NuVista Energy Ltd. (TSX:NVA) is pleased to announce its financial and operating
results for the three months and year ended December 31, 2008 as follows:
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Corporate Highlights
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Three months Years
ended December 31, % ended December 31, %
2008 2007 Change 2008 2007 Change
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Financial
($ thousands, except
per share)
Production revenue 106,982 53,790 99 515,338 212,386 143
Funds from operations (1) 58,878 29,870 97 281,029 113,793 147
Per share - basic 0.74 0.57 30 3.77 2.21 71
Per share - diluted 0.74 0.57 30 3.75 2.19 71
Net earnings 24,443 11,063 121 88,195 26,237 236
Per share - basic 0.31 0.21 48 1.18 0.51 131
Per share - diluted 0.31 0.21 48 1.18 0.51 131
Total assets 1,407,296 683,165 106
Long-term debt, net of
working capital 329,707 180,322 83
Long-term debt, net of
adjusted working
capital (1) 341,266 178,618 91
Shareholders' equity 811,300 370,292 119
Net capital
expenditures 49,166 43,810 12 200,737 164,008 22
Corporate acquisition
(non-cash) - - - 594,944 - -
Weighted average common
shares outstanding
(thousands):
Basic 79,161 52,602 50 74,468 51,375 45
Diluted 79,197 52,835 50 75,021 51,962 44
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Operating
(boe conversion - 6:1
basis)
Production
Natural gas (mmcf/d) 109.8 66.7 65 104.9 66.9 57
Natural gas liquids
(bbls/d) 2,760 336 721 2,357 317 644
Oil (bbls/d) 4,633 2,802 65 4,472 2,381 88
Total oil equivalent
(boe/d) 25,688 14,251 80 24,320 13,851 76
Product prices (2)
Natural gas ($/mcf) 7.80 6.30 24 8.39 6.77 24
Natural gas liquids
($/bbl) 43.41 73.92 (41) 70.09 63.31 11
Oil ($/bbl) 47.44 55.03 (14) 77.00 52.40 47
Operating expenses
Natural gas and
natural gas liquids
($/mcfe) 1.21 1.06 14 1.18 1.06 11
Oil ($/bbl) 16.95 10.12 67 14.16 11.37 25
Total oil equivalent
($/boe) 8.98 7.11 26 8.37 7.23 16
General and
administrative
expenses ($/boe) 1.29 1.23 5 1.35 1.04 30
Funds from operations
netback ($/boe) (1) 24.93 22.78 9 31.58 22.51 40
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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 as per the
statement of cash flows 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 and interest expenses
and cash taxes calculated on a boe basis. Adjusted working capital
excludes the current portion of future income tax asset or liability and
commodity derivatives asset or liability. Total boe is calculated by
multiplying the daily production by the number of days in the period.
For more details on non-GAAP measures, refer to "Management's Discussion
and Analysis" section of this press release.
(2) Product prices include realized gains/losses on commodity derivatives.
Operating (continued)
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2008 2007 % Change
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Undeveloped land, net acres
W3/W4 meridian core regions 517,000 587,000 (12)
W5/W6 meridian core regions 251,000 22,000 1040
Total 768,000 609,000 26
Average working interest 79% 77%
Wells drilled gross (net)
Total 115 (86.0) 138 (107.1) (17)
Natural gas 65 (45.7) 75 (57.8) (13)
Oil 37 (30.8) 46 (35.2) (20)
Dry holes 13 (9.5) 16 (13.3) (19)
Company interest reserves(1)
Proved plus probable
Natural gas (bcf) 340.3 181.4 88
Oil and liquids (mbbls) 20,962 9,560 119
Total barrels of oil equivalent (mboe) 77,680 39,795 95
% proved producing 55% 58% (5)
% total proved 68% 71% (4)
% probable 32% 29% 10
Net present value of future cash flows
before tax ($ millions)(2)
@ 10% discount rate 1,350.7 660.7 104
@ 15% discount rate 1,109.7 561.9 97
Finding development and acquisition
costs ($/boe)(3) (5)
Total proved 24.28 20.63 18
Total proved plus probable 18.51 17.07 8
Reserve life index (years)(5)
Total proved 5.7 5.1 12
Total proved plus probable 8.3 7.3 14
Recycle ratio (4) (5)
Total proved 1.3 1.1 18
Total proved plus probable 1.7 1.3 31
Net asset value per share(2) (5) $14.20 $10.37 37
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(1) Company interest reserves are gross working interest reserves and
royalty interest reserves before the deduction of royalties.
(2) The estimated net present value of future cash flows disclosed do not
represent fair market value.
(3) Includes changes in future development capital expenditures.
(4) Based on funds from operations netback per boe divided by finding,
development and acquisition costs per boe.
(5) For more details, refer to "Management's Discussion and Analysis"
section in this press release.
MESSAGE TO SHAREHOLDERS
NuVista Energy Ltd. ("NuVista") is pleased to report to its shareholders
NuVista's financial and operating results for the three months and year ended
December 31, 2008. For NuVista, 2008 was a year of significant achievements, in
particular, the successful business combination with Rider Resources Ltd.
("Rider"). We achieved record reserves, production, funds from operations and
net earnings both on a total and a per share basis. In addition, we acquired
undeveloped lands with scalable high gas-in-place resource plays that should
position us for sustained, longer term growth. As we enter 2009, we enter a
period of significantly lower commodity prices and economic uncertainty which is
having a significant impact on all businesses. In these difficult times, our
disciplined approach to implementing our capital programs while maintaining
financial flexibility and our ability to continuously adapt to the changing
economic environment will differentiate us from our peers.
In March 2008, NuVista completed the business combination with Rider resulting
in NuVista becoming an intermediate company with both a diversified asset base
and technical expertise in two core regions. The combined entity continues to
focus on creating shareholder value through profitable growth in reserves per
share and production per share. The Rider asset base complements 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. This business combination has
balanced NuVista's production between the W5/W6 meridian and W3/W4 meridian core
regions and increased NuVista's undeveloped land inventory with increased
exposure to deeper natural gas opportunities and high gas-in-place resource
plays.
NuVista achieved strong operating and financial results in 2008. As a result of
our disciplined business model and detailed approach to planning, we achieved
our production and debt reduction guidance targets that were issued in January
2008 on the announcement of the Rider transaction. We achieved record 2008
annual production and maintained our production levels throughout the year while
spending approximately $81 million less than our funds from operations. Our
fourth quarter average production rate of 25,688 boe/d was slightly below budget
due to the impact of cold weather in December and the delayed tie-in of
approximately 900 boe/d of production until February 2009. With declining
commodity prices and the uncertain economic environment experienced throughout
the fourth quarter, we carefully managed our capital expenditures ensuring that
we maintained our financial flexibility.
On October 2, 2008, NuVista announced an increase of approximately $30 million
to our capital program to be invested in our future. We acquired approximately
100 sections of undeveloped land in our Wapiti core area and now have
established a significant acreage position with a multi-year prospect inventory,
in three high gas-in-place resource plays. Although prudent financial management
will limit our exposure in these plays in 2009 to testing concepts for planning
purposes, successful test wells in any of these plays will have a material
impact on our exploration and development plans. Early success on these acquired
lands has resulted in the drilling and tie-in of four Dunvegan gas wells and
along with the installation of field compression will increase production by
approximately 1,200 boe/d in March 2009.
Significant highlights for NuVista in 2008:
- Average production for the three months ended December 31, 2008, of 25,688
boe/d compared to 14,251 boe/d in the same period in 2007. In addition, 2008
average production increased to a record level of 24,320 boe/d from 13,851 boe/d
in 2007. Average production per million shares outstanding increased by 21% to
327 boe/d in 2008 from 270 boe/d in 2007. Current production is approximately
27,000 boe/d;
- Achieved finding, development and acquisition costs (including changes in
future development capital) on a proved plus probable basis of $18.51/boe (2007
- $17.07/boe). This resulted in a proved plus probable recycle ratio of 1.7:1
for 2008. Excluding approximately $30 million of undeveloped land purchased in
the second half of 2008 relating to high gas-in-place resource plays, which were
not assigned any reserves, NuVista's finding, development and acquisition costs
on a proved plus probable basis were $17.87/boe;
- Proved plus probable reserves per share increased by 29% to 0.98 boe at
December 31, 2008, from 0.76 boe at December 31, 2007;
- Drilled 23 wells resulting in 14 natural gas wells and nine oil wells in the
fourth quarter of 2008. For the year ended December 2008, NuVista drilled 115
wells, resulting in 65 natural gas wells, 37 oil wells and 13 dry holes;
- Increased our undeveloped land position in our W5/W6 meridian core region by
over ten times, completing our transition to a deep gas explorer and producer;
- Entered into an agreement to purchase approximately 1,600 boe/d of production,
primarily in our Ferrier/Sunchild, Wapiti and Northwest Saskatchewan core areas
for approximately $55 million. This acquisition closed on January 29, 2009 at
attractive acquisition metrics of approximately 34,000 per flowing boe/d and $13
per boe of proven plus probable reserves. At December 31, 2008, NuVista
estimates proved plus probable reserves of 4.5 million boes associated with this
acquisition (these reserves are not included in NuVista's reported year end
reserves); and
- NuVista ended 2008 with debt net of adjusted working capital of $341 million.
At December 31, 2008, NuVista had a ratio of debt, net of adjusted working
capital to annualized fourth quarter funds from operations of 1.5:1.
Through challenging and at times difficult industry conditions, NuVista
continues to maintain its disciplined approach to its business. We employ an
"acquire and develop" business model focused on reserves per share and
production per share growth while maintaining our financial flexibility. We have
the ability to adjust capital spending levels and closely manage our debts
levels and financial flexibility as we control the timing of all significant
capital projects. We pride ourselves in being able to make business decisions
based on timely and accurate data. This approach has enabled us to adapt to
rapidly changing economic and market conditions. Due to low commodity prices and
an uncertain economic environment, prudent financial management requires a
responsive and flexible capital program in 2009, along with continuing to plan
our future.
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 audited
consolidated financial statements for the year ended December 31, 2008. The
following MD&A of financial condition and results of operations was prepared at
and is dated March 5, 2009. Our audited consolidated financial statements,
Annual Report, Annual Information Form and other disclosure documents for 2008
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 and growth and production and reserves, drilling plans and
results, NuVista's planned capital budget, the timing, allocation and efficiency
of NuVista's capital program and the results therefrom, forecast funds from
operations and targeted operating costs, expectations regarding the payment of
future taxes, the timing of the completion of Nuvista's lenders annual review of
NuVista's reserves and financial results and the effect of Nuvista's credit
facility, expectations regarding future commodity prices, netbacks and industry
conditions, 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 sources and bank and equity markets. 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, per the statement of
cash flows, 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 and interests 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 future income tax asset or
liability and commodity derivative asset or liability. 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:
Three months ended Years ended
December 31, December 31,
------------------------------------------
($ thousands) 2008 2007 2008 2007
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Cash provided by operating
activities 44,923 26,429 232,123 103,184
Add back:
Asset retirement expenditures 670 787 2,516 1,589
Change in non-cash working
capital 13,285 2,654 46,390 9,020
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Funds from operations 58,878 29,870 281,029 113,793
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Change in presentation of MD&A disclosure for 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
NuVista and Rider Resources Ltd. ("Rider") business combination ("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 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 - For the year ended December 31, 2008, NuVista drilled 115
(86 net) wells, resulting in 65 natural gas wells, 37 oil wells and 13 dry
holes, for an overall success rate of 89%. NuVista operated 99 of the wells
drilled. During the fourth quarter of 2008, NuVista participated in 23 wells
resulting in 14 natural gas wells and 9 oil wells. During the fourth quarter,
NuVista drilled 9 gas wells in the Wapiti core area and 4 oil wells in each of
our Provost and Central Saskatchewan core areas. With lower commodity prices and
the closing of a property acquisition on January 29, 2009, NuVista will maintain
its financial flexibility by reducing our drilling program to approximately 10
wells in the first quarter of 2009.
Reserves - NuVista's 2008 year end total proved reserves were 52.8 mmboe or an
88% increase over the closing balance at year end 2007. NuVista's proved plus
probable reserves increased by 95% to 77.7 mmboe compared to 39.8 mmboe at year
end 2007. Finding, development and acquisition costs in 2008, including an
adjustment for the change in future development capital expenditures and after
revisions, were $24.28/boe on a proved basis and $18.51/boe on a proved plus
probable basis. Excluding acquisitions, finding and development costs, on a
proved plus probable basis after revisions and changes in future development
capital expenditures were $19.53/boe. In addition, excluding approximately $30
million of undeveloped land purchased in the second half of 2008 relating to
potential high gas-in-place resource plays (which were not assigned any
reserves), NuVista's finding, development and acquisition costs on a proved plus
probable basis were $17.87/boe. Proved plus probable reserve downward revisions
amounted to only 2% of the opening balance.
The capital program for 2008 resulted in a funds from operations netback recycle
ratio of 1.7 on a proved plus probable basis. NuVista's reserve life index,
based upon production capability at December 31, 2008, was 5.7 years for total
proved reserves and 8.3 years for proved plus probable reserves. This compares
with 5.1 years and 7.3 years respectively at December 31, 2007. All of NuVista's
reserves, as at December 31, 2008, were evaluated by NuVista's independent
engineering consultants, GLJ Petroleum Consultants Ltd.
The following table outlines NuVista's finding, development and acquisition
costs and recycle ratio:
2006 - 2008 (2) 2008 (2) 2007 (2)
---------------------------------------------------------------
Proved plus Proved plus Proved plus
Proved Probable Proved Probable Proved Probable
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After
reserve
revisions
($/boe)
Finding,
development
and
acquisition
cost (1) 24.15 18.50 24.28 18.51 20.63 17.07
Finding and
development
costs (1) 23.36 18.78 24.42 19.53 21.16 18.43
Acquisition
costs 24.64 18.32 24.24 18.14 19.37 14.10
Finding,
development
& acquisition
recycle ratio
Field
netback 1.3 1.6 1.4 1.9 1.2 1.5
Funds from
operations
netback 1.1 1.5 1.3 1.7 1.1 1.3
Before
reserve
revisions
($/boe)
Finding,
development
and
acquisition
cost (1) 24.67 17.84 25.13 18.36 20.19 14.75
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Additional reserve disclosure tables, as required under NI 51-101, will be
contained in the Annual Information Form to be filed on SEDAR on or before March
31, 2009. Reserves have been calculated under the Alberta New Royalty Framework
regime ("NRF") including the transitional rules announced in November 2008. The
reserve estimates contained in the following table are "NuVista's company
interest reserves" which are NuVista's working interest and royalty interest
reserves before the deduction of royalties:
Reserves Oil and natural Total oil
Natural gas gas liquids equivalent
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(bcf) (mbbls) (mboe)
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Total Proved
Balance, December 31, 2007 127.4 6,907 28,137
Exploration and development 29.2 2,279 7,145
Revisions 1.2 494 697
Acquisitions 110.6 7,319 25,756
Dispositions - - -
Production (38.4) (2,501) (8,902)
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Balance, December 31, 2008 230.0 14,498 52,833
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Total Proved plus Probable:
Balance, December 31, 2007 181.4 9,560 39,795
Exploration and development 55.9 3,869 13,189
Revisions (7.6) 454 (804)
Acquisitions 149.0 9,579 34,403
Dispositions - - -
Production (38.4) (2,501) (8,902)
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Balance, December 31, 2008 340.3 20,961 77,681
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On January 29, 2009 NuVista acquired properties in its Ferrier/Sunchild, Wapiti
and Northwest Saskatchewan core areas with proved plus probable reserves,
estimated by management at December 31, 2008, of 4.5 million boes. These
acquired reserves are not included in NuVista's year end reported reserves data
above.
Net Asset Value Per Share
December 31,
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($ thousands) 2008 2007
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Net present value of oil and gas reserves,
discounted at 10%, before tax (1) $1,350,700 $ 660,700
Undeveloped land (2) 114,581 64,288
Cash, accounts receivable and prepaids 64,851 30,463
Accounts payable and accrued liabilities (50,710) (31,972)
Long-term debt (355,407) (177,109)
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Net asset value $1,124,015 $ 546,370
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Shares outstanding (000's) 79,164 52,704
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Net asset value ($/Share) $ 14.20 $ 10.37
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(1) Company interest reserves, as at December 31, 2008, as evaluated by GLJ
Petroleum Consultants Ltd.
(2) Undeveloped land value has been calculated based on a value of
$100/acre for our W3/W4 meridian core region undeveloped lands and
$250/acre for our W5/W6 meridian core region undeveloped lands.
Production
Years ended December 31,
----------------------------------------------------------------------------
2008 2007 % Change
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Natural gas (mcf/d) 104,946 66,919 57
Liquids (bbls/d) 2,357 317 644
Oil (bbls/d) 4,472 2,381 88
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Total oil equivalent (boe/d) 24,320 13,851 76
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Three months ended December 31,
----------------------------------------------------------------------------
2008 2007 % Change
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Natural gas (mcf/d) 109,772 66,680 65
liquids (bbls/d) 2,760 336 721
Oil (bbls/d) 4,633 2,802 65
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Total oil equivalent (boe/d) 25,688 14,251 80
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For the year ended December 31, 2008, NuVista's average production was 24,320
boe/d, comprised of 104,946 mcf/d of natural gas, 2,357 bbls/d of associated
natural gas liquids ("liquids") and 4,472 bbls/d of oil, which represents a 76%
increase over the same period in 2007. This increase is primarily due to the
inclusion of production from the Rider Acquisition in March 2008 and the success
of our 2008 drilling program. For the fourth quarter of 2008, NuVista's average
production was 25,688 boe/d which was comprised of 109,772 mcf/d of natural gas,
2,760 bbls/d of associated natural gas liquids and 4,633 bbls/d of oil and
represents an 80% increase over the same period in 2007. This increase was also
primarily due to the Rider Acquisition. Our fourth quarter average production
rate and exit rate were slightly below budget due to the impact of cold weather
on production in December and the delay in the tie-in of two significant wells
until February 2009. Our current production is 27,000 boe/d.
Revenues
Years ended December 31,
----------------------------------------------------------------------------
($ thousands, except
per unit amounts) 2008 2007 % Change
-----------------------------------------------------
Natural gas $ $/mcf $ $/mcf $ $/mcf
Production revenue 320,346 8.34 160,145 6.56 100 27
Realized gain on
commodity
derivatives 1,869 0.05 5,248 0.21 (64) (76)
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Total 322,215 8.39 165,393 6.77 95 24
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Liquids $ $/bbl $ $/bbl $ $/bbl
Production revenue 60,463 70.09 7,313 63.31 727 11
Realized gain on
commodity
derivatives - - - - - -
----------------------------------------------------------------------------
Total 60,463 70.09 7,313 63.31 727 11
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Oil
Production revenue 134,529 82.19 44,928 51.69 199 59
Realized gain (loss)
on commodity
derivatives (8,497) (5.19) 619 0.71 (1,473) (831)
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Total 126,032 77.00 45,547 52.40 177 47
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Three months ended December 31,
----------------------------------------------------------------------------
($ thousands, except
per unit amounts) 2008 2007 % Change
-----------------------------------------------------
Natural gas $ $/mcf $ $/mcf $ $/mcf
Production revenue 76,856 7.61 37,543 6.12 105 24
Realized gain on
commodity 1,908 0.19 1,132 0.18 69 6
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Total 78,764 7.80 38,675 6.30 104 24
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----------------------------------------------------------------------------
Liquids $ $/bbl $ $/bbl $ $/bbl
Production revenue 11,024 43.41 2,284 73.92 383 (41)
Realized gain on
commodity derivatives - - - - - -
----------------------------------------------------------------------------
Total 11,024 43.41 2,284 73.92 383 (41)
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----------------------------------------------------------------------------
Oil
Production revenue 19,102 44.81 13,963 54.16 37 (17)
Realized gain on
commodity derivatives 1,119 2.63 224 0.87 400 202
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Total 20,221 47.44 14,187 55.03 43 (14)
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For the year ended December 31, 2008, revenues including realized commodity
derivative gains and losses were $508.7 million, a 133% increase from $218.3
million, for the same period in 2007. The increase in revenues for 2008 compared
to the same period of 2007 is primarily due to the 76% increase in production
and a 38% increase in realized prices. These revenues were comprised of $322.2
million of natural gas revenue, $60.5 million of liquids revenue and $126.0
million of oil revenue. The increase in average realized commodity prices is
comprised of a 24% increase in the natural gas price to $8.39/mcf from
$6.77/mcf, an 11% increase in the liquids price to $70.09/bbl from $63.31/bbl
and an increase of 47% in the oil price to $77.00/bbl from $52.40/bbl.
For the three months ended December, 2008, revenues including realized commodity
derivative gains and losses were $110.0 million, a 99% increase from $55.1
million for the same period in 2007. The increase in revenues for the three
months ended December 31, 2008 compared to the same period of 2007 is primarily
due to the 80% increase in production and a 10% increase in realized prices.
These revenues were comprised of $78.8 million of natural gas revenue, $11.0
million of liquids revenue, and $20.2 million of oil revenue. The increase in
average realized commodity prices is comprised of a 24% increase in the natural
gas price to $7.80/mcf from $6.30/mcf, a 41% decrease in the liquids price to
$43.41/bbl from $73.92/bbl and a decrease of 14% in the oil price to $47.44/bbl
from $55.03/bbl.
Commodity price risk management
Year ended December 31,
----------------------------------------------------------------------------
2008 2007
--------------------------------------------------------------
Realized Unrealized Total Realized Unrealized Total
Gain Gain Gain Gain Gain Gain
($ thousands) (Loss) (Loss) (Loss) (Loss) (Loss) (Loss)
----------------------------------------------------------------------------
Natural gas 1,869 1,094 2,963 5,248 - 5,248
Oil (8,497) 17,148 8,651 619 (1,729) (1,110)
----------------------------------------------------------------------------
Total gain
(loss) (6,628) 18,242 11,614 5,867 (1,729) 4,138
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended December 31,
----------------------------------------------------------------------------
2008 2007
--------------------------------------------------------------
Realized Unrealized Total Realized Unrealized Total
Gain Gain Gain Gain Gain Gain
($ thousands) (Loss) (Loss) (Loss) (Loss) (Loss) (Loss)
----------------------------------------------------------------------------
Natural gas 1,908 (784) 1,124 1,132 (1,181) (49)
Oil 1,119 26,601 27,720 224 (3,122) (2,898)
----------------------------------------------------------------------------
Total gain
(loss) 3,027 25,817 28,844 1,356 (4,303) (2,947)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 our 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, using fixed price, put option and
costless collar contracts. To achieve NuVista's price risk management
objectives, we enter into both commodity derivative and physical sale contracts.
NuVista's Board of Directors approved an increase to the limit of 60% for the
period April 2008 to October 2008. For this period the Board approved natural
gas hedges in the amount of 70,000 gj/day. For the year ended December 31, 2008,
the commodity derivative price risk management program resulted in a gain of
$11.6 million consisting of realized loss of $6.6 million and unrealized gain of
$18.2 million. The gain of $11.6 million for 2008 consisted of a $3.0 million
gain on natural gas hedges and an $8.7 million gain on crude oil hedges. In the
fourth quarter of 2008, our commodity derivative price risk management program
resulted in a gain of $28.8 million, consisting of realized gains of $3.0
million and unrealized gain of $25.8 million.
As at December 31, 2008, the mark to market value of our financial commodity
derivative contract was a gain of $16.5 million and the mark to market value of
our physical sales contract was a gain of $14.1 million.
The following is a summary of commodity price risk management contracts in
place as at December 31, 2008:
(a) Financial contracts
Crude oil:
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
1,000 bbls/d CDN. $64.00 - Bow River January 1, 2009 - December 31, 2009
CDN. $95.01 -
1,000 bbls/d $110.01 - WTI(1) January 1, 2009 - December 31, 2009
(1) This is a US$ denominated contract with fixed price of 1.0262 US.
Natural gas:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
5,000 gj/d CDN. $8.50 - $11.00 - AECO November 1, 2008 - March 31, 2009
(b) Physical sale contracts
Natural gas:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
30,000 gj/d CDN. $8.96 - $10.72 - AECO November 1, 2008 - March 31, 2009
$7.45 -
20,000 gj/d CDN. Fixed Price AECO April 1, 2009 - October 31, 2009
Subsequent to December 31, 2008, the following commodity price risk
management contracts have been entered into:
(a) Financial instruments
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
1,000 bbls/d USD. $47.10 - WTI March 1, 2009 -March 31, 2009
1,000 bbls/d CDN. $48.91 - Bow River April 1, 2009 - June 30, 2009
(b) Physical sale contracts
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
5,000 gj/d CDN. $5.65 - AECO Floor(1) April 1, 2009 - October 31, 2009
20,000 gj/d CDN. $5.97 - $6.56 AECO(2) November 1, 2009 - October 31, 2010
(1) The AECO put was purchased at a cost of $0.82/gj for a total cost of
$0.9 million.
(2) The cost associated with the above market collar was $0.30/gj for a
total cost of $2.2 million.
Royalties
Three months ended Years ended
December 31, December 31,
2008 2007 2008 2007
----------------------------------------------------------------------------
Royalty rates (%)
Natural gas and liquids 20 21 25 25
Oil 19 14 17 13
----------------------------------------------------------------------------
Weighted average rate 20 20 23 23
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Royalties of $116.9 million for the year ended December 31, 2008, were 140%
higher than the $48.7 million for the same period of 2007. The increase in
royalties for the year ended December 31, 2008 resulted from revenues that were
143% higher compared to the same period of 2007. Royalty rates by product for
the year ended December 31, 2008, were 25% for natural gas and liquids and 17%
for oil compared to 25% for natural gas and liquids and 13% for oil for the same
period in 2007. Royalties for the three months ended December 31, 2008, were
$21.7 million, an increase of 102% over the $10.7 million reported for the three
months ended December 31, 2007. As a percentage of revenue, the average royalty
rate for the fourth quarter of 2008 was 20% compared to 20% for the comparative
period of 2007. Royalty rates by product for the fourth quarter of 2008 were 20%
for natural gas and liquids and 19% for oil compared to 21% for natural gas and
liquids and 14% for oil for the similar period in 2007. The average natural gas
and liquids royalty rate for the fourth quarter of 2008 was lower than
anticipated due primarily to the receipt of gas cost allowance credits.
Netbacks - The table below summarizes field netbacks by product for the year
ended December 31, 2008:
Natural gas and liquids Oil Total
-------------------------------------------------------
119.1 mmcfe/d 4,472 bbl/d 24,320 boe/d
----------------------------------------------------------------------------
($ thousands, except
per unit amounts) $ $/mcfe $ $/bbl $ $/boe
Production revenue 380,809 8.74 134,529 82.19 515,338 57.90
Realized gain (loss)
on commodity
derivatives 1,869 0.04 (8,497) (5.19) (6,628) (0.74)
----------------------------------------------------------------------------
382,678 8.78 126,032 77.00 508,710 57.16
Royalties (94,853) (2.18) (22,021) (13.45)(116,874) (13.13)
Transportation costs (4,881) (0.11) (2,751) (1.68) (7,632) (0.86)
Operating costs (51,328) (1.18) (23,176) (14.16) (74,504) (8.37)
----------------------------------------------------------------------------
Field netback 231,616 5.31 78,084 47.71 309,700 34.80
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The tables below summarize funds from operations netbacks for the year ended
December 31, 2008, compared to the year ended December 31, 2007, and the three
months ended December 31, 2008, compared to the three months ended December 31,
2007.
Years ended December 31,
----------------------------------------------------------------------------
2008 2007 % Change
($ thousands, except -----------------------------------------------------
per unit amounts) $ $/boe $ $/boe $ $/boe
Production revenue 515,338 57.90 212,386 42.01 143 38
Realized gain (loss)
on commodity
derivatives (6,628) (0.74) 5,867 1.16 (213) (164)
----------------------------------------------------------------------------
508,710 57.16 218,253 43.17 133 32
Royalties (116,874) (13.13) (48,724) (9.64) 140 36
Transportation (7,632) (0.86) (4,422) (0.87) 73 (1)
Operating costs (74,504) (8.37) (36,550) (7.23) 104 16
----------------------------------------------------------------------------
Field netbacks 309,700 34.80 128,557 25.43 141 37
General and
administrative (12,042) (1.35) (5,254) (1.04) 129 30
Restricted share
units (1,120) (0.13) - - - -
Interest (15,509) (1.74) (9,510) (1.88) 63 (7)
----------------------------------------------------------------------------
Funds from operations
netback 281,029 31.58 113,793 22.51 147 40
Three months ended December 31,
----------------------------------------------------------------------------
2008 2007 % Change
($ thousands, except -----------------------------------------------------
per unit amounts) $ $/boe $ $/boe $ $/boe
Production revenue 106,982 45.27 53,790 41.03 99 10
Realized gain (loss)
on commodity
derivatives 3,027 1.28 1,356 1.03 123 24
----------------------------------------------------------------------------
110,009 46.55 55,146 42.06 99 11
Royalties (21,669) (9.17) (10,725) (8.18) 102 12
Transportation (1,797) (0.76) (1,222) (0.93) 47 (18)
Operating costs (21,235) (8.98) (9,316) (7.11) 128 26
----------------------------------------------------------------------------
Field netback 65,308 27.64 33,883 25.84 93 7
General and
administrative (3,053) (1.29) (1,619) (1.23) 89 5
Restricted share units 109 0.05 - - - -
Interest (3,486) (1.47) (2,394) (1.83) 46 20
----------------------------------------------------------------------------
Funds from operations
netback 58,878 24.93 29,870 22.78 97 9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Transportation - For the year ended December 31, 2008, transportation costs were
$7.6 million ($0.86/boe) compared to $4.4 million ($0.87/boe) for the same
period in 2007. The increase in transportation costs in 2008 compared to 2007 is
primarily due to the 76% increase in production volumes. Transportation costs
were $1.8 million ($0.76/boe) for the three months ended December 31, 2008 as
compared to $1.2 million ($0.93/boe) for the fourth quarter of 2007.
Operating - Operating expenses were $74.5 million for the year ended December
31, 2008, compared to $36.6 million for the same period in 2007, an increase of
104%. This increase resulted from significantly higher production volumes and a
16% increase in per unit costs in 2008 compared to 2007. On a boe basis,
operating costs increased 16% to $8.37/boe for the year ended December 31, 2008,
as compared to $7.23/boe for the same period of 2007. The increase in 2008 per
unit costs resulted primarily from increasing cost pressures facing NuVista and
the entire industry. For the year ended, December 31, 2008, natural gas and
liquids operating expenses averaged $1.18/mcfe and oil operating expenses were
$14.16/bbl compared to $1.06/mcfe and $11.37/bbl respectively for the same
period of 2007. For the three months ended December 2008, operating expenses
were $21.2 million ($8.98/boe), a 128% increase when compared to $9.3 million
($7.11/boe) for the three months ended December 31, 2007. This increase also
resulted from significantly higher production volumes and 26% increase in per
unit costs in the fourth quarter of 2008 compared to the fourth quarter of 2007.
For the three months ended, December 31, 2008, natural gas and liquids operating
expenses averaged $1.21/mcfe and oil operating expenses were $16.95/bbl compared
to $1.06/mcfe and $10.12/bbl respectively for the same period of 2007. The
higher per unit oil operating costs for both the three months and year ended
December were higher compared to the same periods of 2007 is due primarily to
higher operating costs associated with optimizing and stabilizing new heavy oil
production. We expect these costs to come down in 2009.
General and administrative - General and administrative expenses, net of
overhead recoveries, for the year ended December 31, 2008, were $12.0 million
($1.35/boe), an increase of 30%, on a per boe basis, over the $5.3 million
($1.04/boe) for the year ended December 31, 2007. This increase is directly
attributable to the higher production base in NuVista, increased staffing levels
associated with less reliance on Bonavista Petroleum Ltd. ("Bonavista") for the
provision of services, the integration of Rider's operations and the associated
move to a new location and higher costs being experienced throughout the energy
industry. For the year ended December 31, 2008, NuVista paid Bonavista $1.1
million (2007 - $1.4 million) in fees relating to general and administrative
services provided by Bonavista. In 2008, NuVista charged Bonavista management
fees for jointly owned partnerships totaling $1.4 million (2007 - $1.4 million).
General and administrative expenses were $3.1 million ($1.29/boe) net of
overhead recoveries for the three months ended December 31, 2008, as compared to
the charge of $1.6 million ($1.23/boe) for the same period in 2007. Higher per
boe general and administration expenses in the fourth quarter of 2008 were
primarily due to bonus accruals.
Three months ended Years ended
December 31, December 31,
---------------------------------------
($ thousands, except
per unit amounts) 2008 2007 2008 2007
----------------------------------------------------------------------------
Gross general and administrative
expenses 4,767 3,022 18,946 10,643
Overhead recoveries (1,714) (1,403) (6,904) (5,389)
----------------------------------------------------------------------------
Net general and administrative
expenses 3,053 1,619 12,042 5,254
----------------------------------------------------------------------------
Per boe 1.29 1.23 1.35 1.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 for the period ending
July 21, 2008, totaling approximately $4.5 million. NuVista agreed with these
two entities to terminate sales contracts effective July 22, 2008, and therefore
NuVista has no ongoing financial exposure with these entities. At this time we
are unable to ascertain with certainty the amount that will be recoverable but
have recorded a provision in the financial statements equal to 100% of the
amount owed. We will continue to reassess the recoverability of the outstanding
balance as more information becomes available.
Stock-based compensation
Three months ended Years ended
December 31, December 31,
---------------------------------------
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Stock-based compensation 1,321 608 4,471 2,833
Restricted share units (109) - 1,120 -
----------------------------------------------------------------------------
Total 1,212 608 5,591 2,833
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NuVista recorded a stock-based compensation charge of $5.6 million for the year
ended December 31, 2008, compared to $2.8 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 future payments under the Restricted
Share Unit ("RSU") incentive plan. The increase in the expense in 2008 relates
primarily to an increase in the number of stock options outstanding and the
implementation of the 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. In the fourth quarter of 2008, the RSU expense was a credit due to
a reduction in the accrual for future payments associated with the decline in
NuVista's share price.
Interest - Interest expense for the year ended December 31, 2008 was $15.5
million ($1.74/boe) versus $9.5 million ($1.88/boe) for the same period of 2007
due primarily to higher average debt levels and higher average interest rates.
Cash paid for interest for the year ended December 31, 2008, was $14.6 million
compared to $8.7 million for 2007. For the three months ended December 31, 2008,
interest expense was $3.5 million ($1.47/boe), up 46% from $2.4 million
($1.83/boe) in the same period of 2007. At March 2, 2009, NuVista's borrowing
rate was approximately 1.8%. With the extension to NuVista credit facility on
March 3, 2009, and the increase to current market borrowing costs, NuVista's
average borrowing rate increased to approximately 3.7%.
Depreciation, depletion and accretion - Depreciation, depletion and accretion
expenses for the year ended December 31, 2008, were $164.2 million, an increase
of 93% over the $85.2 million for the year ended December 31, 2007. The average
cost per unit was $18.45/boe for the twelve months ended December 31, 2008,
compared to $16.86/boe in the same period in 2007. Per unit costs have increased
in 2008 compared to 2007 due to higher acquisition costs, in addition to higher
industry exploitation and development costs. Depreciation, depletion and
accretion expenses were $43.7 million for the fourth quarter of 2008 compared to
$21.1 million for the same period in 2007, an increase of 107%. The average cost
per unit was $18.48/boe in the fourth quarter of 2008 compared to $16.08/boe for
the same period in 2007.
Income taxes - For the year ended December 31, 2008, income taxes were $37.6
million as compared to a recovery of $2.3 million in 2007. The income tax
recovery for 2007 includes a recovery of $11.4 million due to federal and
provincial tax rate reductions. For the fourth quarter of 2008, the provision
for income tax was $11.6 million, as compared to a recovery of $7.2 million with
an effective tax rate of 33% for the fourth quarter of 2008. The recovery in the
fourth quarter of 2007 is primarily due to lower earnings before income tax and
the recovery related to reduced federal and provincial tax rates.
Capital expenditures - Capital expenditures were $200.7 million for the year
ended December 31, 2008, consisting of exploration and development spending of
$171.5 million and $29.3 million of acquisitions. This compares to $164.0
million incurred for the twelve months ended December 31, 2007, with $113.3
million on exploration and development spending and $50.7 million spent on
acquisitions. 2008 acquisitions included two minor property acquisitions for
$29.3 million and the residual amount was comprised of minor property
acquisitions during 2008. Capital expenditures were $49.2 million during the
fourth quarter of 2008 compared to $43.8 million in the same period of 2007,
with $45.3 million of exploration and development spending and $3.9 million
spent on a smaller complementary property acquisition. In March 2008, NuVista
acquired Rider in a business combination through a Plan of Arrangement for
$594.9 million. Each Rider share was exchanged for 0.3540 of a NuVista share.
Three months ended Years ended
December 31, December 31,
---------------------------------------
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
Exploration and development
Land and retention costs 9,507 2,311 37,015 6,145
Seismic 2,857 3,310 11,709 11,961
Drilling and completion 27,606 16,577 88,764 60,305
Facilities and equipment 5,449 10,435 32,117 33,866
Corporate and other (111) 183 1,876 1,043
----------------------------------------------------------------------------
Subtotal 45,308 32,816 171,481 113,320
----------------------------------------------------------------------------
Acquisitions
Property 3,858 10,994 29,256 (1) 50,688
----------------------------------------------------------------------------
Subtotal 3,858 10,994 29,256 50,688
----------------------------------------------------------------------------
Total capital expenditures 49,166 43,810 200,737 164,008
----------------------------------------------------------------------------
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 year ended December 31, 2008,
NuVista's funds from operations were $281.0 million ($3.77/share, basic), a 147%
increase from $113.8 million ($2.21/share, basic) for the year ended December
31, 2007. In the fourth quarter of 2008, funds from operations were $58.9
million ($0.74/share, basic), a 97% increase over the $29.9 million
($0.57/share, basic) for the same period in 2007. Funds from operations for the
three months and year ended 2008 were higher than the same periods in 2007,
primarily due to higher production volumes and commodity prices, partially
offset by increased operating and general and administrative costs.
For the year ended December 31, 2008, net earnings increased 236% to $88.2
million ($1.18/share, basic) from $26.3 million ($0.51/share, basic) for the
same period in 2007. 2008 net earnings were higher when compared against 2007
net earnings due to the same factors impacting funds from operations as well as
the impact of a larger unrealized gain on commodity derivatives, higher
depletion, depreciation and accretion costs and a higher income tax provision.
Net earnings increased during the fourth quarter of 2008 to $24.4 million
($0.31/share, basic) from the $11.1 million ($0.21/share, basic) for the same
period in 2007. Fourth quarter 2008 net earnings were larger compared to the
same period in 2007, for the same factors impacting the increase in annual net
earnings.
Tax pools - At December 31, 2008, NuVista had approximately $925 million (2007 -
$355.0 million) of estimated tax pools available for deduction against future
years' taxable income. The following table summarizes the estimated tax pool
balances:
Maximum Annual
Available Balance Deduction
---------------------------------------
($ thousands) 2008 2007 %
----------------------------------------------------------------------------
Canadian exploration expense 20,000 11,000 100
Canadian development expense 205,000 60,000 30
Canadian oil and natural gas
property expense 430,000 191,000 10
Undepreciated capital cost 210,000 89,000 25
Other 5,000 4,000 -
----------------------------------------------------------------------------
Total tax pools 925,000 355,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liquidity and capital resources - As at December 31, 2008, debt net of adjusted
working capital, was $341.3 million, resulting in a net debt to annualized
fourth quarter funds from operations ratio of 1.5:1. At December 31, 2008,
NuVista had an adjusted working capital surplus of $14.1 million. Adjusted
working capital excludes the current portion of the fair value of the commodity
derivatives asset of $16.5 million and the related current portion of future
income tax liability of $4.9 million. We believe it is appropriate to exclude
these amounts when assessing financial leverage. At December 31, 2008, NuVista
had $94.6 million of unused bank borrowing capacity based on the current credit
facility of $450 million.
On March 4, 2008, NuVista completed the Rider Acquisition and the private
placement of units for proceeds of $84.0 million. Concurrently, NuVista
increased the maximum borrowing amount of the credit facility to $450.0 million.
On March 5, 2008, NuVista repaid the US $99.5 million second lien term loan that
Rider had outstanding with bank borrowings. NuVista also terminated the $16.7
million cross-currency interest swap related to this second lien term loan.
NuVista's has a credit facility from a syndicate of primarily Canadian banks
with a maximum borrowing amount of $450 million. The credit facility is 364 day
revolving facility subject to a request for an extension of the revolving period
for a further 364 days and an annual review by the lenders, at which time a
lender can provide an extension of the revolving period or request conversion to
a one year term loan. Under the term period, no principal payments would be
required until March 4, 2010.
As a result of closing the Rider Acquisition on March 4, 2008 and the concurrent
amendment of NuVista's credit facility, the 364 day revolving period of
NuVista's credit facility ended on March 3, 2009. NuVista and the bank syndicate
agreed to an extension of the revolving period from March 3, 2009 until April
30, 2009 in order to return NuVista to its historical annual review date. As
part of this extension, the credit facility borrowing rates were amended to
current market rates and all other terms of the credit facility remained
unchanged. NuVista's bank syndicate is in the process of completing their annual
review of NuVista's year end reserves and financial information.
NuVista anticipates that funds from operations will provide the flexibility to
fund its planned 2009 capital program. In this period of lower commodity prices
and challenging economic environment, NuVista will place increased emphasis on
maintaining its financial flexibility. NuVista plans to closely monitor its 2009
business plan and adjust capital programs in the context of commodity prices and
access to bank and equity capital. NuVista's capital program will be monitored
and adjusted based on the outlook for commodity prices. At this time NuVista is
targeting first half and annual capital expenditures to approximate funds from
operations. With the closing of the property acquisition on January 29, 2009,
NuVista's current borrowings under its credit facility are approximately $390
million. It is NuVista's intent to have a reduced drilling program for the
remainder of the first half of 2009, which in turn will reduce net debt to the
targeted level of approximately $350 million.
As at December 31, 2008, there were 79.2 million common shares and 3.0 million
common share purchase warrants outstanding which expired on March 4, 2009. In
addition, there were 6.1 million stock options outstanding, with an average
exercise price of $13.69 per share.
Goodwill - Goodwill of $83.7 million arose from various business acquisitions
and was determined based on the excess of total consideration paid less the fair
value of the assets and liabilities acquired. Accounting standards require that
the goodwill balance be assessed for impairment at least annually or more
frequently if events, or changes in circumstances, indicate that the balance
might be impaired. If such impairment exists, it would be charged to income in
the period in which the impairment occurs. NuVista has determined that there was
no goodwill impairment as of December 31, 2008.
Subsequent event - In December 2008, NuVista entered into an agreement to
acquire certain natural gas properties in the Ferrier/Sunchild, Wapiti and
Northwest Saskatchewan core areas. Total proved plus probable reserves, based on
management's internal estimates, were 4.5 million boes. The acquisition closed
on January 29, 2009 and the purchase price was approximately $55 million after
closing adjustments. The acquisition was financed with bank borrowings and cash
flow from operations.
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") with Bonavista. 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 reflected the remaining ongoing services that
will be provided by Bonavista. On November 1, 2008, this services agreement was
terminated and Bonavista no longer provides any ongoing services to NuVista.
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 year
ended December 31, 2008, NuVista paid Bonavista $1.1 million (2007 - $1.4
million) in fees relating to general and administrative services provided by
Bonavista. In 2008, NuVista charged Bonavista management fees for jointly owned
partnerships totalling $1.4 million (2007 - $1.4 million). In addition, during
2008 Bonavista charged NuVista $0.2 million (2007 - $1.0 million) for costs that
are outside of the services agreement (and TSA) relating to NuVista's share of
direct charges from third parties. As at December 31, 2008, the amount
receivable from Bonavista was $1.2 million (2007 - $0.7 million).
Contractual obligations and commitments - NuVista enters into contract
obligations as part of conducting business. As NuVista continues to invest in
its capital programs, we will draw on our bank facility and will have the
related contractual obligation.
The following is a summary of NuVista's contractual obligations and
commitments as at December 31, 2008:
($ thousands) Total 2009 2010 2011 2012 2013
----------------------------------------------------------------------------
Transportation 601 444 123 34 - -
Office lease 7,877 2,055 2,055 2,055 1,712 -
Long-term debt 355,407 - 355,407 - - -
----------------------------------------------------------------------------
Total commitments 363,885 2,499 357,585 2,089 1,712 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Annual financial information - The following table highlights selected
annual financial information for the years ended December 31, 2008, 2007
and 2006:
December 31, 2008 2007 2006
----------------------------------------------------------------------------
($ thousands, except per share amounts)
Production revenue 515,338 212,386 192,639
Net earnings 88,195 26,327 35,824
Per share - basic 1.18 0.51 0.72
Per share - diluted 1.18 0.51 0.71
----------------------------------------------------------------------------
Balance sheet information
Total assets 1,407,296 683,165 590,084
Long-term debt 355,407 177,109 152,485
Shareholders' equity 811,300 370,292 296,513
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarterly financial information - The following table highlights NuVista's
performance for the eight quarterly reporting periods from March 31, 2007 to
December 31, 2008:
2008
----------------------------------------
Dec. 31 Sept. 30 Jun. 30 Mar. 31
----------------------------------------------------------------------------
Production (boe/d) 25,688 26,065 26,153 19,339
($ thousands, except per share
amounts)
Production revenue 106,982 149,648 161,794 97,064
Net earnings 24,443 53,699 2,905 7,150
Net earnings
Per share - basic 0.31 0.68 0.04 0.12
Per share - diluted 0.31 0.68 0.04 0.12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2007
---------------------------------------
Dec. 31 Sept. 30 Jun. 30 Mar. 31
----------------------------------------------------------------------------
Production (boe/d) 14,251 13,590 14,147 13,409
($ thousands, except per share
amounts)
Production revenue 53,790 48,166 56,832 53,626
Net earnings 11,063 754 9,678 4,832
Net earnings
Per share - basic 0.21 0.01 0.19 0.10
Per share - diluted 0.21 0.01 0.18 0.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NuVista has seen growth in quarterly production volumes over the prior eight
quarters. The increases in production during the first and second quarters of
2008 relate primarily to the Rider Acquisition that closed on March 4, 2008.
Production remained relatively constant over the last three quarters of 2008 as
NuVista allocated cash flow to debt reduction rather than capital expenditures.
The decline in production during the fourth quarter of 2008 related primarily to
cold weather and the delay in the tie-in of several wells. Over the prior eight
quarters, quarterly revenue has been in a range of $48.1 million to $161.8
million with revenue primarily influenced by production volumes, and natural gas
and crude oil prices in the quarter. Net earnings have been in a range of $0.1
million to $53.7 million primarily influenced by production volumes, commodity
prices and unrealized gains and losses on commodity derivatives.
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.
(f) Goodwill - Goodwill is recorded on a business combination when the total
purchase consideration exceeds the fair value of the net identifiable assets and
liabilities of the acquired entity. The goodwill balance is not amortized,
however, and must be assessed for impairment at least annually. Impairment is
initially determined based on the fair value of a reporting unit compared to its
book value. Any impairment must be charged to earnings in the period the
impairment occurs. The Company has one reporting unit, being the entity as a
whole, and as at December 31, 2008, we have determined there was no goodwill
impairment.
Update on regulatory matters
(a) New Alberta Royalty Framework - On October 25, 2007, the Government of
Alberta released a report entitled "The New Royalty Framework" (the "NRF")
containing the Government's proposals for Alberta's new royalty regime, which
was followed by the Mines and Minerals (New Royalty Framework) Amendment Act,
2008, which was given Royal Assent on December 2, 2008. The NRF and the
applicable new legislation became effective on January 1, 2009. The NRF
establishes new royalty rates for conventional oil, natural gas and oil sands.
The new royalty rates for conventional oil are set by a single sliding rate
formula which is applied monthly and increases the old royalty from 30% to 35%
applied to the old and new tiers, to up to 50% and with rate caps once the price
of conventional oil reaches $120 per barrel. The sliding rate formula includes
in its calculation the price of oil and well production.
In response to the drop in commodity prices experienced during the second half
of 2008, the Government of Alberta announced on November 19, 2008, the
introduction of a five year program of transitional royalty rates with the
intent of promoting new drilling. Under this new program companies drilling new
natural gas or conventional oil deep wells (between 1,000 and 3,500 metres) will
be given a one-time option, on a well by well basis, to adopt either the new
transitional royalty rates or those outlined in the NRF. In order to qualify for
this program wells must be drilled during the period starting on November 19,
2008 and ending on December 31, 2013. Following this period all new wells
drilled will automatically be subject to the NRF.
On April 10, 2008, the Government of Alberta introduced two new royalty programs
that will encourage the development of deep oil and gas reserves, and these are:
(a) a five-year oil program for exploration wells over 2,000 metres that will
provide royalty adjustments to offset higher drilling costs and provide a
greater incentive for producers to continue to pursue new, deeper oil plays
(these oil wells will qualify for up to a $1 million or 12 months of royalty
offsets, whichever comes first); and (b) a five-year natural gas deep drilling
program that will replace the existing program in order to encourage continued
deep gas exploration for wells deeper than 2,500 metres (the program will create
a sliding scale of royalty credit according to depth, of up to $3,750 per
metre). These new programs are to be implemented along with the NRF. NuVista
does not anticipate a significant benefit from the TRP in 2009 as the majority
of NuVista's wells converted to the NRF on January 1, 2009.
As a result of the current global financial crisis, Premier Ed Stelmach stated
on February 5th, 2009, that the Government of Alberta was going to provide
incentives to junior and mid-size companies with the objective of easing access
to capital for such companies and promoting investment.
On March 3, 2009, the Government of Alberta announced a three-point incentive
program to stimulate new and continued economic activity in Alberta which
included a drilling royalty credit for new conventional oil and natural gas
wells and a new well royalty incentive program. Under the drilling royalty
credit program a $200 per meter royalty credit will be available on new
conventional oil and natural gas wells drilled between April 1, 2009 and March
31, 2010, subject to certain maximum amounts. The maximum credits available will
be determined by the company's production level in 2008 and its drilling
activity between April 1, 2009 and March 31, 2010. Based on NuVista's 2008
production it will be entitle to a maximum credit of 40% of royalties payable in
the period April 1, 2009, and March 31, 2010. The new well incentive program
will apply to wells beginning production of conventional oil and natural gas
between April 1, 2009 and March 31, 2010 and provides for a maximum 5% royalty
rate for the first 12 months of production, up to a maximum of 50,000 barrels or
500 mmcf of natural gas.
As royalties under the NRF are sensitive to both commodity prices and production
levels, the estimated NRF Alberta and corporate royalty rates will fluctuate
with commodity prices, well production rates, production decline of existing
wells, and performance and location of new wells drilled.
(b) Internal controls over financial reporting - On August 15, 2008, the
Canadian Securities Administrators published the National Instrument ("NI")
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.
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 12 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 13 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 - 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 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.
In order to meet the requirement to transition to IFRS, NuVista has appointed
internal staff to lead the conversion project along with sponsorship from an
executive steering committee. NuVista has also involved the external auditors
throughout the conversion project. NuVista has provided training to key
employees, completed a preliminary analysis of the accounting differences and is
monitoring the impact of the transition on its business practices, information
systems and internal controls over financial reporting. Changes in accounting
policies are likely and may materially impact NuVista's consolidated financial
statements. However, continued progress is necessary before NuVista is in a
position to quantify the impact on the financial results.
(e) Business combination - In December 2008, the CICA issued the new accounting
standard Section 1582, Business Combination replacing Section 1581. This Section
establishes principles and requirements for accounting for business
combinations. Significant changes include determination of the purchase price
based on the fair value of shares exchanged at the market price on the
acquisition or closing date. The new guidance also requires that all acquisition
related costs be expensed as incurred, and contingent liabilities are to be
measured at fair value at acquisition date and re-measured to fair value at each
reporting period through earnings until settled. In addition, negative goodwill
is required to be recognized in earnings on the acquisition date. The new
Section will be applied prospectively effective January 1, 2011.
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 NI 52-109.
Disclosure controls and procedures have been designed to ensure that information
to be disclosed by NuVista is accumulated and communicated to management as
appropriate to allow timely decisions regarding required disclosure. NuVista's
CEO and CFO have evaluated the effectiveness of the disclosure controls and
procedures as at December 31, 2008 and have concluded that they provide
reasonable assurance that all material information relating to the Company is
disclosed in a timely manner.
Internal controls over financial reporting are designed to provide reasonable
assurance regarding the reliability of the NuVista's financial reporting and
compliance with generally accepted accounting principles. The CEO and CFO have
evaluated NuVista's internal controls over financial reporting as at December
31, 2008 based on the framework in "Internal Control Over Financial Reporting -
Guidance for Smaller Public Companies" issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") and have concluded they are
designed and operating effectively to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the financial
statements for external purposes in accordance with GAAP. During the year ended
December 31, 2008, there have been no changes to the Company'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, errors or fraud. Control systems, no matter how well conceived or
operated, can provide only reasonable, not absolute assurance that the
objectives of the control systems are met.
Assessment of business risks
The following are the primary risks associated with the business of NuVista.
Most of 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;
- Reserves risk with respect to the quantity and quality of recoverable reserves;
- 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;
- Risk associated with the current global financial crisis;
- Risk associated with the re-negotiation of NuVista's credit facility and the
continued participation of NuVista's lenders;
- Market risk relating to the availability of transportation systems to move the
product to market;
- 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
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 price risk management program to manage commodity prices and
foreign exchange currency rates risk and transacting 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;
- Establishing and maintaining adequate cash resources to fund future
abandonment and site restoration costs;
- Closely monitoring commodity prices and capital programs to manage financial
leverage; and
- Monitoring the bank and equity markets to understand how changes in the
capital market may impact NuVista's business plan.
OUTLOOK
Although the current financial and commodity markets create considerable
uncertainty on the near term, NuVista will be responsive to economic conditions
and continue with its disciplined acquire and develop business model. Our 2009
capital program will be reviewed continually throughout the year in the context
of commodity and financial markets. We look at 2009 as a year that will have as
many opportunities as challenges.
NuVista forecasts 2009 funds from operations of $185 million based on current
pricing assumptions. These assumptions are $5.00/mcf for AECO natural gas,
US$49.00 for WTI crude oil, a foreign exchange rate of 0.80, and include price
risk management contracts currently in place but do not include any benefits
associated with the Alberta Government's announcement of royalty incentives on
March 3, 2009. Based on this forecast of funds from operation, our Board of
Directors has approved a reduction in our 2009 capital budget to $175 million.
Approximately $95 million of the capital program will be allocated to
exploration and development activities with the flexibility to either accelerate
or defer expenditures based upon market conditions. New royalty incentives
announced on March 3, 2009 will improve rates of return for drilling in areas
such as Eastern Alberta. We expect to drill 50 to 70 wells and this should
result in production averaging between 26,000 boe/d and 26,500 boe/d. Our
reduced 2009 capital program will result in a high-grading of opportunities in
2009 and a growing prospect inventory heading into 2010. We will continue to
invest human resources and capital on our emerging resource plays in order to
develop a thorough understanding of recovery concepts. We will advance these
projects in 2009 by drilling new wells to assess recovery from each of these
resource plays.
For the first half of 2009, our objective will be to limit capital spending to
our funds from operations. Capital spending during the first quarter of 2009,
including property acquisitions, are expected to total approximately $90
million. Capital expenditures in the second quarter of 2009 will be
significantly reduced in order to maintain our financial flexibility. Production
in the first quarter of 2009 is forecast to be approximately 26,300 boe/d. This
forecast incorporates the impact of cold weather on production in January,
production from the property acquisition that closed on January 29, 2009, the
delayed tie-in of production volumes in February, and the tie-in of our Dunvegan
wells in March 2009. Based on field estimates, February production is forecast
to average greater than 27,000 boe/d and first quarter exit production rates are
also forecast to be greater than 27,000 boe/d.
A key component of NuVista's business strategy is maintaining financial
flexibility, in particular, during downturns faced by the industry. We plan to
maintain our financial discipline during this period of low commodity prices and
economic uncertainty. NuVista ended 2008 with debt net of adjusted working
capital of $341 million and a ratio of debt net of adjusted working capital to
annualized fourth quarter funds from operations of 1.5:1. In addition to the
prudent management of debt, price risk management activities have always played
an important role in the execution of our business plan and management of
financial risk. Details of our price risk management activities are outlined in
our MD&A and notes to the financial statements.
NuVista will continue to plan for the future. We will continue to focus on our
core strategy of cost control and applying the expertise of our technical staff
to our current operating regions, through both our exploration and development
program and strategic acquisitions. The execution of these strategies is
expected to allow us to continue to grow our production and reserves on a per
share basis, consistently and profitably over the long term. With a strong team
of over 125 dedicated and talented individuals, NuVista is fully staffed in all
key areas. Our talented and energized people are focused on increasing
shareholder value over the long term using a disciplined and sustainable
approach to profitable per share growth within a constructive environment of
integrity, respect and open idea generation.
Over the long term we believe that supply and demand fundamentals will result in
significant upside for both oil and natural gas prices, however we must be
prepared to endure an extended period of low prices before this recovery occurs.
We believe our counter-cyclical strategy of acquiring premium assets at
attractive prices over the next two to three years and optimizing production
from these assets will richly reward our stakeholders over the long term.
Throughout our five and one-half 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.
Sincerely,
Alex G. Verge, President & CEO
Robert F. Froese, Vice-President, Finance & CFO
March 5, 2009
NUVISTA ENERGY LTD.
Consolidated Balance Sheets
($ thousands)
As at December 31, 2008 2007
----------------------------------------------------------------------------
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 139 $ -
Accounts receivable and prepaids (note 4) 64,712 30,463
Commodity derivative asset (note 13) 16,513 -
----------------------------------------------------------------------------
81,364 30,463
Oil and natural gas properties and
equipment (note 6) 1,242,216 598,263
Goodwill (note 7) 83,716 54,439
----------------------------------------------------------------------------
$ 1,407,296 $ 683,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 50,710 $ 31,972
Commodity derivative liability (note 13) - 1,704
Future incomes taxes (note 11) 4,954 -
----------------------------------------------------------------------------
55,664 33,676
Long-term debt (note 9) 355,407 177,109
Compensation liability (note 10) 850 -
Asset retirement obligations (note 8) 46,296 26,574
Future income taxes (note 11) 137,779 75,514
Shareholders' equity
Share capital, warrants and contributed
surplus (note 10) 598,042 245,212
Accumulated other comprehensive income (note 10) - 17
Retained earnings 213,258 125,063
----------------------------------------------------------------------------
811,300 370,292
----------------------------------------------------------------------------
$ 1,407,296 $ 683,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NUVISTA ENERGY LTD.
Consolidated Statements of Earnings, Comprehensive
Income and Retained Earnings
Three months ended Years ended
December 31, December 31,
($ thousands, except per share
amounts) 2008 2007 2008 2007
----------------------------------------------------------------------------
(unaudited)
Revenues
Production $ 106,982 $ 53,790 $ 515,338 $ 212,386
Royalties (21,669) (10,725) (116,874) (48,724)
Realized gain (loss) on
commodity derivatives 3,027 1,356 (6,628) 5,867
Unrealized gain (loss) on
commodity derivatives 25,817 (4,303) 18,242 (1,729)
----------------------------------------------------------------------------
114,157 40,118 410,078 167,800
----------------------------------------------------------------------------
Expenses
Operating 21,235 9,316 74,504 36,550
Transportation 1,797 1,222 7,632 4,422
General and administrative 3,053 1,619 12,042 5,254
Bad debt provision (note 4) 3,631 - 4,758 -
Interest 3,486 2,394 15,509 9,510
Stock-based compensation (note 10) 1,212 608 5,591 2,833
Depreciation, depletion and
accretion 43,685 21,089 164,211 85,246
----------------------------------------------------------------------------
78,099 36,248 284,247 143,815
----------------------------------------------------------------------------
Earnings before income and
other taxes 36,058 3,870 125,831 23,985
Future income tax expense
(reduction) (note 11) 11,615 (7,193) 37,636 (2,342)
----------------------------------------------------------------------------
Net earnings 24,443 11,063 88,195 26,327
Other comprehensive income
Amortization of fair value of
financial instruments (note 10) - (36) (17) (888)
----------------------------------------------------------------------------
Comprehensive income $ 24,443 $ 11,027 $ 88,178 $ 25,439
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained earnings, beginning of
period 188,815 114,000 125,063 98,736
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Retained earnings, end of period $ 213,258 $ 125,063 $ 213,258 $ 125,063
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings per share - basic $ 0.31 $ 0.21 $ 1.18 $ 0.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings per share - diluted $ 0.31 $ 0.21 $ 1.18 $ 0.51
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
NUVISTA ENERGY LTD.
Consolidated Statements of Cash Flows
Three months ended Years ended
December 31, December 31,
($ thousands) 2008 2007 2008 2007
----------------------------------------------------------------------------
(unaudited)
Cash provided by (used in)
Operating Activities
Net earnings $ 24,443 $ 11,063 $ 88,195 $ 26,327
Items not requiring cash from
operations
Depreciation, depletion and
accretion 43,685 21,089 164,211 85,246
Stock-based compensation 1,321 608 4,471 2,833
Bad debt provision 3,631 - 4,758 -
Unrealized gain (loss) on
commodity derivatives (25,817) 4,303 (18,242) 1,729
Future income taxes 11,615 (7,193) 37,636 (2,342)
Asset retirement expenditures (670) (787) (2,516) (1,589)
Increase in non-cash working capital (13,285) (2,654) (46,390) (9,020)
----------------------------------------------------------------------------
44,923 26,429 232,123 103,184
----------------------------------------------------------------------------
Financing Activities
Issue of share capital and
warrants, net of share
issuance costs 461 1,511 90,246 42,871
Increase in long-term debt 10,262 16,085 178,298 24,624
Repayment of long-term debt - - (305,584) -
----------------------------------------------------------------------------
10,723 17,596 (37,040) 67,495
----------------------------------------------------------------------------
Investing Activities
Oil and natural gas properties
and equipment (45,308) (32,816) (169,936) (113,320)
Transaction costs on Rider
acquisition - - (4,146) -
Property acquisition (3,858) (10,994) (26,656) (50,688)
Deposit in capital asset
acquisition - (2,600) - (2,600)
Decrease (increase) in
non-cash working capital (11,716) 2,385 5,794 (4,071)
----------------------------------------------------------------------------
(60,882) (44,025) (194,944) (170,679)
----------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (5,236) - 139 -
Cash and cash equivalents,
beginning of period 5,375 - - -
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period $ 139 $ - $ 139 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes toconsolidated financial statements.
NUVISTA ENERGY LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2008 and 2007.
1. Significant accounting policies
NuVista Energy Ltd. ("NuVista" or the "Company") was established with an
effective date of July 2, 2003 under a Plan of Arrangement entered into by
Bonavista Energy Trust (the "Trust"), Bonavista Petroleum Ltd. ("Bonavista") and
NuVista. Under the Plan of Arrangement, various assets of Bonavista comprising
of certain producing and exploration assets were transferred to NuVista.
Management has prepared its consolidated financial statements in accordance with
Canadian Generally Accepted Accounting Principles. As a determination of many
assets, liabilities, revenue and expenses is dependent upon future events, the
preparation of these consolidated financial statements requires the use of
estimates and assumptions, which have been made using careful judgment. In
particular, the amounts recorded for depreciation and depletion of oil and
natural gas properties and equipment, the provision for asset retirement
obligations and stock-based compensation are based on estimates. The ceiling
test is based on estimates of proved reserves, production rates, future oil and
natural gas prices, future costs and other relevant assumptions. By their
nature, these estimates are subject to measurement uncertainty and the effect on
the financial statements of changes in such estimates in future periods could be
significant. All tabular amounts are in thousands of Canadian dollars, except
per share amounts, unless otherwise stated.
(a) Principles of consolidation
The consolidated financial statements include the accounts of NuVista and its
wholly owned subsidiaries and proportionate share of its partnerships, which are
jointly owned with Bonavista.
(b) Oil and natural gas properties and equipment
NuVista follows the full cost method of accounting, whereby all costs associated
with the exploration for and development of oil and natural gas reserves are
capitalized in cost centres on a country-by-country basis. Such costs include
land acquisitions, drilling, well equipment and geological and geophysical
activities. Gains or losses are not recognized upon disposition of oil and
natural gas properties unless crediting the proceeds against accumulated costs
would result in a change in the rate of depletion by 20% or more.
Costs capitalized in the cost centres, including well equipment, together with
estimated future capital costs associated with proved reserves, are depreciated
and depleted using the unit-of-production method which is based on gross
production and estimated proved oil and natural gas reserves as determined by
independent engineers. The cost of unproven properties is excluded from the
depreciation and depletion base. For purposes of the depreciation and depletion
calculations, oil and natural gas reserves are converted to a common unit of
measure on the basis of their relative energy content, being six thousand cubic
feet of natural gas for one barrel of oil. Facilities are depreciated using the
declining balance method over their useful lives, which range from 12 to 15
years. Costs associated with office furniture, fixtures, leasehold improvements
and information technology are carried at cost and depreciated on a 20%
declining balance.
Oil and natural gas properties and equipment are evaluated in each reporting
period to determine whether the carrying amount in a cost centre is recoverable
and does not exceed the fair value of the properties in the cost centre. The
carrying amounts are assessed to be recoverable when the sum of the undiscounted
cash flows expected from the production of proved reserves, the lower of cost
and market of unproved properties and the cost of major development projects
exceeds the carrying amount of the cost centre. When the carrying amount is not
assessed to be recoverable, an impairment loss is recognized to the extent that
the carrying amount of the cost centre exceeds the sum of the discounted cash
flows expected from the production of proved plus probable reserves, the lower
of cost and market of unproved properties and the cost of major development
projects of the cost centre. The cash flows are estimated using expected future
product prices and costs, and are discounted using a risk-free interest rate.
(c) Joint interest operations
A portion of NuVista's oil and natural gas operations is conducted jointly with
others. Accordingly, the consolidated financial statements reflect only
NuVista's proportionate interest in such activities.
(d) Goodwill
Goodwill represents the excess of purchase price over the fair value of net
assets acquired in a business combination. Goodwill is tested for impairment on
an annual basis at the year-end balance sheet date, or as events occur that
could result in impairment. Impairment is recognized based on the fair value of
the reporting unit compared to the value to the reporting unit. If the fair
value is less than the value, impairment is measured by allocating the fair
value of the identifiable assets and liabilities as if the reporting unit has
been acquired in a business combination for a purchase price equal to its fair
value. The excess of the fair value over the amounts assigned to the
identifiable assets and liabilities is the fair value of goodwill. Any excess of
the value over the implied fair value of goodwill is recognized as an impairment
loss in the period which it occurs.
(e) Asset retirement obligations
NuVista records a liability for the fair value of legal obligations associated
with the retirement of long-lived tangible assets in the period in which they
are incurred, normally when the asset is purchased or developed. On recognition
of the liability, there is a corresponding increase in the carrying amount of
the related asset known as the asset retirement cost, which is depleted on a
unit-of-production basis over the life of the reserves. 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. Actual costs incurred upon settlement of the obligations are charged
against the liability.
(f) Revenue recognition
Revenues from the sale of oil and natural gas are recorded when title passes to
an external party.
(g) Financial instruments
(i) Financial instruments - recognition and measurement
All financial instruments within its scope, including all derivatives are to be
recognized on the consolidated balance sheet initially at fair value. Subsequent
measurement of all financial assets and liabilities except those
held-for-trading and available for sale are measured at amortized cost
determined using the effective interest rate method. Held-for-trading financial
assets are measured at fair value with changes in fair value recognized in
earnings. Available-for-sale financial assets are measured at fair value with
changes in fair value recognized in comprehensive income and reclassified to
earnings when derecognized or impaired. NuVista has classified its accounts
receivable as loans and receivables which are measured at amortized cost.
Accounts payable and accrued liabilities and long-term debt are classified as
other financial liabilities which are measured at amortized cost. Financial
derivatives are designated as held for trading which are measured at fair value.
Changes to the measurement of existing financial assets and liabilities at the
date of adoption were adjusted to either opening retained earnings or opening
accumulated other comprehensive income. The Company immediately expenses all
transaction costs incurred in relation to the acquisition of a financial asset
or liability.
(ii) Derivatives
NuVista continues to utilize financial derivatives and non-financial
derivatives, such as commodity sales contracts requiring physical delivery, to
manage the price risk attributable to anticipated sale of oil and natural gas
production.
NuVista has elected to account for its commodity sales contracts which were
entered into and continue to be held for the purpose of receipt or delivery of
non-financial items in accordance with its expected purchase, sale or usage
requirements as executory contracts rather than as non-financial derivatives.
Prior to January 1, 2007, NuVista applied hedge accounting to its financial
derivatives. On January 1, 2007, NuVista discontinued hedge accounting for all
existing commodity derivatives. Net derivative gains in accumulated other
comprehensive income at January 1, 2007 were reclassified to earnings in future
periods as the original hedged transactions affect net earnings. Commencing
January 1, 2009, the changes in fair value of such derivatives are recognized in
net earnings as incurred.
(iii) Embedded derivatives
Embedded derivatives are derivatives embedded in a host contract. NuVista has
elected January 1, 2007, as its transition date for accounting for any potential
embedded derivatives. NuVista did not identify any material embedded derivatives
which required separate recognition and measurement.
(iv) Other comprehensive income
The new Comprehensive Income standard, Section 1530, requires a new statement of
comprehensive income, which is comprised of net earnings and other comprehensive
income which, for NuVista, to date relate to changes in gains or losses on
derivatives designated as cash flow hedges.
(h) Stock-based compensation
NuVista has equity incentive plans, which are described in note 10,
Shareholders' equity. These stock-based compensation plans for employees do not
involve the direct award of stock, or call for the settlement in cash or other
assets. Upon the exercise of stock options, consideration received together with
the amount previously recognized in contributed surplus is recorded as an
increase to share capital. NuVista uses the fair value method for valuing stock
option grants. Under this method, the compensation cost attributable to all
share options granted is measured at fair value at the grant date and expensed
over the vesting period with a corresponding increase to contributed surplus.
(i) Income taxes
NuVista follows the asset and liability method of accounting for income taxes.
Under this method, income tax liabilities and assets are recognized for the
estimated tax consequences attributable to differences between the amounts
reported in the consolidated financial statements of NuVista and its respective
tax base using substantively enacted future income tax rates. The effective
change in income tax rates on future tax liabilities and assets is recognized in
income in the period in which the change occurs. Temporary differences arising
on acquisitions result in future tax assets and liabilities.
(j) Per share amounts
Diluted per share amounts reflect the potential dilution that could occur if
securities or other contracts to issue common shares were exercised or converted
to common shares. The treasury stock method is used to determine the dilutive
effect of stock options and other dilutive instruments.
(k) Cash and cash equivalents
Cash and cash equivalents are comprised of cash and short-term investments that
are highly liquid in nature and have an original maturity date of three months
or less.
(l) Comparative figures
Certain prior period amounts have been reclassified to conform with current
year's presentation.
2. 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 12, 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 13, Risk management
activities.
(c) Restricted share units
The Company has established a cash-based Restricted Share Unit ("RSU") Incentive
Plan for employees, and officers. Compensation expense associated with the RSU
is determined based on market value at each reporting period which is recognized
in earnings over the vesting period with a corresponding increase or decrease in
compensation liability. Refer to note 10, Shareholders' equity.
3. Future accounting changes
(a) 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 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.
In order to meet the requirement to transition to IFRS, the Company has
appointed internal staff to lead the conversion project along with sponsorship
from an executive steering committee. NuVista has also involved the external
auditors throughout the conversion project. The Company has provided training to
key employees, completed a preliminary analysis of the accounting differences
and is monitoring the impact of the transition on its business practices,
information systems and internal controls over financial reporting. Changes in
accounting policies are likely and may materially impact the Company's
consolidated financial statements. However, continued progress is necessary
before the Company is in a position to quantify the impact on the financial
results.
(c) Business combination
In December 2008, the CICA issued the new accounting standard Section 1582,
Business Combination replacing Section 1581. This Section establishes principles
and requirements for accounting for business combinations. Significant changes
include determination of the purchase price based on the fair value of shares
exchanged at the market price on the acquisition or closing date. The new
guidance also requires that all acquisition related costs be expensed as
incurred, and contingent liabilities are to be measured at fair value at
acquisition date and remeasured to fair value at each reporting period through
earnings until settled. In addition, negative goodwill is required to be
recognized in earnings on the acquisition date. The new Section will be applied
prospectively effective January 1, 2011.
4. 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, the
Company is unable to ascertain with certainty the amount that will be recovered
but has recorded a provision in the financial statements equal to 100% of the
amount owed. The recoverability of the outstanding balance will continue to be
reassessed as more information becomes available. The Company's allowance for
doubtful accounts totalled $4.8 million as at December 31, 2008 (2007 - $0.1
million).
5. 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 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) (18,261)
Bank loan (288,901)
Financial instrument (19,251)
Asset retirement obligations (8,505)
Future income taxes (28,962)
Goodwill 29,277
----------------------------------------------------------------------------
$ 260,341
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Oil and natural gas properties and equipment
2008
----------------------------------------------
Accumulated
Depreciation Net book
Cost and depletion value
----------------------------------------------------------------------------
Oil and gas properties $ 1,496,120 $ 522,641 $ 973,479
Facilities 301,828 33,091 268,737
----------------------------------------------------------------------------
$ 1,797,948 $ 555,732 $ 1,242,216
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2007
----------------------------------------------
Accumulated
Depreciation Net book
Cost and depletion value
----------------------------------------------------------------------------
Oil and gas properties $ 670,104 $ 194,838 $ 475,266
Facilities 140,446 17,449 122,997
----------------------------------------------------------------------------
$ 810,550 $ 212,287 $ 598,263
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unproved property costs of $108.8 million were excluded from the depreciation
and depletion calculation for the year ended December 31, 2008 (2007 - $60.9
million). Future development costs of $49.6 million (2007 - $29.7 million) were
included in the depreciation and depletion calculation. For 2008, NuVista
capitalized $3.7 million (2007 - $2.7 million) in general and administrative
expenses and $1.8 million (2007 - $1.2 million) in stock compensation expense
related to exploration and development activities. Related future income tax
liability was $0.7 million (2007 - $0.5 million).
NuVista has performed the ceiling test as of December 31, 2008, and no
impairment was required. The test was calculated using the benchmark reference
prices at January 1 for the years 2009 to 2014 and thereafter, adjusted for
commodity differentials specific to NuVista, as determined by independent
engineers.
Benchmark Reference Price Forecasts:
2009 2010 2011 2012 2013 2014 Thereafter(1)
----------------------------------------------------------------------------
WTI (US$/bbl) 57.50 68.00 74.00 85.00 92.01 93.85 97.73
AECO (CDN$/mmbtu) 7.58 7.94 8.34 8.70 8.95 9.14 9.34
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Escalated at 2% per year thereafter.
7. Goodwill
The Company tested goodwill for impairment at December 31, 2008. Based upon this
review, the Company has determined that there is no goodwill impairment as of
December 31, 2008.
8. 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 December 31, 2008, the estimated
total undiscounted amount of cash flows required to settle the Company's asset
retirement obligations is $187.9 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 is due to changes in per
well cost estimates.
A reconciliation of the asset retirement obligations is provided below:
2008 2007
----------------------------------------------------------------------------
Balance, beginning of year $ 26,574 $ 22,683
Accretion expense 3,026 1,841
Liabilities incurred 7,203 2,429
Liabilities acquired (see note 5) 8,505 166
Change in assumptions 3,504 1,044
Liabilities settled (2,516) (1,589)
----------------------------------------------------------------------------
Balance, end of year $ 46,296 $ 26,574
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Long-term debt
On March 4, 2008, the Company amended its credit facility to increase the
maximum borrowing amount to $450.0 million (2007 - $220.0 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 has
a 364 day revolving period and 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. As at
December 31, 2008, the Company had drawn $355.4 million (2007 - $177.1 million)
of the long-term debt. Cash paid for interest expense for the year ended
December 31, 2008, was $14.6 million (2007 - $8.7 million).
As a result of closing the Rider Acquisition on March 4, 2008 and the concurrent
amendment of the Company's credit facility, the 364 day revolving period of the
Company's credit facility ends on March 3, 2009. The Company and the lenders
agreed to an extension of the revolving period from March 3, 2009 until April
30, 2009 in order to return NuVista to its historical annual review date. As
part of this extension, the credit facility borrowing rates were amended to
current market rates. All other terms of the credit facility remain unchanged.
10. Shareholders' equity
(a) Share capital, warrants and contributed surplus
2008 2007
----------------------------------------------------------------------------
Share capital $ 587,460 $ 240,245
Warrants 3,454 -
Contributed surplus 7,128 4,967
----------------------------------------------------------------------------
Total $ 598,042 $ 245,212
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(b) Authorized
Unlimited number of voting Common Shares and 1,200,000 Class B Performance
Shares.
(c) Common shares issued
2008 2007
---------------------------------------
Number Amount Number Amount
----------------------------------------------------------------------------
Balance, beginning of year 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 616 6,545 708 4,991
Stock-based compensation - 4,144 - 2,788
Cost associated with shares issued,
net of future tax benefit of $84
(2007 - $557) - (215) - (1,439)
----------------------------------------------------------------------------
Balance, end of year 79,164 $ 587,460 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
2008
----------------------------------------------------------------------------
Number Amount
----------------------------------------------------------------------------
Balance, beginning of year - $ -
Issued 3,000 3,454
----------------------------------------------------------------------------
Balance, end of year 3,000 $ 3,454
----------------------------------------------------------------------------
----------------------------------------------------------------------------
At December 31, 2008, there were 3.0 million common share purchase warrants
outstanding. Each warrant entitled the holder thereof to acquire, subject to
adjustment, one common share for $15.50, prior to March 4, 2009. As of March 5,
2009, these warrants expired and were not exercised. 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 one year; and a volatility of 30%. The fair
value per warrant was calculated at $1.15.
(e) Contributed surplus
2008 2007
----------------------------------------------------------------------------
Balance, beginning of year $ 4,967 $ 3,747
Stock-based compensation 6,305 4,008
Exercise of stock options (4,144) (2,788)
----------------------------------------------------------------------------
Balance, end of year $ 7,128 $ 4,967
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(f)Accumulated other comprehensive income
2008 2007
----------------------------------------------------------------------------
Balance, beginning of year $ 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 year $ - $ 17
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(g) Per share amounts
During the year ended December 31, 2008, there were 74,468,270 (2007 -
51,375,406) weighted average shares outstanding. On a diluted basis, there were
75,021,409 (2007 - 51,961,713) weighted average shares outstanding after giving
effect for dilutive stock options. The number of anti-dilutive options totaled
5,890,266 at December 31, 2008 (2007 - 3,224,150).
(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. Prior to December 2008, 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.
Amendments to the stock option plan were made effective December 2008. Pursuant
to the amendments, options subsequently granted will vest at the rate of 33% per
year and expire 2.5 years after the date of vesting. 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 for the
years ended December 31, 2008 and 2007 is as follows:
2008 2007
---------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
----------------------------------------------------------------------------
Balance, beginning of year 4,046,400 $ 13.46 3,653,711 $ 11.94
Granted 3,263,260 13.64 1,373,100 14.38
Exercised (615,675) 10.63 (707,961) 6.35
Forfeited (508,715) 14.63 (269,950) 14.40
Expired (73,325) 17.64 (2,500) 7.79
----------------------------------------------------------------------------
Balance, end of year 6,111,945 $ 13.69 4,046,400 $ 13.46
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes stock options outstanding and exercisable under
the plan at December 31, 2008:
Options Outstanding Options Exercisable
-----------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Outstanding Exercise
Range of At Year-End Life Price at Year-End Price
Exercise Price
----------------------------------------------------------------------------
$ 6.30 to $9.99 1,031,425 3.7 $ 7.79 208,925 $ 7.15
$ 10.00 to $14.99 2,710,650 2.6 13.72 918,175 13.67
$ 15.00 to $19.56 2,369,870 3.5 16.23 223,400 17.09
----------------------------------------------------------------------------
$ 6.30 to $19.56 6,111,945 3.2 $ 13.69 1,350,500 $ 13.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Stock-based compensation
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 ranged between 2% to 4% (2007 -
4.5%); volatility ranged between 29% to 41% (2007 - 33%); an average expected
life of 4.5 years (2007 - 4.5 years); an estimated forfeiture rate of 10% (2007
- 10%); and dividends of nil (2007 - nil). The weighted average fair value of
stock options granted during the year ended December 31, 2008, was $4.67 per
option (2007 - $4.77 per option).
(j) Restricted share units
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 year ended December 31, 2008, the Company recorded compensation expense
of $1.1 million and capitalized $0.3 million to property, plant and equipment
with a corresponding offset recorded in compensation liability. The compensation
expense was based on the trading price of the Company's shares on December 31,
2008.
The following table summarizes the change in RSU for the year ended December 31,
2008:
2008
----------------------------------------------------------------------------
Number
----------------------------------------------------------------------------
Balance, beginning of year -
Granted 390,163
Forfeited (38,620)
----------------------------------------------------------------------------
Balance, end of year 351,543
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes the change in compensation liability relating
to the RSU's:
2008
----------------------------------------------------------------------------
Amount
----------------------------------------------------------------------------
Balance, beginning of year $ -
Change during the year 1,461
----------------------------------------------------------------------------
Balance, end of year $ 1,461
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Compensation liability - current (included in accounts payable
and accrued liabilities) $ 611
----------------------------------------------------------------------------
Compensation liability - long-term $ 850
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. Income and other taxes
The provision for income tax differs from the result of which would have been
obtained by applying the combined Federal and Provincial income tax rate to the
income before taxes. This difference results from the following items:
2008 2007
----------------------------------------------------------------------------
Expected tax rate 30.8% 33.8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Expected tax expense $ 38,693 $ 8,124
Effect of change in tax rate (7,691) (11,425)
Stock-based compensation 1,375 959
Change in estimated pool balances 5,259 -
----------------------------------------------------------------------------
Future income tax expense $ 37,636 $ (2,342)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The significant components of net future income tax liability are as
follows:
2008 2007
----------------------------------------------------------------------------
Future income tax liabilities
Oil and natural gas properties $ 115,060 $ 77,292
Facilities and well equipment 36,921 7,152
Commodity derivative contracts 4,954 -
Future income tax assets
Asset retirement obligations (12,537) (7,441)
Share issue costs (1,633) (1,015)
Other (32) (474)
----------------------------------------------------------------------------
Net future income tax liability $ 142,733 $ 75,514
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Future income tax liability - current $ 4,954 $
----------------------------------------------------------------------------
Future income tax liability - long-term $ 137,779 $ 75,514
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the year ended December 31, 2008, cash taxes paid was nil (2007 - nil).
12. 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 throughout the
business cycle.
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,
long-term debt, 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 long-term debt plus or minus working capital
adjusted for the current portion of commodity derivative asset or liability and
current portion of future income tax asset or liability, 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 December 31, 2008, the Company had a ratio of net debt to annualized
funds from operations of 1.5:1 (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. The Company is subject to
various covenants under its credit facility. Compliance with these covenants is
monitored on a regular basis and as at December 31, 2008, the Company was in
compliance with all covenants. There were no changes to the Company's approach
to capital management during the year.
13. 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, commodity 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 December 31, 2008, the Company has entered into the following
crude oil contracts:
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
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 - $110.01 - WTI (1) December 31, 2009
(1) This is a US$ denominated contract with fixed price of 1.0262 US.
As at December 31, 2008, the Company has entered into the following natural
gas contracts:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
5,000 gj/d CDN. $8.50 - $11.00 - AECO November 1, 2008 - March 31, 2009
As at December 31, 2008, the mark to market value of the financial
instruments was a gain of $16.5 million the mark to market value of our
physical sale contracts was a gain of $14.1 million.
(ii) Physical sale contracts
As at December 31, 2008, the Company has entered into direct sale natural
gas contracts as follows:
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
November 1, 2008 -
30,000 gj/d CDN. $8.96 - $10.72 - AECO March 31, 2009
April 1, 2009 -
20,000 gj/d CDN. $7.45 - Fixed Price AECO October 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 December 31, 2008, the accounts receivable balance was $46.7 million of
which $9.9 million of accounts receivable were past due. The Company considers
all amounts greater than 90 days past due. These past due accounts receivable
are considered to be collectible, except as described in note 4. When
determining whether past due accounts are uncollectible, the Company factors in
the past credit history of the counterparties. As at December 31, 2008, the
Company had an allowance for doubtful accounts of $4.8 million. Refer to note 4,
Accounts receivable provision.
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 year ended December 31, 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 December 31,
2008, is as follows:
2008 2009 2010 2011 2012 Thereafter
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities $50,710 $ - $ - $ - $ - $ -
Long-term debt - - 355,407 - - -
Compensation liability - - 737 113 - -
----------------------------------------------------------------------------
Total financial liabilities $50,710 $ - $356,144 $ 113 $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 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. An increase
of $0.01 in the US/CDN exchange rate would result in an increase of $26,000 in
revenues. A decrease of $0.01 in the US/CDN exchange rate would result in a
decrease of $26,000 in revenues.
(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 for the year ended December 31, 2008, would have been
$1.7 million 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 year ended December 31, 2008.
14. 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. On November 1,
2008, this services agreement was terminated and Bonavista no longer provides
any ongoing services to NuVista. 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 year ended December 31, 2008, NuVista paid Bonavista $1.1 million (2007
- $1.4 million) in fees relating to general and administrative services provided
by Bonavista. In 2008, NuVista charged Bonavista management fees for jointly
owned partnerships totaling $1.4 million (2007 - $1.4 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 December 31, 2008, the amount receivable from
Bonavista was $1.2 million (2007 - $0.7 million).
15. Commitments
The following is a summary of the Company's contractual obligations and
commitments as at December 31, 2008:
Total 2009 2010 2011 2012 2013
----------------------------------------------------------------------------
Transportation $ 601 $ 444 $ 123 $ 34 $ - $ -
Office lease 7,877 2,055 2,055 2,055 1,712 -
Long-term debt 355,407 - 355,407
----------------------------------------------------------------------------
Total commitments $ 363,885 $ 2,499 $ 357,585 $ 2,089 $ 1,712 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
16. Subsequent events
(a) Property acquisition
In December 2008 the Company entered into an agreement to acquire certain
natural gas properties in the Ferrier/Sunchild, Wapiti and Northwest
Saskatchewan core areas. Total proved plus probable reserves, based on
management's internal estimates, were 4.5 million boes. The purchase price was
approximately $55 million, subject to final purchase adjustments and the
acquisition closed on January 29, 2009. The acquisition was financed with bank
borrowings and cash flow from operations.
(b) Financial instruments
Subsequent to December 31, 2008, the following commodity price risk management
contracts have been entered into in the normal course of business:
(I) Financial contracts
Volume Average Price (Cdn$/bbl) Term
----------------------------------------------------------------------------
1,000 bbls/d USD. $47.10 - WTI March 1, 2009 - March 31, 2009
1,000 bbls/d CDN. $48.91 - Bow River April 1, 2009 - June 30, 2009
(ii) Physical sale contracts
Volume Average Price (Cdn$/gj) Term
----------------------------------------------------------------------------
5,000 gj/d CDN. $5.65 - AECO Floor(1) April 1, 2009 - October 31, 2009
20,000 gj/d CDN $5.97 - $6.56 AECO(2) November 1, 2009 - October 31, 2010
(1) The AECO put was purchased at a cost of $0.82/gj for a total cost of
$0.9 million.
(2) The cost associated with the market collar was $0.30/gj for a total
cost of $2.2 million.
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
Craig W. Stewart, RMP Energy Ltd.
Alex G. Verge, President and CEO
Clayton H. Woitas, Range Royalty Management Ltd.
Grant A. Zawalsky, Burnet, Duckworth & Palmer LLP
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
Joshua T. Truba, Vice President, Land
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"
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