NuVista Energy Ltd. (TSX:NVA) is pleased to announce its financial and operating
results for the three and six months ended June 30, 2008 as follows:
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Corporate Highlights
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Three months Six months
ended June 30, % ended June 30, %
2008 2007 Change 2008 2007 Change
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Financial
($ thousands, except
per share)
Production revenue 161,794 56,832 185 258,858 110,457 134
Funds from operations (1) 89,582 30,416 194 143,016 58,227 146
Per share - basic 1.14 0.59 93 2.05 1.16 77
Per share - diluted 1.11 0.58 91 2.02 1.14 77
Net earnings 2,905 9,678 (70) 10,054 14,510 (31)
Per share - basic 0.04 0.19 (79) 0.14 0.29 (52)
Per share - diluted 0.04 0.18 (78) 0.14 0.28 (50)
Total assets 1,356,172 642,400 111
Long-term debt, net of
working capital 365,282 158,154 131
Long-term debt, net of
adjusted working
capital (1) 338,900 158,154 115
Shareholders' equity 728,591 354,143 106
Net capital
expenditures 16,213 57,624 (72) 67,114 93,572 (28)
Corporate acquisition
(non-cash) - - - 594,944 - -
Weighted average common shares
outstanding (thousands):
Basic 78,830 51,405 53 69,754 50,230 39
Diluted 80,368 52,335 54 70,753 51,085 39
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Operating
(boe conversion - 6:1
basis)
Production:
Natural gas (mmcf/d) 113.0 69.9 62 99.2 68.1 46
Natural gas liquids
(bbls/d) 2,609 417 526 1,857 313 493
Oil (bbls/d) 4,714 2,080 127 4,349 2,121 105
Total oil equivalent
(boe/d) 26,153 14,147 85 22,746 13,780 65
Product prices: (2)
Natural gas ($/mcf) 9.44 7.28 30 8.74 7.38 18
Natural gas liquids
($/bbl) 81.88 60.00 36 80.65 58.43 38
Oil ($/bbl) 91.82 48.36 90 84.95 49.36 72
Operating expenses:
Natural gas and
natural gas liquids
($/mcfe) 1.16 1.07 8 1.15 1.04 10
Oil ($/bbl) 13.76 10.83 27 12.34 13.37 (7)
Total oil equivalent
($/boe) 8.19 7.05 16 7.95 7.34 8
General and
administrative
expenses ($/boe) 1.52 0.98 55 1.40 0.93 51
Funds from operations
netback ($/boe) (1) 37.63 23.63 59 34.55 23.35 47
NOTES:
(1) Funds from operations, funds from operations per share, funds from
operations netback, and adjusted working capital are not defined by GAAP
in Canada and are referred to as non-GAAP measures. Funds from
operations are based on cash flow from operating activities before
changes in non-cash working capital and abandonment expenditures. Funds
from operations per share is calculated based on the weighted average
number of common shares outstanding consistent with the calculation of
net income per share. Funds from operations netback equals the total of
revenues including realized commodity derivative gains/losses, less
royalties, transportation, general and administrative, restricted share
units, interest and cash taxes calculated on a boe basis. Adjusted
working capital excludes the current portion of future income tax and
commodity derivative liabilities. Total boe is calculated by multiplying
the daily production by the number of days in the period.
(2) Product prices include realized gains/losses on commodity derivatives.
MESSAGE TO SHAREHOLDERS
NuVista Energy Ltd. ("NuVista") is pleased to report to shareholders the
financial and operating results for the three and six months ended June 30,
2008. On March 4, 2008 NuVista completed the most significant transaction in its
history, the business combination with Rider Resources Ltd. ("Rider") and the
associated financing with the Ontario Teachers' Pension Plan. The business
combination solidifies NuVista's position as a premium intermediate oil and gas
company with a five year track record of adding shareholder value, while adding
a high impact deep gas exploration component to our existing shallow gas and
heavy oil opportunity inventory. NuVista's Board of Directors and management are
pleased with how NuVista has integrated the Rider operations, reduced debt
levels and the steps taken to continue our growth as an intermediate oil and gas
company.
The second quarter results include a full three months of combined operations
and are therefore more representative of NuVista today than results presented in
the first quarter of 2008. The accretion resulting from this business
combination, coupled with increasing commodity prices, has resulted in record
production levels of 26,153 boe/d for the second quarter and the highest
reported funds from operations per share of $1.14 per share. Over the past six
months, the outlook for commodity prices has increased dramatically with our
average funds from operations netbacks increasing from the range of $20 to
$25/boe to the current levels of $35 to $40/boe. The increased netbacks beyond
levels originally budgeted, has resulted in NuVista achieving its debt reduction
targets well ahead of schedule. With a net debt to funds from operations ratio
of less than 1.0:1 at the end of the second quarter, NuVista now has significant
financial flexibility to increase its capital budget to take advantage of
strategic acquisition opportunities.
NUVISTA-RIDER BUSINESS COMBINATION
The business combination with Rider has resulted in NuVista becoming an
intermediate natural gas focused company with both an asset base and technical
teams to continue creating shareholder value through production per share and
reserves per share growth. The Rider asset base is well suited to NuVista's
existing business strategy which emphasizes long-term sustainability and growth
based upon an acquire and develop business model in multi-zone areas with a
focus on low operating costs and high working interests. The business
combination added three new core areas in liquid rich, natural gas prone regions
of Alberta that are characterized by high netbacks and longer reserve life
production.
NuVista's production is now balanced between the west of the third and fourth
meridian ("W3M/W4M"), and the west of the fifth and sixth meridian ("W5M/W6M")
producing regions. Nuvista is now poised for growth in these regions, both
organically and through acquisitions. With the business combination, NuVista
increased its undeveloped land inventory to over 730,000 acres while maintaining
a high working interest of 77% in the undeveloped lands and top quartile
operating costs targeting $7.75/boe. The asset base remains highly concentrated
with only 300 boe/d of production outside existing core areas. The combination
was completed at attractive acquisition metrics, at a time when natural gas was
out of favour, and is accretive to NuVista on net asset value, reserves,
production, and funds from operations on a per share basis.
Significant highlights for NuVista in the second quarter of 2008 include:
- Increased year over year production by 85% to 26,153 boe/d, with a
corresponding production per share increase of 21%;
- Record funds from operations per share of $1.14 compared to $0.59 during the
same period in 2007 and compared to $0.88 per share in the first quarter of
2008;
- Increased our crude oil and liquids exposure to 28% of boe production;
- Invested $16.2 million in exploration and development activities which
resulted in 17 (12.9 net) wells and an overall success rate of 88%;
- Strong funds from operations allowed us to achieve our year end target of net
debt to funds from operations of 1:1 by June 30, 2008.
SECOND QUARTER CAPITAL PROGRAM
NuVista completed a capital expenditure program of $16.2 million during the
second quarter of 2008. NuVista's capital program was lower in the second
quarter due to spring break-up and scheduled turnaround activities.
Approximately one third of the capital expenditures were directed towards land
and seismic activities to set up our active exploration and development program
for the second half of 2008. All of our capital expenditures were related to
exploration and development activities including participation in 17 wells
resulting in 12 gas wells, 3 oil wells, and 2 dry holes.
SECOND HALF 2008 CAPITAL PROGRAM
For the second half of 2008, NuVista has currently budgeted capital expenditures
of approximately $105 million, with all of the expenditures focused on
exploration and development activities. Approximately 50% of the budget will be
spent in the W5M/W6M region where NuVista and Rider achieved considerable
success in last winter's drilling programs. NuVista anticipates participating in
approximately 25 wells in this region. The remaining 50% of capital expenditures
will be focused in the W3M/W4M region which is expected to result in
participation in about 80 wells. NuVista has completed over 22 wells to date in
the third quarter and currently has five drilling rigs operating in Oyen,
Provost, Saskatchewan, Wapiti and Pembina. NuVista will continue to monitor
commodity prices and will evaluate opportunities to increase its exploration and
development program and make acquisitions.
COMMODITY PRICE RISK MANAGEMENT ACTIVITIES
When NuVista announced the acquisition of Rider, NuVista took advantage of the
rising natural gas price environment in February and March to hedge a
significant portion of its natural gas production from April to October 2008, at
a level which would allow NuVista to return financial flexibility to the balance
sheet by the fourth quarter of 2008. In addition, NuVista entered into natural
gas price management contracts for the period November 2008 to March 2009 as
part of its on going price risk management program. NuVista has also hedged
crude oil prices as part of its ongoing crude oil price risk management program.
Subsequent to entering into these price risk management contracts, natural gas
and crude oil prices have increased and as NuVista has not adopted hedge
accounting, it is required to mark-to-market all financial commodity derivatives
outstanding that relate to future periods. During the second quarter NuVista
recorded an unrealized commodity derivatives loss of $40.0 million ($28.8
million after tax), significantly reducing second quarter earnings but not
impacting funds from operations. NuVista's adjusted net earnings excluding the
impact of this unrealized loss is $31.7 million.
FINANCIAL EXPOSURE TO SEMGROUP LP
On July 22, 2008, SemGroup LP filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code and two of SemGroup LP's Canadian subsidiaries, SemCAMS ULC
and SemCanada Crude Company, filed for creditor protection under the Companies'
Creditors Arrangement Act in Canada. NuVista sold natural gas to SemCAMS ULC and
crude oil to SemCanada Crude Company. NuVista has a financial exposure to these
two entities totaling approximately $4.5 million. Of this amount, $2.6 million
relates to sales for the month ended June 30, 2008 and $1.9 million for the
period July 1 to 21, 2008. NuVista is taking steps to mitigate this financial
exposure and any ongoing financial exposure. At this time we are unable to
ascertain the amount of June revenues that will be recoverable but have recorded
a provision in our second quarter financial statements equal to 25% of the
amount owed at June 30, 2008. In the third quarter, we will reassess the
recoverability of the June revenues and also assess the recoverability of the
July revenues.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis ("MD&A") of financial conditions and
results of operations should be read in conjunction with NuVista's interim
consolidated financial statements for the three and six months ended June 30,
2008 and the audited consolidated financial statements for the year ended
December 31, 2007. The following MD&A of financial condition and results of
operations was prepared at and is dated, August 5, 2008. Our audited
consolidated financial statements, Annual Report, Annual Information Form and
other disclosure documents for 2007 are available through our filings on SEDAR
at www.sedar.com or can be obtained from our website at www.nuvistaenergy.com.
Basis of presentation - The financial data presented below has been prepared in
accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The
reporting and the measurement currency is the Canadian dollar. For the purpose
of calculating unit costs, natural gas is converted to a barrel of oil
equivalent ("boe") using six thousand cubic feet of natural gas equal to one
barrel of oil unless otherwise stated. In certain circumstances natural gas
liquid volumes have been converted to thousand cubic feet equivalent ("mcfe") on
the basis of one barrel of natural gas liquids to six thousand cubic feet. Boe's
and mcfe's may be misleading, particularly if used in isolation. A conversion
ratio of one barrel to six thousand cubic feet of natural gas is based on an
energy equivalency conversion method primarily applicable at the burner tip and
does not represent a value equivalency at the wellhead.
Forward-looking statements - Certain information set forth in this document,
including management's assessment of NuVista's future plans and operations,
forecast production rates, forecast funds from operations and targeted operating
costs, contain forward-looking statements, which are provided to allow investors
to better understand our business. By their nature, forward-looking statements
are subject to numerous risks and uncertainties, some of which are beyond
NuVista's control, including the impact of general economic conditions, industry
conditions, volatility of commodity prices, currency fluctuations, imprecision
of reserve estimates, environmental risks, competition from other industry
participants, the lack of availability of qualified personnel or management and
services, stock market volatility, changes in environmental regulations, tax
laws and royalties and the ability to access sufficient capital from internal
and external sources. Readers are cautioned that the assumptions used in the
preparation of such information, although considered reasonable at the time of
preparation, may prove to be imprecise and, as such, undue reliance should not
be placed on forward-looking statements. NuVista's actual results, performance
or achievement could differ materially from those expressed in, or implied by,
these forward-looking statements, or if any of them do so, what benefits that
NuVista will derive therefrom. NuVista disclaims any intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.
Non-GAAP measurements - Within MD&A, references are made to terms commonly used
in the oil and natural gas industry. Management uses funds from operations to
analyze operating performance and leverage. Funds from operations as presented,
does not have any standardized meaning prescribed by Canadian GAAP and therefore
it may not be comparable with the calculation of similar measures for other
entities. Funds from operations as presented is not intended to represent
operating cash flow or operating profits for the period nor should it be viewed
as an alternative to cash flow from operating activities, net income or other
measures of financial performance calculated in accordance with Canadian GAAP.
All references to funds from operations throughout this report are based on cash
flow from operating activities before changes in non-cash working capital and
abandonment expenditures. Funds from operations per share is calculated based on
the weighted average number of common shares outstanding consistent with the
calculation of net income per share. Funds from operations netbacks equal total
revenue including realized commodity derivative gains/losses less royalties,
transportation, operating costs, general and administrative, restricted share
units, interest expense and cash taxes. Management also uses field netbacks to
analyze operating performance and adjusted working capital to analyze leverage.
Field netbacks and adjusted working capital as presented, do not have any
standardized meaning prescribed by Canadian GAAP and therefore may not be
comparable with the calculation of similar measures for other entities. Field
netbacks equal the total of revenue including realized commodity derivative
gains/losses less royalties, transportation and operating costs. Adjusted
working capital equals working capital excluding the current portions of
commodity derivative liability and future income taxes. Total boe is calculated
by multiplying the daily production by the number of days in the period.
A reconciliation of funds from operations is presented in the
following table:
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For the three months For the six months
ended June 30, ended June 30,
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($ thousands) 2008 2007 2008 2007
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Cash provided by operating activities 67,453 22,482 102,619 39,479
Add back:
Asset retirement expenditures 483 155 537 465
Change in non-cash working capital 21,646 7,779 39,860 18,283
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Funds from operations 89,582 30,416 143,016 58,227
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Change in presentation of MD&A disclosure - natural gas liquids - Prior to 2008,
our MD&A disclosures have combined crude oil volumes and natural gas liquid
volumes, as natural gas liquid volumes were not significant. With the Rider
Acquisition, Nuvista has significantly increased its production of natural gas
liquids and has determined that it is more appropriate in certain circumstances
to include these volumes with natural gas volumes on a mcfe basis. Comparative
MD&A disclosure has been restated to reflect this change. This change only
impacts the classification of natural gas liquids and does not impact reported
results.
Plan of arrangement with Rider Resources Ltd.
On March 4, 2008, NuVista closed a business combination with Rider Resources
Ltd. ("Rider") (the "Rider Acquisition") and a private placement financing with
the Ontario Teachers' Pension Plan Board ("OTPP"). The Rider Acquisition
resulted in the combination of NuVista and Rider, pursuant to which all of the
issued and outstanding Rider shares were exchanged for common shares of NuVista.
Rider shareholders received, for each Rider share held, 0.3540 of a NuVista
share. The results of operations from the Rider assets have been included
effective March 4, 2008. The three months ended June 30, 2008 is the first
reported period to include a full three months of operations of the Rider
assets.
Operating activities - During the second quarter of 2008, NuVista participated
in 17 (12.9 net) wells, including 16 operated wells, with an average working
interest of 76%. Of these wells, nine were drilled in the Oyen core area, four
in the Provost core area, two in our Pembina core area and one in each of the
West Central Saskatchewan and Northwest Saskatchewan core areas. The success
rate of 88% in this drilling program resulted in 12 natural gas wells and three
oil wells. For the six months ended June 30, 2008, NuVista drilled 36 (26.7 net)
wells resulting in 19 natural gas wells and 10 oil wells. NuVista has
approximately 65 wells planned for the third quarter, primarily in the Oyen,
Wapiti and in our Saskatchewan core areas.
Production For the three months ended June 30,
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2008 2007 % Change
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Natural gas (mcf/d) 112,979 69,897 62
Liquids (bbls/d) 2,609 417 526
Oil (bbls/d) 4,714 2,080 127
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Total oil equivalent (boe/d) 26,153 14,147 85
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Production For the six months ended June 30,
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2008 2007 % Change
----------------------------------------------------------------------------
Natural gas (mcf/d) 99,238 68,078 46
Liquids (bbls/d) 1,857 313 493
Oil (bbls/d) 4,349 2,121 105
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Total oil equivalent (boe/d) 22,746 13,780 65
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For the three months ended June 30, 2008 NuVista's average production was 26,153
boe/d, comprised of 113.0 mmcf/d of natural gas, 2,609 bbls/d of natural gas
liquids ("liquids") and 4,714 bbls/d of oil, which represents a 85% increase
over the same period in 2007 and a 35% increase over the first quarter of 2008.
During the second quarter NuVista's production was reduced due to plant
turnarounds in its Wapiti and Ferrier core areas. The increase in natural gas
and liquids revenue is due primarily to the inclusion of a full quarter of
production from the Rider properties acquired in March 2008 and the success of
our drilling program. Oil production increased for the three months ended June
30, 2008, compared to the same period in 2007, due to increased heavy oil
production at our Auburndale property and in our Saskatchewan core areas, and
the heavy oil production acquired in our Provost core area on January 8, 2008.
Oil and liquids production as a percentage of total production on a boe basis,
increased to 28% in the second quarter compared to 18% in the same period in
2007.
Production rates peaked in the month of April 2008 as significant new flush
production was brought on-stream in our Wapiti core area. Production capability
declined throughout the second quarter due to normal production declines
associated with both our new and existing wells, and limited activity during the
spring break-up period. Plant turnarounds were completed in June but NuVista
continued to have shut-in production during July 2008 due to the timing and
priority of bringing wells on production and continuing operational issues
associated with start-up after a major turnaround at a third party facility.
NuVista expects the impact of this delay and other scheduled outages to impact
average third quarter production by approximately 600 boe/d. New production
additions from NuVista's aggressive post spring break-up drilling program are
now being connected and NuVista anticipates production to increase gradually
throughout the second half of 2008 due to the implementation of our capital
program.
NuVista's production for the six months ended June 30, 2008 averaged 22,746
boe/d comprised of 99.2 mmcf/d of natural gas, 1,857 bbls/d of natural gas
liquids ("liquids") and 4,349 bbls/d of oil, which represents a 65% increase
over the same period in 2007. Production increases for the six month period,
compared to the same period in 2007, are primarily due to the same reasons that
production increased in the second quarter.
Revenues For the three months ended June 30,
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($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
Natural gas: $ $/mcf $ $/mcf $ $/mcf
Production revenue 98,140 9.54 45,610 7.17 115 33
Realized gains (losses) on
commodity derivatives (1,026) (0.10) 702 0.11 - -
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Total 97,114 9.44 46,312 7.28 110 30
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For the three months ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
Oil: $ $/bbl $ $/bbl $ $/bbl
Production revenue 44,214 103.07 8,944 47.78 394 117
Realized gains (losses) on
commodity derivatives (4,828) (11.25) 108 0.58
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Total 39,386 91.82 9,052 48.36 335 90
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For the three months ended June 30,
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($ thousands) 2008 2007 % Change
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Liquids: $ $/bbl $ $/bbl $ $/bbl
Production revenue 19,440 81.88 2,280 60.00 753 36
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Total 19,440 81.88 2,280 60.00 753 36
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For the six months ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
Natural gas: $ $/mcf $ $/mcf $ $/mcf
Production revenue 158,992 8.80 88,455 7.18 80 22
Realized gains (losses) on
commodity derivatives (1,026) (0.06) 2,541 0.20 - -
------------------------------------------------------------------
Total 157,966 8.74 90,996 7.38 74 18
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For the six months ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
Oil: $ $/bbl $ $/bbl $ $/bbl
Production revenue 72,610 91.73 18,691 48.70 288 88
Realized gains (losses) on
commodity derivatives (5,368) (6.78) 253 0.66 - -
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Total 67,242 84.95 18,944 49.36 255 72
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For the six months ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
Liquids: $ $/bbl $ $/bbl $ $/bbl
Production revenue 27,256 80.65 3,311 58.43 723 38
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Total 27,256 80.65 3,311 58.43 723 38
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For the three months ended June 30, 2008, revenues including realized commodity
derivative gains and losses were $155.9 million, a 171% increase from $57.6
million, for the same period in 2007. The increase in revenues for the three
months ended June 30, 2008 compared to the same period of 2007, is primarily due
to the 85% increase in production and 54% increase in realized prices. These
revenues were comprised of $97.1 million of natural gas revenue, $39.4 million
of oil revenue, and $19.4 million of liquids revenue. The increase in average
realized commodity prices is comprised of a 30% increase in the natural gas
price to $9.44/mcf from $7.28/mcf, a 90% increase in the oil price to $91.82/bbl
from $48.36/bbl, and an increase of 36% in the liquids price to $81.88/bbl from
$60.00/bbl. The increase in the average realized commodity price in the quarter
compared to the same period in 2007 was due to significantly higher WTI crude
oil and NYMEX natural gas prices that impact Edmonton Par and heavy crude oil
prices and AECO natural gas prices.
For the six months ended June 30, 2008, revenues including realized commodity
derivative gains and losses were $252.5 million, a 123% increase from $113.3
million, for the same period in 2007. The increase in revenues for the first six
months of 2008 compared to the same period of 2007, is primarily due to the 65%
increase in production and 41% increase in realized prices. These revenues were
comprised of $158.0 million of natural gas revenue, $67.2 million of oil
revenue, and $27.3 million of liquids revenue. The increase in average realized
commodity prices is comprised of a 18% increase in the natural gas price to
$8.74/mcf from $7.38/mcf, a 72% increase in the oil price to $84.95/bbl from
$49.36/bbl, and an increase of 38% in the liquids price to $80.65/bbl from
$58.43/bbl.
Commodity price risk management
----------------------------------------------------------------------------
For the three months ended June 30,
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
($ thousands) Realized Unrealized Total Realized Unrealized Total
Gains Gains Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses) (Losses) (Losses)
----------------------------------------------------------------------------
Natural gas (1,026) (5,826) (6,852) 702 2,356 3,058
Oil (4,828) (34,205) (39,033) 108 1,127 1,235
----------------------------------------------------------------------------
Total gains
(losses) (5,854) (40,031) (45,885) 810 3,483 4,293
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the six months ended June 30,
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
($ thousands) Realized Unrealized Total Realized Unrealized Total
Gains Gains Gains Gains Gains Gains
(Losses) (Losses) (Losses) (Losses) (Losses) (Losses)
----------------------------------------------------------------------------
Natural gas (1,026) (9,710) (10,736) 2,541 2,480 5,021
Oil (5,368) (40,065) (45,433) 253 927 1,180
----------------------------------------------------------------------------
Total gains
(losses) (6,394) (49,775) (56,169) 2,794 3,407 6,201
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As part of our financial management strategy, NuVista has adopted a disciplined
commodity price risk management program. The purpose of this program is to
reduce volatility in the financial results, protect acquisition economics and
stabilize cash flow against the unpredictable commodity price environment.
NuVista's Board of Directors has approved a price risk management limit of up to
60% of forecast production, net of royalties for a two year period, using fixed
price and costless collar contracts. NuVista's Board of Directors has approved
an increase to the limit of 60% for the period April 2008 to October 2008. For
this period the Board has approved natural gas hedges in the amount of 70,000
gj/day.
NuVista conducts its price risk management activities through both financial
commodity derivatives and physical sales contracts. While NuVista's price risk
management transactions are economic hedges, NuVista does not use hedge
accounting for these transactions. As a result, NuVista is required to
mark-to-market all financial commodity derivatives outstanding. NuVista is not
required to mark-to-market it's physical sales price risk management contracts.
For the three months ended June 30, 2008, the commodity derivative price risk
management program resulted in a loss of $45.9 million consisting of realized
losses of $5.9 million and unrealized losses of $40.0 million. The gain of $4.3
million for 2007 consisted of $0.8 million of realized gains and $3.5 million of
unrealized gains. For the six months ended June 30, 2008, the commodity
derivative price risk management program resulted in a loss of $56.2 million
consisting of realized losses of $6.4 million and unrealized losses of $49.8
million. The gain of $6.2 million for 2007 consisted of $2.8 million of realized
gains and $3.4 million of unrealized gains.
At June 30, 2008, the mark-to-market of our financial commodity derivatives was
a loss of $51.5 million and the market-to-market of our physical sales contract
was a loss of $37.5 million. The significant unrealized loss in the three and
six months ended June 30, 2008 relate primarily to the mark-to-market of crude
oil commodity derivatives that relate to production in the second half of 2008
and in 2009. Since June 30, 2008, crude oil and natural gas prices have declined
and our unrealized financial commodity derivative and physical sales contract
losses have declined as well.
The following is a summary of commodity price risk management contracts in
place as at June 30, 2008:
a) Financial commodity derivatives
As at June 30, 2008, NuVista has entered into the following crude oil
price risk management contracts:
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
500 bbls/d CDN. $66.50-Bow River April 1, 2008 -
December 31, 2008
750 bbls/d CDN. $70.01-CDN. $86.68-WTI July 1, 2008 -
December 31, 2008
1,000 bbls/d CDN. $64.00-Bow River January 1, 2009 -
December 31, 2009
1,000 bbls/d CDN. $95.01-CDN. $110.01-WTI January 1, 2009 -
December 31, 2009
As at June 30, 2008, NuVista has entered into the following natural gas
price risk management contracts:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
20,000 gj/d CDN. $7.50-$8.42-AECO April 1, 2008 -
October 31, 2008
10,000 gj/d CDN. $8.00-$10.13-AECO November 1, 2008 -
March 31, 2009
(b) Physical sale contracts
As at June 30, 2008, NuVista has entered into direct sale price risk
management contracts to sell natural gas as follows:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
50,000 gj/d CDN. $7.27-$7.43-AECO April 1, 2008 -
October 31, 2008
40,000 gj/d CDN. $8.59-$10.38-AECO November 1, 2008 -
March 31, 2009
Royalties
For the three months For the six months
ended June 30, ended June 30,
----------------------------------------------------------------------------
Royalty rates (%) 2008 2007 2008 2007
----------------------------------------------------------------------------
Natural gas and liquids 25 25 26 27
Oil 18 13 16 13
Weighted average rate 22 23 22 25
----------------------------------------------------------------------------
Royalties for the three months ended June 30, 2008 were $35.9 million, as
compared to $13.3 million reported for the three months ended June 30, 2007.
Royalties for the six months ended June 30, 2008 were $58.2 million, as compared
to $27.7 million reported for the six months ended June 30, 2007. The increase
in royalties results from higher revenues in both the second quarter and first
half of 2008 compared to the same period in 2007.
As a percentage of revenues, the average royalty rate for the second quarter of
2008 was 22% compared to 23% for the same period of 2007. Royalty rates by
product for the second quarter of 2008 were 25% for natural gas and liquids and
18% for oil compared to 25% for natural gas and liquids and 13% for oil for the
same period in 2007. For the six months ended June 30, 2008, the average royalty
rate as a percentage of revenue was 22% compared to 25% for the same period in
2007. Royalty rates by product were 26% for natural gas and liquids and 16% for
oil compared to 27% for natural gas and liquids and 13% for oil for the same
period in 2007.
Royalty rates are based on government market reference prices and not our
average realized prices that includes price risk management activities. As a
result, the losses from our price risk management activities included in revenue
result in a higher royalty rate as a percentage of revenue than if we had no
price risk management activities had taken place. Average royalty rates in the
second quarter of 2008 excluding price risk management activities were 25% for
natural gas and liquids and 15% for oil.
Netbacks - The following table summarizes field netbacks by product for the
three months ended June 30, 2008:
Natural gas Oil Total
and liquids
----------------------------------------------------------------------------
($ thousands) 128.6 mmcfe/d 4,714 bbl/d 26,153 boe/d
----------------------------------------------------------------------------
$ $/mcfe $ $/bbl $ $/boe
Production
revenues 117,580 10.04 44,214 103.07 161,794 67.98
Realized gains on
commodity (losses)
derivatives (1,026) (0.09) (4,828) (11.25) (5,854) (2.46)
----------------------------------------------------------------------------
116,554 9.95 39,386 91.82 155,940 65.52
Royalties (28,959) (2.47) (6,967) (16.24) (35,926) (15.10)
Transportation
costs (1,499) (0.13) (797) (1.85) (2,296) (0.96)
Operating costs (13,580) (1.16) (5,901) (13.76) (19,481) (8.19)
----------------------------------------------------------------------------
Field netbacks 72,516 6.19 25,721 59.97 98,237 41.27
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes field netbacks by product for the six months
ended June 30, 2008:
Natural gas Oil Total
and liquids
----------------------------------------------------------------------------
($thousands) 110.4 mmcfe/d 4,349 bbl/d 22,746 boe/d
----------------------------------------------------------------------------
$ $/mcfe $ $/bbl $ $/boe
Production
revenues 186,248 9.27 72,610 91.73 258,858 62.53
Realized gains
on commodity (losses)
derivatives (1,026) (0.05) (5,368) (6.78) (6,394) (1.54)
----------------------------------------------------------------------------
185,222 9.22 67,242 84.95 252,464 60.99
Royalties (47,337) (2.36) (10,816) (13.66) (58,153) (14.05)
Transportation costs (2,439) (0.12) (1,298) (1.63) (3,737) (0.90)
Operating costs (23,133) (1.15) (9,765) (12.34) (32,898) (7.95)
----------------------------------------------------------------------------
Field netbacks 112,313 5.59 45,363 57.32 157,676 38.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes funds from operations netbacks for the three
and six months ended June 30, 2008, compared to the three and six months
ended June 30, 2007:
For the three months ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
$ $/boe $ $/boe $ $/boe
Production revenues 161,794 67.98 56,832 44.15 185 54
Realized gains
(losses) on
commodity derivatives (5,854) (2.46) 810 0.63 (823) (490)
----------------------------------------------------------
155,940 65.52 57,642 44.78 171 46
Royalties (35,926) (15.10) (13,332) (10.35) 169 46
Transportation costs (2,296) (0.96) (977) (0.76) 135 26
Operating costs (19,481) (8.19) (9,076) (7.05) 115 16
----------------------------------------------------------
Field netbacks 98,237 41.27 34,267 26.62 187 55
General and
administrative (3,606) (1.52) (1,258) (0.98) 187 55
Restricted share
units (865) (0.36) - - - -
Interest (4,184) (1.76) (2,593) (2.01) 61 (12)
----------------------------------------------------------
Funds from
operations netbacks 89,582 37.63 30,416 23.63 1.94 0.59
----------------------------------------------------------
----------------------------------------------------------
For the six months ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
$ $/boe $ $/boe $ $/boe
Production revenues 258,858 62.53 110,457 44.29 134 41
Realized gains (losses)
on commodity
derivatives (6,394) (1.54) 2,794 1.12 (329) (238)
----------------------------------------------------------
252,464 60.99 113,251 45.41 123 34
Royalties (58,153) 14.05 (27,741) (11.12) 110 26
Transportation costs (3,737) (0.90) (2,062) (0.83) 81 8
Operating costs (32,898) (7.95) (18,299) (7.34) 80 8
----------------------------------------------------------
Field netbacks 157,676 38.09 65,149 26.12 142 46
General and
administrative (5,811) (1.40) (2,323) (0.93) 150 51
Restricted share units (1,118) (0.27) - - - -
Interest (7,731) (1.87) (4,599) (1.84) 68 2
----------------------------------------------------------
Funds from operations
netbacks 143,016 34.55 58,227 23.35 146 52
----------------------------------------------------------
----------------------------------------------------------
Transportation - Transportation costs were $2.3 million ($0.96/boe) for the
three months ended June 30, 2008 as compared to $977,000 ($0.76/boe) for the
same period of 2007. Transportation costs were $3.7 million ($0.90/boe) for the
six months ended June 30, 2008 compared to $2.1 million ($0.83/boe) for the same
period in 2007. The increase in transportation costs in 2008 compared to 2007 is
primarily due to an increase in oil and liquids production as a percentage of
overall production and their higher associated transportation costs.
Operating - Operating expenses were $19.5 million ($8.19/boe) for the three
months ended June 30, 2008 as compared to $9.1 million ($7.05/boe) for the three
months ended June 30, 2006. This increase resulted from the 85% increase in
production volumes and a 16% increase in per unit costs. For the three months
ended June 30, 2008 natural gas and natural gas liquid operating costs averaged
$1.16/mcfe and oil operating expenses were $13.76/bbl as compared to $1.07/mcfe
and $10.83/bbl respectively for the same period in 2007.
Operating expenses were $32.9 million ($7.95/boe) for the six months ended June
30, 2008 as compared to $18.3 million ($7.34/boe) for the six months ended June
30, 2007. This increase resulted from the 65% increase in production volumes and
an 8% increase in per unit costs. For the six months ended June 30, 2008 natural
gas and natural gas liquid operating expenses averaged $1.15/mcfe and oil
operating expenses were $12.34/bbl as compared to $1.04/mcfe and $13.37/bbl
respectively, for the same period of 2007.
The increase in per unit costs resulted primarily from higher electricity costs
and the increase in oil production as a percentage of our overall production.
NuVista is forecasting 2008 operating costs for the remainder of the year to
average approximately $7.75/boe.
General and administrative - General and administrative expenses, net of
overhead recoveries, for the three months ended June 30, 2008 were $3.6 million
($1.52/boe) compared to $1.3 million ($0.98/boe) in the same period of 2007.
General and administrative expenses, net of overhead recoveries, for the six
months ended June 30, 2008 were $5.8 million ($1.40/boe) as compared to $2.3
million ($0.93/boe) for the six months ended June 30, 2007. This increase in
general and administrative expenses is directly attributable to the higher
production base in NuVista associated with the Rider Acquisition and increased
costs associated with less reliance on the Technical Services Agreement ("TSA")
with Bonavista Petroleum Ltd. ("Bonavista"). Higher per unit costs reflect
increased staffing costs and general cost increases experienced by the industry.
For the three months ended June 30, 2008 NuVista experienced costs associated
with moving to new leased premises, terminating existing NuVista and Rider
office lease arrangements and integration costs associated with the Rider
Acquisition. NuVista is forecasting 2008 general and administrative costs for
the remainder of the year to average approximately $1.25/boe.
For the three months For the six months
ended June 30, ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Gross general and administrative
expenses 5,384 2,473 8,947 4,939
Overhead recoveries (1,778) (1,215) (3,136) (2,616)
----------------------------------------------------------------------------
Net general and administrative expenses 3,606 1,258 5,811 2,323
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per boe 1.52 0.98 1.40 0.93
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bad debt provision - On July 22, 2008, SemGroup LP filed for reorganization
under Chapter 11 of the U.S. Bankruptcy Code and two of SemGroup LP's Canadian
subsidiaries, SemCAMS ULC and SemCanada Crude Company, filed for creditor
protection under the Companies' Creditors Arrangement Act in Canada. NuVista
sold natural gas to SemCAMS ULC and crude oil to SemCanada Crude Company.
NuVista has a financial exposure to these two entities totaling approximately
$4.5 million. Of this amount, $2.6 million relates to sales for the month ended
June 30, 2008 and $1.9 million for the period July 1 to 21, 2008. NuVista is
taking steps to mitigate this financial exposure and any ongoing financial
exposure. At this time we are unable to ascertain the amount of June revenues
that will be recoverable but have recorded a provision in our second quarter
financial statements equal to 25% of the amount owed at June 30, 2008. In the
third quarter, we will reassess the recoverability of the June revenues and
assess the recoverability of the July revenues.
Stock-based compensation - NuVista recorded a stock-based compensation charge of
$1.9 million for the three month period ended June 30, 2008 compared to $739,000
for the same period in 2007. For the six month period ended June 30, 2007
NuVista recorded a stock-based compensation charge of $3.1 million compared to
$1.5 million for the same period in 2007. The increase in the expense in 2008
relates primarily to the institution of the Restricted Share Unit ("RSU")
Incentive Plan. NuVista's Board of Directors approved a RSU Incentive Plan in
January, 2008. Each RSU entitles participants to receive cash equal to the
market value of the equivalent number of shares of NuVista. The RSU's become
payable as they vest, typically over three years. For the three and six months
ended June 30, 2008, the RSU related stock-based compensation expense was $0.9
million and $1.1 million, respectively.
Interest - For the three months ended June 30, 2008, interest expense was $4.2
million as compared to $2.6 million in the same period of 2007. For the six
months ended June 30, 2008, interest expense was $7.7 million compared to $4.6
million in the same period of 2007. Higher interest costs in the second quarter
and the first half of 2008 are due to higher average debt levels and higher
average interest rates. Currently, our average borrowing rate is approximately
4%.
Depreciation, depletion and accretion - Depreciation, depletion and accretion
expenses were $43.1 million for the second quarter of 2008 as compared to $22.1
million for the same period in 2007. The average per unit cost was $18.11/boe in
the second quarter of 2008 as compared to $17.16/boe for the same period in
2007. Depreciation, depletion and accretion expenses for the six months ended
June 30, 2008 were $75.8 million as compared to $41.5 million for the same
period in 2007. The average per unit cost was $18.31/boe in the first half of
2008 as compared to $16.65/boe in the same period in 2007. The increase in the
depreciation, depletion and accretion expenses for the three months and six
months ended June 30, 2008 when compared to the same periods in 2007 was due to
higher production volumes and also reflects an increase in unit costs. Per unit
costs have increased in 2008 due to the higher costs associated with the Rider
Acquisition and higher exploration and development costs.
Income taxes - For the three months ended June 30, 2008, the provision for
income and other taxes was $1.9 million compared to $1.4 million for the same
period in 2007. For the six months ended June 30, 2008, the provision for income
and other taxes was $4.7 million compared to $4.1 million in the same period of
2007. The provisions for income and other taxes for the three and six months
ended June 30, 2007 include a reduction of $2.3 million related to legislated
reductions in income tax rates, enacted in the second quarter of 2007. For the
six months ended June 30, 2008, the effective tax rate was 32% for the six
months ended June 30, 2007.
Capital expenditures - Capital expenditures were $16.2 million during the second
quarter of 2008 and related to exploration and development activities. This
compares to $57.6 million during the second quarter of 2007, consisting of $35.1
million for acquisitions and $22.6 million for exploration and development.
Capital expenditures for the six months ended June 30, 2008 were $67.1 million,
consisting of $41.7 million for exploration and development spending and $25.4
million for acquisitions. This compares to $93.6 million incurred for the same
period of 2007, consisting of $35.1 million of acquisitions and exploration and
development spending of $58.5 million.
For the three months For the six months
ended June 30, ended June 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Exploration and development
Land and retention costs 4,451 1,228 5,123 3,116
Seismic 2,385 2,258 4,986 8,211
Drilling and completion 6,176 13,024 17,881 30,519
Facilities and equipment 2,278 5,703 12,386 15,932
Corporate and other 1,188 356 1,340 739
----------------------------------------------------------------------------
Subtotal 16,478 22,569 41,716 58,517
Acquisitions
Property (265) 35,055 25,398(1) 35,055
----------------------------------------------------------------------------
Subtotal (265) 35,055 25,398 35,055
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total capital expenditures 17,863 57,624 68,771 93,572
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Corporate acquisition - non-cash - - 594,944 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes a $2.6 million deposit paid in the fourth quarter of 2007
Funds from operations and net earnings - In the second quarter of 2008, funds
from operations were $89.6 million ($1.14/share, basic), a 194% increase over
the $30.4 million ($0.59/share, basic) for the same period in 2007. For the six
months ended June 30, 2008, NuVista's funds from operations was $143.0 million
($2.05/share, basic), a 146% increase from $58.2 million ($1.16/share, basic)
for the six months ended June 30, 2007. The increase in funds from operations in
both the three and six months ended June 30, 2008 compared to the same periods
in 2007 was primarily due to higher production volumes and commodity prices.
Net earnings decreased during the second quarter of 2008 to $2.9 million
($0.04/share, basic) from $9.7 million ($0.19/share, basic) for the same period
in 2007. For the six months ended June 30, 2008, net earnings were $10.0 million
($0.14/share, basic) compared to $14.5 million ($0.29/share, basic) for the same
period in 2007. The decrease in net earnings in both the three and six months
ended June 30, 2008, compared to the same periods in 2007, was primarily due to
the unrealized loss on commodity derivates of $28.8 million on an after tax
basis.
Liquidity and capital resources - As at June 30, 2008, net bank debt, defined as
the bank loan plus adjusted working capital was $338.9 million, resulting in a
net debt to annualized second quarter funds from operations ratio of 1.0:1. At
June 30, 2008, NuVista had a working capital deficiency of $1.3 million.
Adjusted working capital excludes the current portion of the commodity
derivatives mark-to-market of $36.6 million and a current future income tax
asset of $10.3 million. We believe it is appropriate to exclude these amounts
when determining net debt. At June 30, 2008, NuVista had approximately $86.0
million of unused bank borrowing capability based on the current line of credit
of $450.0 million.
NuVista anticipates that 2008 funds from operations will provide NuVista with
the flexibility to fund its planned 2008 capital program and provide for debt
reduction. NuVista has achieved its targeted 2008 net debt to annualized
quarterly funds from operations target of less than 1.0 times. NuVista's capital
program will be monitored and adjusted based on the outlook for commodity prices
and opportunities to increase capital spending.
As at August 5, 2008, there were 79.1 million common shares and 3.0 million
common share purchase warrants outstanding. In addition, there were 5.4 million
stock options outstanding, with an average exercise price of $14.48 per share.
Related party activities - In 2003, as part of the Plan of Arrangement with
Bonavista Petroleum Ltd. ("Bonavista"), NuVista entered into a Technical
Services Agreement ("TSA"). Under the TSA, Bonavista received payment for
certain services provided by it to NuVista. Effective January 1, 2007, the terms
of the TSA were amended to reflect the reduced level of services provided by
Bonavista. On August 31, 2007, the TSA was terminated and replaced with a new
services agreement that reflects the remaining ongoing services that will be
provided by Bonavista. NuVista and Bonavista are considered related as two
directors of NuVista, one of whom is NuVista's chairman, are also directors and
officers of Bonavista and a director and an officer of NuVista are also officers
of Bonavista.
For the three months ended June 30, 2008, NuVista paid Bonavista $0.4 million
(2007 - $0.2 million) in fees relating to general and administrative services
provided by Bonavista, and NuVista charged Bonavista management fees for jointly
owned partnerships totaling $0.3 million (2007 - $0.3 million). In addition,
during the second quarter of 2008, Bonavista charged NuVista $63,000 (2007 -
$62,500) for costs that are outside of the new services agreement relating to
NuVista's share of direct charges from third parties.
For the six months ended June 30, 2008, NuVista paid Bonavista $0.8 million
(2007 - $0.7 million) in fees relating to general and administrative services
provided by Bonavista, and NuVista charged Bonavista management fees for jointly
owned partnerships totaling $0.6 million (2007 - $0.6 million). In addition
Bonavista charged NuVista $72,000 (2007 - $0.6 million) for costs that are
outside of the new services agreement relating to NuVista's share of direct
charges from third parties. As at June 30, 2008, the amount receivable from
Bonavista was $2.9 million.
Contractual obligations and commitments - NuVista enters into many contractual
obligations as part of conducting day-to-day business. As NuVista continues to
spend money as part of its capital program we will draw on our bank facility and
will have the related contractual obligation. In the event that NuVista's credit
facility is not extended at any time before the maturity date, the loan balance
of outstanding will become payable on the maturity date which is March 4, 2010.
The following is a summary of the Company's contractual obligations and
commitments as at June 30, 2008:
Total 2008 2009 2010 2011 Thereafter
----------------------------------------------------------------------------
Transportation $ 1,027 $ 426 $ 444 $ 123 $ 34 $ -
Office lease 9,076 1,199 2,055 2,055 2,055 1,712
----------------------------------------------------------------------------
Total commitments $ 10,103 $ 1,625 $ 2,499 $ 2,178 $ 2,089 $ 1,712
----------------------------------------------------------------------------
Quarterly financial information - The following table highlights NuVista's
performance for the eight quarterly reporting periods from September 30,
2006 to June 30, 2008:
2008 2007 2006
----------------------------------------------------------------------------
June March December September June March December September
30 31 31 30 31 31 31 30
----------------------------------------------------------------------------
Production
(boe/d) 26,153 19,339 14,251 13,590 14,147 13,409 12,612 12,577
($ thousands,
except per
share
amounts)
Production
revenue 161,794 97,064 53,790 48,138 56,832 54,822 49,195 47,530
Net
earnings 2,905 7,150 11,063 754 9,678 4,832 5,765 4,082
Net earnings
per share:
Basic 0.04 0.12 0.21 0.01 0.19 0.10 0.12 0.08
Diluted 0.04 0.12 0.21 0.01 0.18 0.10 0.12 0.08
----------------------------------------------------------------------------
NuVista has seen growth in quarterly production volumes over the prior eight
quarters except for a slight decline experienced in the quarter ended September
30, 2007. This decline was primarily due to plant turnarounds that occurred
during the summer months. Over the prior eight quarters, quarterly revenue has
been in a range of $47.5 million to $161.8 million with revenue influenced by
production volumes and natural gas prices in the quarter. Production volumes and
revenues increased significantly in the quarter ended June 30, 2008 primarily
due to increased production volumes associated with the Rider Acquisition and
higher commodity prices. Net earnings have been in a range of $0.8 million to
$11.1 million primarily influenced by production volumes and natural gas prices
but also higher operating costs, depletion, depreciation and accretion and
unrealized losses on commodity derivatives. Net earnings were higher in the
second and the fourth quarter of 2007 due to the recognition of reductions in
corporate income tax rates.
Critical accounting estimates - The consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles.
Certain accounting policies are critical to understanding the financial
condition and results of operations of NuVista.
(a) Proved oil and natural gas reserves - Proved oil and natural gas reserves,
as defined by the Canadian Securities Administrators in National Instrument
51-101 with reference to the Canadian Oil and Natural Gas Evaluation Handbook,
are those reserves that can be estimated with a high degree of certainty to be
recoverable. It is likely that the actual remaining quantities recovered will
exceed the estimated proved reserves.
An independent reserve evaluator using all available geological and reservoir
data as well as historical production data has prepared NuVista's oil and
natural gas reserve estimates. Estimates are reviewed and revised as
appropriate. Revisions occur as a result of changes in prices, costs, fiscal
regimes, reservoir performance or a change in the Company's development plans.
The effect of changes in proved oil and natural gas reserves on the financial
results and position of the Company is described below.
(b) Depreciation and depletion expense - NuVista uses the full cost method of
accounting for exploration and development activities whereby all costs
associated with these activities are capitalized, whether successful or not. The
aggregate of capitalized costs, net of certain costs related to unproved
properties, and estimated future development costs is amortized using the
unit-of-production method based on estimated proved reserves. Changes in
estimated proved reserves or future development costs have a direct impact on
depreciation and depletion expense.
Certain costs related to unproved properties and major development projects may
be excluded from costs subject to depletion until proved reserves have been
determined or their value is impaired. These properties are reviewed quarterly
to determine if proved reserves should be assigned, at which point they would be
included in the depletion calculation, or for impairment, for which any
writedown would be charged to depreciation and depletion expense.
(c) Full cost accounting ceiling test - The carrying value of property, plant
and equipment is reviewed at least annually for impairment. Impairment occurs
when the carrying value of the assets is not recoverable by the future
undiscounted cash flows. The cost recovery ceiling test is based on estimates of
proved reserves, production rates, petroleum and natural gas prices, future
costs and other relevant assumptions. By their nature, these estimates are
subject to measurement uncertainty and the impact on the financial statements
could be material. Any impairment would be charged as additional depletion and
depreciation expense.
(d) Asset retirement obligation - The asset retirement obligations are estimated
based on existing laws, contracts or other policies. The fair value of the
obligation is based on estimated future costs for abandonments and reclamations
discounted at a credit adjusted risk free rate. The costs are included in
property, plant and equipment and amortized over its useful life. The liability
is adjusted each reporting period to reflect the passage of time, with the
accretion charged to earnings and for revisions to the estimated future cash
flows. By their nature, these estimates are subject to measurement uncertainty
and the impact on the financial statements could be material.
(e) Income taxes - The determination of income and other tax liabilities
requires interpretation of complex laws and regulations often involving multiple
jurisdictions. All tax filings are subject to audit and potential reassessment
after the lapse of considerable time. Accordingly, the actual income tax
liability may differ significantly from that estimated and recorded.
Update on regulatory matters
(a) On October 25, 2007, the Government of Alberta announced the New Alberta
Royalty Framework ("NRF") which proposes changes to the current royalty regime
in Alberta effective January 1, 2009. The proposed NRF includes new royalty
formulas for conventional oil and natural gas that will operate on sliding
scales that are determined by commodity prices and well productivity. On April
10, 2008, the Government of Alberta provided some further clarification on the
NRF and introduced two new royalty programs related to the development of deep
oil and natural gas reserves. Substantial legislative, regulatory and systems
updates will be introduced before the changes become fully effective in 2009.
NuVista continues to monitor the impact of the NRF on its business plan and does
not expect a significant impact at this time.
(b) On April 18, 2008, the Canadian Securities Administrators published the
notice and request for comments for the proposed repeal and replacement of
Multilateral Instrument 52-109 Certification of Disclosure in Issuers' Annual
and Interim Filings. The proposed changes would include the requirement to
provide certification of the effectiveness of internal controls over financial
reporting for years ending after December 15, 2008. On July 11, 2008, the
Canadian Securities Administrators issued Staff Notice 52-322 recommending
securities commissions proceed with the December 15, 2008 effective date. The
Company is developing plans to test the operating effectiveness of internal
controls over financial reporting and provide the required certification.
Update on accounting policies and financial reporting matters
(a) Capital disclosures - Effective January 1, 2008, the Company adopted the new
CICA accounting standard Section 1535, Capital Disclosures. Section 1535
specifies the disclosure of an entity's objectives, policies and processes for
managing capital, quantitative data about what it manages as capital, any
externally imposed capital requirements, and the consequences of non-compliance.
Refer to note 8 of the consolidated financial statements.
(b) Financial instruments - Effective January 1, 2008, the Company adopted the
new CICA accounting standard Section 3862, Financial Instruments Disclosures and
Section 3863, Financial Instrument Presentation. These Sections require the
Company to increase disclosure on the nature, extent and risk arising from the
financial instruments and how the entity manages those risks. Refer to note 9 of
the consolidated financial statements.
(c) Goodwill - The CICA issued the new accounting standard Section 3064 Goodwill
and Intangible Assets replacing Section 3062, Goodwill and Other Intangible
Assets. This new Section will be effective on January 1, 2009. This Section
applies to goodwill subsequent to initial recognition and establishes standards
for the recognition, measurement, presentation and disclosure of goodwill and
intangible assets. This new standard is not expected to have a material impact
on NuVista's consolidated financial statements.
(d) International financial reporting standards ("IFRS") - In February 2008, the
Canadian Accounting Standards Board confirmed January 1, 2011 as the effective
date for the requirement to report under IFRS with comparative periods 2010
converted as well. Canadian generally accepted accounting principles as we
currently know them, will cease to exist for all publicly reporting entities.
Currently, the application of IFRS to the oil and gas industry in Canada
requires considerable clarification. The Canadian Securities Administrators are
in the process of examining changes to securities rules as a result of this
initiative. We are currently assessing the impact of IFRS on our results of
operations, financial position and disclosures and developing an implementation
plan.
Internal control reporting
NuVista's President and Chief Executive Officer ("CEO") and Vice President,
Finance and Chief Financial Officer ("CFO") are responsible for establishing and
maintaining disclosure controls and procedures and internal controls over
financial reporting as defined in Multilateral Instrument 52-109. NuVista's CEO
and CFO have designed disclosure controls and procedures, or caused them to be
designed under their supervision, to provide reasonable assurance that
information to be disclosed by NuVista is accumulated and communicated to
management as appropriate to allow timely decisions regarding required
disclosure. The CEO and CFO have also designed internal controls over financial
reporting, or caused them to be designed under their supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. During the quarter ended June 30, 2008
there have been no changes to NuVista's internal controls over financial
reporting that have materially, or are reasonably likely to, materially affect
the internal controls over financial reporting. During the quarter, management
completed integration of Rider's internal controls over financial reporting into
NuVista's internal control environment.
Because of their inherent limitations, disclosure controls and procedures and
internal controls over financial reporting may not prevent or detect
misstatements, error or fraud. Control systems, no matter how well conceived or
operated, can provide only reasonable, not absolute assurance, that the
objectives of the control system are met.
Assessment of business risks
The following are the primary risks associated with the business of NuVista.
These risks are similar to those affecting others in the conventional oil and
natural gas sector. NuVista's financial position and results of operations are
directly impacted by these factors:
Operational risk associated with the production of oil and natural gas:
- Reserve risk with respect to the quantity and quality of recoverable reserves;
- Market risk relating to the availability of transportation systems to move the
product to market;
- Commodity risk as crude oil and natural gas prices fluctuate due to market forces;
- Financial risk such as volatility of the Canadian/US dollar exchange rate,
interest rates and debt service obligations;
- Environmental and safety risk associated with well operations and production
facilities;
- Changing government regulations relating to royalty legislation, income tax
laws, incentive programs, operating practices and environmental protection
relating to the oil and natural gas industry; and
- Continued participation of NuVista's lenders.
NuVista seeks to mitigate these risks by:
- Acquiring properties with established production trends to reduce technical
uncertainty as well as undeveloped land with development potential;
- Maintaining a low cost structure to maximize product netbacks and reduce
impact of commodity price cycles;
- Diversifying properties to mitigate individual property and well risk;
- Maintaining product mix to balance exposure to commodity prices;
- Conducting rigorous reviews of all property acquisitions;
- Monitoring pricing trends and developing a mix of contractual arrangements for
the marketing of products with creditworthy counterparties;
- Maintaining a hedging program to hedge commodity prices and foreign exchange
currency rates with creditworthy counterparties;
- Ensuring strong third-party operators for non-operated properties;
- Adhering to NuVista's safety program and keeping abreast of current operating
best practices;
- Keeping informed of proposed changes in regulations and laws to properly
respond to and plan for the effects that these changes may have on our
operations;
- Carrying industry standard insurance to cover losses; and
- Establishing and maintaining adequate cash resources to fund future
abandonment and site restoration costs.
OUTLOOK
NuVista continues to believe in the long term favourable outlook for natural gas
prices due to the improving supply and demand fundamentals and the relative
valuation of natural gas compared to crude oil, although this will be partially
offset by higher royalties in 2009 and beyond. The current market strip pricing,
should it materialize, will result in an increase of 40% to 50% in funds from
operations netbacks in 2009, compared to 2007, even after giving effect to the
New Royalty Framework in Alberta. With the successful integration of the Rider
assets, NuVista now has eight core areas with shallow natural gas, deep natural
gas and heavy oil and high working interest multi-horizon opportunities. NuVista
will continue to pursue growth through its exploration and development program
and complementary acquisitions that meet its criteria.
For 2008, NuVista's Board of Directors has approved a capital program, in
addition to the business combination with Rider, of $175 million. With the
recent increase in commodity prices, the acquisition market has become
increasingly competitive. As a result, NuVista has reallocated the remaining
capital for 2008 to exploration and development activities. For the second half
of 2008, the exploration and development program will see NuVista participating
in approximately 25 wells in the W5M/W6M region and over 80 wells in the W3M/W4M
region. In light of the current commodity price environment and increased
financial flexibility in its business model, NuVista will continue to look for
ways to expand its capital program. NuVista's capital program for the second
half of 2008 is well underway. Since July 1, 2008, NuVista has participated in
22 wells with an 83% success rate. New production additions from this capital
program are currently being connected and the implementation of our capital
program is forecast to result in a gradual increase in production throughout the
second half of 2008. NuVista anticipates a 2008 exit production rate of
approximately 27,000 boe/d.
NuVista's financial and operating results for 2008 include the business
combination of Rider effective March 4, 2008. NuVista is currently forecasting
2008 average production of 24,300 boe/d to 24,800 boe/d and is forecasting
combined production of 26,000 - 26,500 boe/d for the second half of 2008.
Production for the third quarter of 2008 will be reduced by approximately 600
boe/d due to known scheduled turnarounds in July at our Pembina crude oil
facility, a scheduled TCPL outage in September in eastern Alberta and continued
downtime at a third party operated Wapiti facility in July and August due to a
slower than expected return to full production after a major turnaround. Based
on current commodity price assumptions of $8.80/mcf for AECO natural gas and
US$115/bbl for WTI, and incorporating price risk management contracts, NuVista
is forecasting funds from operations of $320 to $335 million. NuVista is
targeting operating costs to average approximately $7.75/boe for the second half
of 2008. NuVista is forecasting to exit 2008 with a year end ratio of net debt
to fourth quarter annualized funds from operation of approximately 0.7:1.
In July of 2008, NuVista celebrated its fifth anniversary as an exploration and
production company. Five years ago NuVista made a promise to its stakeholders to
deliver profitable per share growth in a financially prudent and sustainable
manner. NuVista has delivered on its promise of providing stakeholders with
compounded annualized growth of 30% in production per share and 40% in reserves
per share and cash flow per share over a five year period. The results are due
to a team effort and NuVista wants to express its appreciation for the
extraordinary commitment received from the entire NuVista team.
NuVista has delivered on its promise by continuing to focus on what we do best,
acquiring, optimizing, exploiting and growing assets which other companies may
not be focusing on. The completion of the business combination with Rider on
March 4, 2008, is an example of this. The business combination creates a premium
intermediate natural gas focused company with a track record of meeting
expectations, prudent capital management, profitable per share growth and a
disciplined approach to continue to deliver results by doing what we do best.
NuVista will continue to focus on its core strategy of cost control and applying
the expertise of its technical staff to its current operating regions, through
both the exploration and development program and strategic acquisitions. The
execution of these strategies will enable NuVista to continue to grow its
production and funds from operations on a per share basis consistently and
profitably. NuVista has the team, land base and prospect generation ability to
continue to create value for shareholders. NuVista is poised for continued
growth and is well positioned to post strong operational and financial results
for the balance of 2008 and beyond. NuVista remains unwavering in its commitment
to enhance shareholder value over the long-term in a diligent and prudent manner
by accessing the broad depth and expertise of its team.
Sincerely,
Alex G. Verge Robert F. Froese
President & CEO Vice-President, Finance & CFO
August 5, 2008
NUVISTA ENERGY LTD.
Consolidated Balance Sheets
($ thousands) June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 5,593 $ -
Accounts receivable and
prepaids (note 3) 71,729 30,463
Future income taxes 10,259 -
----------------------------------------------------------------------------
87,581 30,463
Oil and natural gas properties
and equipment 1,189,258 598,263
Goodwill 79,333 54,439
----------------------------------------------------------------------------
$ 1,356,172 $ 683,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued
liabilities $ 52,201 $ 31,972
Commodity derivative liability
(note 9) 36,641 1,704
----------------------------------------------------------------------------
88,842 33,676
Bank loan (note 6) 364,021 177,109
Commodity derivative liability (note 9) 14,863 -
Other liabilities (note 7) 713 -
Asset retirement obligations (note 5) 40,518 26,574
Future income taxes 118,624 75,514
Shareholders' equity
Share capital, warrants and
contributed surplus (note 7) 593,474 245,212
Accumulated other comprehensive
income (note 7) - 17
Retained earnings 135,117 125,063
----------------------------------------------------------------------------
728,591 370,292
----------------------------------------------------------------------------
$ 1,356,172 $ 683,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NUVISTA ENERGY LTD.
Consolidated Statements of Earnings, Comprehensive Income and Retained
Earnings
Three months Six months
ended June 30, ended June 30,
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
(unaudited)
Revenues
Production $ 161,794 $ 56,832 $ 258,858 $ 110,457
Royalties (35,926) (13,322) (58,153) (27,741)
Realized gains (losses) on
commodity derivatives (5,854) 810 (6,394) 2,794
Unrealized gains (losses) on
commodity derivatives (40,031) 3,483 (49,775) 3,407
----------------------------------------------------------------------------
79,983 47,803 144,536 88,917
----------------------------------------------------------------------------
Expenses
Operating 19,481 9,076 32,898 18,299
Transportation 2,296 977 3,737 2,062
General and administrative 3,606 1,258 5,811 2,323
Bad debt provision (note 3) 661 - 661 -
Interest 4,184 2,593 7,731 4,599
Stock-based compensation
(note 7) 1,890 739 3,148 1,462
Depreciation, depletion and
accretion 43,091 22,085 75,792 41,524
----------------------------------------------------------------------------
75,209 36,728 129,778 70,269
----------------------------------------------------------------------------
Earnings before income and
other taxes 4,774 11,075 14,758 18,648
Future income taxes 1,869 1,397 4,704 4,138
----------------------------------------------------------------------------
Net earnings 2,905 9,678 10,054 14,510
Other comprehensive income
Amortization of fair value of
financial instruments (note 7) - (63) (17) (813)
----------------------------------------------------------------------------
Comprehensive income 2,905 9,615 10,037 13,697
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained earnings, beginning
of period 132,212 103,568 125,063 98,736
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained earnings, end
of period $ 135,117 $ 113,246 $ 135,117 $ 113,246
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings per
share - basic $ 0.04 $ 0.19 $ 0.14 $ 0.29
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings per
share - diluted $ 0.04 $ 0.18 $ 0.14 $ 0.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
NUVISTA ENERGY LTD.
Consolidated Statements of Cash Flows
Three months Six months
ended June 30, ended June 30,
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
(unaudited)
Cash provided by (used in)
Operating Activities
Net earnings $ 2,905 $ 9,678 $ 10,054 $ 14,510
Items not requiring cash from
operations
Depreciation, depletion and
accretion 43,091 22,085 75,792 41,524
Stock-based compensation 1,025 739 2,030 1,462
Bad debt provision 661 - 661 -
Unrealized losses on commodity
derivatives 40,031 (3,483) 49,775 (3,407)
Future income taxes 1,869 1,397 4,704 4,138
Asset retirement expenditures (483) (155) (537) (465)
Increase in non-cash
working capital items (21,646) (7,779) (39,860) (18,283)
----------------------------------------------------------------------------
67,453 22,482 102,619 39,479
----------------------------------------------------------------------------
Financing Activities
Issue of share capital and
warrants, net of share
issuance costs 4,260 39,734 89,074 40,444
Increase (decrease) in
long-term debt (51,267) (12,313) 184,867 8,069
Repayment of long-term debt - - (303,538) -
----------------------------------------------------------------------------
(47,007) 27,421 (29,597) 48,513
----------------------------------------------------------------------------
Investing Activities
Oil and natural gas properties
and equipment (16,478) (22,221) (1,716) (57,930)
Transaction costs on Rider
acquisition - - (4,130) -
Property acquisition 265 (34,890) (22,798) (34,890)
Deposit on capital acquisition - 3,608 - -
Decrease in non-cash
working capital items 475 3,600 1,215 4,828
----------------------------------------------------------------------------
(15,738) (49,903) (67,429) (87,992)
----------------------------------------------------------------------------
Change in cash and cash
equivalents 4,708 - 5,593 -
Cash and cash equivalents,
beginning of period 885 - - -
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 5,593 $ - $ 5,593 $ -
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2008.
The unaudited consolidated financial statements of NuVista Energy Ltd.
("Nuvista" or "the Company") have been prepared by management in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"), using the same
accounting policies as those set out in note 1 to the consolidated financial
statements for the year ended December 31, 2007, except as noted below. The
consolidated financial statements for the three and six months ended June 30,
2008 should be read in conjunction with the annual audited consolidated
financial statements for the year ended December 31, 2007. Certain amounts have
been reclassified to conform with the current year's presentation. All tabular
amounts are in thousands, except per share amounts, unless otherwise stated.
1. Adoption of new accounting policies
(a) Capital disclosures
Effective January 1, 2008, the Company adopted the new CICA accounting standard
Section 1535, Capital Disclosures. Section 1535 specifies the disclosure of an
entity's objectives, policies and processes for managing capital, quantitative
data about what it manages as capital, any externally imposed capital
requirements, and the consequences of non-compliance. Refer to note 8, Capital
risk management.
(b) Financial instruments
Effective January 1, 2008, the Company adopted the new CICA accounting standard
Section 3862, Financial Instruments Disclosures and Section 3863, Financial
Instrument Presentation. These Sections require the Company to increase
disclosure on the nature, extent and risk arising from the financial instruments
and how the entity manages those risks. Refer to note 9, Risk management
activities.
(c) Restricted share units
The Company has established a Restricted Share Unit ("RSU") Incentive Plan for
employees, and officers. Compensation expense associated with the RSU is
determined based on the intrinsic value, considered to be the market value, at
each reporting period which is recognized in earnings over the vesting period
with a corresponding increase or decrease in liabilities.
2. Future accounting changes
(a) The CICA issued the new accounting standard, Section 3064 Goodwill and
Intangible Assets replacing Section 3062, Goodwill and Other Intangible Assets.
This new Section will be effective on January 1, 2009. This Section applies to
goodwill subsequent to initial recognition and establishes standards for the
recognition, measurement, presentation and disclosure of goodwill and intangible
assets. This new standard is not expected to have a material impact on the
Company's consolidated financial statements.
(b) International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board confirmed January 1,
2011 as the effective date for the requirement to report under International
Financial Reporting Standards ("IFRS") with comparative 2010 periods converted
as well. Canadian generally accepted accounting principles as we currently know
them, will cease to exist for all public reporting entities. Currently, the
application of IFRS to the oil and gas industry in Canada requires considerable
clarification. The Canadian Securities Administrators are in the process of
examining changes to securities rules as a result of this initiative. The
Company is currently assessing the impact of IFRS on the results of operations,
financial position and disclosures.
3. Accounts receivable provision
On July 22, 2008, SemGroup LP filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code and two of SemGroup LP's Canadian subsidiaries, SemCAMS ULC
and SemCanada Crude Company, filed for creditor protection under the Companies'
Creditors Arrangement Act in Canada. NuVista sold natural gas to SemCAMS ULC and
crude oil to SemCanada Crude Company and has a financial exposure to these two
entities totaling $2.6 million at June 30, 2008. At this time we are unable to
ascertain the amount of June revenues that will be recoverable but have recorded
a provision in our second quarter financial statements equal to 25% of the
amount owed at June 30, 2008.
4. Acquisitions
Business combination
In March 2008, the Company completed the acquisition of all of the issued and
outstanding common shares of Rider Resources Ltd. ("Rider") for net
consideration of $260.3 million. The purchase price was based on Rider
shareholders receiving 0.3540 common shares of the Company for each Rider share
owned. The Company issued approximately 19.8 million common shares in exchange
for 56.0 million common shares of Rider. The acquisition was accounted for using
the purchase method. Operating results for Rider have been consolidated with the
results of the Company effective from March 4, 2008, the date of acquisition.
The preliminary allocation of the net purchase price is subject to change as
actual amounts are determined. The preliminary allocation of the net purchase
price to assets acquired and liabilities assumed based on their fair values was
as follows:
Amount
----------------------------------------------------------------------------
Purchase price:
19.8 million NuVista common shares issued $ 256,195
Transaction costs 4,130
----------------------------------------------------------------------------
260,325
----------------------------------------------------------------------------
Allocation of purchase price:
Property, plant and equipment 594,944
Working capital (deficiency) (14,911)
Bank loan (288,901)
Financial instrument (19,251)
Asset retirement obligations (8,505)
Future income taxes (27,945)
Goodwill 24,894
----------------------------------------------------------------------------
$ 260,325
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Asset retirement obligations
Total asset retirement obligations are based on estimated costs to reclaim and
abandon ownership interests in oil and natural gas assets including well sites,
gathering systems and processing facilities. At June 30, 2008, the estimated
total undiscounted amount of cash flows required to settle the Company's asset
retirement obligations is $159.9 million (2007 - $127.4 million), which will be
incurred over the next 51 years. The majority of the costs will be incurred
between 2010 and 2036. A credit-adjusted risk-free rate of 8% (2007 - 8%) and an
inflation rate of 2% (2007 - 2%) were used to calculate the fair value of the
asset retirement obligations.
A reconciliation of the asset retirement obligations is provided below:
December 31,
June 30, 2008 2007
----------------------------------------------------------------------------
Balance, beginning of period $ 26,574 $ 22,683
Accretion expense 1,144 1,841
Liabilities incurred 4,832 2,429
Liabilities acquired (see note 4) 8,505 166
Change in assumptions - 1,044
Liabilities settled (537) (1,589)
----------------------------------------------------------------------------
Balance, end of period $ 40,518 $ 26,574
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Bank loan
On March 4, 2008, the Company increased the revolving credit facility to $450
million (2007 - $210 million). Borrowing under the credit facility may be made
by prime loans, bankers' acceptances and/or US libor advances. These advances
bear interest at the bank's prime rate and/or at money market rates plus a
stamping fee. The credit facility is secured by a first floating charge
debenture, general assignment of book debts and the Company's oil and natural
gas properties and equipment. The credit facility is subject to an annual review
by the lenders, at which time a lender can request conversion to a one year term
loan. Under the term period, no principal payments would be required until March
4, 2010. As such, this credit facility is classified as a long-term liability.
Cash paid for interest was $5.0 million for the three months ended June 30, 2008
(2007 - $2.4 million) and for the six months ended was $7.2 million (2007 -$4.4
million)
7. Shareholders' equity
(a) Share capital, warrants and contributed surplus
Share capital consists of:
December 31,
June 30, 2008 2007
----------------------------------------------------------------------------
Share capital 583,774 $ 240,245
Warrants 3,454 -
Contributed surplus 6,246 4,967
----------------------------------------------------------------------------
Total 593,474 $ 245,212
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Authorized
Unlimited number of voting Common Shares and 1,200,000 Class B Performance
Shares.
(c) Common shares issued
June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Number Amount Number Amount
----------------------------------------------------------------------------
Balance, beginning of period 52,704 $ 240,245 49,015 $ 194,027
Issued for cash 6,000 80,546 2,750 39,875
Issued on Rider acquisition 19,844 256,195 - -
Conversion of Class B
Performance Shares - - 231 3
Exercise of stock options 485 5,374 708 4,991
Stock-based compensation - 1,596 - 2,788
Cost associated with shares issued,
net of future tax benefit - (182) - (1,439)
----------------------------------------------------------------------------
Balance, end of period 79,033 $ 583,774 52,704 $ 240,245
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On March 4, 2008, the Company issued 6.0 million units of NuVista ("Unit")
at a price of $14.00 per Unit for gross proceeds of $84.0 million by way of
a private placement. Each Unit consists of one common share and one-half of
a warrant.
(d) Warrants
June 30, 2008
----------------------------------------------------------------------------
Number Amount
----------------------------------------------------------------------------
Balance, beginning of period - $ -
Issued 3,000 3,454
----------------------------------------------------------------------------
Balance, end of period 3,000 $ 3,454
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At June 30, 2008, there were 3.0 million common share purchase warrants
outstanding. Each warrant entitles the holder thereof to acquire, subject to
adjustment, one common share for $15.50, prior to March 4, 2009. The Company has
estimated a fair value of $3,454,000 for the warrants using a Black - Scholes
pricing model. The pricing model used the following parameters: a risk free
interest rate of 3.76%; an expected life of 1 year; and a volatility of 30%.
(e) Contributed surplus
December 31,
June 30, 2008 2007
Amount Amount
----------------------------------------------------------------------------
Balance, beginning of period $ 4,967 $ 3,747
Stock-based compensation 2,875 4,008
Conversion of Class B Performance Shares
and exercise of stock options (1,596) (2,788)
----------------------------------------------------------------------------
Balance, end of period $ 6,246 $ 4,967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(f) Accumulated other comprehensive income
December 31,
June 30, 2008 2007
----------------------------------------------------------------------------
Amount Amount
----------------------------------------------------------------------------
Balance, beginning of period $ 17 $ -
Transition adjustment for discontinuance of
hedge accounting, net of tax - 905
Reclassification to net earnings during the
period, net of tax (17) (888)
----------------------------------------------------------------------------
Balance, end of period $ - $ 17
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(g) Per share amounts
During the three months ended June 30, 2008, there were 78,829,785 (2007 -
49,022,746) weighted average shares outstanding. On a diluted basis, there were
80,368,214 (2007 - 49,799,168) weighted average shares outstanding after giving
effect for dilutive stock options. For the six months ended June 30, 2008, there
were 69,753,816 weighted average shares outstanding and 70,752,811 weighted
average shares outstanding on a dilutive basis. The number of anti-dilutive
options totaled 221,209 at June 30, 2008 (2007 - 3,224,150). In addition, there
were 3.0 million warrants outstanding at June 30, 2008 which were anti-dilutive.
(h) Stock options
The Company has established a stock option plan whereby officers, directors,
employees and service providers may be granted options to purchase common
shares. Options granted vest at the rate of 25% per year and expire two years
after the date of vesting to a maximum term of six years. The total stock
options outstanding plus the Class B Performance Shares cannot exceed 10% of the
outstanding common shares. The summary of stock options is as follows:
June 30, 2008 December 31, 2007
----------------------------------------------------------------------------
Weighted Weighted
average average
exercise exercise
Number price Number price
----------------------------------------------------------------------------
Balance, beginning of period 4,046,400 $ 13.46 3,653,711 $ 11.94
Granted 1,916,960 15.83 1,373,100 14.38
Exercised (485,075) 11.34 (707,961) 6.35
Forfeited (50,575) 14.47 (272,450) 14.34
----------------------------------------------------------------------------
Balance, end of period 5,427,710 $ 14.48 4,046,400 $ 13.46
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company uses the fair value based method for the determination of the
stock-based compensation costs. The fair value of each option granted was
estimated on the date of grant using the Black-Scholes option pricing model. In
the pricing model, the risk free interest rate was 4.5%; average volatility of
33%; an expected life of 4.5 years; an estimated forfeiture rate of 10%; and
dividends of nil. The weighted average fair value of stock options granted for
the six months ended June 30, 2008 was $5.26 per option (2007 - $4.77 per
option).
(i) Restricted share units ("RSU")
In January 2008, the Board of Directors approved a RSU Incentive Plan for
employees and officers. Each RSU entitles participants to receive cash equal to
the market value of the equivalent number of shares of the Company. The RSU's
become payable as they vest over their lives, typically three years.
For the six months ended June 30, 2008, the Company recorded compensation
expense of $1.1 million and capitalized $0.3 million to property, plant and
equipment with a corresponding offset recorded in liabilities. The compensation
expense was based on the trading price of the Company's shares on June 30, 2008.
The following table summarizes the change in RSU for the six months ended
June 30, 2008:
June 30, 2008
----------------------------------------------------------------------------
Number
----------------------------------------------------------------------------
Balance, beginning of period -
----------------------------------------------------------------------------
Granted 352,693
Forfeited (1,220)
----------------------------------------------------------------------------
Balance, end of period 351,473
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes the change in compensation liability relating
to the RSU's:
June 30, 2008
----------------------------------------------------------------------------
Amount
----------------------------------------------------------------------------
Balance, beginning of period $ -
Change in liabilities during the period 1,454
----------------------------------------------------------------------------
Balance, end of period $ 1,454
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current portion of compensation liability (included in
accounts and accrued liabilities) $ 741
Long-term portion of compensation liability $ 713
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Capital risk management
The Company's objectives when managing capital are: (i) to deploy capital to
provide an appropriate return on investment to its shareholders; (ii) to
maintain financial flexibility in order to preserve its ability to meet
financial obligations; and (iii) to maintain a capital structure that provides
financial flexibility to execute on strategic opportunities.
The Company's strategy is designed and formulated to maintain a flexible capital
structure consistent with the objectives as stated above and to respond to
changes in economic conditions and the risk characteristics of the underlying
assets. The Company considers its capital structure to include share capital,
bank loan, and working capital. In order to maintain or adjust its capital
structure, the Company may issue new shares, raise debt, refinance existing debt
and adjust capital spending.
A key measure the Company utilizes in evaluating its capital structure is the
ratio of net debt to annualized funds from operations. The ratio is calculated
as net debt, defined as outstanding bank loan plus or minus working capital,
divided by cash flow from operations before asset retirement expenditures and
changes in non-cash working capital for the most recent calendar quarter. The
Company's strategy is to maintain a net debt to annualized funds from operations
ratio of less than 2.0:1. At June 30, 2008, the Company had a ratio of net debt
to annualized cash flow of 1.0:1 (2007 - 1.6:1).
The Company's share capital is not subject to external restrictions; however the
credit facility borrowing commitment is based on the lender's semi-annual review
of the Company's petroleum and natural gas reserves. There were no changes to
the Company's approach to capital management during the quarter.
9. Risk management activities
(a) Financial instruments
The Company's financial instruments recognized in the consolidated balance sheet
consist of cash and cash equivalents, accounts receivable, financial derivative
contracts, substantially all current liabilities, and bank loan. Unless
otherwise noted, carrying values reflect the current fair value of the Company's
financial instruments due to their short-term maturities. The estimated fair
values of recognized financial instruments have been determined based on the
Company's assessment of available market information and appropriate
methodologies, through comparisons to similar instruments, or third party
quotes.
(i) As at June 30, 2008, the Company has entered into the following crude
oil contracts:
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
500 bbls/d CDN. $66.50-Bow River April 1, 2008-December 31, 2008
750 bbls/d CDN. $70.01-CDN. $86.68-WTI July 1, 2008-December 31, 2008
1,000 bbls/d CDN. $64.00-Bow River January 1, 2009-December 31, 2009
1,000 bbls/d CDN. $95.01-CDN. $110.01-WTI January 1, 2009-December 31, 2009
As at June 30, 2008, the Company has entered into the following natural
gas contracts:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
20,000 gj/d CDN. $7.50-$8.42-AECO April 1, 2008 - October 31, 2008
10,000 gj/d CDN. $8.00-$10.13-AECO November 1, 2008 - March 31, 2009
As at June 30, 2008, the mark to market value of the financial
instruments was a loss of $51.5 million.
(ii) Physical sale contracts
As at June 30, 2008, the Company has entered into direct sale natural
gas contracts as follows:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
50,000 gj/d CDN. $7.27-$7.43-AECO April 1, 2008-October 31, 2008
40,000 gj/d CDN. $8.59-$10.38-AECO November 1, 2008-March 31, 2009
(b) Credit risk
Credit risk is the risk of financial loss to the Company if a counterparty to a
financial instrument fails to meet its contractual obligation. The Company is
exposed to credit risk with respect to its accounts receivables. Most of the
Company's accounts receivable arises from transactions with joint venture
partners and oil and natural gas sales with petroleum and natural gas marketers.
The Company mitigates its credit risk by entering into contracts with
established counterparties and reviewing its exposure to individual
counterparties on a regular basis.
As at June 30, 2008, the accounts receivable balance was $47.2 million of which
$2.9 million of accounts receivable were past due. The Company considers all
amounts greater than 90 days past due. These past due accounts receivable are
considered to be collectible. When determining whether past due accounts are
uncollectible, the Company factors in the past credit history of the
counterparties. As at June 30, 2008, the Company had an allowance for doubtful
accounts of $0.7 million (see Note 3).
The carrying amount of accounts receivable and cash and cash equivalents
represents the maximum credit exposure risk to the Company. The Company did not
have accounts receivable balances owing from counterparties that constituted
more than 10% of the total revenue during the six months ended June 30, 2008.
(c) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they become due. The Company manages its liquidity
through continuously monitoring cash flows from operating activities, review of
actual capital expenditure program, managing maturity profiles of financial
assets and financial liabilities, maintaining a revolving credit facility with
sufficient capacity, and managing its commodity price risk management program.
These activities ensure that the Company has sufficient funds to meet its
financial obligations when due.
The timing of cash flows relating to financial liabilities as at June 30,
2008 are as follows:
2008 2009 2010 2011 Thereafter
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities $ 51,460 $ 741 $ - $ - $ -
Commodity derivative
liability 36,641 14,863 - - -
Bank loan - - 364,021 - -
Other liabilities - 642 71 -
----------------------------------------------------------------------------
Total $ 88,101 $ 15,604 $ 364,663 $ 71 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(d) Market risk
Market risk is the risk that the fair value or future cash flows of a financial
instrument will fluctuate due to changes in commodity price risk, currency risk,
and interest rate risk. The objective of market risk management is to manage the
Company's exposure to these risks to within acceptable parameters, while
optimizing returns.
(i) Commodity price risk
The Company is engaged in exploration, development and production activities in
Canada and as a result has exposure to commodity price risk. Commodity price
risk is the risk that the fair value of financial instruments or future cash
flows will fluctuate as a result of changes in commodity prices. Commodity
prices are impacted by global economic, political and environmental factors
which affect the levels of supply and demand. The Company sells all of its crude
oil, natural gas and natural gas liquids in Canada with sales prices denominated
in Canadian dollars.
The Company has adopted a disciplined commodity price risk management program as
part of its overall financial management strategy. The Board of Directors has a
commodity price risk management limit of up to a maximum of 60% of forecast
production volumes, net of royalties. For the period April 2008 to October 2008,
the Board has approved an increase to the limit for natural gas contracts up to
70,000 gj/day. The Company manages the risks associated with changes in
commodity prices through the use of various financial derivative and physical
delivery sales contracts. The price risk management contracts are considered
economic hedges and the change in the fair value of these contracts is offset by
an equal and opposite change in the fair value of the Company's future cash
flows.
(ii) Currency risk
Currency risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate as a result of changes in foreign exchange
rates. The Company is exposed to currency risk as the underlying commodity
prices in Canada for petroleum and natural gas are impacted by changes in
exchange rate between the Canadian and United States dollars. The Company
manages this exposure through its commodity price risk management.
(iii) Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market interest rates.
The Company is exposed to interest rate fluctuations on its bank loan which
bears a floating rate of interest. If interest rates had been 0.5% higher, the
impact to net earnings after tax for the three and six months ended June 30,
2008 would have been $0.5 million and $0.4 million respectively due to higher
interest expense. Conversely, if interest rates had been 0.5% lower, an equal
and opposite impact would have occurred to net earnings. The Company had no
interest rate swap or financial contracts in place as at or during the six
months ended June 30, 2008.
10. Relationship with Bonavista Petroleum Ltd.
In 2003, as part of the Plan of Arrangement with Bonavista Petroleum Ltd.
("Bonavista"), NuVista entered into a Technical Services Agreement ("TSA").
Under the TSA, Bonavista received payment for certain services provided by it to
NuVista. Effective January 1, 2007, the terms of the TSA were amended to reflect
the reduced level of services provided by Bonavista. On August 31, 2007, the TSA
was terminated and replaced with a new services agreement that reflects the
remaining ongoing services that will be provided by Bonavista. NuVista and
Bonavista are considered related as two directors of NuVista, one of whom is
NuVista's chairman, are also directors and officers of Bonavista and a director
and an officer of NuVista are also officers of Bonavista.
For the three months ending June 30, 2008, NuVista paid Bonavista $0.4 million
(2007 - $0.2 million) in fees relating to general and administrative services
provided by Bonavista. In 2008, NuVista charged Bonavista management fees for
jointly owned partnerships totaling $0.3 million (2007 - $0.3 million). In
addition, during the second quarter of 2008, Bonavista charged NuVista $63,000
(2007 - $62,500) for costs that are outside of the new services agreement
relating to NuVista's share of direct charges from third parties.
For the six months ending June 30, 2008, NuVista paid Bonavista $0.8 million
(2007 - $0.7 million) in fees relating to general and administrative services
provided by Bonavista. In 2008, NuVista charged Bonavista management fees for
jointly owned partnerships totaling $0.6 million (2007 - $0.6 million). In
addition Bonavista charged NuVista $72,000 (2007 - $0.6 million) for costs that
are outside of the new services agreement relating to NuVista's share of direct
charges from third parties. As at June 30, 2008, the amount receivable from
Bonavista was $2.9 million.
11. Commitments
The following is a summary of the Company's contractual obligations and
commitments as at June 30, 2008:
Total 2008 2009 2010 2011 Thereafter
----------------------------------------------------------------------------
Transportation $ 1,027 $ 426 $ 444 $ 123 $ 34 $ -
Office lease 9,076 1,199 2,055 2,055 2,055 1,712
----------------------------------------------------------------------------
Total commitments $ 10,103 $ 1,625 $ 2,499 $ 2,178 $ 2,089 $ 1,712
----------------------------------------------------------------------------
Corporate Information
Directors
Keith A. MacPhail, Chairman
W. Peter Comber, Barrantagh Investment Management Inc.
Pentti O. Karkkainen, KERN Partners
Ronald J. Poelzer, Bonavista Energy Trust
Alex G. Verge, President and CEO
Clayton H. Woitas, Range Royalty Management Ltd.
Grant A. Zawalsky, Burnet, Duckworth & Palmer LLP
Craig W. Stewart, Director
Officers
Keith A. MacPhail, Chairman
Alex G. Verge, President and CEO
Robert F. Froese, Vice President, Finance and CFO
D. Chris McDavid, Vice President, Operations
Daniel B. McKinnon, Vice President, Engineering
Kevin J. Christie, Vice President, Exploration
Steven J. Dalman, Vice President, Business Development
Glenn A. Hamilton, Corporate Secretary
Auditors Legal Counsel
KPMG LLP Burnet, Duckworth & Palmer LLP
Chartered Accountants
Calgary, Alberta
Bankers Registrar and Transfer Agent
Canadian Imperial Bank of Commerce Valiant Trust Company
Bank of Montreal Calgary, Alberta
Royal Bank of Canada
Toronto-Dominion Bank
Bank of Nova Scotia
Alberta Treasury Branches
Union Bank of California, Canada Branch
Calgary, Alberta
Engineering Consultants Stock Exchange Listing
GLJ Petroleum Consultants Ltd. Toronto Stock Exchange
Calgary, Alberta Trading Symbol "NVA"
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