates are dependent on prices and individual well production levels such that
average royalty rates will vary as the nature of our properties change through
ongoing development activities and acquisitions. We expect the royalty rate to
be in the range of 18% to 20% for the remainder of 2008 given the current
environment.Operating Costs
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
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Operating costs
($000) $ 39,917 $ 26,919 48% $ 80,189 $ 57,189 40%
per boe $ 13.70 $ 10.91 26% $ 13.53 $ 11.26 20%Total operating costs increased 48% for the three months and 40% for the
six months ended June 30, 2008 as compared to 2007, mainly due to increased
production from the Sound acquisition, which closed September 5, 2007. Total
operating costs for the three months ended June 30, 2008 was slightly down
from $40.3 million incurred in the three months ended March 31, 2008.
Operating costs per boe increased 26% for the three months and 20% for the six
months ended June 30, 2008, due to severe cold weather experienced in the
first quarter of 2008, lower production volumes resulting from several third
party facility turnaround maintenance outages in the second quarter of 2008, a
higher percentage of oil properties which incur higher operating costs than
gas properties, and escalating costs including electricity, chemicals, gas
processing fees, and transportation. We will continue to be opportunistic and
proactive in pursuing optimization initiatives that will improve our operating
cost structure. We expect that operating costs per boe will be in the range of
$13.40 to $13.90 for the remainder of the 2008 year.General and Administrative
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
General and
administrative
expense ($000) $ 5,763 $ 4,861 19% $ 12,995 $ 9,577 36%
per boe $ 1.98 $ 1.97 - $ 2.19 $ 1.89 16%
Employees at
June 30 174 135 29%Total general and administrative ("G&A") expense has increased 19% and
36% for the three and six months ended June 30, 2008. The higher total G&A
expense has been primarily due to an increase in staff levels that have
resulted from the Sound acquisition, general growth of the Fund, and a
one-time payment to terminate an office lease that occurred in the first
quarter of 2008. Total G&A expense has decreased 20% as compared to the first
quarter of 2008.Management Internalization
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Management
internalization
($000) $ 2,439 $ 5,350 (54)% $ 4,930 $ 10,719 (54)%
per boe $ 0.84 $ 2.17 (61)% $ 0.83 $ 2.11 (61)%In 2006, the Fund and the Manager reached an agreement to internalize the
pre-existing management contract arrangement. As part of the agreement,
Advantage agreed to purchase all of the outstanding shares of the Manager
pursuant to the terms of the Arrangement, thereby eliminating the management
fee and performance incentive effective April 1, 2006. The Trust Unit
consideration issued in exchange for the outstanding shares of the Manager was
placed in escrow for a 3-year period and is being deferred and amortized into
income as management internalization expense over the specific vesting periods
during which employee services are provided. The management internalization is
lower for the three and six months as one third vested and was paid in June
2007 with an additional one third vested and paid in June 2008.Interest
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Interest expense
($000) $ 7,118 $ 5,005 42% $ 14,884 $ 10,192 46%
per boe $ 2.44 $ 2.03 20% $ 2.51 $ 2.01 25%
Average effective
interest rate 5.1% 5.4% (0.3)% 5.4% 5.4% -
Bank indebtedness
at June 30 ($000) $547,946 $377,812 45%Total interest expense and interest expense per boe increased as compared
to 2007 primarily due to the additional debt assumed by the Fund from the
Sound acquisition on September 5, 2007. Interest expense versus the first
quarter of 2008 was 8% less as our debt level decreased during the second
quarter of 2008. We monitor the debt level to ensure an optimal mix of
financing and cost of capital that will provide a maximum return to our
Unitholders. Our current credit facilities have been a favorable financing
alternative with an effective interest rate of only 5.4% for the six months
ended June 30, 2008. The Fund's interest rates are primarily based on short
term Bankers Acceptance rates plus a stamping fee.Interest and Accretion on Convertible Debentures
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Interest on
convertible
debentures
($000) $ 4,204 $ 3,293 28% $ 8,391 $ 6,531 28%
per boe $ 1.44 $ 1.33 8% $ 1.42 $ 1.29 10%
Accretion on
convertible
debentures
($000) $ 720 $ 605 19% $ 1,440 $ 1,204 20%
per boe $ 0.25 $ 0.25 - $ 0.24 $ 0.24 -
Convertible
debentures
maturity value
at June 30 ($000) $224,587 $180,725 24%Interest and accretion on convertible debentures has increased compared
to 2007 due to Advantage assuming Sound's 8.75% and 8.00% convertible
debentures on the acquisition. The increased interest and accretion from the
additional debentures has been slightly offset by the maturation of the 10%
convertible debentures with a face value of $1.4 million on November 1, 2007.
The interest per boe for 2008 is slightly higher as our convertible debentures
outstanding have somewhat increased relative to our level of production.Depletion, Depreciation and Accretion
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Depletion,
depreciation
and accretion
($000) $ 74,704 $ 61,365 22% $151,584 $125,283 21%
per boe $ 25.64 $ 24.87 3% $ 25.57 $ 24.67 4%Depletion and depreciation of property and equipment is provided on the
"unit-of-production" method based on total proved reserves. The depletion,
depreciation and accretion ("DD&A") provision has increased in total due to
the increase in production and fixed assets in comparison to the three and six
months ended June 30, 2007, mainly attributed to the Sound acquisition. The
slight increase in the DD&A rate per boe compared to the prior year is due to
high capital expenditures in the first half of 2008 and the higher value
assigned to the Sound acquisition than accumulated from prior development
activities.
Taxes
Current taxes paid or payable for the quarter ended June 30, 2008
amounted to $0.9 million, as compared to the $0.2 million expensed for the
same period of 2007. Current taxes primarily represent Saskatchewan resource
surcharge, which is based on the petroleum and natural gas revenues within the
province of Saskatchewan.
Future income taxes arise from differences between the accounting and tax
bases of the assets and liabilities. For the six months ended June 30, 2008,
the Fund recognized an income tax reduction of $44.0 million compared to a
reduction of $16.3 million for 2007. As at June 30, 2008, the Fund had a
future income tax liability of $22.7 million compared to $66.7 million at
December 31, 2007.
Under the Fund's current structure, payments are made between the
operating company and the Fund transferring income tax obligations to
Unitholders and as a result no cash income taxes would be paid by the
operating company or the Fund prior to 2011. However, the Specified Investment
Flow-Through Entity ("SIFT") tax legislation was enacted on June 22, 2007
altering the tax treatment by subjecting income trusts to a two-tier tax
structure, similar to that of corporations, whereby the taxable portion of
distributions paid by trusts will be subject to tax at the trust level and at
the Unitholder level. The rules are effective for tax years beginning in 2011
for existing publicly-traded trusts. The effect of the new tax law was
recognized in the future income tax expense and liability for the year ended
December 31, 2007. Canadian generally accepted accounting principles require
that a future income tax liability be recorded when the book value of assets
exceeds the balance of tax pools.
On July 14, 2008, the Department of Finance released draft legislative
proposals to facilitate the conversion of SIFT trusts into corporations. In
general, the rules are meant to ensure that existing SIFT's can choose to
reorganize as corporations on a tax efficient basis without undue tax effects
for unitholders and the SIFT trust. It is expected that the draft legislative
proposals will form part of a bill to be introduced into Parliament later in
2008. Management continues to review the impact of the SIFT tax on its
business strategy and the Fund's organizational structure.Net Income (Loss)
Three months ended Six months ended
June 30 June 30
2008 2007 % change 2008 2007 % change
-------------------------------------------------------------------------
Net income
(loss)
($000) $(14,369) $ 4,531 (417)% $(38,491) $ 4,872 (890)%
per Trust
Unit -
Basic and
diluted $ (0.10) $ 0.04 (350)% $ (0.28) $ 0.04 (800)%Advantage has experienced net losses for 2008 as compared to the similar
periods of 2007. Although higher production and commodity prices in the three
and six months ended June 30, 2008 resulted in considerable increased revenue,
this was more than offset by unrealized losses on derivatives of $62.7 million
and $123.9 million for the three and six months ended June 30, 2008,
respectively. The unrealized losses on derivatives are due to improved forward
commodity prices as compared to the prices per the open derivative positions.
The unrealized amounts are not cash and the actual gains or losses realized on
eventual cash settlement can vary materially due to subsequent fluctuations in
commodity prices. The Fund does not apply hedge accounting and current
accounting standards require changes in the fair value to be included in the
consolidated statement of income and comprehensive income as an unrealized
derivative gain or loss with a corresponding derivative asset and liability
recorded on the balance sheet. These derivative contracts will settle from
July 2008 to March 2009 corresponding to when Advantage will receive revenues
from production.Cash Netbacks
Three months ended
June 30
2008 2007
$000 per boe $000 per boe
-------------------------------------------------------------------------
Revenue $230,953 $ 79.27 $125,131 $ 50.71
Realized gain (loss) on
derivatives (22,085) (7.58) (56) (0.02)
Royalties (46,173) (15.85) (22,749) (9.22)
Operating costs (39,917) (13.70) (26,919) (10.91)
-------------------------------------------------------------------------
Operating $122,778 $ 42.14 $ 75,407 $ 30.56
General and administrative(1) (6,831) (2.34) (4,232) (1.72)
Interest (7,118) (2.44) (5,005) (2.03)
Interest on convertible
debentures(1) (4,204) (1.44) (3,293) (1.33)
Income and capital taxes (871) (0.30) (243) (0.10)
-------------------------------------------------------------------------
Funds from operations $103,754 $ 35.62 $ 62,634 $ 25.38
-------------------------------------------------------------------------
Six months ended
June 30
2008 2007
$000 per boe $000 per boe
-------------------------------------------------------------------------
Revenue $417,051 $ 70.35 $254,403 $ 50.09
Realized gain (loss) on
derivatives (19,678) (3.32) 6,174 1.22
Royalties (80,054) (13.50) (48,914) (9.63)
Operating costs (80,189) (13.53) (57,189) (11.26)
-------------------------------------------------------------------------
Operating $237,130 $ 40.00 $154,474 $ 30.42
General and administrative(1) (13,924) (2.35) (8,948) (1.76)
Interest (14,884) (2.51) (10,192) (2.01)
Interest on convertible
debentures(1) (8,391) (1.42) (6,531) (1.29)
Income and capital taxes (1,559) (0.26) (524) (0.10)
-------------------------------------------------------------------------
Funds from operations $198,372 $ 33.46 $128,279 $ 25.26
-------------------------------------------------------------------------
(1) General and administrative expense excludes non-cash unit-based
compensation expense. Interest on convertible debentures excludes
non-cash accretion expense.Funds from operations of Advantage increased for both the three and six
months ended June 30, 2008, compared to corresponding periods in 2007, due
primarily to additional production from the Sound acquisition and greatly
improved commodity prices. Cash netbacks per boe are also higher due to
stronger realized commodity prices. Increased cash netbacks were partially
offset by realized losses on derivatives, and increased operating expenses and
royalties. Realized hedging losses resulted from the higher commodity price
environment as the Fund entered derivative contracts to lessen commodity price
fluctuations, which can positively or negatively impact cash flows and
resulting distributions. Operating costs have steadily increased over the past
year due to significantly higher field costs associated with supplies and
services, an overall industry labour cost increase, and higher relative
operating costs from the Sound acquisition. Specific to the Fund, we have
experienced production outages caused by weather and turnaround shut-downs in
2008. Royalties have increased as would be expected since they are generally
based on current commodity prices.
Contractual Obligations and Commitments
The Fund has contractual obligations in the normal course of operations
including purchases of assets and services, operating agreements,
transportation commitments, sales contracts and convertible debentures. These
obligations are of a recurring and consistent nature and impact cash flow in
an ongoing manner. The following table is a summary of the Fund's remaining
contractual obligations and commitments. Advantage has no guarantees or
off-balance sheet arrangements other than as disclosed.Payments due by period
($ millions) Total 2008 2009 2010 2011 2012
-------------------------------------------------------------------------
Building
leases $ 13.4 $ 2.1 $ 4.1 $ 4.1 $ 1.8 $ 1.3
Capital leases 7.0 0.8 2.1 2.2 1.9 -
Pipeline/
transportation 5.7 2.0 2.4 1.0 0.3 -
Convertible
debentures(1) 224.6 5.4 87.0 69.9 62.3 -
-------------------------------------------------------------------------
Total
contractual
obligations $ 250.7 $ 10.3 $ 95.6 $ 77.2 $ 66.3 $ 1.3
-------------------------------------------------------------------------
(1) As at June 30, 2008, Advantage had $224.6 million convertible
debentures outstanding (excluding interest payable during the various
debenture terms). Each series of convertible debentures are
convertible to Trust Units based on an established conversion price.
The Fund settled the principal amount of 9.00% convertible debenture
by payment of $5.4 million in cash on August 1, 2008. All remaining
obligations related to convertible debentures have the option to be
settled through the issuance of Trust Units.
(2) Bank indebtedness of $547.9 million has been excluded from the
contractual obligations table as the credit facilities constitute a
revolving facility for a 364 day term which is extendible annually
for a further 364 day revolving period at the option of the
syndicate. If not extended, the revolving credit facility is
converted to a two year term facility with the first payment due one
year and one day after commencement of the term.
Liquidity and Capital Resources
The following table is a summary of the Fund's capitalization structure.
($000, except as otherwise indicated) June 30, 2008
-------------------------------------------------------------------------
Bank indebtedness (long-term) $ 547,946
Working capital deficit(1) 42,201
-------------------------------------------------------------------------
Net debt $ 590,147
-------------------------------------------------------------------------
Trust Units outstanding (000) 140,271
Trust Unit closing market price ($/Trust Unit) $ 13.15
-------------------------------------------------------------------------
Market value $ 1,844,563
-------------------------------------------------------------------------
Convertible debentures maturity value (long-term) $ 184,489
Capital lease obligation (long-term) 5,008
-------------------------------------------------------------------------
Total capitalization $ 2,624,207
-------------------------------------------------------------------------
(1) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,
distributions payable, and the current portion of capital lease
obligations and convertible debentures.Unitholders' Equity and Convertible Debentures
Advantage has utilized a combination of Trust Units, convertible
debentures and bank debt to finance acquisitions and development activities.
As at June 30, 2008, the Fund had 140.3 million Trust Units outstanding.
During the six months ended June 30, 2008, 1,854,776 Trust Units were issued
as a result of the Premium Distribution™, Distribution Reinvestment and
Optional Trust Unit Purchase Plan (the "Plan"), generating $19.5 million
reinvested in the Fund and representing an approximate 20% participation rate
(for six months ended June 30, 2007, 2,076,686 Trust Units were issued under
the Plan, generating $24.6 million reinvested in the Fund). As at August 14,
2008, Advantage had 140.6 million Trust Units issued and outstanding.
At both June 30, 2008 and December 31, 2007, the Fund had $224.6 million
convertible debentures outstanding that were immediately convertible to
9.8 million Trust Units based on the applicable conversion prices. During the
period ended June 30, 2008, $25,000 debentures were converted resulting in the
issuance of 1,001 Trust Units. As at August 14, 2008, the convertible
debentures outstanding have decreased to $219.2 million given that the 9.00%
debentures matured on August 1, 2008, resulting in a cash payment of
$5,392,000 to the debenture holders.
Advantage has a Trust Units Rights Incentive Plan for external directors
as approved by the Unitholders of the Fund. A total of 500,000 Trust Units
have been reserved for issuance under the plan with an aggregate of
400,000 rights granted since inception. The initial exercise price of rights
granted under the plan may not be less than the current market price of the
Trust Units as of the date of the grant and the maximum term of each right is
not to exceed ten years with all rights vesting immediately upon grant. At the
option of the rights holder, the exercise price of the rights can be adjusted
downwards over time based upon distributions paid by the Fund to Unitholders.
In June 2008, all remaining 150,000 outstanding rights were exercised at
$8.60 per right for total cash proceeds of $1,290,000, of which $322,500 was
received after June 30, 2008.
Bank Indebtedness, Credit Facility and Other Obligations
At June 30, 2008, Advantage had bank indebtedness outstanding of
$547.9 million. The Fund has a $710 million credit facility agreement
consisting of a $690 million extendible revolving loan facility and a
$20 million operating loan facility. The current credit facilities are
collateralized by a $1 billion floating charge demand debenture, a general
security agreement and a subordination agreement from the Fund covering all
assets and cash flows. During the second quarter, the Fund repaid
$15.6 million of bank indebtedness due to the strength of our operating
results. Bank indebtedness is relatively unchanged from December 31, 2007. In
June 2008, the Fund renewed its credit facilities for a further year with the
next annual review scheduled to occur in June 2009.
Advantage had a working capital deficiency of $42.2 million as at
June 30, 2008. Our working capital includes items expected for normal
operations such as trade receivables, prepaids, deposits, trade payables and
accruals as well as the current portion of capital lease obligations and
convertible debentures. Working capital varies primarily due to the timing of
such items, the current level of business activity including our capital
program, commodity price volatility, and seasonal fluctuations. Advantage has
no unusual working capital requirements. We do not anticipate any problems in
meeting future obligations as they become due given the strength of our funds
from operations. It is also important to note that working capital is
effectively integrated with Advantage's operating credit facility, which
assists with the timing of cash flows as required.
Advantage has capital lease obligations on various pieces of equipment
used in its operations. The total amount of principal obligation outstanding
at June 30, 2008 is $6.3 million, bearing interest at effective rates ranging
from 5.5% to 6.7%, and is collateralized by the related equipment. The leases
expire at dates ranging from December 2009 to August 2010.Capital Expenditures
Three months ended Six months ended
June 30 June 30
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
Land and seismic $ 11 $ 1,581 $ 4,181 $ 3,921
Drilling, completions
and workovers 9,425 15,475 46,169 42,610
Well equipping and facilities 11,978 8,464 37,576 28,574
Other 218 158 609 269
-------------------------------------------------------------------------
$ 21,632 $ 25,678 $ 88,535 $ 75,374
Property acquisitions - - - 12,851
Property dispositions - - (91) (427)
-------------------------------------------------------------------------
Total capital expenditures $ 21,632 $ 25,678 $ 88,444 $ 87,798
-------------------------------------------------------------------------Advantage's growth strategy has been to acquire properties in or near
areas where we have large land positions, shallow to medium depth drilling
opportunities, and a balance of year round access. We focus on areas where
past activity has yielded long-life reserves with high cash netbacks.
Advantage is very well positioned to selectively exploit the highest
value-generating drilling opportunities given the size, strength and diversity
of our asset base. As a result, the Fund has a high level of flexibility to
distribute its capital program and ensure a risk-balanced platform of
projects. Our preference is to operate a high percentage of our properties
such that we can maintain control of capital expenditures, operations and cash
flows.
For the three month period ended June 30, 2008, the Fund spent a net
$21.6 million. The majority of the capital expenditures for this quarter
related to completions, tie-ins and the addition of new facilities related to
bringing production on-stream from wells drilled during the very active first
quarter winter drilling program. As operations wound down with the onset of
seasonal spring breakup, only 3 net (4 gross) wells were drilled in the second
quarter. Total capital spending in the quarter included $8.5 million at Nevis,
$2.4 million at Sousa, $1.3 million at Glacier, $1.2 million at Willesden
Green, and $1.2 million at Martin Creek.
On June 27, 2008, the Board of Directors approved an increase of
$55.0 million to the 2008 capital expenditures budget, bringing the 2008 total
capital expenditure budget to $200.0 million. It is anticipated that these
additional expenditures can be fully funded with funds from operations, and
therefore no incremental debt or other financing will be required. The
increased capital spending will be primarily directed towards further drilling
in our Montney natural gas resource play at Glacier in Northwest Alberta with
the balance directed towards additional opportunities that have resulted from
increased commodity prices.
Sources and Uses of Funds
The following table summarizes the various funding requirements during
the six months ended June 30, 2008 and 2007 and the sources of funding to meet
those requirements:Six months ended
June 30
($000) 2008 2007
-------------------------------------------------------------------------
Sources of funds
Funds from operations $198,372 $128,279
Units issued, net of costs 925 104,486
Increase in bank indebtedness 520 -
Property dispositions 91 427
-------------------------------------------------------------------------
$199,908 $233,192
-------------------------------------------------------------------------
Uses of funds
Expenditures on property and equipment $ 88,535 $ 75,374
Distributions to Unitholders 80,632 79,305
Increase in working capital 23,882 27,123
Expenditures on asset retirement 5,947 3,707
Reduction of capital lease obligations 912 2,070
Decrease in bank indebtedness - 32,762
Property acquisitions - 12,851
-------------------------------------------------------------------------
$199,908 $233,192
-------------------------------------------------------------------------The Fund has enjoyed a substantial increase in funds from operations
during 2008 from the higher production levels and stronger commodity price
environment. As a result, the Fund has been able to adequately finance its
capital expenditures and distributions to Unitholders without additional debt.
We believe that our current strategy, including our capital program and
distribution level, are balanced and will continue to ensure that Advantage is
well positioned for future growth.Quarterly Performance
2008 2007
($000, except as
otherwise indicated) Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Daily production
Natural gas (mcf/d) 123,104 125,113 128,556 115,991
Crude oil and NGLs
(bbls/d) 11,498 12,281 12,895 10,014
Total (boe/d) 32,015 33,133 34,321 29,346
Average prices
Natural gas ($/mcf)
Excluding hedging $ 10.33 $ 7.90 $ 6.23 $ 5.62
Including hedging $ 9.18 $ 8.23 $ 6.97 $ 6.35
AECO monthly index $ 9.35 $ 7.13 $ 6.00 $ 5.62
Crude oil and NGLs
($/bbl)
Excluding hedging $ 110.15 $ 85.99 $ 73.40 $ 69.03
Including hedging $ 101.34 $ 84.83 $ 70.40 $ 68.51
WTI ($US/bbl) $ 124.00 $ 97.96 $ 90.63 $ 75.33
Total revenues (before
royalties) $ 208,868 $ 188,505 $ 165,951 $ 130,830
Net income (loss) $ (14,369) $ (24,122) $ 13,795 $ (26,202)
per Trust Unit -
basic and diluted $ (0.10) $ (0.18) $ 0.10 $ (0.22)
Funds from operations $ 103,754 $ 94,618 $ 80,519 $ 62,345
Distributions declared $ 50,364 $ 50,021 $ 57,875 $ 55,017
2007 2006
($000, except as
otherwise indicated) Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Daily production
Natural gas (mcf/d) 108,978 114,324 117,134 122,227
Crude oil and NGLs
(bbls/d) 8,952 9,958 9,570 9,330
Total (boe/d) 27,115 29,012 29,092 29,701
Average prices
Natural gas ($/mcf)
Excluding hedging $ 7.54 $ 7.61 $ 6.90 $ 5.89
Including hedging $ 7.52 $ 8.06 $ 7.27 $ 5.90
AECO monthly index $ 7.37 $ 7.46 $ 6.36 $ 6.03
Crude oil and NGLs
($/bbl)
Excluding hedging $ 61.84 $ 56.84 $ 54.58 $ 67.77
Including hedging $ 61.93 $ 58.64 $ 55.86 $ 67.77
WTI ($US/bbl) $ 65.02 $ 58.12 $ 60.21 $ 70.55
Total revenues (before
royalties) $ 125,075 $ 135,502 $ 127,539 $ 124,521
Net income (loss) $ 4,531 $ 341 $ 8,736 $ 1,209
per Trust Unit -
basic and diluted $ 0.04 $ 0.00 $ 0.08 $ 0.01
Funds from operations $ 62,634 $ 65,645 $ 62,737 $ 63,110
Distributions declared $ 52,096 $ 50,206 $ 58,791 $ 60,498The table above highlights the Fund's performance for the second quarter
of 2008 and also for the preceding seven quarters. A combination of natural
reserve declines and spring breakup resulted in production decreases from the
third quarter of 2006 through the second quarter of 2007. The second quarter
of 2007 was further disrupted by several facility turnarounds in that period.
The Sound acquisition closed on September 5, 2007, and significantly increased
production for the third and fourth quarters of 2007. Production has gradually
decreased since the acquisition of Sound once again due to natural declines
combined with spring breakup and facility turnarounds that occurred in the
second quarter of 2008. Financial results have also steadily improved during
these periods, particularly revenues and funds from operations, as both
commodity prices and production have generally increased. We experienced a net
loss in the third quarter of 2007 due to a significant drop in natural gas
prices realized at that time, amortization of the management internalization
consideration and increased depletion and depreciation expense. Net income
increased in the fourth quarter of 2007 due to the full integration of the
Sound acquisition and moderately improved commodity prices. Net losses were
realized in the first and second quarters of 2008, primarily as a result of
significant unrealized losses on hedging positions for future periods. These
losses are not cash and have no impact on our cash position, funds from
operations, or our distributions.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires
Management to make certain judgments and estimates. Changes in these judgments
and estimates could have a material impact on the Fund's financial results and
financial condition.
Management relies on the estimate of reserves as prepared by the Fund's
independent qualified reserves evaluator. The process of estimating reserves
is critical to several accounting estimates. The process of estimating
reserves is complex and requires significant judgments and decisions based on
available geological, geophysical, engineering and economic data. These
estimates may change substantially as additional data from ongoing development
and production activities becomes available and as economic conditions impact
crude oil and natural gas prices, operating costs, royalty burden changes, and
future development costs. Reserve estimates impact net income through
depletion and depreciation of fixed assets, the provision for asset retirement
costs and related accretion expense, and impairment calculations for fixed
assets and goodwill. The reserve estimates are also used to assess the
borrowing base for the Fund's credit facilities. Revision or changes in the
reserve estimates can have either a positive or a negative impact on net
income and the borrowing base of the Fund.
Management's process of determining the provision for future income
taxes, the provision for asset retirement obligation costs and related
accretion expense, and the fair values assigned to any acquired company's
assets and liabilities in a business combination is based on estimates. These
estimates are significant and can include reserves, future production rates,
future crude oil and natural gas prices, future costs, future interest rates,
future tax rates and other relevant assumptions. Revisions or changes in any
of these estimates can have either a positive or a negative impact on asset
and liability values and net income.
In accordance with GAAP, derivative assets and liabilities are recorded
at their fair values at the reporting date, with unrealized gains and losses
recognized directly into net income and comprehensive income in the same
period. The fair value of derivatives outstanding is an estimate based on
pricing models, estimates, assumptions and market data available at that time.
As such, the unrealized amounts are not cash and the actual gains or losses
realized on eventual cash settlement can vary materially due to subsequent
fluctuations in commodity prices as compared to the valuation assumptions.
International Financial Reporting Standards ("IFRS")
In February 2008, the Accounting Standards Board of the Canadian
Institute of Chartered Accountants confirmed that publicly accountable
entities will be required to adopt IFRS effective January 1, 2011, including
preparation of comparative financial information. Management is currently
evaluating the effects of adopting IFRS on its financial statements and is in
the planning stage, including assessment and evaluation of key differences
between Canadian GAAP and IFRS. Upon completion of this initial diagnosis
stage, we will be organizing a detailed project plan to ensure all accounting
differences are dealt with and implemented in a timely manner such that
Advantage's financial statements are prepared in accordance with IFRS by the
required deadline.
Controls and Procedures
The Fund has established procedures and internal control systems to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with GAAP. Management of the Fund is committed to providing timely,
accurate and balanced disclosure of all material information about the Fund.
Disclosure controls and procedures are in place to ensure all ongoing
reporting requirements are met and material information is disclosed on a
timely basis. The Chief Executive Officer and Vice-President, Finance and
Chief Financial Officer, individually, sign certifications that the financial
statements, together with the other financial information included in the
regular filings, fairly present in all material respects the financial
condition, results of operations, and cash flows as of the dates and for the
periods presented in the filings. The certifications further acknowledge that
the filings do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated or that is necessary to make a
statement not misleading in light of the circumstances under which it was
made, with respect to the period covered by the filings. During the six months
ended June 30, 2008, there were no significant changes that would materially
affect, or are reasonably likely to materially affect, the internal controls
over financial reporting.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements and even those systems
determined to be effective can provide only reasonable assurance with respect
to the financial statement preparation and presentation. Further, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Outlook
The Fund's 2008 Budget, as approved by the Board of Directors, retains a
high degree of activity and focus on drilling in many of our key properties
where a high level of success was realized through 2007. Capital has also been
directed to delineate the Montney natural gas resource play at Glacier in
Northwest Alberta and to accommodate facility expansions and enhanced recovery
schemes as necessary.
For 2008, we are forecasting production to be in the range of 32,000 to
34,000 boe/d. Advantage's 2008 capital expenditures budget was originally
estimated to be approximately $145 million to drill approximately 143 gross
(88 net) wells. On June 27, 2008, the Board approved an increase of
$55 million to the capital budget, bringing the 2008 total capital budget to
$200 million. The additional capital spending will be directed primarily
towards the Montney natural gas resource play at Glacier in Northwest Alberta,
and any remainder towards additional opportunities. During the first quarter
of 2008, the Fund drilled five vertical delineation wells in the Glacier
property which helped confirm geological formations, reservoir productivity
and pool continuity. Additional activity will be pursued during the balance of
2008 to further define longer term development plans. The Glacier property is
accessible through most of the year and rigs have been secured to drill the
additional wells. Approximately $39 million will be spent on the next phase of
development at Glacier where the Fund plans to drill five gross horizontal
wells, five gross vertical delineation wells and initiate infrastructure
expansion.
Operating costs on an annual basis are expected to now range between
$13.40 and $13.90 per boe. Industry supply, servicing and maintenance costs
have increased during the first six months of 2008 driven primarily from
higher crude oil and natural gas prices. In particular, we have seen
significant increases from electrical power costs, processing fees, steel and
chemicals.
On October 25, 2007, the Alberta Provincial Government announced changes
to royalties for conventional oil, natural gas and oil sands that will become
effective January 1, 2009. Royalty rates will be commodity price sensitive and
dependent on individual well productivity. Advantage has a significant number
of lower rate wells producing within our long life Alberta properties. We also
have a significant Horseshoe Canyon coal bed methane drilling inventory that
can be pursued which will also have a favorable royalty treatment due to lower
rate per well characteristics. Our exposure in Northeast British Columbia and
Saskatchewan also affords us further flexibility with mitigating the royalty
impact in our capital program. If the current higher price commodity
environment were to continue, we would expect our future royalty rates to be
higher than what we have historically experienced under the current royalty
regime. We anticipate our royalty rates will range from 18% to 20% for the
2008 year.
Advantage's funds from operations in 2008 will continue to be impacted by
the volatility of crude oil and natural gas prices and the $US/$Canadian
exchange rate. Hedging has been completed for 2008 and a portion of 2009 to
(i) stabilize cash flows and (ii) ensure that the Fund's capital program is
substantially funded out of cash flow. Approximately 56% of our natural gas
production, net of royalties, is hedged for the 2008 calendar year at an
average price of $7.52 Canadian per mcf. Advantage has also hedged 40% of its
2008 crude oil production, net of royalties, at an average price of
$94.07 Canadian per bbl.
Advantage will continue to follow its strategy of acquiring properties
that provide highly economic development opportunities to enhance long-term
cash flow. Advantage will also continue to focus on efficient production and
reserve additions through low to medium risk development drilling
opportunities that have arisen as a result of the acquisitions completed in
prior years and from the significant inventory of drilling opportunities that
has resulted from the Ketch and Sound acquisitions.
Looking forward, Advantage's high quality assets combined with a greater
than five year conventional drilling inventory, exposure to the Montney
natural gas resource play and excellent tax pools provides many options for
the Fund and we are committed to maximizing value generation for our
Unitholders.
Additional Information
Additional information relating to Advantage can be found on SEDAR at
www.sedar.com and the Fund's website at www.advantageincome.com. Such other
information includes the annual information form, the annual information
circular - proxy statement, press releases, material contracts and agreements,
and other financial reports. The annual information form will be of particular
interest for current and potential Unitholders as it discusses a variety of
subject matter including the nature of the business, structure of the Fund,
description of our operations, general and recent business developments, risk
factors, reserves data and other oil and gas information.
August 14, 2008CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
June 30, December 31,
(thousands of dollars) 2008 2007
-------------------------------------------------------------------------
(unaudited)
Assets
Current assets
Accounts receivable $ 117,925 $ 95,474
Prepaid expenses and deposits 14,939 21,988
Derivative asset (note 10) 545 7,027
-------------------------------------------------------------------------
133,409 124,489
Derivative asset (note 10) - 174
Fixed assets (note 3) 2,125,736 2,177,346
Goodwill 120,271 120,271
-------------------------------------------------------------------------
$2,379,416 $2,422,280
-------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 117,232 $ 122,087
Distributions payable to Unitholders 16,833 16,592
Current portion of capital lease
obligations (note 4) 1,270 1,537
Current portion of convertible
debentures (note 5) 39,730 5,333
Derivative liability (note 10) 122,246 2,242
-------------------------------------------------------------------------
297,311 147,791
Derivative liability (note 10) - 2,778
Capital lease obligations (note 4) 5,008 5,653
Bank indebtedness (note 6) 547,946 547,426
Convertible debentures (note 5) 179,221 212,203
Asset retirement obligations (note 7) 62,797 60,835
Future income taxes 22,683 66,727
-------------------------------------------------------------------------
1,114,966 1,043,413
-------------------------------------------------------------------------
Unitholders' Equity
Unitholders' capital (note 8) 2,053,471 2,027,065
Convertible debentures equity component (note 5) 9,632 9,632
Contributed surplus (note 8) 58 2,005
Accumulated deficit (note 9) (798,711) (659,835)
-------------------------------------------------------------------------
1,264,450 1,378,867
-------------------------------------------------------------------------
$2,379,416 $2,422,280
-------------------------------------------------------------------------
Commitments (note 12)
see accompanying Notes to Consolidated Financial Statements
Consolidated Statements of Income (Loss),
Comprehensive Income (Loss) and Accumulated Deficit
(thousands of dollars, Three months ended Six months ended
except for per Trust June 30, June 30, June 30, June 30,
Unit amounts) (unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue
Petroleum and natural
gas $ 230,953 $ 125,131 $ 417,051 $ 254,403
Realized gain (loss) on
derivatives (note 10) (22,085) (56) (19,678) 6,174
Unrealized gain (loss)
on derivatives (note 10) (62,696) 10,126 (123,882) (1,903)
Royalties (46,173) (22,749) (80,054) (48,914)
-------------------------------------------------------------------------
99,999 112,452 193,437 209,760
-------------------------------------------------------------------------
Expenses
Operating 39,917 26,919 80,189 57,189
General and administrative 5,763 4,861 12,995 9,577
Management internalization
(note 8) 2,439 5,350 4,930 10,719
Interest 7,118 5,005 14,884 10,192
Interest and accretion on
convertible debentures 4,924 3,898 9,831 7,735
Depletion, depreciation
and accretion 74,704 61,365 151,584 125,283
-------------------------------------------------------------------------
134,865 107,398 274,413 220,695
-------------------------------------------------------------------------
Income (loss) before taxes (34,866) 5,054 (80,976) (10,935)
Future income tax expense
(reduction) (21,368) 280 (44,044) (16,331)
Income and capital taxes 871 243 1,559 524
-------------------------------------------------------------------------
(20,497) 523 (42,485) (15,807)
-------------------------------------------------------------------------
Net income (loss) and
comprehensive income (loss) (14,369) 4,531 (38,491) 4,872
Accumulated deficit,
beginning of period (733,978) (486,971) (659,835) (437,106)
Distributions declared (50,364) (52,096) (100,385) (102,302)
-------------------------------------------------------------------------
Accumulated deficit, end
of period $ (798,711) $ (534,536) $ (798,711) $(534,536)
-------------------------------------------------------------------------
Net income (loss) per
Trust Unit (note 8)
Basic and diluted $ (0.10) $ 0.04 $ (0.28) $ 0.04
-------------------------------------------------------------------------
see accompanying Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Three months ended Six months ended
(thousands of dollars) June 30, June 30, June 30, June 30,
(unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (14,369) $ 4,531 $ (38,491) $ 4,872
Add (deduct) items not
requiring cash:
Unrealized loss (gain)
on derivatives 62,696 (10,126) 123,882 1,903
Unit-based compensation (1,068) 629 (929) 629
Management internalization 2,439 5,350 4,930 10,719
Accretion on convertible
debentures 720 605 1,440 1,204
Depletion, depreciation
and accretion 74,704 61,365 151,584 125,283
Future income taxes (21,368) 280 (44,044) (16,331)
Expenditures on asset
retirement (982) 302 (5,947) (3,707)
Changes in non-cash
working capital (8,890) (13,004) (16,950) (24,120)
-------------------------------------------------------------------------
Cash provided by
operating activities 93,882 49,932 175,475 100,452
-------------------------------------------------------------------------
Financing Activities
Units issued, net of
costs (note 8) 967 386 925 104,486
Increase (decrease) in
bank indebtedness (15,554) 23,369 520 (32,762)
Reduction of capital
lease obligations (306) (1,719) (912) (2,070)
Distributions to Unitholders (40,330) (39,767) (80,632) (79,305)
-------------------------------------------------------------------------
Cash used in financing
activities (55,223) (17,731) (80,099) (9,651)
-------------------------------------------------------------------------
Investing Activities
Expenditures on property
and equipment (21,632) (25,678) (88,535) (75,374)
Property acquisitions - - - (12,851)
Property dispositions - - 91 427
Changes in non-cash
working capital (17,027) (6,523) (6,932) (3,003)
-------------------------------------------------------------------------
Cash used in investing
activities (38,659) (32,201) (95,376) (90,801)
-------------------------------------------------------------------------
Net change in cash - - - -
Cash, beginning of period - - - -
-------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
-------------------------------------------------------------------------
Supplementary Cash Flow
Information
Interest paid $ 10,013 $ 10,171 $ 18,579 $ 17,176
Taxes paid $ 638 $ 469 $ 792 $ 830
see accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008 (unaudited)
All tabular amounts in thousands except as otherwise indicated.
The interim consolidated financial statements of Advantage Energy Income
Fund ("Advantage" or the "Fund") have been prepared by management in
accordance with Canadian generally accepted accounting principles using
the same accounting policies as those set out in note 2 to the
consolidated financial statements for the year ended December 31, 2007,
except as described below. The interim consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements of Advantage for the year ended December 31, 2007 as set out
in Advantage's Annual Report.
1. Changes in Accounting Policies
(a) Capital disclosures
Effective January 1, 2008, the Fund adopted CICA Handbook Section
1535, Capital Disclosures. This Section establishes standards for
disclosing information about an entity's capital and how it is
managed to enable users of financial statements to evaluate the
entity's objectives, policies and procedures for managing capital.
The adoption of this Section requires that information on capital
management be included in the notes to the consolidated financial
statements (note 11). This new standard does not have any effect on
our financial position or results of operations.
(b) Comparative figures
Certain comparative figures have been reclassified to conform to the
current year's presentation.
(c) Recent accounting changes not implemented
(i) Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and
Intangible Assets, replacing Section 3062, Goodwill and Other
Intangible Assets and Section 3450, Research and Development
Costs. The new Section will become effective January 1, 2009.
Management has evaluated the new Section and there will be no
impact for the financial statements of the Fund. The only
applicable item for the Fund is goodwill, and the standards
concerning goodwill are unchanged from the prior standard.
(ii) International Financial Reporting Standards ("IFRS")
In February 2008, the CICA Accounting Standards Board confirmed
that IFRS will replace Canadian GAAP effective January 1, 2011
for publicly accountable enterprises. Management is currently
evaluating the effects of all current and pending pronouncements
of the International Accounting Standards Board on the financial
statements of the Fund, and is developing a plan for
implementation.
2. Sound Energy Trust Acquisition
On September 5, 2007, Advantage acquired all of the issued and
outstanding Trust Units and Exchangeable Shares of Sound Energy Trust
("Sound") for $21.4 million cash consideration, 16,977,184 Advantage
Trust Units and $0.9 million of acquisition costs. Sound Unitholders
and Exchangeable Shareholders could elect to receive 0.30 Advantage
Trust Units for each Sound Trust Unit or receive $0.66 in cash and
0.2557 Advantage Trust Units for each Sound Trust Unit. All of the
Sound Exchangeable Shares were exchanged for Advantage Trust Units on
the same ratio as the Sound Trust Units based on the conversion ratio
in effect at the effective date of the acquisition. Sound was an
energy trust engaged in the development, acquisition and production
of natural gas and crude oil in western Canada. The acquisition is
being accounted for using the "purchase method" with the results of
operations included in the consolidated financial statements as of
the closing date of the acquisition.
The purchase price has been allocated as follows:
Net assets acquired and Consideration:
liabilities assumed:
Fixed assets $ 513,604 16,977,184 Trust
Accounts receivable 27,654 Units issued $ 228,852
Prepaid expenses Cash 21,403
and deposits 3,873 Acquisition costs
Derivative asset, net 2,797 incurred 904
Bank indebtedness (107,959) -----------
Convertible debentures (101,553) $ 251,159
Accounts payable and -----------
accrued liabilities (39,565)
Future income taxes (29,430)
Asset retirement
obligations (16,695)
Capital lease
obligations (1,567)
-----------
$ 251,159
-----------
The value of the Trust Units issued as consideration was determined
based on the weighted average trading value of Advantage Trust Units
during the two-day period before and after the terms of the
acquisition were agreed to and announced. The allocation of the
purchase price has been revised in 2008 due to the realization of
estimates and is subject to further refinement as additional cost
estimates and tax balances are finalized. As a result, fixed assets
increased $4.0 million, accounts receivable increased $0.2 million,
and accounts payable and accrued liabilities increased $4.2 million.
3. Fixed Assets
Accumulated
Depletion and Net Book
June 30, 2008 Cost Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas
properties $ 3,113,515 $ 993,153 $ 2,120,362
Furniture and equipment 11,157 5,783 5,374
---------------------------------------------------------------------
$ 3,124,672 $ 998,936 $ 2,125,736
---------------------------------------------------------------------
Accumulated
Depletion and Net Book
December 31, 2007 Cost Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas
properties $ 3,016,243 $ 844,671 $ 2,171,572
Furniture and equipment 10,548 4,774 5,774
---------------------------------------------------------------------
$ 3,026,791 $ 849,445 $ 2,177,346
---------------------------------------------------------------------
During the six months ended June 30, 2008, Advantage capitalized
general and administrative expenditures directly related to
exploration and development activities of $6,349,000 (June 30, 2007 -
$3,943,000).
4. Capital Lease Obligations
The Fund has capital leases on a variety of fixed assets. Future
minimum lease payments at June 30, 2008 consist of the following:
2008 $ 799
2009 2,040
2010 2,200
2011 1,925
---------------------------------------------
6,964
Less amounts representing interest (686)
---------------------------------------------
6,278
Current portion (1,270)
---------------------------------------------
$ 5,008
---------------------------------------------
5. Convertible Debentures
The balance of debentures outstanding at June 30, 2008 and changes in
the liability and equity components during the six months ended June
30, 2008 are as follows:
9.00% 8.25% 8.75% 7.50%
---------------------------------------------------------------------
Debentures
outstanding $ 5,392 $ 4,867 $ 29,839 $ 52,268
---------------------------------------------------------------------
Liability
component:
Balance at
Dec. 31,
2007 $ 5,333 $ 4,767 $ 29,382 $ 50,671
Accretion
of
discount 50 46 152 451
Converted to
Trust Units - - - -
---------------------------------------------------------------------
Balance at
June 30,
2008 $ 5,383 $ 4,813 $ 29,534 $ 51,122
---------------------------------------------------------------------
Equity
component:
Balance at
Dec. 31,
2007 $ 229 $ 248 $ 852 $ 2,248
Converted to
Trust Units - - - -
---------------------------------------------------------------------
Balance at
June 30,
2008 $ 229 $ 248 $ 852 $ 2,248
---------------------------------------------------------------------
6.50% 7.75% 8.00% Total
---------------------------------------------------------------------
Debentures
outstanding $ 69,927 $ 46,766 $ 15,528 $ 224,587
---------------------------------------------------------------------
Liability
component:
Balance at
Dec. 31,
2007 $ 68,092 $ 44,360 $ 14,931 $ 217,536
Accretion
of
discount 368 300 73 1,440
Converted to
Trust Units (25) - - (25)
---------------------------------------------------------------------
Balance at
June 30,
2008 $ 68,435 $ 44,660 $ 15,004 $ 218,951
---------------------------------------------------------------------
Equity
component:
Balance at
Dec. 31,
2007 $ 2,971 $ 2,286 $ 798 $ 9,632
Converted to
Trust Units - - - -
---------------------------------------------------------------------
Balance at
June 30,
2008 $ 2,971 $ 2,286 $ 798 $ 9,632
---------------------------------------------------------------------
During the six months ended June 30, 2008, $25,000 debentures (June
30, 2007 - $5,000 debentures) were converted resulting in the
issuance of 1,001 Trust Units (June 30, 2007 - 375 Trust Units). The
principal amount of 9.00% convertible debentures matured on August 1,
2008 and the Fund settled the obligation by payment of $5.4 million
in cash.
6. Bank Indebtedness
Advantage has a credit facility agreement with a syndicate of
financial institutions which provides for a $690 million extendible
revolving loan facility and a $20 million operating loan facility.
The loan's interest rate is based on either prime, US base rate,
LIBOR or bankers' acceptance rates, at the Fund's option, subject to
certain basis point or stamping fee adjustments ranging from 0.00% to
1.50% depending on the Fund's debt to cash flow ratio. The credit
facilities are collateralized by a $1 billion floating charge demand
debenture, a general security agreement and a subordination agreement
from the Fund covering all assets and cash flows. The credit
facilities are subject to review on an annual basis with the next
review due in June 2009. Various borrowing options are available
under the credit facilities, including prime rate-based advances, US
base rate advances, US dollar LIBOR advances and bankers' acceptances
loans. The credit facilities constitute a revolving facility for a
364 day term which is extendible annually for a further 364 day
revolving period at the option of the syndicate. If not extended, the
revolving credit facility is converted to a two year term facility
with the first payment due one year and one day after commencement of
the term. The credit facilities contain standard commercial covenants
for facilities of this nature. The only financial covenant is a
requirement for Advantage Oil & Gas Ltd. ("AOG") to maintain a
minimum cash flow to interest expense ratio of 3.5:1, determined on a
rolling four quarter basis. The credit facilities also prohibit the
Fund from entering into any derivative contract where the term of
such contract exceeds two years or the aggregate of such contracts
hedge greater than 60% of the Fund's estimated oil and gas
production. Breach of any covenant will result in an event of default
in which case AOG has 20 days to remedy such default. If the default
is not remedied or waived, and if required by the majority of
lenders, the administrative agent of the lenders has the option to
declare all obligations of AOG under the credit facilities to be
immediately due and payable without further demand, presentation,
protest, or notice of any kind. Distributions by AOG to the Fund (and
effectively by the Fund to Unitholders) are subordinated to the
repayment of any amounts owing under the credit facilities.
Distributions to Unitholders are not permitted if the Fund is in
default of such credit facilities or if the amount of the Fund's
outstanding indebtedness under such facilities exceeds the then
existing current borrowing base. Interest payments under the
debentures are also subordinated to indebtedness under the credit
facilities and payments under the debentures are similarly
restricted. For the six months ended June 30, 2008, the effective
interest rate on the outstanding amounts under the facility was
approximately 5.4% (June 30, 2007 - 5.4%).
7. Asset Retirement Obligations
A reconciliation of the asset retirement obligations is provided
below:
Six months
ended Year ended
June 30, December 31,
2008 2007
---------------------------------------------------------------------
Balance, beginning of period $ 60,835 $ 34,324
Accretion expense 2,093 2,795
Assumed in Sound acquisition - 16,695
Liabilities incurred and
change in estimates 5,816 13,972
Liabilities settled (5,947) (6,951)
---------------------------------------------------------------------
Balance, end of period $ 62,797 $ 60,835
---------------------------------------------------------------------
8. Unitholders' Equity
(a) Unitholders' capital
(i) Authorized
Unlimited number of voting Trust Units
(ii) Issued
Number of Units Amount
---------------------------------------------------------------------
Balance at December 31, 2007 138,269,374 $ 2,036,121
Distribution reinvestment plan 1,854,776 19,512
Issued for cash, net of costs - (42)
Issued on conversion of debentures 1,001 25
Issued on exercise of Trust Unit rights 150,000 1,981
Management internalization forfeitures (4,193) (84)
---------------------------------------------------------------------
140,270,958 $ 2,057,513
---------------------------------------------------------------------
Management internalization
escrowed Trust Units (4,042)
---------------------------------------------------------------------
Balance at June 30, 2008 $ 2,053,471
---------------------------------------------------------------------
On June 23, 2006, Advantage internalized the external management
contract structure and eliminated all related fees for total original
consideration of 1,933,208 Advantage Trust Units initially valued at
$39.1 million and subject to escrow provisions over a 3-year period,
vesting one-third each year beginning June 23, 2007. For the six
months ended June 30, 2008, a total of 4,193 Trust Units issued for
the management internalization were forfeited (June 30, 2007 -
14,139 Trust Units) and $4.9 million has been recognized as
management internalization expense (June 30, 2007 - $10.7 million).
As at June 30, 2008, 594,725 Trust Units remain held in escrow
(December 31, 2007 - 1,193,622 Trust Units).
During the six months ended June 30, 2008, 1,854,776 Trust Units
(June 30, 2007 - 2,076,686 Trust Units) were issued under the Premium
Distribution™, Distribution Reinvestment and Optional Trust Unit
Purchase Plan, generating $19.5 million (June 30, 2007 -
$24.6 million) reinvested in the Fund.
Effective June 25, 2002, a Trust Units Rights Incentive Plan for
external directors was established and approved with a total of
500,000 Trust Units reserved for issuance and an aggregate of
400,000 rights granted since inception. At December 31, 2007,
150,000 rights remained outstanding under the plan, all of which were
exercised at $8.60 per right in June 2008 for total cash proceeds of
$1,290,000, of which $322,500 was received after June 30, 2008.
Contributed surplus of $691,000 in respect of these rights has been
transferred to Unitholders' capital. No rights are outstanding as of
June 30, 2008.
(b) Contributed surplus
Six months
ended Year ended
June 30, December 31,
2008 2007
---------------------------------------------------------------------
Balance, beginning of period $ 2,005 $ 863
Unit-based compensation (1,256) 1,256
Expiration of convertible debentures
equity component - 58
Exercise of Trust Unit Rights (691) (172)
---------------------------------------------------------------------
Balance, end of period $ 58 $ 2,005
---------------------------------------------------------------------
(c) Net income (loss) per Trust Unit
The calculations of basic and diluted net income (loss) per Trust
Unit are derived from both income (loss) available to Unitholders and
weighted average Trust Units outstanding, calculated as follows:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
---------------------------------------------------------------------
Income (loss)
available to
Unitholders
Basic and
diluted $ (14,369) $ 4,531 $ (38,491) $ 4,872
---------------------------------------------------------------------
Weighted average
Trust Units
outstanding
Basic 138,611,924 113,854,335 138,105,497 111,108,403
Trust Units
Rights
Incentive
Plan - 43,259 - 39,487
Management
Internali-
zation - 223,495 - 152,844
---------------------------------------------------------------------
Diluted 138,611,924 114,121,089 138,105,497 111,300,734
---------------------------------------------------------------------
The calculation of diluted net income per Trust Unit excludes all
series of convertible debentures for the three and six months ended
June 30, 2008 and 2007 as the impact would be anti-dilutive. Total
weighted average Trust Units issuable in exchange for the convertible
debentures and excluded from the diluted net income per Trust Unit
calculation for the three and six months ended June 30, 2008 were
9,846,252 and 9,846,610, respectively (June 30, 2007 - 8,334,353 and
8,334,403 Trust Units, respectively). As at June 30, 2008, the total
convertible debentures outstanding were immediately convertible to
9,846,252 Trust Units (June 30, 2007 - 8,334,077 Trust Units).
All of the Trust Unit Rights and Management Internalization escrowed
Trust Units have been excluded from the calculation of diluted net
income per Trust Unit for the three and six months ended June 30,
2008, as the impact would be anti-dilutive. Total weighted average
Trust Units issuable in exchange for the Trust Unit Rights and
excluded from the diluted net income per Trust Unit calculation for
the three and six months ended June 30, 2008 were 42,145 and 37,634.
Total weighted average Trust Units issuable in exchange for the
Management Internalization escrowed Trust Units and excluded from the
diluted net income per Trust Unit calculation for the three and six
months ended June 30, 2008 were 528,068 and 484,869, respectively.
9. Accumulated Deficit
Accumulated deficit consists of accumulated income and accumulated
distributions for the Fund since inception as follows:
June 30, December 31,
2008 2007
---------------------------------------------------------------------
Accumulated Income $ 181,497 $ 219,988
Accumulated Distributions (980,208) (879,823)
---------------------------------------------------------------------
Accumulated Deficit $ (798,711) $ (659,835)
---------------------------------------------------------------------
For the six months ended June 30, 2008, the Fund declared
$100.4 million in distributions, representing $0.72 per distributable
Trust Unit (six months ended June 30, 2007 - $102.3 million
representing $0.90 per distributable Trust Unit).
10. Financial Instruments
Financial instruments of the Fund include accounts receivable,
deposits, accounts payable and accrued liabilities, distributions
payable to Unitholders, bank indebtedness, convertible debentures and
derivative assets and liabilities.
Accounts receivable and deposits are classified as loans and
receivables and measured at amortized cost. Accounts payable and
accrued liabilities, distributions payable to Unitholders and bank
indebtedness are all classified as other liabilities and similarly
measured at amortized cost. As at June 30, 2008, there were no
significant differences between the carrying amounts reported on the
balance sheet and the estimated fair values of these financial
instruments due to the short terms to maturity and the floating
interest rate on the bank indebtedness.
The Fund has convertible debenture obligations outstanding, of which
the liability component has been classified as other liabilities and
measured at amortized cost. The convertible debentures have different
fixed terms and interest rates (note 5) resulting in fair values that
will vary over time as market conditions change. As at June 30, 2008,
the estimated fair value of the total outstanding convertible
debenture obligation was $227.7 million (December 31, 2007 -
$215.4 million). The fair value of the liability component of
convertible debentures was determined primarily based on a discounted
cash flow model assuming no future conversions and continuation of
current interest and principal payments as well as taking into
consideration the current public trading activity of such debentures.
The Fund applied discount rates of between 5 and 6% considering
current available market information, assumed credit adjustments, and
various terms to maturity.
Advantage has an established strategy to manage the risk associated
with changes in commodity prices by entering into derivatives, which
are recorded at fair value as derivative assets and liabilities with
gains and losses recognized through earnings. As the fair value of
the contracts varies with commodity prices, they give rise to
financial assets and liabilities. The fair values of the derivatives
are determined through valuation models completed by third parties.
Various assumptions based on current market information were used in
these valuations, including settled forward commodity prices,
interest rates, foreign exchange rates, volatility and other relevant
factors. The actual gains and losses realized on eventual cash
settlement can vary materially due to subsequent fluctuations in
commodity prices as compared to the valuation assumptions.
Credit Risk
Accounts receivable, deposits, and derivative assets are subject to
credit risk exposure and the carrying values reflect Management's
assessment of the associated maximum exposure to such credit risk.
Substantially all of the Fund's accounts receivable are due from
customers and joint operation partners concentrated in the Canadian
oil and gas industry. As such, accounts receivable are subject to
normal industry credit risks. Advantage mitigates such credit risk by
closely monitoring significant counterparties and dealing with a
broad selection of partners that diversify risk within the sector.
The Fund's deposits are primarily due from the Alberta Provincial
government and are viewed by Management as having minimal associated
credit risk. To the extent that Advantage enters derivatives to
manage commodity price risk, it may be subject to credit risk
associated with counterparties with which it contracts. Credit risk
is mitigated by entering into contracts with only stable,
creditworthy parties and through frequent reviews of exposures to
individual entities. In addition, the Fund generally enters into
derivative contracts with investment grade institutions that are
members of Advantage's credit facility syndicate to further mitigate
associated credit risk.
Liquidity Risk
The Fund is subject to liquidity risk attributed from accounts
payable and accrued liabilities, distributions payable to
Unitholders, bank indebtedness, convertible debentures, and
derivative liabilities. Accounts payable and accrued liabilities,
distributions payable to Unitholders and derivative liabilities are
primarily due within one year of the balance sheet date and Advantage
does not anticipate any problems in satisfying the obligations due to
the strength of cash provided by operating activities and the
existing credit facility. The Fund's bank indebtedness is subject to
a $710 million credit facility agreement which mitigates liquidity
risk by enabling Advantage to manage interim cash flow fluctuations.
The credit facility constitutes a revolving facility for a 364 day
term which is extendible annually for a further 364 day revolving
period at the option of the syndicate. If not extended, the revolving
credit facility is converted to a two year term facility with the
first payment due one year and one day after commencement of the
term. The terms of the credit facility are such that it provides
Advantage adequate flexibility to evaluate and assess liquidity
issues if and when they arise. Additionally, the Fund regularly
monitors liquidity related to obligations by evaluating forecasted
cash flows, optimal debt levels, capital spending activity, working
capital requirements, and other potential cash expenditures. This
continual financial assessment process further enables the Fund to
mitigate liquidity risk.
Advantage has several series of convertible debentures outstanding
that mature from 2008 to 2011 (note 5). Interest payments are made
semi-annually with excess cash provided by operating activities. As
the debentures become due, the Fund can satisfy the obligations in
cash or issue Trust Units at a price determined in the applicable
debenture agreements. This settlement alternative allows the Fund to
adequately manage liquidity, plan available cash resources and
implement an optimal capital structure.
To the extent that Advantage enters derivatives to manage commodity
price risk, it may be subject to liquidity risk as derivative
liabilities become due. While the Fund has elected not to follow
hedge accounting, derivative instruments are not entered for
speculative purposes and Management closely monitors existing
commodity risk exposures. As such, liquidity risk is mitigated since
any losses actually realized are subsidized by increased cash flows
realized from the higher commodity price environment.
Interest Rate Risk
The Fund is exposed to interest rate risk to the extent that bank
indebtedness is at a floating rate of interest and the Fund's maximum
exposure to interest rate risk is based on the effective interest
rate and the current carrying value of the bank indebtedness. The
Fund monitors the interest rate markets to ensure that appropriate
steps can be taken if interest rate volatility compromises the Fund's
cash flows. A 1% interest rate fluctuation for the six months ended
June 30, 2008 could potentially have impacted net income by
approximately $1.9 million for that period.
Price and Currency Risk
Advantage's derivative assets and liabilities are subject to both
price and currency risks as their fair values are based on
assumptions including forward commodity prices and foreign exchange
rates. The Fund enters derivative financial instruments to manage
commodity price risk exposure relative to actual commodity production
and does not utilize derivative instruments for speculative purposes.
Changes in the price assumptions can have a significant effect on the
fair value of the derivative assets and liabilities and thereby
impact net income. It is estimated that a 10% change in the forward
natural gas prices used to calculate the fair value of the natural
gas derivatives at June 30, 2008 could impact net income by
approximately $15.1 million for the six months ended June 30, 2008.
As well, a change of 10% in the forward crude oil prices used to
calculate the fair value of the crude oil derivatives at June 30,
2008 could impact net income by $6.9 million for the six months ended
June 30, 2008. A change of 10% in the forward power prices used to
calculate the fair value of the power derivatives at June 30, 2008
could impact net income by $0.1 million for the six months ended
June 30, 2008. A similar change in the currency rate assumption
underlying the derivatives fair value does not have a material impact
on net income. As at June 30, 2008 the Fund had the following
derivatives in place:
Description of
Derivative Term Volume Average Price
-------------------------------------------------------------------------
Natural gas - AECO
Fixed April 2008 to 14,217 mcf/d Cdn$6.85/mcf
price October 2008
Fixed April 2008 to 9,478 mcf/d Cdn$7.25/mcf
price October 2008
Fixed April 2008 to 14,217 mcf/d Cdn$7.83/mcf
price October 2008
Fixed April 2008 to 14,217 mcf/d Cdn$7.10/mcf
price March 2009
Fixed April 2008 to 14,217 mcf/d Cdn$7.06/mcf
price March 2009
Fixed November 2008 to 14,217 mcf/d Cdn$7.77/mcf
price March 2009
Fixed November 2008 to 4,739 mcf/d Cdn$8.10/mcf
price March 2009
Fixed November 2008 to 14,217 mcf/d Cdn$9.45/mcf
price March 2009
Crude oil - WTI
Fixed February 2008 to 2,000 bbls/d Cdn$90.93/bbl
price January 2009
Collar February 2008 to 2,000 bbls/d Sold put Cdn$70.00/bbl
January 2009 Purchase call Cdn$105.00/bbl
Cost Cdn$1.52/bbl
Fixed April 2008 to 2,500 bbls/d Cdn$97.15/bbl
price March 2009
Electricity - Alberta Pool Price
Fixed January 2008 to 3.0 MW Cdn$54.00/MWh
price December 2008
As at June 30, 2008, the fair value of the derivatives outstanding
resulted in an asset of approximately $545,000 (December 31, 2007 -
$7,201,000) and a liability of approximately $122,246,000
(December 31, 2007 - $5,020,000). For the six months ended June 30,
2008, $123,882,000 was recognized in income as an unrealized
derivative loss (June 30, 2007 - $1,903,000 unrealized derivative
loss) and $19,678,000 was recognized in income as a realized
derivative loss (June 30, 2007 - $6,174,000 realized derivative
gain).
11. Capital Management
The Fund manages its capital with the following objectives:
- To ensure sufficient financial flexibility to achieve the ongoing
business objectives including replacement of production, funding
of future growth opportunities, and pursuit of accretive
acquisitions; and
- To maximize Unitholder return and provide stable distributions
that will enhance the Trust Unit value.
Advantage monitors its capital structure and makes adjustments
according to market conditions in an effort to meet its objectives
given the current outlook of the business and industry in general.
The capital structure of the Fund is composed of working capital
(excluding derivative assets and liabilities), bank indebtedness,
convertible debentures, capital lease obligations and Unitholders'
equity. The Fund internally views convertible debentures as another
form of equity as the obligations can be settled through the issuance
of Trust Units. Advantage may manage its capital structure by issuing
new Trust Units, obtaining additional financing either through bank
indebtedness or convertible debenture issuances, refinancing current
debt, issuing other financial or equity-based instruments, adjusting
the amount of monthly distributions, suspending or renewing its
distribution reinvestment plan, adjusting capital spending, or
disposing of non-core assets. The capital structure is reviewed by
Management and the Board of Directors on an ongoing basis.
Advantage's capital structure as at June 30, 2008 is as follows:
June 30, 2008
---------------------------------------------------------------------
Bank indebtedness (long-term) $ 547,946
Working capital deficit(1) 42,201
---------------------------------------------------------------------
Net debt 590,147
Trust Units outstanding market value 1,844,563
Convertible debentures maturity value (long-term) 184,489
Capital lease obligations (long-term) 5,008
---------------------------------------------------------------------
Total $ 2,624,207
---------------------------------------------------------------------
(2) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,
distributions payable, and the current portion of capital lease
obligations and convertible debentures.
The Fund's bank indebtedness is governed by a $710 million credit
facility agreement (note 6) that contains standard commercial
covenants for facilities of this nature. The only financial covenant
is a requirement for AOG to maintain a minimum cash flow to interest
expense ratio of 3.5:1, determined on a rolling four quarter basis.
The Fund is in compliance with all credit facility covenants. As
well, the borrowing base for the Fund's credit facilities is
determined through utilizing the regular reserve estimates. Revision
or changes in the reserve estimates can have either a positive or a
negative impact on the borrowing base of the Fund. Advantage's
issuance of convertible debentures is limited by its Trust Indenture
which currently restricts the issuance of additional convertible
debentures to 25% of market capitalization subsequent to issuance.
Advantage's Trust Indenture also provides for the issuance of an
unlimited number of Trust Units. However, through new tax
legislation, an income trust is restricted to doubling its market
capitalization as it stands on October 31, 2006 by growing a maximum
of 40% in 2007 and 20% for the years 2008 to 2010. In addition, an
income trust may replace debt that was outstanding as of October 31,
2006 with new equity or issue new, non-convertible debt without
affecting the normal growth percentage. As a result of the "normal
growth" guidelines, the Fund is permitted to issue approximately
$2.0 billion of new equity from October 31, 2006 to January 1, 2011,
which we believe is adequate for any growth we expect to incur. If an
income trust exceeds the established limits on the issuance of new
trust units and convertible debt that constitute normal growth, the
income trust will be immediately subject to the Specified Investment
Flow-Through Entity tax legislation whereby the taxable portion of
distributions paid will be subject to tax at the trust level.
Management of the Fund's capital structure is facilitated through its
financial and operational forecasting processes. The forecast of the
Fund's future cash flows is based on estimates of production,
commodity prices, forecast capital and operating expenditures, and
other investing and financing activities. The forecast is regularly
updated based on new commodity prices and other changes, which the
Fund views as critical in the current environment. Selected forecast
information is frequently provided to the Board of Directors.
The Fund's capital management objectives, policies and processes have
remained unchanged during the six month period ended June 30, 2008.
12. Commitments
Advantage has several lease commitments relating to office buildings.
The estimated remaining annual minimum operating lease rental
payments for the buildings are as follows:
2008 $ 2,055
2009 4,126
2010 4,141
2011 1,735
2012 1,314
----------------------------------------
$ 13,371
----------------------------------------Advisory
The information in this release contains certain forward-looking
statements. These statements relate to future events or our future
performance. All statements other than statements of historical fact may be
forward-looking statements. Forward-looking statements are often, but not
always, identified by the use of words such as "seek", "anticipate", "plan",
"continue", "estimate", "expect", "may", "will", "project", "predict",
"potential", "targeting", "intend", "could", "might", "should", "believe",
"would" and similar expressions. These statements involve substantial known
and unknown risks and uncertainties, certain of which are beyond Advantage's
control, including: the impact of general economic conditions; 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; fluctuations in commodity prices and foreign exchange and interest
rates; stock market volatility and market valuations; volatility in market
prices for oil and natural gas; liabilities inherent in oil and natural gas
operations; uncertainties associated with estimating oil and natural gas
reserves; competition for, among other things, capital, acquisitions, of
reserves, undeveloped lands and skilled personnel; incorrect assessments of
the value of acquisitions; changes in income tax laws or changes in tax laws
and incentive programs relating to the oil and gas industry and income trusts;
geological, technical, drilling and processing problems and other difficulties
in producing petroleum reserves; and obtaining required approvals of
regulatory authorities. Advantage's actual results, performance or achievement
could differ materially from those expressed in, or implied by, such
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, what benefits that Advantage will derive from
them. Except as required by law, Advantage undertakes no obligation to
publicly update or revise any forward-looking statements.
%SEDAR: 00016522E %CIK: 0001259995
For further information:
For further information: Investor Relations, Toll free: 1-866-393-0393; ADVANTAGE ENERGY INCOME FUND, 700, 400 - 3rd Avenue SW, Calgary, Alberta, T2P 4H2, Phone: (403) 718-8000, Fax: (403) 718-8300, Web Site: www.advantageincome.com, E-mail: advantage@advantageincome.com