NuVista Energy Ltd. (TSX:NVA) is pleased to announce its financial and operating
results for the three and nine months ended September 30, 2008 as follows:
----------------------------------------------------------------------------
Corporate Highlights
----------------------------------------------------------------------------
Three months Nine months
ended September 30, % ended September 30, %
2008 2007 Change 2008 2007 Change
----------------------------------------------------------------------------
Financial
($ thousands,
except per share)
Production revenue 149,648 48,166 211 408,506 158,623 158
Funds from
operations (1) 79,136 25,697 208 222,152 83,924 165
Per share - basic 1.00 0.49 104 3.05 1.65 85
Per share - diluted 1.00 0.49 104 3.02 1.62 86
Net earnings 53,699 754 - 63,753 15,264 318
Per share - basic 0.68 0.01 - 0.87 0.30 190
Per share - diluted 0.68 0.01 - 0.87 0.29 200
Total assets 1,387,517 651,158 113
Long-term debt,
net of working
capital 349,261 160,149 118
Long-term debt, net
of adjusted working
capital (1) 344,176 162,802 115
Shareholders' equity 784,557 356,894 120
Net capital
expenditures 82,928 27,379 203 151,572 120,199 26
Corporate acquisition
(non-cash) - - - 594,944 - -
Weighted average
common shares
outstanding
(thousands):
Basic 79,103 52,402 51 72,893 50,962 43
Diluted 79,270 52,814 50 73,619 51,667 42
----------------------------------------------------------------------------
Operating
(boe conversion -
6:1 basis)
Production:
Natural gas
(mmcf/d) 111.4 64.9 72 103.3 67.0 54
Natural gas liquids
(bbls/d) 2,942 303 871 2,221 309 619
Oil (bbls/d) 4,554 2,474 84 4,418 2,240 97
Total oil equivalent
(boe/d) 26,065 13,590 92 23,860 13,716 74
Product prices: (2)
Natural gas ($/mcf) 8.35 5.99 39 8.60 6.93 24
Natural gas liquids
($/bbl) 81.95 61.48 33 81.23 59.43 37
Oil ($/bbl) 92.06 54.56 69 87.41 51.29 70
Operating expenses:
Natural gas and
natural gas
liquids ($/mcfe) 1.20 1.09 10 1.17 1.06 10
Oil ($/bbl) 14.70 9.94 48 13.18 11.90 11
Total oil equivalent
($/boe) 8.50 7.15 19 8.15 7.27 12
General and
administrative
expenses ($/boe) 1.33 1.05 27 1.37 0.97 41
Funds from operations
netback ($/boe) (1) 33.00 20.55 61 33.98 22.41 52
----------------------------------------------------------------------------
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 derivatives. 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 its shareholders the
financial and operating results for the three and nine months ended September
30, 2008. NuVista had a solid third quarter with production averaging 26,065
boe/d and funds from operations of $79.1 million, close to the record levels
experienced in the second quarter of 2008. In addition, NuVista ended the third
quarter with a strong balance sheet and approximately 40% of its net natural gas
production hedged for the winter period. NuVista was able to maintain its
production in the third quarter by spending less than funds from operations on
its exploration and development drilling programs. The remainder of capital
expenditures were used to acquire undeveloped lands in NuVista's core areas,
substantially expanding its prospect inventory for the future.
THIRD QUARTER 2008 FINANCIAL AND OPERATING RESULTS
NuVista's funds from operations for the three months ended September 30, 2008
were $79.1 million ($1.00 per share) compared to $25.7 million ($0.49 per share)
for the same period of 2007, and $89.6 million ($1.14 per share) for the three
months ended June 30, 2008. Net earnings for the three months ended September
30, 2008 were $53.7 million ($0.68 per share) compared to $0.8 million ($0.01
per share) for the same period of 2007. Net earnings in the third quarter of
2008 included an after-tax unrealized gain of $30.4 million on commodity
derivatives contracts relating to future periods. NuVista ended the third
quarter with over $100 million of available capacity on its credit facility and
a net debt to annualized quarterly funds from operations ratio of 1.1:1.
NuVista completed a large capital expenditure program during the third quarter
of 2008, totaling $82.9 million. This capital program included an aggressive
drilling program of 56 wells and significant purchases of undeveloped lands. The
drilling program resulted in 32 natural gas wells, 18 oil wells, and six dry
holes, for an 89% overall success rate. On October 2, 2008, NuVista's Board of
Directors approved an increase in NuVista's 2008 capital program to $205 million
from $175 million with the additional capital allocated to the purchase of
undeveloped crown lands. Undeveloped land purchases during the third quarter
totaled $22.4 million or 27% of total capital expenditures. These purchases were
focused on a number of large natural gas in place resource deposits in the
Wapiti core area.
NuVista continues with its growth plans as a premium intermediate oil and
natural gas company with:
- a five year track record of adding shareholder value;
- balanced production between W5/W6 and W3/W4 core regions;
- shallow natural gas, deep natural gas and heavy oil opportunities;
- a 72% natural gas weighting; and
- a number of developing scaleable resource plays that will enable expansions to
the exploration and development program, when appropriate.
Developments in global economies stemming from the credit crisis over the past
three months have had a significant impact on the outlook for commodity prices
and the equity valuations for exploration and production companies in Western
Canada. This is the third consecutive year where broader influences beyond
management's control have significantly affected the oil and natural gas
industry. Just as we endured the changes to taxation of Royalty Trusts two years
ago and the new Royalty Framework last year, NuVista has steadfast resolve to
endure challenges presented by the financial crisis and emerge stronger than
ever before. With over $100 million of available capacity on our credit facility
and significant free cash flow; a talented and dedicated work force committed to
adding value through the prudent allocation of capital; a disciplined approach
to evaluating and integrating strategic acquisitions; and an experienced and
aligned Board of Directors, NuVista believes these industry challenges will
create opportunities.
ADDITION OF LANDS WITH A VIEW TO SCALEABLE RESOURCE PLAY DEVELOPMENT
The business combination with Rider Resources Ltd. ("Rider") resulted in NuVista
becoming an intermediate natural gas focused company with both a diversified
asset base and strong technical teams to continue creating shareholder value
through growth in production per share and reserves per share. The Rider asset
base is well suited to NuVista's existing business strategy which emphasizes
long-term and profitable growth based on 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 liquids rich
natural gas prone regions of Alberta that are characterized by high netbacks and
longer reserve life production.
The core areas added through the Rider business combination provide an
opportunity inventory of high impact drilling locations and lands which are also
amenable to a number of large natural gas in place resource deposits where new
drilling and completion technologies can play a significant role in increasing
the ultimate recovery of the resource in place. NuVista is continuing to acquire
lands, field test development concepts, and build technical expertise in three
potential resource plays in the Wapiti core area. As of today's date, NuVista's
undeveloped land inventory in the Wapiti core area has increased to
approximately 118,000 net acres from 55,000 net acres when the business
combination was completed in March 2008. A significant portion of our developed
acreage in the Wapiti core area is also considered to be prospective for high
natural gas in place scaleable resource plays.
In light of the recent developments in the financial markets, NuVista will
prudently spend capital to assess the resource potential and continue to
increase our technical knowledge base on these resource plays. NuVista is the
operator of two of the three resource plays and therefore has the ability to
control the pace of development. The total land cost exposure related to these
resource plays represents less than five percent of the ultimate development
cost for the resource. In many instances the lands purchased can be held for up
to nine years with minimal capital spending. NuVista has seen material
reductions in land purchase costs on these plays over the past three months and
has used this opportunity to cost effectively acquire lands at a time when
industry capital has been constrained. NuVista will continue to increase its
knowledge base on these scaleable resource plays in 2009, however, a portion of
expenditures originally planned prior to spring break-up may be deferred to
later in the 2009 if a favourable environment for acquisitions requires the
re-allocation of capital spending.
COMMODITY PRICE RISK MANAGEMENT ACTIVITIES
When NuVista announced the acquisition of Rider in January 2008, it entered into
price risk management contracts for a significant portion of its natural gas
production for the period April 2008 to March 2009 in order to achieve debt
reduction targets. With high commodity prices during the first half of 2008,
NuVista achieved its debt reduction targets by the end of the second quarter.
For the period November 1, 2008 to March 31, 2009, NuVista has entered into
price risk management transactions for approximately 40% of its production net
of royalties, with an average AECO floor price of $9.36/mcf and upside price
participation to $11.33/mcf. NuVista has also hedged crude oil prices as part of
its ongoing crude oil price risk management program.
With increases in commodity prices in early 2008 and then more recent declines,
NuVista has incurred both significant unrealized commodity derivative contract
gains and losses during 2008. NuVista does not account for its financial price
risk management contracts as hedges and therefore is required to record the
mark-to-market unrealized commodity derivative contract gain or loss relating to
future periods, at the end of each quarter. This can result in significant
volatility in NuVista's reported net earnings. During the three months ended
September 30, 2008, NuVista recorded an unrealized commodity derivative contract
gain of $42.2 million ($30.4 million after-tax) more than offsetting an
unrealized commodity derivative contract loss of $40.0 million ($28.8 million
after-tax) recorded in the second quarter of 2008. While the recording of
unrealized commodity derivative contract gains and losses has a significant
impact on net earnings, it does not impact funds from operations.
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 nine months ended September
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, October 30, 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
unit, 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:
----------------------------------------------------------------------------
For the three months For the nine months
ended September 30, ended September 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by operating
activities 84,582 37,277 187,201 76,756
Add back:
Asset retirement expenditures 1,309 337 1,846 802
Change in non-cash working
capital (6,755) (11,917) 33,105 6,366
----------------------------------------------------------------------------
Funds from operations 79,136 25,697 222,152 83,924
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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.
Operating activities - During the third quarter of 2008, NuVista participated in
56 (42.6 net) wells, with a success rate of 89%. NuVista was the operator for 50
of the wells drilled. The focus of NuVista's summer drilling program was in
eastern Alberta and western Saskatchewan with a total of 41 wells drilled in
these areas. Of these wells, 20 were drilled in the Oyen core area, eight in the
Northwest Saskatchewan core area, seven in the Provost core area and six in the
West Central Saskatchewan core area. NuVista drilled 16 wells in west central
Alberta, including eight wells in its Pembina core area and six wells in the
Wapiti core area. The success rate of 89% in the third quarter drilling program
resulted in 32 natural gas wells and 18 oil wells. For the nine months ended
September 30, 2008, NuVista drilled 92 (69.3 net) wells resulting in 51 natural
gas wells and 28 oil wells. NuVista has 25 to 30 wells planned for the fourth
quarter, with the focus on natural gas wells in the Wapiti core area and oil
wells in the Saskatchewan core areas.
Production For the three months ended September 30,
----------------------------------------------------------------------------
2008 2007 % Change
----------------------------------------------------------------------------
Natural gas (mcf/d) 111,409 64,877 72
Liquids (bbls/d) 2,942 303 871
Oil (bbls/d) 4,554 2,474 84
-----------------------------------------------------------
Total oil equivalent (boe/d) 26,065 13,590 92
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months ended September 30,
----------------------------------------------------------------------------
2008 2007 % Change
----------------------------------------------------------------------------
Natural gas (mcf/d) 103,325 66,999 54
Liquids (bbls/d) 2,221 309 619
Oil (bbls/d) 4,418 2,240 97
-----------------------------------------------------------
Total oil equivalent (boe/d) 23,860 13,716 74
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended September 30, 2008, NuVista's average production was
26,065 boe/d, a 92% increase over the same period in 2007 and a slight decrease
over the second quarter of 2008. Third quarter production was comprised of
111,409 mcf/d of natural gas, 2,942 bbls/d of associated natural gas liquids
("liquids") and 4,554 bbls/d of oil. During the third quarter, NuVista's
production was reduced due to restricted access to third-party gas processing
plants in the Wapiti and Waskahigan/Kaybob core areas, a scheduled TCPL outage
in September in Eastern Alberta and turnarounds at two Pembina crude oil
facilities. The increase in natural gas and liquids revenue is due primarily to
the inclusion of production from the Rider properties acquired in March 2008 and
the success of the drilling program. Oil production increased for the three
months ended September 30, 2008, compared to the same period in 2007, due to
increased production 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 29% in the
third quarter compared to 20% in the same period in 2007.
NuVista's production for the nine months ended September 30, 2008 averaged
23,860 boe/d comprised of 103,325 mcf/d of natural gas, 2,221 bbls/d of liquids
and 4,418 bbls/d of oil, which represents a 74% increase over the same period in
2007. Production increases for the nine month period, compared to the same
period in 2007, are primarily due to the same reasons that production increased
in the third quarter.
Revenues For the three months ended September 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
Natural gas: $ $/mcf $ $/mcf $ $/mcf
Production revenue 84,647 8.26 32,858 5.51 158 50
Realized gains (losses) on
commodity derivatives 988 0.09 2,892 0.48 (66) (81)
---------------------------------------------------------------
Total 85,635 8.35 35,750 5.99 140 39
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Oil: $ $/bbl $ $/bbl $ $/bbl
Production revenue 42,817 102.20 12,300 54.05 248 89
Realized gains (losses)
on commodity derivatives (4,249) (10.14) 117 0.51 (3,732) (2,088)
-------------------------------------------------------------
Total 38,568 92.06 12,417 54.56 211 69
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liquids:
Production revenue 22,184 81.95 1,717 61.48 1,192 33
Realized gains (losses) on
commodity derivatives - - - - - -
-------------------------------------------------------------
Total 22,184 81.95 1,717 61.48 1,192 33
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months ended September 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
Natural gas: $ $/mcf $ $/mcf $ $/mcf
Production revenue 243,640 8.61 122,629 6.70 99 28
Realized gains (losses) on
commodity derivatives (38) (0.01) 4,116 0.23 (101) (104)
-------------------------------------------------------------
Total 243,602 8.60 126,745 6.93 92 24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Oil: $ $/bbl $ $/bbl $ $/bbl
Production revenue 115,427 95.35 30,964 50.64 273 88
Realized gains (losses) on
commodity derivatives (9,617) (7.94) 395 0.65 (2,535) (1,322)
-------------------------------------------------------------
Total 105,810 87.41 31,359 51.29 237 70
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liquids:
Production revenue 49,439 81.23 5,030 59.43 883 37
Realized gains (losses) on
commodity derivatives - - - - - -
-------------------------------------------------------------
Total 49,439 81.23 5,030 59.43 883 37
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three months ended September 30, 2008, revenues including realized
commodity derivative gains and losses were $146.4 million, a 193% increase from
$49.9 million for the same period in 2007. The increase in revenues for the
three months ended September 30, 2008 compared to the same period of 2007 is
primarily due to the 92% increase in production and 51% increase in realized
prices. These revenues were comprised of $85.6 million of natural gas revenue,
$38.6 million of oil revenue, and $22.2 million of liquids revenue. The increase
in average realized commodity prices is comprised of a 39% increase in the
natural gas price to $8.35/mcf from $5.99/mcf, a 69% increase in the oil price
to $92.06/bbl from $54.56/bbl, and an increase of 33% in the liquids price to
$81.95/bbl from $61.48/bbl. The increase in the average realized commodity
prices 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 nine months ended September 30, 2008, revenues including realized
commodity derivative gains and losses were $398.9 million, a 144% increase from
$163.1 million, for the same period in 2007. The increase in revenues for the
first nine months of 2008 compared to the same period of 2007 is primarily due
to the 74% increase in production and 40% increase in realized prices. These
revenues were comprised of $243.6 million of natural gas revenue, $105.8 million
of oil revenue, and $49.4 million of liquids revenue. The increase in average
realized commodity prices is comprised of a 24% increase in the natural gas
price to $8.60/mcf from $6.93/mcf, a 70% increase in the oil price to $87.41/bbl
from $51.29/bbl, and an increase of 37% in the liquids price to $81.23/bbl from
$59.43/bbl.
Commodity price risk management
For the three months ended September 30,
----------------------------------------------------------------------------
2008 2007
----------------------------------------------------------------------------
Realized Unrealized Total Realized Unrealized Total
Gains Gains Gains Gains Gains Gains
($ thousands) (Losses) (Losses) (Losses) (Losses) (Losses) (Losses)
----------------------------------------------------------------------------
Natural gas 988 11,587 12,575 2,892 (2,558) 334
Oil (4,249) 30,613 26,364 117 433 550
----------------------------------------------------------------------------
Total gains (losses)(3,261) 42,200 38,939 3,009 (2,125) 884
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months ended September 30,
----------------------------------------------------------------------------
2008 2007
Realized Unrealized Total Realized Unrealized Total
Gains Gains Gains Gains Gains Gains
($ thousands) (Losses) (Losses) (Losses) (Losses) (Losses) (Losses)
----------------------------------------------------------------------------
Natural gas (38) 1,877 1,839 4,116 1,181 5,297
Oil (9,617) (9,452) (19,069) 395 1,393 1,788
----------------------------------------------------------------------------
Total gains (losses)(9,655) (7,575) (17,230) 4,511 2,574 7,085
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
primarily fixed price swaps 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 its physical sales price risk management contracts.
For the three months ended September 30, 2008, the financial commodity
derivative price risk management program resulted in a gain of $38.9 million
consisting of realized losses of $3.3 million and unrealized gains of $42.2
million. The unrealized gains in the third quarter offset an unrealized loss in
the second quarter of $40.0 million. These large unrealized gains and losses
reflect the volatility in commodity prices during the last six months. For the
nine months ended September 30, 2008, the financial commodity derivative price
risk management program resulted in a loss of $17.2 million consisting of
realized losses of $9.7 million and unrealized losses of $7.6 million.
For the three months ended September 30, 2007, the financial commodity
derivative price risk management program resulted in a gain of $0.9 million and
consisted of $3.0 million of realized gains and $2.1 million of unrealized
losses. For the nine months ended September 30, 2007, the financial commodity
derivative price risk management program resulted in a gain of $7.1 million and
consisted of $4.5 million of realized gains and $2.6 million of unrealized
gains.
At September 30, 2008, the mark-to-market of our financial commodity derivative
contracts was a loss of $9.3 million and the market-to-market of our physical
sales contracts was a gain of $11.6 million.
The following is a summary of commodity price risk management contracts in place
as at September 30, 2008:
a) Financial commodity derivatives
As at September 30, 2008, NuVista has entered into the following crude oil
price risk management contracts:
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
500 bbls/d CDN. $66.50 - Bow River October 1, 2008 -
December 31, 2008
750 bbls/d CDN. $70.01 - CDN. $86.68 - WTI October 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. $110.01 - WTI January 1, 2009 -
December 31, 2009
As at September 30, 2008, NuVista has entered into the following natural
gas price risk management contracts:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
20,000 gj/d CDN. $7.50 - $8.42 - AECO October 1, 2008 -
October 31, 2008
5,000 gj/d CDN. $8.50 - $11.00 - AECO November 1, 2008 -
March 31, 2009
(b) Physical sale contracts
As at September 30, 2008, NuVista has entered into direct sale price risk
management contracts to sell natural gas as follows:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
50,000 gj/d CDN. $7.27 - $7.43 - AECO October 1, 2008 -
October 31, 2008
30,000 gj/d CDN. $8.96 - $10.72 - AECO November 1, 2008 -
March 31, 2009
Royalties
For the three months ended For the nine months ended
September 30, September 30,
----------------------------------------------------------------------------
Royalty rates (%) 2008 2007 2008 2007
----------------------------------------------------------------------------
Natural gas and liquids 28 26 26 27
Oil 19 12 17 12
Weighted average rate 25 21 23 24
----------------------------------------------------------------------------
Royalties for the three months ended September 30, 2008, were $37.1 million, as
compared to $10.3 million reported for the three months ended September 30,
2007. Royalties for the nine months ended September 30, 2008 were $95.2 million,
as compared to $40.0 million reported for the nine months ended September 30,
2007. The increase in royalties results from higher revenues in both the third
quarter and first half of 2008 compared to the same period in 2007.
As a percentage of revenues, the average royalty rate for the third quarter of
2008 was 25% compared to 21% for the same period in 2007. Royalty rates by
product for the third quarter of 2008 were 28% for natural gas and liquids and
19% for oil compared to 26% for natural gas and liquids and 12% for oil for the
same period in 2007. For the nine months ended September 30, 2008, the average
royalty rate as a percentage of revenue was 23% compared to 24% for the same
period in 2007. Royalty rates by product were 26% for natural gas and liquids
and 17% for oil compared to 27% for natural gas and liquids and 12% for oil for
the same period in 2007.
Royalty rates are based on government market reference prices and not our
average realized prices that includes price risk management activities. As a
result, the losses from our price risk management activities included in revenue
result in a higher royalty rate as a percentage of revenue if no price risk
management activities had taken place. Average royalty rates in the third
quarter of 2008 excluding price risk management activities were 26% for natural
gas and liquids and 16% for oil.
Netbacks - The following table summarizes field netbacks by product for the
three months ended September 30, 2008:
Natural gas
and liquids Oil Total
----------------------------------------------------------------------------
($ thousands) 129.1 mmcfe/d 4,554 bbl/d 26,065 boe/d
----------------------------------------------------------------------------
$ $/mcf $ $/bbl $ $/boe
Production revenue 106,831 9.00 42,817 102.20 149,648 62.41
Realized gains (losses)
on commodity derivatives 988 0.08 (4,249) (10.14) (3,261) (1.36)
----------------------------------------------------------------------------
107,819 9.08 38,568 92.06 146,387 61.05
Royalties (29,734) (2.50) (7,317) (17.46) (37,051)(15.45)
Transportation costs (1,313) (0.11) (785) (1.87) (2,098) (0.87)
Operating costs (14,213) (1.20) (6,158) (14.70) (20,371) (8.50)
----------------------------------------------------------------------------
Field netbacks 62,559 5.27 24,308 58.03 86,867 36.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes field netbacks by product for the nine months
ended September 30, 2008:
Natural gas
and liquids Oil Total
----------------------------------------------------------------------------
($ thousands) 116.7 mmcfe/d 4,418 bbl/d 23,860 boe/d
----------------------------------------------------------------------------
$ $/mcf $ $/bbl $ $/boe
Production revenue 293,079 9.17 115,427 95.35 408,506 62.48
Realized gains (losses)
on commodity derivatives (38) - (9,617) (7.94) (9,655) (1.48)
----------------------------------------------------------------------------
293,041 9.17 105,810 87.41 398,851 61.00
Royalties (77,071) (2.41) (18,133) (14.98) (95,204)(14.56)
Transportation costs (3,752) (0.12) (2,083) (1.72) (5,835) (0.89)
Operating costs (37,318) (1.17) (15,951) (13.18) (53,269) (8.15)
----------------------------------------------------------------------------
Field netbacks 174,900 5.47 69,643 57.53 244,543 37.40
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes funds from operations netbacks for the three
and nine months ended September 30, 2008, compared to the three and nine
months ended September 30, 2007:
For the three months ended September 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
$ $/boe $ $/boe $ $/boe
Production revenue 149,648 62.41 46,874 37.49 219 66
Realized gains (losses)
on commodity derivatives (3,261) (1.36) 3,009 2.41 (208) (156)
----------------------------------------------------------------
146,387 61.05 49,883 39.90 193 53
Royalties (37,051) (15.45) (10,258) (8.20) 261 88
Transportation costs (2,098) (0.87) (1,138) (0.91) 84 (4)
Operating costs (20,371) (8.50) (8,934) (7.15) 128 19
----------------------------------------------------------------
Field netbacks 86,867 36.23 29,553 23.64 194 53
General and administrative (3,178) (1.33) (1,312) (1.05) 142 27
Restricted share units (110) (0.05) - - - -
Interest (4,443) (1.85) (2,544) (2.04) 75 (9)
Funds from operations
netbacks 79,136 33.00 25,697 20.55 208 61
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the nine months ended September 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 % Change
----------------------------------------------------------------------------
$ $/boe $ $/boe $ $/boe
Production revenue 408,506 62.48 158,623 42.36 158 47
Realized gains (losses)
on commodity derivatives (9,655) (1.48) 4,511 1.20 (314) (223)
----------------------------------------------------------------------------
398,851 61.00 163,134 43.56 144 40
Royalties (95,204) (14.56) (37,999) (10.15) 151 43
Transportation costs (5,835) (0.89) (3,200) (0.85) 82 5
Operating costs (53,269) (8.15) (27,233) (7.27) 96 12
----------------------------------------------------------------
Field netbacks 244,543 37.40 94,702 25.29 158 48
General and administrative (8,989) (1.37) (3,635) (0.97) 147 41
Restricted share units (1,228) (0.19) - - - -
Interest (12,174) (1.86) (7,143) (1.91) 70 (3)
Funds from operations
netbacks 222,152 33.98 83,924 22.41 165 52
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Transportation - Transportation costs were $2.1 million ($0.87/boe) for the
three months ended September 30, 2008 as compared to $1.1 million ($0.91/boe)
for the same period in 2007. Transportation costs were $5.8 million ($0.89/boe)
for the nine months ended September 30, 2008 compared to $3.2 million
($0.85/boe) for the same period in 2007. The increase in transportation costs in
2008 compared to 2007 is primarily due to an increase in overall production
levels.
Operating - Operating expenses were $20.4 million ($8.50/boe) for the three
months ended September 30, 2008 as compared to $8.9 million ($7.15/boe) for the
three months ended September 30, 2007. This increase resulted from the 92%
increase in production volumes and a 19% increase in per unit costs. For the
three months ended September 30, 2008 natural gas and natural gas liquids
operating costs averaged $1.20/mcfe and oil operating expenses were $14.70/bbl
as compared to $1.09/mcfe and $9.94/bbl respectively for the same period in
2007.
Operating expenses were $53.3 million ($8.15/boe) for the nine months ended
September 30, 2008 as compared to $27.2 million ($7.27/boe) for the nine months
ended September 30, 2007. This increase resulted from the 74% increase in
production volumes and a 12% increase in per unit costs. For the nine months
ended September 30, 2008 natural gas and natural gas liquid operating expenses
averaged $1.17/mcfe and oil operating expenses were $13.18/bbl as compared to
$1.06/mcfe and $11.90/bbl respectively, for the same period in 2007.
The increase in per unit costs resulted primarily from third-party processing
fee adjustments, higher operating costs at our heavy oil properties and the
increase in oil production as a percentage of our overall production. NuVista is
forecasting fourth quarter 2008 operating costs of approximately $8.25/boe.
General and administrative - General and administrative expenses, net of
overhead recoveries, for the three months ended September 30, 2008 were $3.2
million ($1.33/boe) compared to $1.3 million ($1.05/boe) in the same period in
2007. General and administrative expenses, net of overhead recoveries, for the
nine months ended September 30, 2008 were $9.0 million ($1.37/boe) as compared
to $3.6 million ($0.97/boe) for the nine months ended September 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, costs associated with moving to new
leased premises, terminating existing NuVista and Rider office lease
arrangements, integration costs associated with the Rider Acquisition and
general cost increases experienced by the industry. NuVista is forecasting 2008
general and administrative costs for the remainder of the year to average
approximately $1.25/boe.
For the three months For the nine months
ended September 30, ended September 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Gross general and
administrative expenses 5,232 2,683 14,179 7,622
Overhead recoveries (2,054) (1,371) (5,190) (3,987)
----------------------------------------------------------------------------
Net general and
administrative expenses 3,178 1,312 8,989 3,635
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per boe 1.33 1.05 1.37 0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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. NuVista has agreed with these two entities to terminate sales
contracts effective July 22, 2008, and therefore NuVista has no ongoing
financial exposure with these entities. At this time we are unable to ascertain
the amount of revenues that will be recoverable but have recorded a provision in
the financial statements equal to 25% of the amount owed. The provision
increased from $0.7 million at June 30, 2008, to $1.1 million at September 30,
2008 to reflect a provision of 25% on July revenues. We will continue to
reassess the recoverability of the revenues as more information becomes
available.
Stock-based compensation - NuVista recorded a stock-based compensation charge of
$1.2 million for the three months ended September 30, 2008, compared to $0.8
million for the same period in 2007. For the nine months ended September 30,
2008, NuVista recorded a stock-based compensation charge of $4.4 million
compared to $2.2 million for the same period in 2007. The stock-based
compensation charge relates to the amortization of the value of stock option
awards and the accrual for awards under the Restricted Share Unit ("RSU")
incentive plan. The increase in the expense in 2008 relates primarily to the
implementation of the 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 nine months ended September 30, 2008, the RSU related stock-based
compensation expense was $0.1 million and $1.2 million respectively.
Interest - For the three months ended September 30, 2008, interest expense was
$4.4 million as compared to $2.5 million for the same period in 2007. For the
nine months ended September 30, 2008, interest expense was $12.2 million
compared to $7.1 million for the same period in 2007. Higher interest costs for
the three and nine months ended September 30, 2008 are due to higher average
debt levels and higher average interest rates. Currently, our average borrowing
rate is approximately 4.5%.
Depreciation, depletion and accretion - Depreciation, depletion and accretion
expenses were $44.7 million for the three months ended September 30, 2008, as
compared to $22.6 million for the same period in 2007. The average per unit cost
was $18.65/boe for the three months ended September 30, 2008, as compared to
$18.10/boe for the same period in 2007. Depreciation, depletion and accretion
expenses for the nine months ended September 30, 2008, were $120.5 million as
compared to $64.2 million for the same period in 2007. The average per unit cost
was $18.44/boe for the nine months ended September 30, 2008, as compared to
$17.07/boe for the same period in 2007. The increase in the depreciation,
depletion and accretion expenses for the three and nine months ended September
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 September 30, 2008, the provision for
income and other taxes was $21.3 million compared to $0.7 million for the same
period in 2007. For the nine months ended September 30, 2008, the provision for
income and other taxes was $26.0 million compared to $4.9 million for the same
period in 2007. The higher provisions in 2008 primarily relate to significantly
higher pre-tax earnings associated with higher commodity prices. The provisions
for income and other taxes for the nine months ended September 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 nine months ended September 30,
2008, the effective tax rate was 29%.
Capital expenditures - Capital expenditures were $82.9 million during the three
months ended September 30, 2008, and relating to exploration and development
activities. This compares to $27.4 million incurred for the same period in 2007,
consisting of $4.8 million for acquisitions and $22.6 million for exploration
and development. During the third quarter of 2008, NuVista spent $22.4 million
or 27% of total capital expenditures for the purchase of undeveloped lands
compared to $0.7 million for the same period in 2007. These land purchases were
focused on a number of large natural gas in place resource deposits in the
Wapiti core area. Capital expenditures for the nine months ended September 30,
2008, were $151.6 million, consisting of $126.2 million for exploration and
development spending and $25.4 million for acquisitions. This compares to $120.2
million incurred for the same period in 2007, consisting of $39.9 million of
acquisitions and $80.3 million of exploration and development spending.
For the three months For the nine months
ended September 30, ended September 30,
----------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Exploration and development
Land and retention costs 22,385 718 27,508 3,834
Seismic 4,169 1,192 8,852 8,651
Drilling and completion 40,039 13,046 61,159 43,565
Facilities and equipment 15,842 7,498 26,668 23,430
Corporate and other 493 121 1,987 859
----------------------------------------------------------------------------
82,928 22,575 126,174 80,339
Acquisitions
Business - - - 35,056
Property - 4,804 25,398 (1) 4,804
----------------------------------------------------------------------------
- 4,804 25,398 39,860
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total capital expenditures 82,928 27,379 151,572 120,199
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 - For the three months ended September
30, 2008, funds from operations were $79.1 million ($1.00/share, basic), a 208%
increase over the $25.7 million ($0.49/share, basic) for the same period in
2007. For the nine months ended September 30, 2008, NuVista's funds from
operations was $222.2 million ($3.05/share, basic), a 165% increase from $83.9
million ($1.65/share, basic) for the same period in 2007. The increase in funds
from operations in both the three and nine months ended September 30, 2008,
compared to the same periods in 2007 was primarily due to higher production
volumes and commodity prices.
Net earnings increased during the three months ended September 30, 2008, to
$53.7 million ($0.68/share, basic) from $0.8 million ($0.01/share, basic) for
the same period in 2007. For the nine months ended September 30, 2008, net
earnings were $63.8 million ($0.87/share, basic) compared to $15.3 million
($0.30/share, basic) for the same period in 2007. The increase in net earnings
in the three and nine months ended September 30, 2008, compared to the same
periods in 2007, was primarily due to higher commodity prices in 2008 and the
additional impact in the three months ended September 30, 2008 of the unrealized
gain on commodity derivatives of approximately $30.4 million on an after
tax-basis.
Liquidity and capital resources - As at September 30, 2008, net bank debt,
defined as the bank loan plus adjusted working capital was $3.5 million,
resulting in a net debt to annualized third quarter funds from operations ratio
of 1.1:1. At September 30, 2008, NuVista had a working capital deficiency of
$4.1 million. Adjusted working capital excludes the current portion of the
commodity derivatives mark-to-market of $8.9 million and a current future income
tax asset of $2.0 million. We believe it is appropriate to exclude these amounts
when determining net debt.
At September 30, 2008, NuVista had approximately $104.9 million of unused bank
borrowing capability based on the current credit facility of $450.0 million.
NuVista's credit facility is provided by a syndicate of primarily Canadian
banks. 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. On
October 17, 2008, NuVista received notification from our banking syndicate that
the semi-annual review of the borrowing base was completed and our credit
facility will remain unchanged at $450.0 million.
NuVista anticipates that funds from operations will provide the flexibility to
fund its remaining 2008 capital program and its planned 2009 capital program.
NuVista's capital program will be monitored and adjusted based on the outlook
for commodity prices and opportunities to increase capital spending.
As at September 30, 2008, there were 79.1 million common shares and 3.0 million
common share purchase warrants outstanding. In addition, there were 5.7 million
stock options outstanding, with an average exercise price of $14.62 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 September 30, 2008, NuVista paid Bonavista $0.3
million (2007 - $0.4 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 third quarter of 2008, Bonavista charged NuVista $0.1
million (2007 - $0.4 million) for costs that are outside of the new services
agreement relating to NuVista's share of direct charges from third parties.
For the nine months ended September 30, 2008, NuVista paid Bonavista $1.1
million (2007 - $1.0 million) in fees relating to general and administrative
services provided by Bonavista, and NuVista charged Bonavista management fees
for jointly owned partnerships totaling $1.0 million (2007 - $1.0 million). In
addition Bonavista charged NuVista $0.2 million(2007 - $1.0 million) for costs
that are outside of the new services agreement relating to NuVista's share of
direct charges from third parties. As at September 30, 2008, the amount
receivable from Bonavista was $1.0 million.
Contractual obligations and commitments - NuVista enters into many contractual
obligations as part of conducting day-to-day business. As NuVista continues to
spend money as part of our capital program we will draw on our credit facility
and will have the related contractual obligation. The credit facility is subject
to an annual review by the lenders, at which time a lender can request
conversion to a one year term loan. Under the term period, no principal payments
would be required until March 4, 2010.
The following is a summary of NuVista's contractual obligations and commitments
as at September 30, 2008:
($ thousands) Total 2008 2009 2010 2011 Thereafter
----------------------------------------------------------------------------
Transportation 813 212 444 123 34 -
Office lease 8,391 514 2,055 2,055 2,055 1,712
----------------------------------------------------------------------------
Total commitments 9,204 726 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 December 31, 2006 to
September 30, 2008:
2008 2007 2006
----------------------------------------------------------------------------
September June March December September June March December
30 30 31 31 30 30 31 31
----------------------------------------------------------------------------
Production
(boe/d) 26,065 26,153 19,339 14,251 13,590 14,147 13,409 12,612
($ thousands,
except per
share
amounts)
Production
revenue 149,648 161,794 97,064 53,790 48,166 56,832 54,822 49,195
Net
earnings 53,699 2,905 7,150 11,063 754 9,678 4,832 5,765
Net earnings
per share:
Basic 0.68 0.04 0.12 0.21 0.01 0.19 0.10 0.12
Diluted 0.68 0.04 0.12 0.21 0.01 0.18 0.10 0.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NuVista has seen growth in consecutive quarterly production volumes over the
prior eight quarters except for slight declines experienced in the quarters
ended September 30, 2007 and September 30, 2008. These declines were primarily
due to plant turnarounds that occurred during the summer months. Over the prior
eight quarters, quarterly revenue has been in a range of $48.1 million to $161.8
million with revenue influenced primarily 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 $53.7 million primarily
influenced by production volumes and natural gas prices, unrealized gains and
losses on commodity derivatives and future income tax recoveries associated with
the reduction in corporate income tax rates. Net earnings in the quarter ended
September 30, 2008 included an after-tax unrealized gain on commodity
derivatives of approximately $30.4 million and net earnings in the quarter ended
June 30, 2008 included an after-tax unrealized loss on commodity derivatives of
approximately $28.8 million.
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, depletion and accretion 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 asset 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 August 15, 2008, the Canadian Securities Administrators published the
National Instrument 52-109 Certification of Disclosure in Issuers' Annual and
Interim Filings. The changes include the requirement to provide certification of
the effectiveness of internal controls over financial reporting for years ending
after December 15, 2008. NuVista has plans in place 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, NuVista 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, NuVista adopted the new
CICA accounting standard Section 3862, Financial Instruments Disclosures and
Section 3863, Financial Instrument Presentation. These Sections require NuVista
to increase disclosure on the nature, extent and risk arising from the financial
instruments and how it 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. NuVista has completed a preliminary analysis of the accounting
differences and has plans in place to perform a detailed assessment of the
impact of IFRS on our results of operations, financial position and disclosures.
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 National 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 the 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 September 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.
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 favourable outlook for commodity prices over
the long term. By focusing on production and reserves per share growth while
maintaining financial flexibility, NuVista expects to continue to turn adversity
into opportunity and emerge stronger from downturns faced by the industry. With
the successful integration of the Rider assets behind us, NuVista now has eight
core areas with shallow natural gas, deep natural gas and heavy oil, high
working interest multi-zone opportunities. With the addition of new undeveloped
lands in the Wapiti core area containing high natural gas in place resource
deposits, NuVista is well positioned to expand exploration and development
activities in the future.
FOURTH QUARTER 2008
For 2008, NuVista's Board of Directors has approved a capital program of $205
million that will see NuVista participate in approximately 120 wells for the
year with 25-30 wells in the fourth quarter. NuVista also expects to continue to
add to its undeveloped land inventory. Approximately 25% of fourth quarter
capital is expected to be allocated to undeveloped land purchases in our core
areas. In order to continue to preserve capital in an uncertain environment,
NuVista has shifted 15-20 wells in our W3/W4 meridian core region from 2008 to
2009. For the third consecutive quarter, capital spending on drilling activities
is expected to be less than funds from operations and production levels are
expected to be maintained at approximately 26,000 boe/d. During the fourth
quarter, NuVista will use excess funds from operations to build for the future
and maintain financial flexibility. Based on current fourth quarter 2008 pricing
assumptions of $6.90/mcf for AECO natural gas, US$70 for WTI crude oil, a
foreign exchange rate of 0.88, and incorporating price risk management
contracts, NuVista is forecasting 2008 funds from operations of approximately
$280 million. NuVista is currently forecasting 2008 annual production to be
within its guidance range announced earlier in the year, at approximately 24,300
boe/d.
CAPITAL PROGRAM for 2009
Although the current financial markets create considerable uncertainty on the
outlook for near term commodity prices, NuVista will continue to implement its
balanced acquire and develop business model. For 2009, we look at the year as
one filled with many opportunities as well as challenges. For 2009, NuVista's
Board of Directors has approved a preliminary base capital program of $290
million with over 75% of this capital program currently budgeted for exploration
and development activities. The 2009 capital program will be continually
reviewed throughout the year, with particular attention to the first quarter, in
the context of commodity and financial markets and available opportunities. The
implementation of our base capital program is forecast to result in production
levels of approximately 27,000 boe/d in 2009.
Throughout our five year history, NuVista has demonstrated a disciplined and
flexible approach to spending and allocating capital with a focus on profitable
per share growth while maintaining a strong balance sheet. NuVista will continue
with this approach in 2009 looking for additional opportunities beyond the base
plan to create additional shareholder value from the current adversity within
the financial markets and the oil and gas sector. In the past, NuVista has used
periods such as these when capital is scarce to expand our business plan through
strategic acquisitions. We will continue to carefully review our total capital
program and our capital allocation throughout the year as opportunities present
themselves. In the latter half of 2008, NuVista has complemented our historical
business strategy by acquiring undeveloped lands in scaleable resource plays in
our Wapiti core area at a time when capital is scarce and land prices are
depressed. This should allow NuVista to expand its exploration and development
program during periods of higher commodity prices.
A key element of NuVista's strategy is maintaining a strong balance sheet and
financial flexibility, in particular during downturns faced by the industry.
Following the announcement of the business combination with Rider in early 2008,
NuVista reduced exploration and development capital spending and entered into
commodity price risk management contracts in order to restore its balance sheet
strength by the end of 2008. Notwithstanding a strong outlook for commodity
prices during the first half of 2008, NuVista remained focused on its debt
reduction targets and achieved its year end target debt level by the end of the
second quarter of 2008. NuVista ended the third quarter of 2008 with a net debt
to annualized quarterly funds from operations ratio of 1.l:1, over $100 million
of available capacity on its credit facility and approximately 40% of its net
natural gas production hedged until March 2009 at an AECO floor price of
$9.36/mcf. NuVista plans to maintain its financial discipline during this period
of uncertainty and will look for opportunities to create shareholder value.
In July of 2008, NuVista celebrated its fifth anniversary. Five years ago,
NuVista made a commitment to its stakeholders to deliver profitable per share
growth in a financially prudent and sustainable manner. NuVista has delivered on
its commitment by providing shareholders with compounded annualized growth in
production per share of approximately 30% and in reserves per share of
approximately 40%. NuVista has delivered on its commitment by continuing to
focus on what we do best; acquiring, optimizing, exploiting and growing assets
which previous owners may not have focused on. The results achieved are due to a
team effort and NuVista wants to express its appreciation for the extraordinary
commitment received from the entire NuVista team.
NuVista will continue to focus on its core strategy of cost control and applying
the expertise of its technical staff to its current operating regions, through
both its exploration and development program and strategic acquisitions. The
execution of these strategies is expected to allow NuVista to continue to grow
its production and reserves on a per share basis, consistently and profitably.
NuVista has the team, land base and prospect generation ability to continue to
create value for shareholders. NuVista is poised for continued growth and is
well positioned to post strong operational and financial results for the balance
of 2008 and beyond. NuVista remains unwavering in its commitment to enhance
shareholder value over the long-term in a diligent and prudent manner by
accessing the broad depth and expertise of its team.
Sincerely,
Alex G. Verge Robert F. Froese
President & CEO Vice-President, Finance & CFO
October 30, 2008
NUVISTA ENERGY LTD.
Consolidated Balance Sheets
($ thousands) September 30, 2008 December 31, 2007
----------------------------------------------------------------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 5,375 $ -
Accounts receivable and prepaids
(note 3) 66,042 30,463
Future income taxes 1,977 -
----------------------------------------------------------------------------
73,394 30,463
Oil and natural gas properties and
equipment 1,234,448 598,263
Goodwill 79,675 54,439
----------------------------------------------------------------------------
$ 1,387,517 $ 683,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued
liabilities $ 68,571 $ 31,972
Commodity derivative liability (note 9) 8,939 1,704
----------------------------------------------------------------------------
77,510 33,676
Long-term term debt (note 6) 345,145 177,109
Commodity derivative liability (note 9) 2,242 -
Other liabilities (note 7) 861 -
Asset retirement obligations (note 5) 45,326 26,574
Future income taxes 131,876 75,514
Shareholders' equity
Share capital, warrants and contributed
surplus (note 7) 595,741 245,212
Accumulated other comprehensive income
(note 7) - 17
Retained earnings 188,816 125,063
----------------------------------------------------------------------------
784,557 370,292
----------------------------------------------------------------------------
$ 1,387,517 $ 683,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NUVISTA ENERGY LTD.
Consolidated Statements of Earnings, Comprehensive Income and Retained
Earnings
Three months Nine months
ended September 30, ended September 30,
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
(unaudited)
Revenues
Production $ 149,648 $ 48,166 $ 408,506 $ 158,623
Royalties (37,051) (10,258) (95,204) (37,999)
Realized gains (losses)
on commodity derivatives (3,261) 3,009 (9,655) 4,511
Unrealized gains (losses)
on commodity derivatives 42,200 (2,125) (7,575) 2,574
----------------------------------------------------------------------------
151,536 38,792 296,072 127,709
----------------------------------------------------------------------------
Expenses
Operating 20,371 8,934 53,269 27,233
Transportation 2,098 1,138 5,835 3,200
General and administrative 3,178 1,312 8,989 3,635
Bad debt provision (note 3) 466 - 1,127 -
Interest 4,443 2,544 12,174 7,143
Stock-based compensation
(note 7) 1,230 763 4,378 2,225
Depreciation, depletion and
accretion 44,734 22,633 120,526 64,157
----------------------------------------------------------------------------
76,520 37,324 206,298 107,593
----------------------------------------------------------------------------
Earnings before income and
other taxes 75,016 1,468 89,774 20,116
Future income taxes 21,317 714 26,021 4,852
----------------------------------------------------------------------------
Net earnings 53,699 754 63,753 15,264
Other comprehensive income
Amortization of fair value
of financial instruments
(note 7) - (39) (17) (852)
----------------------------------------------------------------------------
Comprehensive income $ 53,699 $ 715 $ 63,736 $ 14,412
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained earnings,
beginning of period 135,117 113,246 125,063 98,736
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained earnings,
end of period $ 188,816 $ 114,000 $ 188,816 $ 114,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings per share
- basic $ 0.68 $ 0.01 $ 0.87 $ 0.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings per share
- diluted $ 0.68 $ 0.01 $ 0.87 $ 0.29
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
NUVISTA ENERGY LTD.
Consolidated Statements of Cash Flows
Three months Nine months
ended September 30, ended September 30,
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
(unaudited)
Cash provided by (used in)
Operating Activities
Net earnings $ 53,699 $ 754 $ 63,753 $ 15,264
Items not requiring cash from
operations
Depreciation, depletion and
accretion 44,734 22,633 120,526 64,157
Stock-based compensation 1,120 763 3,150 2,225
Bad debt provision 466 - 1,127 -
Unrealized gains (losses) on
commodity derivatives (42,200) 833 7,575 (2,574)
Future income taxes 21,317 714 26,021 4,852
Asset retirement expenditures (1,309) (337) (1,846) (802)
Decrease (increase) in
non-cash working capital
items 6,755 11,917 (33,105) (6,366)
----------------------------------------------------------------------------
84,582 37,277 187,201 76,756
----------------------------------------------------------------------------
Financing Activities
Issue of share capital and
warrants, net of
share issuance costs 711 916 89,785 41,360
Increase (decrease) in
long-term debt (16,831) 470 168,036 8,539
Repayment of long-term debt (2,046) - (305,584) -
----------------------------------------------------------------------------
(18,166) 1,386 (47,763) 49,899
----------------------------------------------------------------------------
Investing Activities
Oil and natural gas
properties and equipment (82,912) (22,575) (124,628) (80,505)
Transaction costs on Rider
acquisition (16) - (4,146) -
Property acquisition - (4,804) (22,798) (39,694)
Decrease (increase) in
non-cash working capital
items 16,294 (11,284) 17,509 (6,456)
----------------------------------------------------------------------------
(66,634) (38,663) (134,063) (126,655)
----------------------------------------------------------------------------
Change in cash and cash
equivalents (218) - 5,375 -
Cash and cash equivalents,
beginning of period 5,593 - - -
----------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 5,375 $ - $ 5,375 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NUVISTA ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended September 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 nine months ended September
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 other 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 has completed a preliminary analysis of the accounting differences and
has plans in place to perform a detailed assessment of 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 approximately $4.5 million. NuVista has agreed with these two
entities to terminate sales contract effective July 22, 2008, and therefore
NuVista has no ongoing financial exposure with these entities. At this time we
are unable to ascertain the amount of revenues that will be recoverable but have
recorded a provision in our financial statements equal to 25% of the amount
owed. The provision increased from $0.7 million at June 30, 2008, to $1.1
million at September 30, 2008 to reflect a provision of 25% on July revenue. We
will continue to reassess the recoverability of the revenues as more information
becomes available.
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 4,146
----------------------------------------------------------------------------
260,341
----------------------------------------------------------------------------
Allocation of purchase price:
Property, plant and equipment 594,944
Working capital (deficiency) (15,237)
Bank loan (288,901)
Financial instrument (19,251)
Asset retirement obligations (8,505)
Future income taxes (27,945)
Goodwill 25,236
----------------------------------------------------------------------------
$ 260,341
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 September 30, 2008, the
estimated total undiscounted amount of cash flows required to settle the
Company's asset retirement obligations is $201.9 million (2007 - $143.3
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. The change in assumptions
are due to changes in per well cost estimates.
A reconciliation of the asset retirement obligations is provided below:
September 30, December 31,
2008 2007
----------------------------------------------------------------------------
Balance, beginning of period $ 26,574 $ 22,683
Accretion expense 2,159 1,841
Liabilities incurred 6,430 2,429
Liabilities acquired (see note 4) 8,505 166
Change in assumptions 3,504 1,044
Liabilities settled (1,846) (1,589)
----------------------------------------------------------------------------
Balance, end of period $ 45,326 $ 26,574
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Long-term debt
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.
On October 17, 2008, the Company received notification from its banking
syndicate that the semi-annual review of the borrowing base was completed and
the credit facility will remain unchanged at $450.0 million. Cash paid for
interest expense for the three and nine months ended September 30, 2008, was
$3.9 million (2007 - $2.2 million) and $11.1 million (2007 - $6.6 million)
respectively.
7. Shareholders' equity
(a) Share capital, warrants and contributed surplus
September 30, December 31,
2008 2007
----------------------------------------------------------------------------
Share capital $ 585,200 $ 240,245
Warrants 3,454 -
Contributed surplus 7,087 4,967
----------------------------------------------------------------------------
Total $ 595,741 $ 245,212
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Authorized
Unlimited number of voting Common Shares and 1,200,000 Class B
Performance Shares.
(c) Common shares issued
September 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 564 6,086 708 4,991
Stock-based compensation - 2,343 - 2,788
Cost associated with shares issued,
net of future tax benefit - (215) - (1,439)
----------------------------------------------------------------------------
Balance, end of period 79,112 $ 585,200 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
September 30, 2008
----------------------------------------------------------------------------
Number Amount
----------------------------------------------------------------------------
Balance, beginning of period - $ -
Issued 3,000 3,454
----------------------------------------------------------------------------
Balance, end of period 3,000 $ 3,454
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At September 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 $3.5 million 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
September 30, December 31,
2008 2007
----------------------------------------------------------------------------
Balance, beginning of period $ 4,967 $ 3,747
Stock-based compensation 4,463 4,008
Exercise of stock options (2,343) (2,788)
----------------------------------------------------------------------------
Balance, end of period $ 7,087 $ 4,967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(f) Accumulated other comprehensive income
September 30, December 31,
2008 2007
----------------------------------------------------------------------------
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 September 30, 2008, there were 79,102,721 (2007 -
52,402,464) weighted average shares outstanding and 79,269,886 (2007 -
52,814,060) average shares outstanding on a dilutive basis. For the nine months
ended September 30, 2008, there were 72,892,750 (2007 - 50,961,977) weighted
average shares outstanding and 73,619,230 (2007 - 51,667,461) weighted average
shares outstanding on a dilutive basis. The number of anti-dilutive options
totaled 6,748,497 (2007 - 2,770,500) at September 30, 2008. In addition, there
were 3.0 million warrants outstanding at September 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 transactions is as
follows:
September 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 2,351,860 15.71 1,373,100 14.38
Exercised (563,175) 10.81 (707,961) 6.35
Forfeited (173,975) 14.64 (269,950) 14.40
Expired (9,200) 14.80 (2,500) 7.79
----------------------------------------------------------------------------
Balance, end of period 5,651,910 $ 14.62 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 4.0 years; an estimated forfeiture rate of 10%; and
dividends of nil. The weighted average fair value of stock options granted for
the nine months ended September 30, 2008, was $5.30 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 nine months ended September 30, 2008, the Company recorded compensation
expense of $1.3 million and capitalized $0.4 million to property, plant and
equipment with a corresponding offset recorded in other liabilities. The
compensation expense was based on the trading price of the Company's shares on
September 30, 2008.
The following table summarizes the change in RSU for the nine months ended
September 30, 2008:
September 30,
2008
----------------------------------------------------------------------------
Number
----------------------------------------------------------------------------
Balance, beginning of period -
Granted 373,293
Forfeited (16,070)
----------------------------------------------------------------------------
Balance, end of period 357,223
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes the change in compensation liability relating
to the RSU's:
September 30,
2008
----------------------------------------------------------------------------
Amount
----------------------------------------------------------------------------
Balance, beginning of period $ -
Change in liabilities during the period 1,644
----------------------------------------------------------------------------
Balance, end of period $ 1,644
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current portion of compensation liability (included
in accounts payableand accrued liabilities) $ 783
Long-term portion of compensation liability $ 861
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 September 30, 2008, the Company had a ratio of net
debt to annualized funds from operations of 1.1:1 (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, accounts payable and accrued 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 September 30, 2008, the Company has entered into the following
crude oil contracts:
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
October 1, 2008 -
500 bbls/d CDN. $66.50 - Bow River December 31, 2008
October 1, 2008 -
750 bbls/d CDN. $70.01 - CDN. $86.68 - WTI December 31, 2008
January 1, 2009 -
1,000 bbls/d CDN. $64.00 - Bow River December 31, 2009
January 1, 2009 -
1,000 bbls/d CDN. $95.01 - CDN. $110.01 - WTI December 31, 2009
As at September 30, 2008, the Company has entered into the following natural
gas contracts:
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
October 1, 2008 -
20,000 gj/d CDN. $7.50 - $8.42 - AECO October 31, 2008
November 1, 2008 -
5,000 gj/d CDN. $8.50 - $11.00 - AECO March 31, 2009
As at September 30, 2008, the mark to market value of the financial
instruments was a loss of $9.3 million.
(ii) Physical sale contracts
As at September 30, 2008, the Company has entered into direct sale natural
gas contracts as follows:
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
October 1, 2008 -
50,000 gj/d CDN. $7.27 - $7.43 - AECO October 31, 2008
November 1, 2008 -
30,000 gj/d CDN. $8.96 - $10.72 - AECO 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 that have strong credit ratings and reviewing its
exposure to individual counterparties on a regular basis.
As at September 30, 2008, the accounts receivable balance was $54.3 million of
which $10.8 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, except as described in note 3. When
determining whether past due accounts are uncollectible, the Company factors in
the past credit history of the counterparties. As at September 30, 2008, the
Company had an allowance for doubtful accounts of $1.3 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 nine months ended September 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 September 30,
2008, are as follows:
2008 2009 2010 2011 Thereafter
----------------------------------------------------------------------------
Accounts payable and
accrued liabilities $ 77,510 $ - $ - $ - $ -
Commodity derivative
liability - 2,242 - - -
Bank loan - - 345,145 - -
Other liabilities - - 738 123 -
----------------------------------------------------------------------------
Total $ 77,510 $ 2,242 $ 345,883 $ 123 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 nine months ended September
30, 2008, would have been $0.4 million and $1.2 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 nine
months ended September 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 ended September 30, 2008, NuVista paid Bonavista $0.3
million (2007 - $0.4 million) in fees relating to general and administrative
services provided by Bonavista. NuVista charged Bonavista management fees for
jointly owned partnerships totaling $0.3 million (2007 - $0.3 million). In
addition, during the third quarter of 2008, Bonavista charged NuVista $0.1
million (2007 - $0.4 million) for costs that are outside of the new services
agreement relating to NuVista's share of direct charges from third parties.
For the nine months ended September 30, 2008, NuVista paid Bonavista $1.1
million (2007 - $1.0 million) in fees relating to general and administrative
services provided by Bonavista. In 2008, NuVista charged Bonavista management
fees for jointly owned partnerships totaling $1.0 million (2007 - $1.0 million).
In addition Bonavista charged NuVista $0.2 million (2007 - $1.0 million) for
costs that are outside of the new services agreement relating to NuVista's share
of direct charges from third parties. As at September 30, 2008, the amount
receivable from Bonavista was $1.0 million.
11. Commitments
The following is a summary of the Company's contractual obligations and
commitments as at September 30, 2008:
----------------------------------------------------------------------------
Total 2008 2009 2010 2011 Thereafter
Transportation $ 813 $ 212 $ 444 $ 123 $ 34 $ -
Office lease 8,391 514 2,055 2,055 2,055 1,712
----------------------------------------------------------------------------
Total
commitments $ 9,204 $ 726 $ 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, RMP Energy Ltd.
Officers
Keith A. MacPhail, Chairman
Alex G. Verge, President and CEO
Robert F. Froese, Vice President, Finance and CFO
Kevin J. Christie, Vice President, Exploration
Steven J. Dalman, Vice President, Business Development
D. Chris McDavid, Vice President, Operations
Daniel B. McKinnon, Vice President, Engineering
Glenn A. Hamilton, Corporate Secretary
Auditors Legal Counsel
KPMG LLP Burnet, Duckworth & Palmer LLP
Chartered Accountants Calgary, Alberta
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
Engineering Consultants Stock Exchange Listing
GLJ Petroleum Consultants Ltd. Toronto Stock Exchange
Calgary, Alberta Trading Symbol "NVA"
Trans America Industrial Com Npv (TSXV:TSA)
Historical Stock Chart
From Oct 2024 to Nov 2024
Trans America Industrial Com Npv (TSXV:TSA)
Historical Stock Chart
From Nov 2023 to Nov 2024
