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PrimeWest Energy Trust announces first quarter 2004 results
CALGARY, April 27 /PRNewswire-FirstCall/ -- (TSX: PWI.UN, PWX; NYSE: PWI) -
PrimeWest Energy Trust (PrimeWest or the Trust) today announced interim
operating and financial results for the first quarter ended March 31, 2004, and
information is provided as of April 27, 2004. Unless otherwise noted, all
figures contained in this report are in Canadian dollars.
First Quarter Highlights:
- First quarter production averaged 31,202 barrels of oil equivalent
(BOE) per day, compared to the fourth quarter 2003 rate of
32,111 BOE/day(1).
- Distributions of $0.82 per unit represent a payout ratio of
approximately 70%, compared to fourth quarter 2003 distributions of
$0.96 per unit, representing a payout ratio of 107%.
- Cash flow from operations of $58.5 million ($1.15 per unit) compared
to $43.2 million ($0.86 per unit) in the fourth quarter of 2003,
primarily due to a continued strong commodity price environment.
- Operating costs of $19.7 million ($6.92 per BOE) were lower than the
fourth quarter 2003 operating costs of $21.2 million ($7.18 per BOE).
- The acquisition of Seventh Energy Ltd. closed during the quarter, for
total consideration of $34.8 million plus assumed debt, working
capital adjustments and transaction costs of $11.6 million, adding
approximately 1,300 BOE/day of predominantly natural gas production
to PrimeWest and providing future development potential.
- PrimeWest determined that as of March 22, 2004 the ownership of its
trust units by non-residents exceeded 50%, giving the Trust more than
2.5 years to comply with the Canadian Federal Government's proposal
to limit foreign ownership of Canadian energy royalty trusts to less
than 50% by January 1, 2007. PrimeWest continues to investigate
alternatives to comply with this proposal should it become law.
Subsequent Events
- On April 5, 2004 PrimeWest announced a bought deal financing of
5.4 million units at $26.30 per unit, raising gross proceeds totaling
approximately $142 million, and net proceeds after commissions of
$134.9 million. The funds will be used to reduce debt partially
incurred in the $46 million acquisition of Seventh Energy, for
ongoing capital expenditures and for general corporate purposes. On a
proforma basis after applying the proceeds of the offering,
PrimeWest's first quarter net debt would be approximately
$170 million, and net debt to first quarter cash flow annualized
would be approximately 0.7 times.
- On April 15, 2004 PrimeWest announced the appointment of Peter
Valentine to its Board of Directors. Mr. Valentine brings extensive
experience to the audit function, including his current position as
Chair of the Board of Governors of the Canadian Comprehensive Audit
Foundation. As an independent and unrelated director, Mr. Valentine
will serve on PrimeWest's Audit Committee.
- On April 15, 2004 the Board of Directors also established a new
Operations and Reserves Committee.
Management's Discussion and Analysis
The following is management's discussion and analysis (MD&A) of PrimeWest's
operating and financial results for the quarter ended March 31, 2004 compared
with the preceding quarter and the corresponding period in the prior year as
well as information and opinions concerning the Trust's future outlook based on
currently available information. This discussion should be read in conjunction
with the Trust's audited consolidated financial statements for the years ended
December 31, 2003 and 2002, together with accompanying notes, as contained in
the Trust's 2003 Annual Report.
Financial and Operating Highlights - First Quarter
Financial Highlights Three Months Ended
--------------------------------------
(millions of dollars, except per Mar 31, Dec 31, Mar 31,
BOE and per Trust Unit amounts) 2004 2003 2003
-------------------------------------------------------------------------
Net revenue $ 85.7 $ 73.0 $ 94.0
per BOE(1) 30.20 24.72 30.23
Cash flow from operations 58.5 43.2 64.8
per BOE 20.59 14.62 20.84
per Trust Unit(2) 1.15 0.86 1.53
Royalty expense 23.3 21.1 32.7
per BOE 8.22 7.13 10.50
Operating expenses 19.7 21.2 20.6
per BOE 6.92 7.18 6.63
G&A expenses - Cash 4.2 4.1 3.8
per BOE 1.49 1.37 1.23
G&A expenses - Non-cash 0.4 8.5 0.4
per BOE 0.15 2.88 0.12
Interest expense 3.2 4.1 3.6
per BOE 1.11 1.37 1.16
Distributions to unitholders 41.1 46.3 49.8
per Trust Unit(3) 0.82 0.96 1.20
Net debt(4) 305.7 255.9 281.5
per Trust Unit(5) 5.99 5.07 6.15
-------------------------------------------------------------------------
(1) All calculations required to convert natural gas to a crude oil
equivalent (BOE) have been made using a ratio of 6,000 cubic feet of
natural gas to 1 barrel of crude oil. BOE's may be misleading,
particularly if used in isolation. The BOE conversion ratio is based
on an energy equivalency conversion method primarily applicable at
the burner tip and does not represent a value equivalency at the
wellhead.
(2) Weighted average Trust Units & exchangeable shares (diluted).
(3) Based on Trust Units outstanding at date of distribution.
(4) Net debt is long-term debt & adjusted for working capital.
(5) Trust Units and exchangeable shares outstanding (diluted) at end of
period.
Operating Highlights Three months ended
--------------------------------------
Mar 31, Dec 31, Mar 31,
2004 2003 2003
-------------------------------------------------------------------------
Daily Sales Volumes
Natural gas (mmcf/day) 123.9 126.9 140.3
Crude oil (bbls/day) 7,864 8,189 8,142
Natural gas liquids (bbls/day) 2,696 2,779 3,030
-------------------------------------------------------------------------
Total (BOE/day) 31,202 32,111 34,554
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Realized Commodity Prices(1) (Cdn $)
Natural gas ($/Mcf) 6.57 5.52 6.92
Without hedging 6.62 5.50 7.84
Crude oil ($/bbl) 34.93 31.27 38.33
Without hedging 39.44 33.43 43.65
Natural gas liquids ($/bbl) 38.54 34.49 40.77
-------------------------------------------------------------------------
Total ($ per BOE) 38.21 32.78 40.70
Without hedging 39.56 33.25 45.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes hedging gains (losses)
Forward Looking Information
This MD&A contains forward-looking or outlook information with respect to
PrimeWest.
The use of any of the words "anticipate", "continue", "estimate", "expect",
"may", "will", "project", "should", "believe", "outlook" and similar
expressions are intended to identify forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors
that may cause actual results or events to differ materially from those
anticipated in our forward-looking statements. We believe the expectations
reflected in those forward-looking statements are reasonable. However, we
cannot assure you that these expectations will prove to be correct. You should
not unduly rely on forward-looking statements included in this report. These
statements speak only as of the date of this MD&A.
In particular, this MD&A contains forward-looking statements pertaining to the
following:
- The quantity and recoverability of our reserves;
- The timing and amount of future production;
- Prices for oil, natural gas, and natural gas liquids produced;
- Operating and other costs;
- Business strategies and plans of management;
- Supply and demand for oil and natural gas;
- Expectations regarding our ability to raise capital and to add to our
reserves through acquisitions and exploration and development;
- Our treatment under governmental regulatory regimes;
- The focus of capital expenditures on development activity rather than
exploration;
- The sale, farming in, farming out or development of certain
exploration properties using third party resources;
- The objective to achieve a predictable level of monthly cash
distributions;
- The use of development activity and acquisitions to replace and add
to reserves;
- The impact of changes in oil and natural gas prices on cash flow
after hedging;
- Drilling plans;
- The existence, operation and strategy of the commodity price risk
management program;
- The approximate and maximum amount of forward sales and hedging to be
employed;
- The Trust's acquisition strategy, the criteria to be considered in
connection therewith and the benefits to be derived therefrom;
- The impact of the Canadian federal and provincial governmental
regulation on the Trust relative to other oil and gas issuers of
similar size;
- The goal to sustain or grow production and reserves through prudent
management and acquisitions;
- The emergence of accretive growth opportunities, and
- The Trust's ability to benefit from the combination of growth
opportunities and the ability to grow through the capital markets.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this MD&A:
- Volatility in market prices for oil, natural gas and natural gas
liquids;
- Risks inherent in our oil and gas operations;
- Uncertainties associated with estimating reserves;
- Competition for, among other things; capital, acquisitions of
reserves, undeveloped lands and skilled personnel;
- Incorrect assessments of the value of acquisitions;
- Geological, technical, drilling and processing problems;
- General economic conditions in Canada, the United States and
globally;
- Industry conditions, including fluctuations in the price of oil,
natural gas and natural gas liquids;
- Royalties payable in respect of PrimeWest's oil and gas production;
- Governmental regulation of the oil and gas industry, including
environmental regulation;
- Fluctuation in foreign exchange or interest rates;
- Unanticipated operating events that can reduce production or cause
production to be shut-in or delayed;
- Failure to obtain industry partner and other third party consents and
approvals, when required;
- Stock market volatility and market valuations;
- The need to obtain required approvals from regulatory authorities,
and
- The other factors discussed under "Operational and Other Business
Risks" in this MD&A.
These factors should not be construed as exhaustive.
Evaluation of Disclosure Controls and Procedures
The Chief Executive Officer, Don Garner, and Chief Financial Officer, Dennis
Feuchuk, evaluated the effectiveness of PrimeWest Energy's disclosure controls
and procedures as of March 31, 2004 and concluded that PrimeWest Energy's
disclosure controls and procedures were effective to ensure that information
PrimeWest is required to disclose in its filings with the Securities and
Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange
Act) is recorded, processed, summarized and reported, within the time periods
specified in the (SEC's) rules and forms, and to ensure that information
required to be disclosed by PrimeWest in the reports that it files under the
Exchange Act is accumulated and communicated to PrimeWest's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Changes to Internal Controls and Procedures for Financial Reporting
There were no significant changes to PrimeWest's internal controls or in other
factors that could significantly affect these controls subsequent to the
evaluation date.
Vision, Core Business and Strategy
PrimeWest Energy Trust is a conventional oil and gas royalty trust actively
managed to generate monthly cash distributions for unitholders. The Trust's
operations are focused in Canada, with its assets concentrated in the Western
Canadian Sedimentary Basin. PrimeWest is one of North America's largest natural
gas weighted energy trusts.
Maximizing total return to unitholders, in the form of cash distributions and
change in unit price, is PrimeWest's overriding objective. Our strategies for
asset management and growth, financial management and corporate governance are
outlined in this MD&A, along with a discussion of our performance in the first
quarter of 2004 and our goals for the remainder of 2004 and beyond.
We believe that PrimeWest can maximize total return to unitholders through the
continued development of our core properties, making opportunistic acquisitions
that emphasize value creation, exercising disciplined financial management
which broadens access to capital while minimizing risk to unitholders, and
complying with strong corporate governance to protect the interests of all
stakeholders.
Asset Management and Growth
PrimeWest has a strategy to focus our expansion efforts on existing Canadian
core areas, and pursue field optimization within those core areas to maximize
asset value. We strive to control our operations whenever possible, and
maintain high working interests. Maintaining control of 80% of operations
allows us to use existing infrastructure and synergies within our core areas.
We believe this high level of operatorship can translate to control over costs
and timing of capital outlays and projects. We will continue to be an
opportunistic acquirer who uses the business cycles to make accretive
acquisitions. The current size of the Trust gives us the ability and critical
mass to make acquisitions of significant size, while still being able to add
value by transacting smaller acquisitions.
During the first quarter of 2004, the Trust closed the acquisition of Seventh
Energy Ltd. (Seventh), a publicly traded company with primarily natural gas
production in Southeastern Alberta, for total consideration of $34.8 million
plus assumed debt, working capital adjustments and transaction costs of $11.6
million. The predominantly natural gas assets acquired from Seventh are
adjacent to PrimeWest's existing assets in the Princess, Hays and Taber areas
and in the first quarter produced an average of approximately 1,300 BOE per
day, of which 72% was natural gas and 28% was crude oil and natural gas
liquids. Volumes associated with the Seventh acquisition were only included in
PrimeWest's first quarter results for the period of March 16 to March 31, 2004.
The first quarter impact on PrimeWest's overall volumes was approximately 200
BOE/day.
The assets acquired include approximately 39,000 net acres of undeveloped land,
and a proprietary 3-D seismic inventory, both of which will provide future
development opportunities for PrimeWest. In order to protect the transaction
economics upon announcing the deal, PrimeWest hedged approximately 70% of the
gas production at a price of Cdn $6.18 per thousand cubic feet from March 2004
through April 2005. In the near-term PrimeWest will be investing approximately
$7 million in drilling, facilities, and waterflood opportunities that will
significantly enhance both the production volumes and reserve recovery from the
acquired assets. The acquisition costs were funded through PrimeWest's existing
debt facility. Net proceeds of $134.9 million from an equity offering
undertaken subsequent to quarter-end will reduce bank debt, including the debt
incurred with the Seventh acquisition. Future development costs will also be
funded through the debt facility. Based on current forecasts, PrimeWest expects
the acquisition to be accretive to its unitholders during 2004 on both a cash
flow and net asset value per unit basis.
Financial Management
PrimeWest strives to maintain a conservative debt position, to allow us to take
advantage of opportunities that arise in the acquisition market, as well as
fund development activities. Our diversified debt instruments help to reduce
our reliance on the bank syndicate, as well as afford additional foreign
exchange protection because a portion of our debt, the secured notes, is
denominated in U.S. dollars. PrimeWest's consistent commodity hedging approach
helps to stabilize cash flow, reduce volatility, and protect transaction
economics.
PrimeWest continues to target a payout ratio between 70% and 90% of annual cash
flow to increase the Trust's financial flexibility. The first quarter 2004
payout ratio was approximately 70%, and the retained cash flow was utilized
primarily for debt repayment, and towards the Trust's capital spending program.
PrimeWest's success in executing conservative financial management is
demonstrated by our debt to cash flow level of 1.3 times at the end of the
first quarter, less than our internal limit of 2.0 times and slightly higher
than our level of 1.1 times for the same period the previous year.
PrimeWest's dual listing on both the Toronto Stock Exchange (TSX) and New York
Stock Exchange (NYSE) provide increased liquidity and a broadened investor
base. The NYSE listing enables U.S. unitholders to conveniently trade in our
Trust Units, allows us to access the U.S. capital markets in the future, and
our status as a corporation for U.S. tax purposes simplifies tax reporting for
our U.S. unitholders.
For eligible Canadian unitholders, PrimeWest offers participation in the
Distribution Reinvestment Plan (DRIP), Premium Distribution Plan (PREP), and
Optional Trust Unit Purchase Plan (OTUPP), which represent a convenient way to
maximize an investment in PrimeWest. For alternate investment styles, PrimeWest
also has exchangeable shares available, which permit participation in PrimeWest
without the ongoing tax implications associated with receiving a distribution.
Corporate Governance
PrimeWest remains committed to the highest standards of corporate governance
and upholds the rules of the governing regulatory bodies under which it
operates. Full disclosure of our compliance with existing corporate governance
rules and regulations is available on our website at
http://www.primewestenergy.com/. PrimeWest actively monitors the corporate
governance and disclosure environment to ensure compliance with current and
future requirements.
Subsequent to the end of the first quarter, PrimeWest announced the appointment
of Mr. Peter Valentine to the Board of Directors, an additional independent and
unrelated director with extensive experience in the finance field.
Our high standards of corporate governance are not limited to the boardroom. At
the field level, PrimeWest proactively manages environmental, health and safety
issues. We place a great deal of importance on community involvement and
maintaining good relationships with landowners.
Outlook - 2004
PrimeWest continues to expect 2004 production volumes to average approximately
30,000 BOE/day. Full year operating costs are expected to be approximately
$6.75/BOE. PrimeWest expects to invest between $65 and $90 million in its
capital development program, with the focus primarily in the core areas of
Caroline, Valhalla, Brant/Farrow and Princess/Hays.
For unitholders resident in Canada, PrimeWest anticipates that approximately
60% of 2004 distributions will be taxable and 40% will be deemed return of
capital. The taxability of 2004 distributions for U.S. unitholders cannot be
accurately estimated at this time, but will be confirmed after year end. For
residents of the U.S., Canadian withholding tax of 15% applies to the
distribution. In addition, the Canadian Federal Government announced a proposal
on March 23, 2004 which would expand Canadian withholding tax on non- Canadian
residents (15% for U.S. unitholders) by applying it to both the "taxable
income" portion, as well as the return of capital portion of the distributions
made after 2004. For more details on withholding tax, please visit our website
at http://www.primewestenergy.com/.
Cash Flow Reconciliation
($ millions)
------------------------------------------------------------
Fourth quarter 2003 cash flow from operations $ 43.2
Production volumes (3.8)
Commodity prices 18.0
Net hedging change from prior year (2.5)
Operating expenses 1.5
Royalties (2.2)
Other 4.3
------------------------------------------------------------
First quarter 2004 cash flow from operations $ 58.5
------------------------------------------------------------
The above table includes non-GAAP measurements which may not be
comparable to other companies.
The basis of PrimeWest's business and a key performance driver for the Trust is
cash flow from operations. Cash flow is generated through the production and
sale of crude oil, natural gas and natural gas liquids, and is dependent on
production levels, commodity prices, operating expenses, hedging gains or
losses, royalties and currency exchange rates. Cash flow from operations can be
impacted by macro factors such as commodity prices, the currency exchange rate,
royalties and the forward markets for oil and gas. Cash flow can also be
impacted by factors specific to PrimeWest such as production levels, hedging
gains or losses, or operating expenses, as well as interest and general and
administrative (G&A) expenses. It is expected that these factors will impact
cash flows in the future.
Quarterly Performance
------------------------------------------------------
($ millions, 2004 2003 2002
except per Trust ------------------------------------------------------
Unit amounts) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Net Revenues 85.7 73.0 77.3 85.6 94.0 68.8 63.8 62.3 69.4
Net Income 20.1 (0.7) 7.4 61.6 22.4 (7.3) 8.2 (6.2) 6.0
Net Income Per
Unit - Basic 0.40 (0.01) 0.16 1.35 0.53 (0.20) 0.24 (0.20) 0.20
Net Income Per
Unit - Diluted 0.40 (0.01) 0.16 1.34 0.53 (0.20) 0.24 (0.20) 0.16
-------------------------------------------------------------------------
The above table highlights PrimeWest's performance for the first quarter
ended 2004, and the preceding eight quarters through 2003 and 2002.
Net revenues are primarily impacted by commodity prices, production volumes,
and operating expenses. As a result, the first quarter 2004 net revenues were
higher compared to the fourth quarter of 2003. As production volumes decline
due to natural reservoir depletion, net revenues can also be impacted and trend
accordingly.
Net income and net income per unit are secondary measures for a royalty trust
because net income includes both cash and non-cash items. The non-cash items
such as depletion, depreciation and amortization (DD&A), future income taxes,
foreign exchange, and unrealized gain or loss on derivatives can cause the net
income to vary significantly.
Capital Expenditures
Three months ended
--------------------------------------
Mar 31, Dec 31, Mar 31,
($ millions, except per BOE) 2004 2003 2003
-------------------------------------------------------------------------
Land & lease acquisitions $ 1.8 $ 2.1 $ 1.2
Geological and geophysical 1.7 4.4 0.6
Drilling and completions 18.8 17.2 15.0
Investment in facilities
Equipping & tie-in 4.0 3.4 3.0
Compression & processing 2.0 0.5 1.7
Gas gathering 0.5 1.4 2.3
Production facilities 2.1 2.4 0.8
Capitalized G&A 0.4 0.3 0.5
-------------------------------------------------------------------------
Development capital $ 31.3 $ 31.7 $ 25.1
-------------------------------------------------------------------------
Corporate/property acquisitions 38.6 3.9 198.2
Dispositions (3.5) (1.5) (0.2)
Head office equipment 0.2 - (0.1)
-------------------------------------------------------------------------
Total $ 66.6 $ 34.1 $ 223.0
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During the first quarter of 2004, PrimeWest's capital expenditures totaled
$66.6 million, including the acquisition of Seventh, compared to the first
quarter of 2003 spending of $246.4, which included the acquisition of two
private Canadian oil and gas companies. Development capital of $31.3 million
was higher than the first quarter 2003 development capital of $25.1 million.
For many oil and gas companies, the first quarter winter months tend to be
capital intensive periods with active drilling programs. Of the $31.3 million
in development capital, $18.8 million or 60% was spent on drilling and
completions, which contribute to new reserve additions and help offset natural
production decline. Of the $9 million investments made in facilities, $4
million or 44% represents equipping and volume tie-ins, with the remainder
invested in other activities that contribute to future production volumes. In
the first quarter of 2004, PrimeWest's capital spending was focused primarily
in the areas of Caroline, Brant/Farrow, and Boundary Lake where the Trust
drilled 4, 6, and 4 new wells respectively. Gross wells drilled in the first
quarter totaled 32, with a success rate of approximately 91%.
Quarter over quarter, development capital spending in the first quarter of 2004
did not differ materially from the fourth quarter of 2003. The Seventh
acquisition completed in 2004 contributed to the increase in total capital
spending for the first quarter of 2004 relative to the previous quarter.
Through acquisitions as well as development drilling, workovers, and
recompletion activities, PrimeWest strives to offset the natural production
decline, and add to reserves in an effort to sustain cash flows. Capital is
allocated on the basis of anticipated rate of return on projects undertaken. At
PrimeWest, every capital project is measured against stringent economic
evaluation criteria prior to approval that include expected return, risks and
further development opportunities.
Assets
Since inception, PrimeWest has focused on the conventional oil and natural gas
plays of the Western Canadian Sedimentary Basin. Within this focused area, we
have a diversified, multi-zone suite of assets stretching from northeast B.C.,
across much of Alberta and down through southwest Saskatchewan. We believe this
diversity reduces risks to overall corporate production and cash flow, while
the core area focus allows us to capitalize on our existing technical knowledge
in each of the core areas.
PrimeWest currently has 15 primary assets, with no single asset producing
greater than 20% of PrimeWest's total volumes. As a result of the Seventh
acquisition, PrimeWest's 2004 capital spending program includes investment in
the expanded Princess/Hays region of southeast Alberta. This is an example of
the Trust's strategy to expand on existing areas or build new core areas within
which we retain control of operations.
Production Volumes
Three months ended
--------------------------------------
Mar 31, Dec 31, Mar 31,
2004 2003 2003
-------------------------------------------------------------------------
Natural gas (mmcf/day) 123.9 126.9 140.3
Crude oil (bbls/day) 7,864 8,189 8,142
Natural gas liquids (bbls/day) 2,696 2,779 3,030
-------------------------------------------------------------------------
Total (BOE/day) 31,202 32,111 34,554
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross Overriding Royalty volumes
included above (BOE/day) 1,397 1,595 1,700
-------------------------------------------------------------------------
-------------------------------------------------------------------------
All production information is reported before the deduction of crown and
freehold royalties.
PrimeWest's production volumes in the first quarter 2004 were lower than the
same period the prior year and the previous quarter, primarily due to natural
production decline, partially offset by development volume additions throughout
the first quarter of 2004.
Production of approximately 300 BOE/day at Ells is expected to be shut-in as a
result of an Alberta Energy and Utilities Board ruling regarding the gas over
bitumen issue. With the operator, PrimeWest intends to seek compensation for
any shut-in production. Production at PrimeWest's non-operated Whiskey Creek
area was partially restricted during the first quarter of 2004, with further
curtailments anticipated throughout 2004 due to third party facility capacity
constraints.
PrimeWest continues to expect full year 2004 production to average
approximately 30,000 BOE/day. This estimate incorporates PrimeWest's expected
natural decline rate, the production volume shut-ins described above, offset by
production additions due to the capital development program and the acquired
production from Seventh.
Commodity Prices
Three months ended
--------------------------------------
Mar 31, Dec 31, Mar 31,
Benchmark Prices 2004 2003 2003
-------------------------------------------------------------------------
Natural gas ($/mcf AECO) $ 6.61 $ 5.59 $ 7.92
Crude oil (U.S.$/bbl WTI) $ 35.17 $ 31.18 $ 33.86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Realized Sales Prices
Three months ended
--------------------------------------
Mar 31, Dec 31, Mar 31,
(Canadian Dollars) 2004 2003 2003
-------------------------------------------------------------------------
Natural gas ($/mcf)(1)(2) $ 6.57 $ 5.52 $ 6.92
Without hedging 6.62 5.50 7.84
Crude oil ($/bbl)(1) 34.93 31.27 38.33
Without hedging 39.44 33.43 43.65
Natural gas liquids ($/bbl) 38.54 34.49 40.77
-------------------------------------------------------------------------
Total Oil Equivalent(2) ($/BOE) $ 38.21 $ 32.78 $ 40.70
Without hedging $ 39.56 $ 33.25 $ 45.68
-------------------------------------------------------------------------
Realized hedging gain (loss)
included in prices above ($/BOE) $ (1.35) $ (0.47) $ (4.98)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes hedging gains/losses.
(2) Excludes sulphur.
Canadian commodity prices were generally lower in the first quarter 2004 than
during the same period in 2003, with average realized selling prices per BOE
decreasing by 6% in the first quarter 2004 compared to the same period in 2003.
The realized selling price in Canadian dollars is impacted by currency exchange
rates. Oil and gas prices are denominated in U.S. dollars, therefore, a
strengthened Canadian dollar translates into lower realized prices and lower
Canadian revenue for producers. At March 31, 2003, the Canadian dollar was
$0.6813 versus its U.S. counterpart, compared to $0.7626 at March 31, 2004, an
increase of 12%.
Compared to the fourth quarter 2003, average realized sales prices per BOE
increased 17% in the first quarter 2004 due to higher average prices for crude
oil, liquids and natural gas.
PrimeWest's cash flow from operations is directly impacted by commodity prices,
but the use of hedging can increase or decrease the prices realized by the
Trust. In the first quarter of 2004, PrimeWest had a $3.8 million hedging loss
compared to a loss of $15.5 million for the same period in 2003. PrimeWest's
hedging loss was $1.4 million in the fourth quarter 2003 as a result of lower
average commodity prices in that quarter.
The following table sets forth benchmark historical and estimated future
commodity prices.
Benchmark
Commodity Prices Past Four Quarters (Actual)
-------------------------------------------------------------------------
Q2 2003 Q3 2003 Q4 2003 Q1 2004
-------------------------------------------------------------------------
Natural gas
NYMEX ($U.S./Mcf) 5.48 5.10 4.58 5.69
AECO ($Cdn/Mcf) 6.99 6.29 5.59 6.61
Crude oil WTI ($U.S./bbl) 28.91 30.20 31.18 35.17
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Benchmark
Commodity Prices Next Four Quarters (Forward Markets)(1)
-------------------------------------------------------------------------
Q2 2004 Q3 2004 Q4 2004 Q1 2005
-------------------------------------------------------------------------
Natural gas
NYMEX ($U.S./Mcf) 5.76 6.02 6.17 6.32
AECO ($Cdn/Mcf) 6.61 6.88 7.14 7.34
Crude oil WTI ($U.S./bbl) 34.94 33.55 32.55 31.71
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As at March 31, 2004
Sales Revenue
Three months ended
------------------------------------------------------
Mar 31, % of Dec 31, % of Mar 31, % of
Revenue ($ millions) 2004 total 2003 total 2003 total
-------------------------------------------------------------------------
Natural gas(1) $ 74.0 68% $ 64.5 67% $ 87.4 69%
Crude oil 25.0 23% 23.6 24% 28.1 22%
Natural gas liquids 9.5 9% 8.8 9% 11.1 9%
-------------------------------------------------------------------------
Total $ 108.5 100% $ 96.9 100% $ 126.6 100%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Hedging (loss)/gains
included above(2) $ (3.8) $ (1.4) $ (15.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Excludes sulphur.
(2) Net of amortized premiums.
First quarter 2004 revenues were lower than the same period the previous year,
primarily as a result of lower production volumes and a stronger Canadian
dollar versus its U.S. counterpart. Since oil and gas prices are denominated in
U.S. dollars, a strengthened Canadian dollar translates into lower Canadian
revenue for producers. Revenues are 17% higher in the first quarter 2004
compared to the previous quarter due to the higher commodity price environment.
If the pricing environment softens in 2004, and the Canadian dollar remains
strong, oil and gas revenues will be negatively impacted. Since a greater
portion of PrimeWest's revenues (68%) is derived from natural gas, the Trust
has greater sensitivity to changes in natural gas prices than crude oil prices.
Natural decline is expected to reduce production volumes, some of which may be
offset by development projects and any acquisition activity.
Financial Derivatives
As part of our financial management strategy, PrimeWest uses a consistent
commodity hedging approach. The purpose of the hedging program is to reduce
volatility in cash flows, protect acquisition economics and to stabilize cash
flow against the unpredictable commodity price environment. PrimeWest's hedging
program delivered gains of $33.3 million over the period from January 1, 2001
to March 31, 2004. Hedging is an important element in PrimeWest's financial
management strategy. It is designed to reduce commodity price volatility,
increase cash flow stability, and protect the economics of asset acquisitions.
The hedging policy reflects a willingness to forfeit a portion of the pricing
upside in return for protection against a significant downturn in prices.
Approximate percentage of future anticipated production volumes hedged at March
31, 2004, net of anticipated royalties, reflecting full production declines
with no offsetting additions:
-----------------------------------------------------------
2004 Q2 Q3 Q4 Q2-Q4
-------------------------------------------------------------------------
Crude Oil 65% 59% 55% 60%
Natural Gas 53% 57% 28% 46%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-----------------------------------------------------------
2005 Q1 Q2 Q3 Q4 Full Year
-------------------------------------------------------------------------
Crude Oil 33% 26% 18% 9% 21%
Natural Gas 12% 0% 0% 0% 3%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
PrimeWest generally sells its oil and gas under short-term market-based
contracts. Derivative financial instruments, options and swaps may be used to
hedge the impact of oil and gas price fluctuations.
A listing of these contracts in place at March 31, 2004 follows:
Crude Oil ($U.S./bbl)
-------------------------------------------------------------------------
Volume WTI Price
Period (bbls/d) Type ($U.S./bbl)
-------------------------------------------------------------------------
Apr - Jun 2004 1000 Swap 27.13
Apr - Jun 2004 500 Swap 28.64
Apr - Jun 2004 500 Swap 30.06
Apr - Jun 2004 500 Swap 32.04
Apr - Jun 2004 500 Costless Collar 22.00/26.12
Apr - Jun 2004 500 Costless Collar 24.00/30.50
Apr - Jun 2004 500 Costless Collar 25.00/28.07
Apr - Jun 2004 500 Costless Collar 26.00/32.07
Jul - Aug 2004 500 Swap 31.55
Jul - Sep 2004 500 Swap 26.07
Jul - Sep 2004 500 Swap 27.04
Jul - Sep 2004 500 Swap 28.51
Jul - Sep 2004 500 Swap 30.23
Jul - Sep 2004 500 Costless Collar 24.00/30.75
Jul - Sep 2004 500 Costless Collar 25.00/28.30
Jul - Sep 2004 500 Costless Collar 26.00/32.05
Oct - Dec 2004 500 Swap 26.00
Oct - Dec 2004 500 Swap 27.03
Oct - Dec 2004 500 Swap 28.53
Oct - Dec 2004 500 Swap 30.10
Oct - Dec 2004 500 Costless Collar 24.00/30.00
Oct - Dec 2004 500 Costless Collar 25.00/28.30
Oct - Dec 2004 500 Costless Collar 26.00/32.72
Jan - Mar 2005 500 Swap 27.25
Jan - Mar 2005 500 Swap 28.60
Jan - Mar 2005 500 Swap 30.00
Jan - Mar 2005 500 Costless Collar 28.00/34.35
Apr - Jun 2005 500 Swap 27.07
Apr - Jun 2005 500 Swap 28.50
Apr - Jun 2005 500 Swap 30.00
Jul - Sep 2005 500 Swap 27.05
Jul - Sep 2005 500 Swap 28.50
Oct - Dec 2005 500 Swap 27.18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Natural Gas (Cdn$/mcf)
-------------------------------------------------------------------------
Volume AECO Price
Period (mmcf/d) Type (Cdn$/mcf)
-------------------------------------------------------------------------
Jan 2004 - Oct 2004 9.5 3 Way 3.17/4.22/6.09
Jan 2004 - Dec 2004 1.0 Swap 6.02
Apr 2004 - Oct 2004 4.7 Swap 5.45
Apr 2004 - Oct 2004 4.7 Swap 6.02
Apr 2004 - Oct 2004 4.7 Swap 6.06
Apr 2004 - Oct 2004 4.7 Costless Collar 5.01/6.06
Apr 2004 - Oct 2004 4.7 Costless Collar 5.28/7.39
Apr 2004 - Oct 2004 4.7 Swap 6.25
Apr 2004 - Oct 2004 4.7 Swap 6.20
Nov 2004 - Mar 2005 4.7 Costless Collar 5.80/7.91
Nov 2004 - Mar 2005 4.7 Swap 6.71
-------------------------------------------------------------------------
-------------------------------------------------------------------------
A 3-way option is like a traditional collar, except that PrimeWest has resold
the put at a lower price. Utilizing the first 3-way natural gas contract above
as an example, PrimeWest has sold a call at $6.09, purchased a put at $4.22,
and resold the put at $3.17. Should the market price drop below $4.22 PrimeWest
will receive $4.22 until the price is less than $3.17, at which time PrimeWest
would then receive market price plus $1.05. However, should market prices rise
above $6.09, PrimeWest would receive a maximum of $6.09. Should the market
price remain between $4.22 and $6.09, PrimeWest would receive the market price.
Natural Gas Basis Differential
-------------------------------------------------------------------------
Volume Basis Price
Period (mmcf/day) Type ($U.S./mcf)
-------------------------------------------------------------------------
Apr - Oct 2004 5 Basis Swap $0.71
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The AECO basis is the difference between the NYMEX gas price in $U.S. per mcf
and the AECO price in $U.S. per mcf. Using the basis swap above as an example,
PrimeWest has fixed this price difference between the two markets at $U.S. 0.71
per mcf from April 2004 through October 2004. If the NYMEX price for the period
turned out to be $U.S. 5.00 per mcf, PrimeWest would receive an AECO equivalent
price of $U.S. 4.29 per mcf.
Electrical Power
-------------------------------------------------------------------------
Power
Period Amount (MW) Type Price ($/MW-hr)
-------------------------------------------------------------------------
Q2 2004 7.5 Fixed Price Swap 40.25
Q3 2004 5 Fixed Price Swap 46.50
Q4 2004 5 Fixed Price Swap 44.00
Calendar 2004 5 Fixed Price Swap 45.65
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest Rate Risk Management
-------------------------------------------------------------------------
Term Notional amount ($ millions) Fixed BA rate (%)
-------------------------------------------------------------------------
May 24/98 - May 25/04 $25 6.48
Nov 26/01 - May 26/04 $25 3.85
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CICA Accounting Guideline 13 (AcG-13), "Hedging Relationships", became
effective for fiscal years beginning on or after July 1, 2003. AcG-13 addresses
the identification, designation, documentation and effectiveness of hedging
transactions for the purposes of applying hedge accounting. It also establishes
conditions for applying or discontinuing hedge accounting. Under the new
guideline, hedging transactions must be documented and it must be demonstrated
that the hedges are sufficiently effective in order to continue accrual
accounting for positions hedged with derivatives. PrimeWest is not applying
hedge accounting to its hedging relationships.
As of January 1, 2004, the Trust recorded $6.0 million for the mark-to-market
value of the outstanding hedges as a derivative liability and a $6.0 million
deferred derivative loss, to be realized upon settlement of the corresponding
derivative instrument. The deferred loss at January 1, 2004 was comprised of a
$3.9 million loss for crude oil, $2.1 million loss for natural gas, $0.6
million loss for interest rate swaps and a gain of $0.6 million for electrical
power.
As of March 31, 2004, PrimeWest had an outstanding deferred derivative loss of
$3.4 million, comprised of $2.3 million for crude oil, $1.5 million for natural
gas, $0.1 million for interest rate swaps, and a $0.5 million gain for
electrical power. The deferred loss will continue to be amortized to earnings
upon settlement of the corresponding hedges.
All hedging contracts entered into by PrimeWest subsequent to January 1, 2004
have been recognized as either a deferred derivative asset or liability on the
balance sheet with an unrealized hedging gain or loss being recorded on the
income statement.
The unrealized hedging loss at March 31, 2004 is $12.3 million. This is
comprised of a $6.3 million loss for crude oil, $6.0 million loss for natural
gas, $0.1 million loss for interest rate swaps and a $0.1 million gain for
electrical power.
The mark-to-market valuation of hedges in place at March 31, 2004 was a $15.9
million loss consisting of an $8.6 million loss in crude oil, $7.5 million loss
in natural gas, $0.7 million gain on electrical power and a $0.4 million loss
on interest rate swaps.
In the first quarter of 2004, the financial impact of contracts settling in the
quarter was a $4.3 million loss consisting of a $3.2 million loss in crude oil,
$0.6 million loss in natural gas, $0.1 million loss on electrical power and an
increase of $0.4 million in interest paid.
Royalties (Net of ARTC)
Royalties are paid by PrimeWest to the owners of mineral rights with whom
PrimeWest holds leases. PrimeWest has mineral leases with the Crown (Provincial
and Federal Governments), freeholders (individuals or other companies) and
other operators. ARTC is the Alberta Royalty Tax Credit, a tax rebate provided
by the Alberta government to producers that paid eligible Crown royalties in
the year.
Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
($ millions, except per BOE) 2004 2003 2003
-------------------------------------------------------------------------
Royalty expense (net of ARTC) $ 23.3 $ 21.1 $ 32.7
Per BOE $ 8.22 $ 7.13 $ 10.50
Royalties as % of sales revenues
With hedge loss 21.5% 21.8% 25.8%
Excluding hedge loss 20.8% 21.5% 23.0%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Royalty expense in the first quarter of 2004 is lower than the same period the
previous year due to lower crude oil and natural gas revenues year over year.
Sales revenues in the first quarter of 2004 included higher Gross Over Riding
Royalties compared to sales revenues in the fourth quarter of 2003, resulting
in lower royalties as a percentage of sales revenue excluding hedges in the
first quarter.
Royalty rates are based on commodity prices so future changes to prices will be
accompanied by changes in royalty expense.
Operating Expenses Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
($ millions, except per BOE) 2004 2003 2003
-------------------------------------------------------------------------
Operating expense ($ millions) $ 19.7 $ 21.2 $ 20.6
Per BOE $ 6.92 $ 7.18 $ 6.63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Compared to both the first quarter of 2003 and the previous quarter,
PrimeWest's total operating expenses for the first quarter 2004 are lower by
approximately 4% and 7%, respectively. However, on a per BOE basis, operating
costs are 4% higher in the first quarter 2004 compared to the same quarter the
previous year, but 4% lower compared to the fourth quarter. Higher operating
expense on a per BOE basis in the first quarter 2004 is primarily due to lower
production volumes in 2004 than in 2003.
Operating Expenses Outlook
Operating costs for the year are expected to be higher than in 2003, and
PrimeWest continues to target 2004 operating expenses at approximately
$6.75/BOE.
Operating Margin Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
($/BOE) 2004 2003 2003
-------------------------------------------------------------------------
Sales price and other revenue(1) $ 38.42 $ 31.85 $ 40.74
Royalties 8.22 7.13 10.50
Operating expenses 6.92 7.18 6.63
-------------------------------------------------------------------------
Operating margin $ 23.28 $ 17.54 $ 23.61
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes hedging and sulphur
Operating margin decreased 1% during the first quarter 2004 compared to the
same quarter in 2003. This is primarily due to lower sales prices and higher
operating expenses, offset by lower royalties. Operating margin is an important
measure of our business because it gives an indication of the amount of cash
flow PrimeWest realizes per barrel of oil equivalent that is produced, before
head office expenses and financing charges.
Compared to the previous quarter, operating margin in the first quarter 2004
increased 33%, primarily attributable to higher sales revenue.
Based on PrimeWest's commodity price outlook, the Canadian/U.S. dollar exchange
rate, operating expense expectations and hedge positions, margins are expected
to be lower in 2004 than 2003. PrimeWest will continue to emphasize maintaining
lower than average operating expenses to maximize margins, which can reduce the
volatility of cash flows through commodity price cycles.
General & Administrative Expense Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
($ millions, except per BOE) 2004 2003 2003
-------------------------------------------------------------------------
Cash G&A expense ($ millions) $ 4.2 $ 4.1 $ 3.8
Per BOE $ 1.49 $ 1.37 $ 1.23
Non-cash G&A expense ($ millions) $ 0.4 $ 8.5 $ 0.4
Per BOE $ 0.15 $ 2.88 $ 0.12
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash G&A expense per BOE increased 21% in the first quarter of 2004 to
$1.49/BOE compared to first quarter 2003 levels of $1.23/BOE, primarily due to
lower overall sales volumes in the first quarter 2004 versus the first quarter
of 2003. In the first quarter of 2004, insurance expense as well as employee
salaries and benefits were higher than in 2003.
Compared to the same period in 2003, the first quarter 2004 non-cash G&A
expense per BOE increased slightly to $0.15/BOE from $0.12/BOE, attributable to
lower production volumes year to date in 2004.
Quarter over quarter, total cash G&A expense in the first quarter 2004
increased marginally, while cash G&A per BOE increased 9% due to lower
production volumes. PrimeWest's total and per BOE non-cash G&A expense
decreased approximately 95% from the fourth quarter 2003 due to a lower average
Unit Appreciation Rights (UARs) value in the first quarter 2004 under
PrimeWest's Long Term Incentive Plan (LTIP).
Non-cash G&A expense consists mainly of the change in the value of the UARs.
Unit Appreciation Rights in a trust are similar to stock options in a
corporation. Consistent with the resolution approved by unitholders at the last
annual meeting of unitholders, PrimeWest continues to pay for the exercise of
UARs in Trust Units. The intent of PrimeWest's LTIP is to align employee and
unitholder interests. The program rewards employees based on total unitholder
return, which is comprised of cumulative distributions on a reinvested basis
plus growth in unit price. No benefit accrues to employees who hold UARs until
the unitholders have first achieved a 5% total annual return from the time of
grant. Expenses related to the LTIP are recorded on a mark-to-market basis,
whereby increases or decreases in the valuation of the UAR liability are
reported quarterly, as a charge to the income statement.
G&A Expense Outlook
Cash G&A expenses in 2004 are expected to increase over 2003 levels and are
expected to be approximately $1.25 per BOE for the year.
Interest Expense Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
($ millions, except per Trust Unit) 2004 2003 2003
-------------------------------------------------------------------------
Interest expense $ 3.2 $ 4.1 $ 3.6
Period end net debt level $ 305.7 $ 255.9 $ 281.5
Debt per Trust Unit $ 5.99 $ 5.07 $ 6.15
-------------------------------------------------------------------------
Average cost of debt 4.4% 4.7% 4.8%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest expense, representing interest on bank debt and private placement
debt, decreased in the first quarter 2004 to $3.2 million from $3.6 million in
the same quarter 2003, and from $4.1 million in the previous quarter due to
lower average interest rates in 2004 compared to 2003.
In May of 2003, PrimeWest closed a private placement debt financing of $U.S.
125 million at a U.S. fixed coupon rate of 4.19%, successfully diversifying its
debt. The actual Canadian interest expense will fluctuate with any changes in
the Canadian/U.S. foreign exchange rates. Canadian interest rates are expected
to be lower through 2004 compared to 2003, as the Bank of Canada again reduced
its overnight rate by 25 basis points on April 13, 2004.
Foreign Exchange Loss
The foreign exchange loss of $1.7 million in the first quarter 2004 results
from the translation of the U.S. dollar denominated secured notes and related
interest payable in Canadian dollars.
Depletion, Depreciation and
Amortization Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
($ millions, except per BOE) 2004 2003 2003
-------------------------------------------------------------------------
Depletion, depreciation
and amortization $ 41.7 $ 53.9 $ 52.0
-------------------------------------------------------------------------
$/BOE $ 14.68 $ 18.26 $ 16.72
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The first quarter 2004 DD&A rate of $14.68/BOE is lower than the 2003 first
quarter rate of $16.72/BOE and the fourth quarter 2003 rate of $18.26 due to
the January 1, 2004 ceiling test write down of $309 million.
Ceiling Test
Effective January 1, 2004, PrimeWest has adopted CICA Accounting Guideline 16
(AcG-16), "Oil and Gas Accounting - Full Cost". This new standard replaces the
CICA Accounting Guideline 5 (AcG-5), "Full Cost Accounting in the Oil and Gas
Industry".
Under AcG-5, the cost recovery test is calculated based on undiscounted future
net revenues for proved reserves, less general and administrative expenses,
site restoration, future financing costs and applicable income taxes. The
aggregate result is limited to capitalized costs, less accumulated depletion
and site restoration, the lower of cost and market value of unproved land and
future income taxes. The cost recovery test is based on costs and commodity
prices existing at the balance sheet date.
AcG-16 impacts the application of the cost centre impairment test (ceiling
test). The guideline is effective for fiscal years beginning on or after
January 1, 2004. The cost impairment test is now a two stage process which is
to be performed at least annually. The first stage of the test determines if
the cost pool is impaired. An impairment loss exists when the carrying amount
of an asset is not recoverable and exceeds its fair value. The carrying amount
is not recoverable if it exceeds the sum of the undiscounted cash flows from
Proved reserves plus unproved costs using management's best estimate of future
prices. The second stage determines the amount of the impairment loss to be
recorded. The impairment is measured as the amount by which the carrying amount
of capitalized assets exceeds the future discounted cash flows from Proved plus
Probable reserves. The discount rate used is the risk free rate.
Performing this test at January 1, 2004, using consultant's average prices as
at January 1, 2004 of AECO $5.90 per mcf for natural gas, $U.S. 29.21 per
barrel WTI for crude oil results in a before tax impairment of $308.9 million,
and an after tax impairment of $233.2 million. The write down was booked to
accumulated income in the first quarter of 2004.
Site Reclamation and Restoration Reserve
Since the inception of the Trust, PrimeWest has maintained an environmental
fund to pay for future costs related to well abandonment and site clean-up. The
fund is used to pay for such costs as they are incurred. The 2004 contribution
rate for the fund is unchanged from 2003 at $0.50/BOE, which is expected to be
sufficient to meet expenditure requirements for the future.
The reclamation and abandonment costs in the first quarter of 2004 were $0.9
million, compared to $0.1 million for the same period in 2003.
Asset Retirement Obligation
In the first quarter of 2004, PrimeWest adopted the new CICA Handbook section
3110, "Asset Retirement Obligations". This standard focuses on the recognition
and measurement of liabilities related to legal obligations associated with the
retirement of property, plant and equipment. Under this standard, these
obligations are initially measured at fair value and subsequently adjusted for
the accretion of discount and any changes in the underlying cash flows. The
asset retirement cost is to be capitalized to the related asset and amortized
into earnings over time.
The adoption of CICA Handbook section 3110 allows for the cumulative effect of
the change in accounting policy to be booked to accumulated income with the
restatement of prior period comparatives. At January 1, 2004, this resulted in
an increase to the asset retirement obligation of $19.7 million (2003 - $15.3
million), an increase to property, plant and equipment (PP&E) of $10.6 million
(2003 - $9.0 million), a $5.6 million (2003 - $0.04 million) increase to
accumulated income, a decrease of site restoration provision of $17.8 million
(2003 - $6.2 million) and an increase to the future tax liability of $3.1
million (2003 - $(0.03) million).
Income and Capital Taxes Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
($ millions) 2004 2003 2003
-------------------------------------------------------------------------
Income and capital taxes $ 0.3 $ 0.3 $ 1.2
Future income taxes recovery (18.2) (11.8) (10.4)
-------------------------------------------------------------------------
$ (17.9) $ (11.5) $ (9.2)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the first quarter of 2004, the Alberta Government substantially enacted
a tax rate reduction of 1% reducing the rate from 12.5% to 11.5% effective
April 1, 2004. This resulted in an additional tax recovery during the quarter
of approximately $9.0 million.
During 2003, the Canadian Government enacted Federal income tax changes for the
oil and gas resource sector. The Federal income tax changes effectively reduced
the statutory tax rates for current and future periods. Specifically, the 100%
deductibility of the resource allowance will be completely phased out by the
year 2007. During the same time frame, Crown charges will become 100%
deductible and resource tax rates will decline from the current 27% to 21%.
Net Income Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
($ millions) 2004 2003 2003
-------------------------------------------------------------------------
Net income (loss) $ 20.1 $ 0.7 $ 22.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash flow from operations, as opposed to net income, is the primary measure of
performance for an energy trust. The generation of cash flow is critical for an
energy trust to continue paying its distributions to unitholders.
Conversely, net income is an accounting measure impacted by both cash and
non-cash items. The largest non-cash items impacting PrimeWest's net income are
DD&A and future taxes.
Net income for the first quarter of 2004 was impacted by lower sales revenue as
a result of lower commodity prices and production volumes compared to the first
quarter of 2003. Future income tax recoveries contributed approximately $10.4
million to net income in 2003, while PrimeWest realized $1.7 million in foreign
exchange losses and future income tax recoveries of $18.2 million in the same
period in 2004.
Compared to the previous quarter, the first quarter 2004 net income was higher
due to higher commodity prices, offset by lower production volumes, and higher
future income tax recoveries.
Liquidity & Capital Resources
Long Term Debt Three months ended
------------------------------------
Mar 31, Dec 31, Mar 31,
($ millions) 2004 2003 2003
-------------------------------------------------------------------------
Long-term debt $ 299.9 $ 250.1 $ 300.0
Deficit/(working capital) 5.8 5.8 (18.5)
-------------------------------------------------------------------------
Net debt $ 305.7 $ 255.9 $ 281.5
Market value of Trust Units and
exchangeable shares outstanding(1) 1,355.7 1,380.7 1,154.0
-------------------------------------------------------------------------
Total capitalization $ 1,661.4 $ 1,636.6 $ 1,435.5
-------------------------------------------------------------------------
Net debt as a % of total
capitalization 18% 16% 19%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Based on March 31, 2004 Trust Unit closing price of $26.65 and
exchange ratio of 0.45885:1
Long term debt is comprised of bank credit facilities and senior secured notes
for $136.0 million and $163.9 million, respectively. PrimeWest had a borrowing
base of $390 million at March 31, 2004. The bank credit facilities consist of a
revolving term loan of $188 million and an operating facility of $25 million.
In addition to amounts outstanding under the facility, at the end of the first
quarter, PrimeWest has outstanding letters of credit in the amount of $4.8
million, compared to $4.5 million in the same period in 2003. The credit
facility revolves until June 30, 2004, by which time the lenders will have
conducted their annual borrowing base review.
PrimeWest's first quarter 2004 net debt totaled $305.7 million, 9% higher than
the same period in 2003 and 20% higher than the previous quarter. The year over
year and quarter over quarter increase is primarily due to the debt incurred
with the acquisition of Seventh in the first quarter 2004.
Being in a cyclical business, it is important that PrimeWest maintain financial
flexibility to ensure we can operate without any restrictions regardless of
where commodities are in the price cycle. PrimeWest's objective is to have
conservative debt levels. Our internal targets are to keep debt at 2 times or
less than our annual cash flow and less than 25% of total capitalization. For
the first quarter of 2004, PrimeWest's debt to annualized cash flow is
approximately 1.3 times, and 18% of our total capitalization. In 2003,
PrimeWest expanded its debt financing strategy by undertaking a U.S. private
placement and thus reducing its total dependence on bank financing. In
addition, PrimeWest's lower payout ratio of 70% for the first quarter 2004
versus 77% for the first quarter 2003 enabled the Trust to use internally
generated cash to invest in development opportunities and pay down bank debt.
PrimeWest has no material capital commitments at the end of the first quarter,
2004.
Unitholders' Equity
At the end of the first quarter 2004, the Trust had 50,223,123 Trust Units
outstanding, compared to 43,668,118 Trust Units outstanding at the end of the
first quarter 2003. In addition, PrimeWest had 1,407,357 (2003 - 4,494,475)
exchangeable shares outstanding which are exchangeable into a total of 645,767
(2003 - 1,762,868) Trust Units using the March 15, 2004 exchange ratio of
0.45885:1 (2003 - 0.39223:1).
For Canadian resident unitholders, PrimeWest offers a Distribution Reinvestment
Plan (DRIP), and components of it include the Optional Trust Unit Purchase Plan
(OTUPP) and the Premium Distribution Plan (PREP). The DRIP gives Canadian
unitholders the chance to reinvest their monthly distributions at a 5% discount
to the volume weighted average market price, while the OTUPP gives Canadian
unitholders an opportunity to purchase additional Trust Units directly from
PrimeWest at the same 5% discount to the volume weighted average market price.
The PREP allows eligible Canadian unitholders to elect to receive a premium
cash distribution of up to 102% of the cash that the unitholder would otherwise
have received on the distribution date, subject to proration in certain events.
The DRIP and PREP components are mutually exclusive, and participation in the
OTUPP requires enrollment in either the DRIP or PREP. For further details on
these plans or to obtain the enrolment forms, please contact PrimeWest's Plan
Agent, Computershare Trust Company of Canada at 1-800-564-6253, or visit
PrimeWest's website at http://www.primewestenergy.com/.
These plan components benefit unitholders by offering alternatives to maximize
their investment in PrimeWest while providing the Trust with an inexpensive
method to raise additional capital. Proceeds from these plans are used for debt
reduction of PrimeWest's credit facility and to help fund ongoing capital
development programs.
Exchangeable Shares
Exchangeable shares were issued in connection with both the Venator Petroleum
Company Ltd. acquisition in April 2000 and the Cypress Energy Inc. acquisition
in March 2001. These shares were issued to provide a tax deferred rollover of
the adjusted cost base from the shares being exchanged to the exchangeable
shares of PrimeWest. A tax deferral is not permitted by Canadian tax law when
shares are exchanged for Trust Units.
The exchangeable shares do not receive cash distributions. In lieu of receiving
cash distributions, the number of Trust Units that the exchangeable shareholder
will receive upon exchange increases each month based on the distribution
amount divided by the market price of the Trust Units on the 15th day of each
month.
At March 31, 2004, there were 1,407,357 exchangeable shares outstanding. The
exchange ratio on these shares was 0.45885:1 Trust Units for each exchangeable
share as at the end of the first quarter. For purposes of calculating basic per
Trust Unit amounts, these exchangeable shares have been assumed to be exchanged
into Trust Units at the current exchange ratio.
Cash Distributions
Cash distributions to unitholders are at the discretion of the Board of
Directors and can fluctuate depending on the cash flow generated from
operations. As discussed previously, the cash flow available for distribution
is dependent upon many factors including commodity prices, production levels,
debt levels, capital spending requirements, and factors in the overall
environment. In order to increase PrimeWest's financial flexibility, the Board
of Directors maintains a longer term target distribution payout ratio of
approximately 70-90% of cash flow from operations.
In the first quarter of 2004, cash distributions totaled $41.1 million, or
$0.82 per Trust Unit representing a payout ratio of 70%, compared to $49.8
million, or $1.20 per Trust Unit (77% payout ratio) for the same period in
2003. In the fourth quarter of 2003 cash distributions totaled $46.3 million,
or $0.96 per Trust Unit representing a payout ratio of approximately 107% in
that quarter.
Distribution payments to U.S. unitholders are subject to 15% Canadian
withholding tax, which is deducted from the distribution amount prior to
deposit into accounts. For Trust Units held in tax sheltered accounts,
withholding tax should not apply.
Contractual Obligations
PrimeWest enters into many contract obligations as part of conducting day-
to-day business. Material contract obligations that PrimeWest has currently in
place are lease rental commitments that run from 2004 through 2009 and require
annual payments after deducting sub-lease income of $1.2 million in 2004, $1.1
million in 2005 and 2006, and $2.4 million in 2007 through 2009, the remaining
term of the lease. In addition, PrimeWest also has a pipeline transportation
commitment that runs to October 31, 2007 and has minimum annual payment
requirements of $U.S. 2.1 million.
As part of PrimeWest's internalization transaction (see Note 11 in the
Consolidated Financial Statements of the 2003 Annual Report), PrimeWest agreed
to pay $3.5 million in exchangeable shares pursuant to a special employee
retention plan. One quarter of the exchangeable shares will be issuable to the
senior managers of PrimeWest on each of the second, third, fourth and fifth
anniversary of transaction closing, November 6, 2002. As at March 31, 2004 $0.6
million has been accrued in non-cash general and administrative expenses
related to the special employee retention plan.
As at March 31, 2004 Payments due by period ($ millions)
-------------------------------------------------------------------------
Less than 1-3 4-5 More than
Total 1 year years years 5 years
-----------------------------------------------
Long-term debt
obligations $299.9 136.0 41.0 82.0 40.9
Lease rental obligations $5.9 1.3 3.5 1.1 -
Pipeline transportation
obligations $9.6 2.7 5.4 1.5 -
Derivative liabilities $15.9 13.9 2.0 - -
-------------------------------------------------------------------------
Total contractual
obligations $331.3 153.9 51.9 84.6 40.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Critical Accounting Estimates
PrimeWest's financial statements have been prepared in accordance with
generally accepted accounting principles. Certain accounting policies require
that management make appropriate decisions with respect to the formulation of
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. The following discussion reviews such
accounting policies and is included in Management's Discussion and Analysis to
aid the reader in assessing the critical accounting policies and practices of
the Trust and the likelihood of materially different results being reported.
PrimeWest's management reviews its estimates regularly, but new information and
changed circumstances may result in actual results or changes to estimated
amounts that differ materially from current estimates.
The following assessment of significant accounting policies is not meant to be
exhaustive. The Trust may realize different results from the application of new
accounting standards proposed and/or implemented, from time to time, by various
rule-making bodies.
Proved and Probable Oil and Gas Reserves
Proved oil and gas reserves, as defined by the Canadian Securities
Administrators' National Instrument 51-101 (NI 51-101), are the estimated
quantities of crude oil, natural gas liquids, including condensate, and natural
gas that geological and engineering data demonstrate with reasonable certainty
can be recovered in future years from known reservoirs under existing economic
and operating conditions, i.e., prices and costs as of the date the estimate is
made.
Proved reserves are those reserves that can be estimated with a high degree of
certainty to be recoverable (i.e. it is likely that the actual remaining
quantities recovered will exceed the estimated proved reserves). In accordance
with this definition, the level of certainty targeted by the reporting company
should result in at least a 90% probability that the quantities actually
recovered will equal or exceed the estimated proved reserves.
For probable reserves, which are by definition less certain to be recovered
than proved reserves, NI 51-101 states that it must be equally likely that the
actual remaining quantities recovered will be greater or less than the sum of
the estimated proved plus probable reserves. With respect to the consideration
of certainty, in order to report reserves as proved plus probable, the level of
certainty targeted by the reporting company should result in at least a 50%
probability that the quantities actually recovered will equal or exceed the sum
of the estimated proved plus probable reserves.
The oil and gas reserve estimates are made using all available geological and
reservoir data as well as historical production data. Estimates are reviewed
and revised as appropriate. Revisions occur as a result of changes in prices,
costs, fiscal regimes, reservoir performance or a change in PrimeWest's plans.
The effect of changes in proved oil and gas reserves on the financial results
and position of PrimeWest is described under the heading "Full Cost Accounting
for Oil and Gas Activities".
Full Cost Accounting For Oil and Gas Activities
PrimeWest has adopted CICA Accounting Guideline 16 (AcG-16), "Oil and Gas
Accounting - Full Costs". The new guideline modifies how the ceiling test is
performed and requires cost centers be tested for recoverability using
undiscounted future cash flows from proved reserves which are determined by
using forward indexed prices. When the carrying amount of a cost center is not
recoverable, the cost center would be written down to its fair value. Fair
value is estimated using accepted present value techniques which incorporate
risks and other uncertainties when determining expected cash flows.
Depletion Expense
-----------------
PrimeWest uses the full cost method of accounting for exploration and
development activities. In accordance with this method of accounting, all costs
associated with exploration and development are capitalized whether successful
or not. The aggregate of net capitalized costs and estimated future development
costs less estimated salvage values is amortized using the unit of production
method based on estimated proved oil and gas reserves.An increase in estimated
proved oil and gas reserves would result in a corresponding reduction in
depletion expense. A decrease in estimated future development costs would
result in a corresponding reduction in depletion expense.
Fair Value of Derivative Instruments
As part of its financial management strategy, PrimeWest utilizes financial
derivatives to manage market risk. The purpose of the hedge is to provide an
element of stability to PrimeWest's cash flow in a volatile commodity price
environment. Effective January 1, 2004 PrimeWest adopted CICA Accounting
Guideline 13, "Hedging Relationships" ("AcG-13").
The estimation of the fair value of certain hedging derivatives requires
considerable judgment. The estimation of the fair value of commodity price
hedges requires sophisticated financial models that incorporate forward price
and volatility data and, which when compared with PrimeWest's open hedging
contracts, produce cash inflow or outflow variances over the contract period.
The estimate of fair value for interest rate and foreign currency hedges is
determined primarily through quotes from financial institutions.
Asset Retirement Obligations
Effective January 1, 2004 PrimeWest changed its accounting policy with respect
to accounting for asset retirement obligations. CICA section 3110 requires the
fair value of asset retirement obligations to be recorded when they are
incurred rather than merely accumulated or accrued over the useful life of the
respective asset.
PrimeWest, under the current policy, is required to provide for future removal
and site restoration costs. PrimeWest must estimate these costs in accordance
with existing laws, contracts or other policies. These estimated costs are
charged to earnings and the appropriate liability account over the expected
service life of the asset. When the future removal and site restoration costs
cannot be reasonably determined, a contingent liability may exist. Contingent
liabilities are charged to earnings when management is able to determine the
amount and the likelihood of the future obligation.
Legal, Environmental Remediation and Other Contingent Matters
The Trust is required to both determine whether a loss is probable based on
judgment and interpretation of laws and regulations and whether that loss can
reasonably be estimated. When the loss is determined, it is charged to
earnings. PrimeWest's management must continually monitor known and potential
contingent matters and make appropriate provisions by charges to earnings when
warranted by circumstance.
Income Tax Accounting
The determination of the Trust's income and other tax liabilities requires
interpretation of complex laws and regulations. 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 by management.
Business Combinations
Since inception, PrimeWest has grown considerably through combining with other
businesses. PrimeWest acquired Seventh Energy Ltd in the first quarter of 2004.
This transaction was accounted for using what is now the only accounting method
available, the purchase method. Under the purchase method, the acquiring
company includes the fair value of the assets of the acquired entity on its
balance sheet. The determination of fair value necessarily involves many
assumptions. The valuation of oil and gas properties primarily involves placing
a value on the oil and gas reserves. The valuation of oil and gas reserves
entails the process described above under the caption "Proved and Probable Oil
and Gas Reserves" but also incorporates the use of economic forecasts that
estimate future changes in prices and costs. This methodology is also used to
value unproved oil and gas reserves. The valuation of these reserves, by their
nature, is less certain than the valuation of proved reserves.
Goodwill
The process of accounting for the purchase of a company, described above,
results in recognizing the fair value of the acquired company's assets on the
balance sheet of the acquiring company. Any excess of the purchase price over
fair value is recorded as goodwill. Since goodwill results from the culmination
of a process that is inherently imprecise, the determination of goodwill is
also imprecise. In accordance with the recent issuance of CICA section 3062,
"Goodwill and Other Intangible Assets", goodwill is no longer amortized but
assessed periodically for impairment. The process of assessing goodwill for
impairment necessarily requires PrimeWest to determine the fair value of its
assets and liabilities. Such a process involves considerable judgment.
Business Risks
PrimeWest's operations are affected by a number of underlying risks, both
internal and external to the Trust. These risks are similar to those affecting
others in both the conventional oil and gas royalty trust sector and the
conventional oil and gas producers sector. The Trust's financial position,
results of operations, and cash available for distribution to unitholders are
directly impacted by these factors. These factors are discussed under two broad
categories - Commodity Price, Foreign Exchange and Interest Rate Risk; and
Operational and Other Business Risks.
Commodity Price, Foreign Exchange And Interest Rate Risk
The two most important factors affecting the level of cash distributions
available to unitholders are the level of production achieved by PrimeWest, and
the price received for its products. These prices are influenced in varying
degrees by factors outside the Trust's control. Some of these factors include:
- world market forces, specifically the actions of OPEC and other
large crude oil producing countries including Russia, and their
implications on the supply of crude oil;
- world and North American economic conditions which influence the
demand for both crude oil and natural gas and the level of interest
rates set by the governments of Canada and the U.S.;
- weather conditions that influence the demand for natural gas and
heating oil;
- the Canadian/U.S. exchange rate that affects the price received for
crude oil as the price of crude oil is referenced in U.S. dollars;
- transportation availability and costs; and
- price differentials among world and North American markets based on
transportation costs to major markets and quality of production.
To mitigate these risks, PrimeWest has an active hedging program in place based
on an established set of criteria that has been approved by the Board of
Directors. The results of the hedging program are reviewed against these
criteria and the results actively monitored by the Board.
Beyond our hedging strategy, PrimeWest also mitigates risk by having a
well-diversified marketing portfolio and by transacting with a number of
counter-parties and limiting exposure to each counter-party. In 2003,
approximately 25% of natural gas production was sold to aggregators and 75%
into the Alberta short-term or export long-term markets, and for 2004 we do not
anticipate any material change to this breakdown.
The contracts that PrimeWest has with aggregators vary in length. They
represent a blend of domestic and U.S. markets and fixed and floating prices
designed to provide price diversification to our revenue stream.
The primary objective of our commodity risk management program is to reduce the
volatility of our cash distributions, to lock in the economics on major
acquisitions and to protect our capital structure when commodity prices cycle
downwards. In the first quarter of 2004, PrimeWest lost $3.8 million from
commodity hedges, but has added $33.3 million to revenue from its hedging
program from January 1, 2001 to the end of the first quarter of 2004.
Operational And Other Business Risks
PrimeWest is also exposed to a number of risks related to its activities within
the oil and gas industry that have an impact on the amount of cash available to
unitholders. These risks, and the manner in which PrimeWest seeks to mitigate
these risks include, but are not limited to:
Risk:
Production
----------
Risk associated with the production of oil and gas - includes well operations,
processing and the physical delivery of commodities to market.
We mitigate by:
Performing regular and proactive protective well, facility and pipeline
maintenance supported by telemetry, physical inspection and diagnostic tools.
Commodity Price
---------------
Fluctuations in natural gas, crude oil and natural gas liquid prices
We mitigate by:
Hedging. See "Financial Derivatives" section of this press release.
Transportation
--------------
Market risk related to the availability of transportation to market and
potential disruption in delivery systems.
We mitigate by:
Diversifying the transportation systems on which we rely to get our product to
market.
Natural decline
---------------
Development risk associated with capital enhancement activities undertaken -
the risk that capital spending on activities such as drilling, well
completions, well workovers and other capital activities will not result in
reserve additions or in quantities sufficient to replace annual production
declines.
We mitigate by:
Diversifying our capital spending program over a large number of projects so
that significant capital is not risked on any one activity. We also have a
highly skilled technical team of geologists, geophysicists and engineers
working to apply the latest technology in planning and executing capital
programs. Capital is spent only after strict economic criteria for production
and reserve additions are assessed.
Acquisitions
------------
Acquisition risk associated with acquiring producing properties at low cost to
renew our inventory of assets.
We mitigate by:
Continually scanning the marketplace for opportunities to acquire assets. Our
technical acquisition specialists evaluate potential corporate or property
acquisitions and identify areas for value enhancement through operational
efficiencies or capital investment. All prospects are subjected to rigorous
economic review against established acquisition and economic hurdle rates. In
some cases we may also hedge commodity prices to protect the acquisition
economics in the near term period.
Reserves
--------
Reserve risk in respect of the quantity and quality of recoverable reserves.
We mitigate by:
Contracting our reserves evaluation to a reputable third party consultant,
Gilbert Lausten Jung (GLJ). The work and independence of GLJ is reviewed by the
Audit and Reserves Committee of the Board of Directors of PrimeWest. Our
strategy is to invest in mature, longer life properties having a higher proved
producing component where the reserve risk is generally lower and cash flows
are more stable and predictable.
Environmental Health and Safety (EH&S)
--------------------------------------
Environmental, health and safety risks associated with oil and gas properties
and facilities.
We mitigate by:
Establishing and adhering to strict guidelines for EH&S including training,
proper reporting of incidents, supervision and awareness. PrimeWest has active
community involvement in field locations including regular meetings with
stakeholders in the area. PrimeWest carries adequate insurance to cover
property losses, liability and business interruption.
These risks are reviewed regularly by the Corporate Governance and Nominating
Committee of the Board, which acts as PrimeWest's Environmental, Health and
Safety Committee.
Regulation, Tax and Royalties
-----------------------------
Changes in government regulations including reporting requirements, income tax
laws, operating practices, environmental protection requirements and royalty
rates.
We mitigate by:
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.
Liability to unitholders
------------------------
There is no statutory protection for unitholders from liabilities of the Trust.
We mitigate by:
Limiting the business of the Trust to the right to receive the net cash flow of
PrimeWest Energy Inc. and its subsidiaries. All of the oil and gas business
operations of PrimeWest are conducted by PrimeWest Energy Inc. and its
subsidiaries. PrimeWest Energy Inc. has a vigorous EH&S program as well as
significant insurance protection.
First Quarter 2004 Conference Call and Webcast
PrimeWest will be conducting a conference call and Web cast for interested
analysts, brokers, investors and media representatives about its first quarter
2004 results at 9:00 a.m. Mountain time (11:00 a.m. Eastern time) on April
28th, 2004.
Callers may dial 1-800-814-4857 a few minutes prior to start and request the
PrimeWest conference call. The call also will be available for replay by
dialing 1-877-289-8525, and entering pass code 21043127 followed by the pound
(No.) key.
Webcast listeners are invited to go to:
http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID(equal sign)759660 for
the live Web cast and/or replay or access the Web cast at the PrimeWest
website, http://www.primewestenergy.com/.
Additional Information
Additional information pertaining to PrimeWest, including the Trust's most
recently filed Annual Report and Annual Information Form, is available on SEDAR
at http://www.sedar.com/ and on the PrimeWest website at
http://www.primewestenergy.com/. PrimeWest welcomes questions from unitholders
and potential investors; call Investor Relations at 403-234-6600 or toll-free
in Canada and the U.S. at 1-877-968-7878; or visit us at our website,
http://www.primewestenergy.com/. We make every effort to respond to queries as
quickly as possible, but during periods of heavy call volume, our response time
may take up to 2 business days.
FIRST AND FINAL ADD TO FOLLOW
DATASOURCE: PrimeWest Energy Trust
CONTACT: Investor Relations at (403) 234-6600 or toll-free in Canada and
the U.S. at 1-877-968-7878; or visit us at our website,
http://www.primewestenergy.co/