Successful first quarter drilling and significant infrastructure
expansion
CALGARY, April 28 /CNW/ -
Three Months Ended March 31 2008 2007
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Financial ($ thousands, except per share amounts)
Petroleum and natural gas revenue 48,787 25,524
Funds generated from operations 26,069 17,907
- Basic per share 0.49 0.45
- Diluted per share 0.46 0.39
Net earnings 1,873 4,066
- Basic per share 0.04 0.10
- Diluted per share 0.03 0.09
Capital investment 64,760 50,488
Bank debt and working capital deficiency 147,742 69,858
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Operations
Production
- Natural gas (mcf/d) 57,880 36,631
- Crude oil (bbls/d) 506 384
- Natural gas liquids (bbls/d) 341 246
- Total production (boe/d) 10,493 6,735
Average realized price
- Natural gas ($/mcf) 7.98 7.57
- Crude oil ($/bbl) 92.41 64.46
- Natural gas liquids ($/bbl) 81.34 61.24
Netback per boe ($)
Petroleum and natural gas revenue 51.09 47.06
Realized gain on financial instruments - 5.83
Royalties (11.13) (12.47)
Operating expenses (5.58) (4.80)
Transportation expenses (3.88) (3.68)
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Operating netback 30.50 31.94
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ACCOMPLISHMENTS
- Five new pool discoveries were made for the three months ended
March 31, 2008 (the "Quarter"). Two Debolt discoveries were made in
Caribou and three Halfway discoveries at Beg, Green and Caribou all of
which provide development drilling opportunities in the upcoming
quarters.
- Drilling activities were primarily concentrated in the Caribou,
Buckinghorse, Julienne and Bubbles properties. A significant number of
pipeline and facility expansions were completed during the Quarter,
accounting for approximately 30 percent of the capital investment.
This included a 7.2 kilometer pipeline at Caribou which required two
river crossings, the Buckinghorse River and a tributary each requiring
a one kilometer river bore. On the strength of these projects current
production is over 13,000 boe per day.
- ProEx Energy Ltd.'s ("ProEx" or The "Company") land base continues to
grow with 8,000 net acres of land in the Green area added via crown
land sales during the Quarter.
- Production for the Quarter averaged 10,493 boe per day, up 56 percent,
compared to 6,735 boe per day in the same quarter in 2007. Production
per share, diluted was up 26 percent compared to the same period in
2007.
- The Company drilled 26 wells (18.3 net) during the Quarter with a
100 percent success rate and invested $64.8 million compared to
24 wells (15.2 net) and $50.5 million in the same period in 2007.
- Funds generated from operations for the Quarter were $26.1 million
compared to $17.9 million for the same period in 2007. Funds generated
from operations per share were $0.49 basic ($0.46 diluted) compared to
$0.45 basic ($0.39 diluted) in the same period in 2007. The Company
reported net earnings of $1.9 million for the Quarter compared to
$4.1 million during the same period in 2007.
- The Company has hedged approximately 50 percent of its natural gas
volumes for the period April 1, 2008 to October 31, 2008 resulting in
a net floor of $7.90 per thousand cubic feet ("mcf") and a ceiling of
$9.00 per mcf. The Company recorded an unrealized loss of $9.8 million
in the Quarter related to these contracts. This compares to an
unrealized loss of $4.1 million in that same period in 2007.
- The Company's credit facility has been expanded and now includes the
Bank of Montreal as lead, the Bank of Nova Scotia and the National
Bank of Canada. The Company's syndicated credit facility has been
increased to an aggregate $225 million from $185 million providing
further financial flexibility. The Company ended the Quarter with
total debt of $147.7 million (including a working capital deficit of
$18.3 million).
Exploration Update
ProEx's exploration program pushed aggressively northward into the Caribou and Buckinghorse properties positively confirming subsurface targets and deepening the Company's inventory of drilling locations. In addition to recording a new 200 square kilometer 3D seismic program over the Company's controlled lands, ProEx operated or participated in 26 wells (18.3 net) in the Quarter. Of the 26 wells drilled during the Quarter, 20 wells are on stream with the majority of the balance of six wells to be tied-in during the third quarter.
In total, five new pool discoveries were made during the Quarter. Two 100 percent working interest Debolt discoveries were made in the Caribou area building on the successes of the fourth quarter 2007 deep exploration program. The Halfway exploration program continued in the Quarter with new discoveries being made at Beg, Green and Caribou all of which will provide development drilling in the upcoming quarters. The Caribou discovery pushes the Halfway potential over 36 kilometers north of ProEx's closest Halfway pool, significantly expanding the production fairway. Additional infill and pool extension Halfway wells were also completed at Bubbles and Sasquatch.
Eight vertical pool extension wells and a successful medium reach horizontal well, that utilized limited entry multi-stage fracturing technology, were drilled at Julienne in the Gething formation. The Julienne horizontal well was drilled horizontally due to surface access restrictions and provided an opportunity for the Company to test the application of this technology. A second horizontal well, a more conventional horizontal test, was completed in the Quarter at Bernadet in the Coplin member of the Triassic Charlie Lake formation. This well is expected to be tied-in and on production in the third quarter.
The Company is planning a number of other horizontal wells later this year. Each test is expected to employ limited-entry/multi-stage fracture treatment technology. Two or three of these wells will target the pervasive, tighter Halfway reservoirs in previously discovered pools. Over the past four years at least five new Halfway pools have been discovered but left undeveloped due to their tighter permeabilities. Capital was allocated elsewhere on the Halfway trend where other more attractive opportunities and land expansion initiatives could capture as much of the available mineral rights as possible. This expansion initiative will continue during 2008 as well as the testing of the commerciality of some of these previously identified pools. At least two wells in higher grade Halfway reservoirs, likely in the Caribou and Green areas, will also be drilled with this technology due to significant geographic obstacles inherent in the region.
With the new Buckinghorse 3D seismic data and exploration successes during the winter, ProEx is well positioned for its exploratory and stepout drilling program for the balance of the year at Caribou, Buckinghorse, Julienne and Sasquatch which will feed both recently constructed and expanded facilities. The drilling program will target a growing inventory of other 3D defined gas-rich reservoirs in addition to the traditional Halfway formation which is targeted for approximately 65 percent of the Company's drilling. The balance of the year will also see continued development drilling at Bubbles.
The Company's land acquisition program is expected to accelerate for the remainder of 2008 as ProEx continues its expansion of its gas directed opportunities in the Foothills. During the first quarter, 8,000 net acres were added in the Green area via crown land sales.
2008 First Quarter Drilling Results
Gross Wells Net Wells
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Gas Oil Dry Total Gas Oil Dry Total
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British Columbia
- Foothills region 25 - - 25 18.1 - - 18.1
- Fort St. John
Plains region 1 - - 1 0.2 - - 0.2
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Total 26 - - 26 18.3 - - 18.3
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Operations Update
During the Quarter, the Company undertook a number of facility projects
including;
- In early April, a 7.2 kilometer pipeline at Caribou which required two
river crossings, the Buckinghorse River and a tributary each requiring
a one kilometer river bore, was completed. The first phase of the
Caribou pipeline was completed in the fourth quarter and consisted of
a 10 kilometer section connecting directly into Keyera Energy Limited
Partnership's Caribou gas plant.
- Following the drilling success at Sasquatch during the fourth quarter
of 2007 and the Quarter, the Company expanded its Dogrib facility
adding a compressor which has increased the capacity of the plant to
18 million cubic feet ("mmcf") per day from nine mmcf per day.
- The Company completed a line loop at Julienne to ease back pressure
from increased volumes. A compressor expansion at the Julienne
facility, originally planned for the second quarter, was completed
during March. Capacity of this plant is now 25 mmcf per day expanded
from 16 mmcf per day.
- At Julienne, in partnership with the government of British Columbia,
the Company completed construction of a pipeline to tie-in stranded
gas at North Julienne.
- Also, in partnership with the government of British Columbia, the
Company completed the building of a pipeline to tie-in stranded gas in
the recently acquired Blair property. This project was connected to
the Company's Gundy facility.
ProEx is working with third parties to expand processing capacity in the Caribou area, north and south of the Buckinghorse River, by the first quarter of 2009.
Natural Gas Outlook
Current and futures prices for natural gas have continued to strengthen through the Quarter. On the supply side, the fundamentals for natural gas have been driven by normal winter weather across North America, which has drawn down natural gas storage to levels consistent with the five year average, while shipments of liquefied natural gas to North America have been significantly lower compared to the same period in 2007. On the demand side, weather will continue to be a key factor impacting the rate at which natural gas storage will be refilled during the summer as warmer weather will have the effect of increasing demand for electrical power generation. Additionally, oil price futures above US$100 per barrel may place upward pressure on gas prices to move closer to a historical BTU-equivalency ratio of 6:1.
Hedging Update
ProEx employs an active risk management program to provide certainty to a portion of its cash flow supporting its capital investment program. The Company has hedged 40,000 gigajoules ("GJ") per day (approximately 35 mmcf per day), or approximately 50 percent of its before royalty forecasted natural gas production, for the period from April 1, 2008 through to October 31, 2008, at an average net floor price of C$7.90 per mcf based on the Company's high heat content natural gas production. The summer hedging program was completed using a series of swaps and bull spread structures. The swap and bull spread structure that ProEx utilizes sets a relatively high floor in the current market and allows participation up to an equivalent average summer 2008 net gas price of C$9.00 per mcf. The Company recorded an unrealized loss of $9.8 million in the Quarter related to this hedge. This compares to an unrealized loss of $4.1 million in that same period in 2007.
Annual and Special Meeting of Shareholders
The Company's Annual and Special Meeting is scheduled for 3:30 PM on Tuesday April 29, 2008 at the Petroleum Club, 319 - 5th Avenue S.W. Calgary, Alberta.
Outlook
The Company's successful first quarter drilling program, along with the completion of the facility construction mentioned above, has allowed ProEx to rapidly expand its production rate to currently over 13,000 boe per day, inline with Management's production guidance. Production for the Quarter averaged 10,493 boe per day compared to 9,680 boe per day in the fourth quarter of 2007 and 6,735 boe per day in the first quarter of 2007. First quarter production was negatively impacted due to problems related to extreme cold weather and some level of construction delays.
Production guidance for 2008 remains unchanged with production expected to average between 12,000 and 13,000 boe per day. Production guidance includes the scheduled plant turnaround at the Spectra owned McMahon gas processing facility which will be shut down for a period of approximately 22 days in June. Approximately 65 percent of the Company's production will be shut-in during this turnaround and as a result the second quarter production will be relatively flat to the first quarter. Exit rate production in 2008 is expected to be in the range of 14,000 to 15,000 boe per day. The Company's 2008 capital investment program remains unchanged at approximately $150 million. Approximately 65 percent will be directed towards drilling and completions and includes the drilling of approximately 45 net wells.
Drilling activities for 2008 will be balanced between exploration and development drilling on our traditional tight Halfway gas play complemented by shallower Gething gas exploration and Debolt exploratory drilling. In addition to these new initiatives, ProEx will investigate the potential of utilizing emerging new technologies such as horizontal drilling/multi-stage fracturing which will target previously discovered Halfway accumulations where gas has been encountered over the past several years. Approximately, three to four such tests are expected to be completed over the next six months.
The first quarter facility construction has opened up exploration fairways for the Company which were not previously accessible to processing facilities. These facilities expansions, along with the expansion of our Dogrib and Julienne infrastructure, position us for our exploratory and stepout drilling program for the balance of the year.
The Company now has an approved bank facility totalling $225 million increased from $185 million. This increased credit capacity, combined with the improved natural gas pricing environment, has the Company well positioned to finance its planned 2008 program internally.
We believe the long term prospects for natural gas in North America remain very bullish and will continue to aggressively position the Company's asset base in the Foothills of British Columbia to capitalize on this opportunity.
On behalf of the Board of Directors,
(Signed) "David D. Johnson"
David D. Johnson
President & Chief Executive Officer
April 28, 2008
Forward Looking Statements - Certain information regarding ProEx Energy Ltd. set forth in this document, including management's assessment of ProEx Energy Ltd.'s future plans and operations, contains forward-looking statements that involve substantial known and unknown risks and uncertainties. These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond ProEx Energy Ltd.'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 producers, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. ProEx Energy Ltd.'s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that ProEx Energy Ltd. will derive therefrom.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
The following discussion and analysis as provided by the Management of ProEx Energy Ltd. ("ProEx" or the "Company") as of April 28, 2008, is to be read in conjunction with the accompanying unaudited interim financial statements and related notes for the three months ended March 31, 2008 and ProEx's audited financial statements, related notes and MD&A for the year ended December 31, 2007. The financial data presented has been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The reporting and the measurement currency is the Canadian dollar.
Description of Company
ProEx is a Calgary based, natural gas focused, exploration and development company, established on July 2, 2004. Primary operating areas include the northeast British Columbia Foothills and Fort St. John Plains regions. Shares of ProEx trade on the Toronto Stock Exchange ("TSX") under the symbol PXE.
Relationship with Progress Energy Trust
The Company receives personnel and certain administrative and technical services from Progress Energy Trust ("Progress") in connection with the management, development, exploitation and operation of the assets of ProEx and the marketing of its production. Progress provides these services in accordance with the Technical Services Agreement entered into with ProEx as described below. ProEx has granted performance shares and stock options to Progress executives and employees and common shares under Progress' long term incentive compensation plan ("LTI") to non-executive employees of Progress in their capacity as service providers.
Under the terms of the LTI, non-executive Progress employees in their capacity as service providers, may be granted LTI awards to be paid in common shares of the Company. ProEx agreed to contribute to the LTI to ensure that service providers retain incentives related to the success of ProEx. Awards granted under the LTI will vest on the second anniversary date of the date of grant. ProEx has agreed to reimburse Progress for this expense.
ProEx and Progress have joint interest in certain properties and undeveloped land in the northeast British Columbia Foothills and Fort St. John Plains regions. These joint interest properties are governed by standard industry agreements and in addition the Company has entered into a protocol arrangement ("Protocol Arrangement") with Progress that specifies how each company will manage the joint lands in specifically identified areas of interest. To ensure good governance practices, both ProEx and Progress have each created independent committees of their Board of Directors to monitor compliance with the Technical Services Agreement and the Protocol Arrangement.
Technical Services Agreement - The Technical Services Agreement has no set termination date and will continue until terminated by either party with one year prior written notice to the other party or some other date as mutually agreed. The Company receives services including management, development, exploitation, operations, administrative, and marketing, as well as information technology systems from Progress on an expense reimbursement basis, based on the Company's monthly capital activity and production levels relative to the combined capital activity and production levels of both ProEx and Progress.
Protocol Arrangement - The Protocol Arrangement identifies methods and processes to be followed on both existing and new lands, joint facilities, marketing, seismic and surface rights. The Protocol Arrangement also outlines the practices to be followed in the event either party enters into areas outside of the identified areas of interest.
On April 2, 2007, ProEx acquired certain interests in northeast British Columbia Foothills assets previously acquired by Progress. ProEx's total consideration, including transaction costs of $0.9 million was $136.4 million. When considering the bid process for this acquisition, each of Progress and ProEx identified assets that they were interested in acquiring and values that they were willing to pay to acquire such assets. Progress made a single bid on behalf of ProEx and Progress and the ultimate purchase was based on the prices that each of Progress and ProEx were willing to pay for the assets that they had selected to acquire. The resale of assets between Progress and ProEx is based on these allocations. The technical services committee reviewed the details of the transaction prior to the purchase and sale agreement being signed. All lands are managed in accordance with the Protocol Arrangement.
On November 30, 2007, ProEx and Progress jointly acquired certain assets in the Foothills region of British Columbia. The total cost of the acquisition of $17.9 million was split in accordance with working interests currently held in the surrounding area. As a result, ProEx acquired an 80 percent interest ($14.3 million) and Progress acquired a 20 percent interest in the assets ($3.6 million).
Non-GAAP Measures
The MD&A contains the term "funds generated from operations" and "funds generated from operations per share" which do not have any standardized meaning prescribed by Canadian GAAP. Management uses funds generated from operations and funds generated from operations per share to analyze operating performance and leverage and considers funds generated from operations to be a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and to repay debt. Funds generated from operations should not be considered an alternative to, or more meaningful than cash flow from operating activities as determined in accordance with Canadian GAAP as an indicator of the Company's performance. Therefore references to funds generated from operations or funds generated from operations per share (basic and diluted) may not be comparable with the calculation of similar measures for other entities. Funds generated from operations per share is calculated using the basic and diluted weighted average number of shares for the period. The reconciliation between funds generated from operations and cash flow from operations after changes in working capital for the three months ended March 31, 2008 and 2007 is as follows:
($ thousands) 2008 2007
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Funds generated from operations 26,069 17,907
Changes in non-cash working capital 520 3,584
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Cash flow from operations after changes
in working capital 26,589 21,491
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Management uses certain industry benchmarks such as operating netback to analyze financial and operating performance. This benchmark as presented does not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures for other entities. Management considers netbacks an important measure as it demonstrates its profitability relative to current commodity prices. The Company uses this measure to help evaluate its performance.
Boe Presentation
Barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet ("mcf") to one barrel ("bbl") is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived by converting natural gas to oil in the ratio of six mcf of gas to one barrel of oil.
Forward-Looking Information
Certain information regarding the Company set forth in this document, including Management's assessment of the Company's future plans and operations, may constitute forward-looking statements under applicable securities law and necessarily involve risks associated with oil and gas exploration, production, marketing, and transportation such as loss of market, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers and ability to access sufficient capital from internal and external sources; as a consequence, actual results may differ materially from those anticipated in the forward-looking statements.
RESULTS OF OPERATIONS
Asset Acquisition
On April 2, 2007, ProEx acquired certain interests in northeast British Columbia Foothills assets previously acquired by Progress (the "Asset Acquisition"). ProEx's total consideration, including transaction costs of $0.9 million was $136.4 million. The Asset Acquisition was financed through an equity offering of 8,050,000 common shares of the Company at a price of $12.45 per share for aggregate gross proceeds of $100.2 million ($95.6 million net of issue costs). The remainder of the purchase price was financed through increased bank debt.
The Asset Acquisition included approximately 2,000 boe per day of production, 95 percent natural gas and approximately 80,000 net acres of undeveloped land.
Production
The following is a summary of daily production for the periods indicated:
Three Months Ended
March 31
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2008 2007
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Natural gas (mcf/d) 57,880 36,631
Crude oil (bbls/d) 506 384
Natural gas liquids (bbls/d) 341 246
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Total production (boe/d) 10,493 6,735
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Production for the three months ended March 31, 2008 (the "Quarter") of 10,493 boe per day was 56 percent higher than the 6,735 boe per day recorded in the same period in 2007. Natural gas production of 57,880 mcf per day during the Quarter was 58 percent higher than the 36,631 mcf per day recorded for the same period in 2007. Crude oil and natural gas liquids production for the Quarter increased 34 percent to 847 bbls per day from 630 bbls per day for the same period in 2007. Production increases are a result of the Company's successful exploration and development drilling program in addition to approximately 2,000 boe per day of production added from the Asset Acquisition beginning in the second quarter of 2007. The Company's production portfolio was weighted 92 percent to natural gas, five percent to crude oil and three percent to natural gas liquids.
The production for the Quarter was negatively impacted by problems related to extreme cold weather and some level of construction delays. Subsequent to the Quarter, with the completion of facility and pipeline projects, primarily in the Caribou area, production is now currently over 13,000 boe per day. Production is expected to average between 12,000 and 13,000 boe per day for 2008, which includes the estimated impact of the scheduled plant turnaround at the Spectra owned McMahon gas processing facility which will be shut down for a period of approximately 22 days in June.
Pricing and Risk Management
Natural Gas Markets
ProEx's realized natural gas price in the Quarter was $7.98 per mcf (2007 - $7.57 per mcf) compared to the AECO daily index average of $7.97 per mcf. ProEx markets its natural gas at a mix of daily and monthly pricing. The higher realization reflects the higher heat content of ProEx's natural gas stream.
The first three months of 2008 turned out to be amongst the coldest of the past five to ten years in many regions of North America which created significant natural gas demand for heating and power generation. The result was strong withdrawals from natural gas storage facilities which at one point set a new record high one week draw-down. US Natural gas storage began the winter heating season at a record high, 3.545 trillion cubic feet, but was depleted down to approximately equal to the five year average exit level of 1.248 trillion cubic feet. North American natural gas prices steadily increased through the Quarter in response to the high demand and increasing support from strengthening crude oil prices.
The outlook for natural gas prices remains strong given the forecast growth in North American demand, smaller than expected 2008 imports of liquefied natural gas and relatively flat 2008 production profile for North America.
Three Months Ended
Average Benchmark Prices March 31
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2008 2007
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Natural gas - Station No. 2 ($/mcf daily index) 7.91 7.19
Natural gas - AECO ($/mcf daily index) 7.97 7.48
Natural gas - AECO ($/mcf monthly index) 7.20 7.47
Exchange rate (US$/Cdn$) 1.0040 1.1716
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Three Months Ended
ProEx Realized Prices March 31
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2008 2007
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Natural gas ($/mcf) 7.98 7.57
Crude oil ($/bbl) 92.41 64.46
Natural gas liquids ($/bbl) 81.34 61.24
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Risk Management
The Company has entered into natural gas financial contracts for the purpose of protecting its funds generated from operations from the volatility of natural gas prices. For the Quarter, the Company's natural gas price risk management program had a net realized gain of nil (2007 - $3.5 million).
On January 1, 2007 the Company adopted the new accounting standards regarding the accounting for financial instruments. In addition to the adoption of the new standards, Management elected not to use hedge accounting and consequently recognizes the fair value of its natural gas financial contracts at each reporting period with the change in the fair value being classified as unrealized gains and losses in the statement of earnings.
On adoption, the Company recognized a current asset of $7.4 million for the fair value of its natural gas derivative contracts with a corresponding increase to accumulated other comprehensive income of $4.9 million (net of tax of $2.5 million). The $4.9 million in accumulated other comprehensive income was amortized through other comprehensive income and unrealized gain or loss on the statement of earnings over the term of the contracts. For the three months ended March 31, 2007, $3.0 million was amortized through other comprehensive income with a corresponding pre-tax unrealized gain of $4.5 million and a charge to future income tax expense of $1.5 million. The balance in accumulated other comprehensive income was fully amortized at December 31, 2007, therefore requiring no charge to other comprehensive income for the period ended March 31, 2008.
At March 31, 2008, the fair value of the natural gas financial contracts was a liability of $9.8 million (2007 - $1.1 million). The decrease in value for the Quarter of $9.8 million (2007 - $8.5 million) was due to the increase in forward natural gas prices since the contracts were entered into and has been recognized as an unrealized loss on financial instruments on the statement of earnings.
The following table reconciles the Company's unrealized gain (loss) on financial contracts:
Three Months Ended
March 31
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($ thousands) 2008 2007
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Change in fair value of financial instruments (9,814) 8,517
Amortization of accumulated other comprehensive
income - (4,483)
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Unrealized gain (loss) on financial instruments (9,814) (4,034)
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The Company's financial derivative trading activities are conducted pursuant to the Company's Risk Management Policy approved by the Board of Directors. The Risk Management Policy has the objectives of reducing risk exposure to budgeted annual funds generated from operations projections resulting from uncertainty or changes in commodity prices, interest rates or foreign exchange; limiting financial contract volumes up to a maximum of 50 percent of budgeted production, net of royalties (or higher subject to Board of Director's approval); and limiting financial derivative trading activity to counter-parties that provide sufficient collateral in support of payment or have investment grade credit ratings.
ProEx's commodity risk management positions are described in Note 8 in the unaudited interim financial statements. The Company's current financial derivative contracts are for the period April 2008 to October 2008 for a total of 40,000 gigajoules ("gj") per day using swaps and bull spreads with an average net floor price (net of premiums to be paid) of $6.93 per gj and an average net ceiling price of $7.93 per gj.
Revenues
For the Quarter, total revenues increased 71 percent to $48.8 million compared to $28.5 million for the same period in 2007. The increase was a result of increased production from the successful capital program over the past twelve months, the Asset Acquisition and higher commodity prices. Natural gas revenue for the Quarter increased 68 percent to $42.0 million from $24.9 million for the same period in 2007, while crude oil sales increased 91 percent to $4.3 million compared to $2.2 million in 2007 and natural gas liquids sales increased 86 percent to $2.5 million from $1.4 million for the same period in 2007.
For the three months ended March 31, 2008, petroleum and natural gas revenue included the following balances compared to the same period in 2007:
Three Months Ended
March 31
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($ thousands) 2008 2007
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Natural gas sales 42,012 24,943
Crude oil sales 4,254 2,227
Natural gas liquids sales 2,521 1,354
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Petroleum and natural gas revenue 48,787 28,524
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Royalties
Royalty expense consists of royalties paid to provincial governments, freehold landowners and overriding royalty owners. For the Quarter, royalties increased 41 percent to $10.6 million compared to $7.6 million for the same period in 2007 due to higher revenues as a result of higher production and commodity prices. The Company's average royalty rate for the Quarter was 21.8 percent compared to 26.5 percent in 2007. The decrease in the royalty rate is the result of lower royalty rates on the properties acquired in the Asset Acquisition, which also included wells in which ProEx paid gross over riding royalties. Management anticipates, based on current commodity prices, the average royalty rate for the remainder of 2008 will be approximately 23 to 26 percent.
Operating Expenses
Operating expenses during the Quarter were $5.3 million compared to $2.9 million for the same period in 2007. On a boe basis, operating expenses for the Quarter increased 16 percent to $5.58 compared to $4.80 for the same period in 2007. The increase on a per boe basis for the Quarter was due to higher costs associated with the extreme cold weather conditions, as well as, slightly higher operating costs on the properties acquired in the Asset Acquisition. Given the production increase in April 2008, Management anticipates operating expenses for the remainder of 2008 to be between $5.00 and $5.30 per boe.
Transportation Expenses
Transportation expenses for the Quarter increased 66 percent to $3.7 million compared to the $2.2 million for the same period in 2007. On a boe basis, transportation expenses during the Quarter were $3.88 compared to $3.68 for the same period in 2007. Higher per boe costs in the Quarter are due to higher transportation and treatment tolls associated with the Asset Acquisition.
In British Columbia, there is an infrastructure owned by Spectra Energy that enables gas producers to avoid facility construction in exchange for regulated gathering, processing and transmission fees. This all-in charge is included in transportation expenses.
Operating Netbacks
The following table summarizes the operating netbacks for natural gas and crude oil properties for the Quarter compared to the same period in 2007:
Three Months Ended
March 31
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2008 2007
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Natural gas properties ($/mcf)
Sales price 7.62 7.73
Realized gain on financial instruments - 1.02
Royalties (1.82) (2.08)
Operating expenses (0.89) (0.77)
Transportation expenses (0.72) (0.62)
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Operating netback - natural gas properties 4.19 5.28
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Crude oil properties ($/bbl)
Sales price 74.52 60.27
Royalties (14.99) (11.82)
Operating expenses (9.98) (8.87)
Transportation expenses (1.81) (2.33)
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Operating netback - crude oil properties 47.74 37.25
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General and Administrative Expenses
For the Quarter, general and administrative expenses net of overhead recoveries, ("G&A") increased 74 percent to $1.2 million compared to $0.7 million for the same period in 2007. On a boe basis for the Quarter, G&A was $1.29 compared to $1.17 for the same period in 2007.
The increase in G&A for the Quarter as compared to the same period in 2007 is primarily due to the increased size of the Company and the resulting technical services fee from Progress. The Company receives services including management, development, exploitation, operations, administrative, and marketing, as well as information technology systems from Progress on an expense reimbursement basis, based on the Company's monthly capital activity and production levels relative to the combined capital activity and production levels of both ProEx and Progress. Management anticipates G&A expense to average between $1.10 per boe and $1.20 per boe for 2008.
The following table summarizes G&A for the Quarter compared to the same period in 2007:
Three Months Ended
March 31
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($ thousands) 2008 2007
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Direct expenses 144 218
Technical services fee from Progress 2,266 1,584
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Gross G&A 2,410 1,802
Recoveries (1,091) (880)
Capitalized expenses (85) (212)
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Total G&A 1,234 710
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Total G&A ($boe) 1.29 1.17
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Long Term Incentive Compensation
For the Quarter, long term incentive compensation expense, relating to outstanding stock options, Class B Performance Shares and Progress' LTI, was $0.8 million ($0.88 per boe) compared to $0.3 million ($0.47 per boe) for the same period in 2007. The increase in compensation expense per boe in the Quarter as compared to the same period in the prior year is a result of the expense relating to the LTI and options granted during the first half of 2007.
During 2007, Progress' LTI was established for the benefit of Progress employees. ProEx agreed to contribute to the LTI to ensure that service providers retain incentives related to the success of ProEx. As at March 31, 2008, 182,069 common shares of ProEx have been granted to Progress employees, in their capacity as service providers to ProEx, resulting in a total compensation cost of $2.6 million. ProEx reimbursed Progress for this expense, therefore the total compensation expense has been recorded as a prepaid expense and will be amortized through long term incentive compensation expense equally over the two year vesting period. Awards granted under the LTI will vest on the second anniversary date of the date of grant.
Interest and Financing
For the Quarter, interest and financing charges were $1.4 million ($1.45 per boe) compared to $0.5 million ($0.81 per boe) for the same period in 2007. The increase in interest and financing charges for the Quarter as compared to the same period in the prior year, is a result of higher debt levels utilized to fund the capital investment program and a portion of the Asset Acquisition. Details of ProEx's bank debt are described in Note 4 in the unaudited interim financial statements.
Depletion, Depreciation and Accretion
For the Quarter, depletion and depreciation of property, plant and equipment and the accretion of the asset retirement obligations ("DD&A") was $14.4 million compared to $8.1 million for the same period in 2007. DD&A per boe for the Quarter was $15.12 per boe compared to $13.35 per boe recorded for the same period in 2007. The increase in DD&A per boe was due primarily to the Asset Acquisition on April 2, 2007.
Future Income Taxes
The provision for future income taxes for the Quarter was a recovery of $0.5 million compared to a $1.7 million expense in the same period in 2007. The lower taxes in the Quarter as compared to the same period in 2007 is a result of lower pre-tax earnings, along with a general corporate tax rate reduction in British Columbia from 12 percent to 11.5 percent on January 1, 2008 and a further reduction to 11 percent on January 1, 2009.
Net Earnings, Comprehensive Income and Funds Generated from Operations
The Company recorded net earnings for the Quarter of $1.9 million compared to net earnings of $4.1 million during the same period in 2007. Basic and diluted net earnings per share for the Quarter were $0.04 and $0.03 respectively ($0.10 basic and $0.09 diluted for the same period in 2007). Net earnings for the Quarter includes a $9.8 million unrealized loss on financial instruments relating to the decrease in fair market value of the Company's financial contracts.
Funds generated from operations were $26.1 million for the Quarter compared to $17.9 million during the same period in 2007. Basic and diluted funds generated from operations per share for the Quarter was $0.49 basic and $0.46 diluted, compared to $0.45 and $0.39 respectively during the same period in 2007. Funds generated from operations increased 46 percent over the same period in the prior year due primarily to a 56 percent increase in production compared to the same period in 2007.
The following table summarizes the funds generated from operations and net earnings on a boe basis for the Quarter compared to the same period in 2007:
Three Months Ended
March 31
-------------------------------------------------------------------------
($/boe) 2008 2007
-------------------------------------------------------------------------
Petroleum and natural gas revenues 51.09 47.06
Royalties (11.13) (12.47)
-------------------------------------------------------------------------
39.96 34.59
Realized gain on financial instruments - 5.83
-------------------------------------------------------------------------
39.96 40.42
Operating expenses (5.58) (4.80)
Transportation expenses (3.88) (3.68)
-------------------------------------------------------------------------
Operating netback 30.50 31.94
General and administrative expenses (1.29) (1.17)
Long term incentive - cash component (0.27) (0.81)
Interest and financing expenses (1.45) (0.42)
Asset retirement expenditures(1) (0.19) -
-------------------------------------------------------------------------
Funds generated from operations 27.30 29.54
Asset retirement expenditures(1) 0.19 0.42
Unrealized loss in financial instruments (10.28) (6.65)
Long term incentive compensation expense (0.61) (0.47)
Depletion, depreciation and accretion expenses (15.12) (13.35)
-------------------------------------------------------------------------
Net earnings before taxes 1.48 9.49
Future income taxes recovery (expense) 0.48 (2.78)
-------------------------------------------------------------------------
Net earnings 1.96 6.71
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Actual asset retirement costs incurred during the period are
classified for cash flow purposes as an operating item, however these
costs are not an expense of the period and are therefore added back
for purposes of determining net earnings.
The Company's funds generated from operations were $27.30 per boe for the Quarter compared to $29.54 per boe for the same period in 2007. The difference was due to the realized gain on financial instruments for the first quarter of 2007. Net earnings were $1.96 per boe for the Quarter compared to $6.71 per boe in the same period in 2007. Higher DD&A charges resulting from the Asset Acquisition and the large unrealized loss on financial instruments relating to the decrease in the fair market value of the Company's financial contracts were the primary causes for the lower net earnings recorded for the Quarter.
Capital Expenditures
The following table summarizes the capital investment for the Quarter compared to the same period in 2007:
Three Months Ended
March 31
-------------------------------------------------------------------------
($ thousands) 2008 2007
-------------------------------------------------------------------------
Land acquisitions and retention 2,249 2,811
Geological and geophysical 4,857 4,885
Drilling and completions 38,167 34,660
Equipping and facilities 19,487 7,888
Net property acquisitions (dispositions) - 244
-------------------------------------------------------------------------
Total net capital investment 64,760 50,488
-------------------------------------------------------------------------
-------------------------------------------------------------------------
During the Quarter, ProEx drilled 26 gross natural gas wells (18.3 net)
with a 100 percent success rate. Drilling activities during the Quarter were
concentrated in the Caribou, Buckinghorse, Julienne, and Bubbles properties.
Capitalization and Capital Resources
Common Share Information (thousands)
March December
31, 2008 31, 2007
-------------------------------------------------------------------------
Three months ended weighted average outstanding
Common Shares
- Basic 52,931 47,326
- Diluted 57,204 52,702
Outstanding Securities
- Common Shares 53,951 52,528
- Common Share options 1,876 1,934
- Common Share warrants 3,644 4,765
-------------------------------------------------------------------------
- Diluted Common Shares outstanding 57,204 59,227
-------------------------------------------------------------------------
- Class B Performance Shares 236 551
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Outstanding Securities at April 25, 2008 (thousands)
- Common Shares 54,852
- Common Share options 1,852
- Common Share warrants 3,000
-------------------------------------------------------------------------
- Diluted Common Shares outstanding 59,704
-------------------------------------------------------------------------
- Class B Performance Shares 15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In conjunction with the Asset Acquisition on April 2, 2007, ProEx issued 8,050,000 common shares at a price of $12.45 per share for aggregate gross proceeds of $100.2 million ($96.1 million net of issue costs).
On September 12, 2007 ProEx issued 1,830,000 common shares at a price of $13.70 per common share and 1,420,000 flow-through common shares at a price of $17.65 per flow-through share. The aggregate proceeds, net of share issue costs of $2.3 million ($1.6 million net of tax) were $47.8 million. Pursuant to the flow-through share offering, ProEx will incur $25.1 million of qualifying resource expenditures prior to December 31, 2008, to satisfy its flow-through share obligation. ProEx renounced the qualifying resource expenditures to holders of the flow-through shares effective on or before December 31, 2007. The future income tax effect and reduction to share capital was accounted for in the Quarter, the date that the Company filed the renouncement documents with the tax authorities.
Total Market Capitalization
The Company's market capitalization at March 31, 2008 was $890.2 million.
March December
(thousands, except per share amounts) 31, 2008 31, 2007
-------------------------------------------------------------------------
Common Shares outstanding 53,951 52,528
Share price ($)(1) 16.50 11.83
-------------------------------------------------------------------------
Total market capitalization ($) 890,192 621,406
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Represents the closing price on the Toronto Stock Exchange ("TSX").
Liquidity and Capital Resources
March December
($ thousands) 31, 2008 31, 2007
-------------------------------------------------------------------------
Working capital deficiency 18,344 14,105
Bank debt 129,398 96,881
-------------------------------------------------------------------------
Total debt 147,742 110,986
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At March 31, 2008 the Company had $129.4 million outstanding on its credit facilities and a working capital deficit of $18.3 million, resulting in $147.7 million of total debt. The credit facilities consisted of a $175 million extendible revolving term credit facility and a $10 million working capital credit facility with a syndicate of Canadian chartered banks. On April 15, 2008, the Company increased the credit facilities from $185 million to $225 million. The facilities are available on a revolving basis for a period of at least 364 days until April 15, 2009, and such initial term out date may be extended for further 364 day periods at the request of the Company, subject to approval by the banks. Following the term out date, the facilities will be available on a non-revolving basis for a one year term, at which time the facilities would be due and payable. The facility is a borrowing base facility that is determined based on, among other things, the Company's current reserve report, results of operations, current and forecasted commodity prices and the current economic environment.
The Company's investing activities in the Quarter consisted primarily of expenditures on its capital program. Management anticipates that the Company will continue to have adequate liquidity to fund future working capital and budgeted capital expenditures during 2008 through a combination of cash flow and additional debt. Should natural gas prices weaken for a protracted period, the Company may choose to reduce budgeted capital expenditures. New equity, if available and on favorable terms, may be utilized to expand exploration programs.
QUARTERLY FINANCIAL SUMMARY
The following table highlights ProEx's performance for the quarterly reporting periods from April 1, 2006 to March 31, 2008:
2008 2007
-------------------------------------------------------------------------
($ thousands, except per
share amounts) Mar 31 Dec 31 Sept 30 June 30 Mar 31
-------------------------------------------------------------------------
Petroleum and natural
gas sales 48,787 38,057 28,231 37,347 28,524
Funds generated from
operations 26,069 22,098 15,176 18,628 17,907
-Per share basic 0.49 0.42 0.31 0.39 0.45
-Per share diluted 0.46 0.39 0.28 0.35 0.39
Net earnings 1,873 7,725 716 7,564 4,066
-Per share basic 0.04 0.15 0.01 0.16 0.10
-Per share diluted 0.03 0.14 0.01 0.14 0.09
Total assets 605,898 549,343 484,888 470,906 339,252
Bank debt and working
capital deficiency 147,742 110,986 59,352 88,411 69,858
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006
-------------------------------------------------------
($ thousands, except per
share amounts) Dec 31 Sept 30 June 30
-------------------------------------------------------
Petroleum and natural
gas sales 23,386 19,419 20,723
Funds generated from
operations 13,995 8,766 10,118
-Per share basic 0.37 0.24 0.29
-Per share diluted 0.32 0.21 0.25
Net earnings 4,293 2,627 3,978
-Per share basic 0.11 0.07 0.12
-Per share diluted 0.10 0.06 0.10
Total assets 290,307 246,227 217,078
Bank debt and working
capital deficiency 27,838 41,499 18,364
-------------------------------------------------------
-------------------------------------------------------
Lower petroleum and natural gas revenue, funds generated from operations and net earnings in the second and third quarters of 2006 was due to a sharp decline in natural gas prices, while the following three quarters increased due to consistent production growth and strengthening natural gas prices. The third quarter of 2007 experienced declines in realized natural gas prices which was reflected in the lower revenue, funds generated from operations and net earnings. The two most recently completed quarters experienced increases in realized natural gas prices and production which was reflected in the higher revenues, and funds generated from operations. Net earnings in the first quarter of 2008 was lower due to unrealized losses associated with the Company's financial commodity contracts.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by ProEx is accumulated and communicated to the Company's Management as appropriate to allow timely decisions regarding required disclosures. The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the interim filings that the Company's disclosure controls and procedures are effective to provide reasonable assurance that material information related to the issuer, is made known to them by others within the Company. It should be noted that while the Company's Chief Executive Officer and Chief Financial Officer believe that the Company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
ADDITIONAL INFORMATION
Additional information relating to the Company is filed on SEDAR and can be viewed at www.sedar.com. Information can also be obtained by contacting the Company at ProEx Energy Ltd. 1200, 205 - 5th Avenue S.W., Calgary, Alberta, Canada T2P 2V7 or by e-mail at ir@proexenergy.com. Information is also accessible on the Company's web site at www.proexenergy.com.
PROEX ENERGY LTD.
BALANCE SHEETS
March December
($ thousands) 31, 2008 31, 2007
-------------------------------------------------------------------------
(unaudited)
ASSETS
Current
Cash and short-term investments - -
Accounts receivable 22,676 20,091
Prepaid expenses and deposits 3,203 3,473
Future income taxes 2,969 -
-------------------------------------------------------------------------
28,848 23,564
Property, plant and equipment 577,050 525,779
-------------------------------------------------------------------------
605,898 549,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities 44,223 37,669
Fair value of financial instruments (Note 8) 9,814 -
-------------------------------------------------------------------------
54,037 37,669
Bank debt (Note 4) 129,398 96,881
Asset retirement obligations (Note 5) 6,458 5,691
Future income taxes 28,775 19,752
-------------------------------------------------------------------------
218,668 159,993
SHAREHOLDERS' EQUITY
Share capital and warrants (Note 6) 329,629 333,861
Contributed surplus (Note 6) 3,761 3,522
Retained earnings 53,840 51,967
-------------------------------------------------------------------------
387,230 389,350
-------------------------------------------------------------------------
605,898 549,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the financial statements
PROEX ENERGY LTD.
STATEMENTS OF NET EARNINGS, COMPREHENSIVE INCOME
AND RETAINED EARNINGS
(Unaudited)
Three Months Ended
March 31
($ thousands, except per share amounts) 2008 2007
-------------------------------------------------------------------------
REVENUES
Petroleum and natural gas 48,787 28,524
Royalties (10,632) (7,557)
-------------------------------------------------------------------------
38,155 20,967
Realized gain on financial instruments (Note 8) - 3,535
Unrealized loss on financial instruments (Note 8) (9,814) (4,034)
-------------------------------------------------------------------------
28,341 20,468
-------------------------------------------------------------------------
EXPENSES
Operating 5,331 2,907
Transportation 3,700 2,232
General and administrative 1,234 710
Long term incentive compensation (Note 6) 842 284
Interest and financing 1,381 490
Depletion, depreciation and accretion 14,442 8,093
-------------------------------------------------------------------------
26,930 14,716
-------------------------------------------------------------------------
Net earnings before taxes 1,411 5,752
TAXES
Future income tax expense (recovery) (462) 1,686
-------------------------------------------------------------------------
NET EARNINGS 1,873 4,066
OTHER COMPREHENSIVE INCOME
Amortization of fair value of financial
instruments (Note 6) - (2,998)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME 1,873 1,068
-------------------------------------------------------------------------
Retained earnings, beginning of period 51,967 31,895
-------------------------------------------------------------------------
Retained earnings, end of period 53,840 35,961
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per share (Note 6)
Basic $0.04 $0.10
Diluted $0.03 $0.09
-------------------------------------------------------------------------
See accompanying notes to the financial statements
PROEX ENERGY LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
-------------------------------------------------------------------------
($ thousands) 2008 2007
-------------------------------------------------------------------------
Cash provided by (used in)
OPERATING
Net earnings 1,873 4,066
Depletion, depreciation and accretion 14,442 8,093
Unrealized loss on financial instruments 9,814 4,034
Long term incentive compensation (Note 6) 588 284
Asset retirement expenditures (Note 5) (186) (256)
Future income taxes (462) 1,686
-------------------------------------------------------------------------
26,069 17,907
Change in non-cash working capital (Note 7) 520 3,584
-------------------------------------------------------------------------
26,589 21,491
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FINANCING
Increase in bank debt 32,517 33,969
Issue of shares (net of share issue costs)
(Note 6) 1,935 263
Change in non-cash working capital (Note 7) - (97)
-------------------------------------------------------------------------
34,452 34,135
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INVESTING
Deferred acquisition (Note 3) - (9,702)
Capital expenditures (64,760) (50,488)
Change in non-cash working capital (Note 7) 3,719 4,564
-------------------------------------------------------------------------
(61,041) (55,626)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in cash and short-term investments - -
Cash and short-term investments, beginning of period - -
-------------------------------------------------------------------------
Cash and short-term investments, end of period - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the financial statements
PROEX ENERGY LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
ProEx Energy Ltd. ("ProEx" or the "Company") was incorporated on April 8,
2004 and commenced commercial operations on July 2, 2004 under a Plan of
Arrangement. Under the Plan of Arrangement various assets of Progress
Energy Trust ("Progress") were transferred to ProEx.
1. SUMMARY OF ACCOUNTING POLICIES
Nature of Business and Basis of Presentation
ProEx is involved in the exploration, development and production of
petroleum and natural gas in British Columbia. The financial statements
are stated in Canadian dollars and have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP").
The unaudited interim financial statements of the Company have been
prepared by Management in accordance with Canadian GAAP, following the
same accounting policies and methods of computation as the audited
financial statements of ProEx Energy Ltd. for the year ended December 31,
2007. The disclosures provided below are incremental to those included
with the annual financial statements and certain disclosures which are
normally required to be included in the notes to the annual financial
statements, have been condensed or omitted. These unaudited interim
financial statements should be read in conjunction with the financial
statements and notes thereto in ProEx's annual report for the year ended
December 31, 2007.
The preparation of financial statements in conformity with Canadian GAAP
requires Management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual
results may differ from those estimates.
2. RELATIONSHIP WITH PROGRESS ENERGY TRUST
A technical services agreement ("Technical Service Agreement") is
currently in place between ProEx and Progress whereby Progress provides
personnel and certain administrative and technical services in connection
with the management, development, exploitation and operation of the
assets of ProEx and the marketing of its production. ProEx has granted
performance shares and stock options to executives and employees of
Progress and common shares under Progress' long-term incentive
compensation plan to the non-executive employees of Progress as service
providers. Progress provides these services to ProEx on an expense
reimbursement basis, based on ProEx's monthly capital activity and
production levels relative to the combined capital activity and
production levels of both Progress and ProEx. Total expenses reimbursed
by ProEx for the three month period ended March 31, 2008 was $2.3 million
(2007 - $1.2 million). As at March 31, 2008, accounts receivable included
$0.8 million (2007 - $2.6 million) receivable from Progress which
includes standard joint venture amounts. These amounts were received
subsequent to March 31, 2008.
On April 2, 2007, ProEx acquired certain interests in northeast British
Columbia Foothills assets previously acquired by Progress (the "Asset
Acquisition"). ProEx's total consideration, including transaction costs
of $0.9 million was $136.4 million. When considering the bid process for
the Acquisition, each of Progress and ProEx identified assets that they
were interested in acquiring and values that they were willing to pay to
acquire such assets. Progress made a single bid on behalf of ProEx and
Progress and the ultimate purchase was based on the prices that each of
Progress and ProEx were willing to pay for the assets that they had
selected to acquire. The resale of assets from Progress to ProEx was
based on these allocations. The technical services committee reviewed the
details of the transaction prior to the purchase and sale agreement being
signed. All lands are managed in accordance with the Protocol
Arrangement.
Under the terms of the long term incentive compensation plan (the "LTI"),
Progress employees in their capacity as service providers, may be granted
LTI awards to be paid in Common Shares of the Company. ProEx agreed to
contribute to the LTI to ensure that service providers retain incentives
related to the success of ProEx. Awards granted under the LTI will vest
on the second anniversary date of the date of grant. ProEx has agreed to
reimburse Progress for this expense. Refer to note 6 for details of the
long term incentive compensation plan.
3. ASSET ACQUISITION
At March 31, 2007 ProEx had incurred $9.7 million in costs related to the
following acquisition which was completed subsequent to March 31, 2007:
On April 2, 2007, ProEx acquired interests in certain northeast British
Columbia Foothills assets previously acquired by Progress. ProEx's total
consideration, including transaction costs of $0.9 million was
$136.4 million. The full cost of the Asset Acquisition was recorded to
property, plant and equipment (including unproved property value of
$16.0 million which is excluded from the calculation of depletion and
depreciation), and in addition, the Company recorded an asset retirement
obligation on the acquired assets of $1.9 million. The Asset Acquisition
was financed through an equity offering of 8,050,000 Common Shares of the
Company at a price of $12.45 per share for aggregate gross proceeds of
$100.2 million ($95.6 million net of issue costs). The remainder of the
purchase price was financed through bank debt.
4. BANK DEBT
At March 31, 2008, the Company's credit facilities consisted of a
$175 million extendible revolving term credit facility and a $10 million
working capital credit facility with a syndicate of Canadian chartered
banks. On April 15, 2008, the Company increased the credit facilities
borrowing base from $185 million to $225 million. The facilities are
available on a revolving basis for a period of at least 364 days until
April 15, 2009, and such initial term out date may be extended for
further 364 day periods at the request of the Company, subject to
approval by the banks. Following the term out date, the facilities will
be available on a non-revolving basis for a one year term, at which time
the facilities would be due and payable. Various borrowing options are
available under the facilities including prime rate based advances and
banker's acceptance loans. The credit facilities are secured by a
$500 million fixed and floating charge debenture on the assets of the
Company. The borrowing base is subject to semi-annual review by the
banks.
5. ASSET RETIREMENT OBLIGATIONS
The total future asset retirement obligation was estimated based on the
Company's net ownership interest in all wells and facilities, the
estimated costs to abandon and reclaim the wells and facilities and the
estimated timing of the costs to be incurred in future periods. The total
undiscounted amount of the estimated cash flows required to settle the
asset retirement obligations is approximately $32.4 million which will be
incurred over the next 42 years with the majority of costs incurred
between 2008 and 2020. A credit adjusted risk-free rate of eight percent
was used to calculate the fair value of the asset retirement obligations.
The following reconciles the Company's asset retirement obligations:
Three Months Ended Year Ended
March 31 December 31
-------------------------------------------------------------------------
($ thousands) 2008 2007 2007
-------------------------------------------------------------------------
Balance, beginning of period 5,691 1,791 1,791
Liabilities incurred 840 848 1,819
Liabilities acquired - - 1,990
Liabilities settled (186) (256) (341)
Accretion expense 113 53 432
-------------------------------------------------------------------------
Balance, end of period 6,458 2,436 5,691
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. SHARE CAPITAL
Authorized
Unlimited number of voting Common Shares, without nominal or par value
701,300 Class B Performance Shares, without nominal or par value
Issued Three Months Ended March 31
2008 2007
($ thousands - except
share amounts) Number Amount Number Amount
-------------------------------------------------------------------------
Common Shares
Balance, beginning of
period 52,527,916 332,128 39,690,659 189,820
Issued on exercise
of Options 31,133 504 7,667 95
Issued on exercise
of Warrants 1,121,277 1,962 131,066 229
Issued on exercise
of Class B Performance
Shares 270,315 225 - -
Forfeited - - - -
Flow through share
renouncement - (6,516) - (6,093)
-------------------------------------------------------------------------
Balance, end of period 53,950,641 328,303 39,829,392 184,051
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Warrants
Balance, beginning of
period 4,765,028 1,727 6,143,539 2,223
Exercised (1,121,277) (404) (131,066) (47)
Forfeited - - - -
-------------------------------------------------------------------------
Balance, end of period 3,643,751 1,323 6,012,473 2,176
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Class B Performance Shares
Balance, beginning of
period 551,197 6 694,566 7
Exercised (295,812) (3) - -
Forfeited - - - -
-------------------------------------------------------------------------
Balance, end of period 255,385 3 694,566 7
-------------------------------------------------------------------------
Total share capital and
warrants, at end of period 329,629 186,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Warrants
One Common Share may be issued for each Common Share purchase Warrant
("Warrants") at a price of $1.39 per share. All Warrants are exercisable
and expire on July 2, 2008.
Class B Performance Shares
Each Class B Performance Share is convertible into a percentage of a
Common Share equal to the closing trading price of the Common Shares on
the TSX on the trading day prior to such conversion (the "Current Market
Price") less $1.39, if positive, divided by the Current Market Price.
Holders of Class B Performance Shares are not entitled to any voting
rights or to receive notice of or attend any meetings of the shareholders
of the Company, are not entitled to receive any dividends on the
performance shares and are not entitled upon any liquidation, dissolution
or winding-up of the Company to any return of capital other than the
payment of the redemption price for each performance share in preference
to the holders of Common Shares. All Class B Performance Shares are
exercisable and expire on July 2, 2008.
Earnings per share
Net earnings per Common Share figures have been calculated using the
treasury stock method. The following table reconciles the denominators
used for the basic and diluted earnings per Common Share calculations.
Three Months Ended
March 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Weighted Average Common Shares
Basic 52,931,179 39,767,593
Effect of warrants 3,810,217 5,422,605
Effect of Class B Performance Shares 462,351 630,056
-------------------------------------------------------------------------
Diluted 57,203,747 45,820,254
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Long term incentive compensation
Stock options
Under the terms of the stock option plan (the "Plan"), directors and
officers of ProEx and Progress employees in their capacity as service
providers, may be granted options to purchase Common Shares. The Plan
provides for the granting of up to 10 percent of the issued and
outstanding Common Shares of the Company. As at March 31, 2008, the
Company could grant up to 5,395,064 options. Options granted under the
Plan have a term of five years to expiry and vest over a three year
period. The exercise price of each option equals the market price of the
Company's Common Shares on the date of grant.
The following table sets forth a reconciliation of the Plan activity for
the three months ended March 31, 2008.
Weighted
average
Number exercise
of options price ($)
-------------------------------------------------------------------------
Balance, beginning of period 1,933,501 12.63
Granted 100,000 15.07
Forfeited (126,667) 13.95
Exercised (31,133) 11.71
-------------------------------------------------------------------------
Balance, end of period 1,875,701 12.69
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes stock options outstanding and exercisable
under the Plan at March 31, 2008.
Options outstanding Options exercisable
-------------------------------------------------------------------------
Weighted
average Weighted Number Weighted
Range of Number remaining average exercisable average
exercise outstanding contractual exercise at period exercise
price at period end life price end price
-------------------------------------------------------------------------
$5.60 to
$7.95 223,200 1.34 5.79 223,200 5.79
$9.08 to
$13.40 269,667 2.62 11.30 153,334 10.43
$14.50 to
$16.50 1,382,834 4.15 14.07 91,834 14.44
-------------------------------------------------------------------------
1,875,701 3.58 12.69 468,368 9.01
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company accounts for its stock based compensation plan using the fair
value method. Under this method, a compensation cost is charged over the
vesting period for stock options and Class B Performance Shares granted
to officers and directors of ProEx and Progress employees in their
capacity as service providers, with a corresponding increase to
contributed surplus.
The fair value of the options granted during the period was estimated on
the date of grant using the Black-Scholes option pricing model with
weighted average assumptions and resulting values for grants as follows:
Assumptions Three Months Ended
March 31
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Risk free interest rate (%) 3.66 3.96
Expected life (years) 3.00 3.00
Expected volatility (%) 38 43
Weighted average fair value of options granted ($) 5.94 5.93
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table reconciles the Company's contributed surplus:
Three Months Ended
March 31
-------------------------------------------------------------------------
($ thousands) 2008 2007
-------------------------------------------------------------------------
Balance, beginning of period 3,522 1,453
Stock based compensation expense
Stock options 588 272
Class B Performance shares - 12
Exercise of stock options and Class B Performance shares (349) (16)
-------------------------------------------------------------------------
Balance, end of period 3,761 1,721
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Long Term Incentive Compensation
Under the terms of Progress' long term incentive compensation plan
(the "LTI"), non-executive Progress employees in their capacity as
service providers, may be granted LTI awards to be paid in Common Shares
of the Company. ProEx agreed to contribute to the LTI to ensure that
service providers retain incentives related to the success of ProEx.
Awards granted under the LTI will vest on the second anniversary date of
the date of grant. ProEx has agreed to reimburse Progress for this
expense, therefore the total compensation expense has been included in
prepaid expenses and will be amortized through long term incentive
compensation expense equally over the two year vesting period. At
March 31, 2008, 182,069 Common Shares of ProEx have been granted to
Progress employees in their capacity as service providers at a total
compensation cost of $2.6 million.
Accumulated Other Comprehensive Income Three Months Ended
March 31
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($ thousands) 2008 2007
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Balance, beginning of period - -
Fair value of financial instruments upon initial
adoption of new accounting standard
(net of tax of $2.5 million) - 4,947
Fair value applicable to the period, amortized to
earnings (net of tax of $1.5 million) - (2,998)
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Balance, end of period - 1,949
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7. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital
Three Months Ended
March 31
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($ thousands) 2008 2007
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Accounts receivable (2,585) 4,869
Prepaid expenses and deposits 270 (817)
Accounts payables and accrued liabilities 6,554 3,999
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Change in non-cash working capital 4,239 8,051
Relating to:
Financing activities - (97)
Investing activities 3,719 4,564
Operating activities 520 3,584
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Interest and taxes paid
Three Months Ended
March 31
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($ thousands) 2008 2007
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Interest paid 2,025 460
Income and other taxes paid - -
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8. FINANCIAL INSTRUMENTS
Fair value of financial instruments
The Company's financial instruments recognized in the balance sheet
consist of cash and short-term investments, accounts receivable, accounts
payable and accrued liabilities, bank debt and derivative natural gas
contracts ("financial instruments"). The fair value of these instruments,
excluding the derivative natural gas contracts, approximate their
carrying amounts due to their short terms to maturity or the indexed rate
of interest on the bank debt. The fair value of the natural gas contracts
is recognized on the balance sheet as described below.
Financial Derivative Contracts
ProEx has entered into derivative natural gas financial instruments for
the purpose of protecting its cash flow from operations (before changes
in non-cash working capital) from the volatility of natural gas prices.
For the Quarter, the Company's natural gas price risk management program
had a net realized gain of nil (2007 - $3.5 million). The Company
recognizes the fair value of its commodity price contracts on the balance
sheet each reporting period with the change in fair value being
recognized as an unrealized gain or loss on the statement of earnings. At
March 31, 2008 the fair value was a liability of $9.8 million, resulting
in an unrealized loss for the Quarter of $9.8 million.
At January 1, 2007 ProEx adopted the new accounting standards regarding
the recognition, measurement, disclosure and presentation of financial
instruments. The fair value of the derivative natural gas financial
instruments on adoption was $7.4 million of which $4.9 million was
included in accumulated other comprehensive income and $2.5 million was
charged to the future income tax liability. The amount in accumulated
other comprehensive income was amortized through the unrealized gain or
loss on financial instruments on the statement of earnings and other
comprehensive income over the term of the contracts. For the period ended
March 31, 2007, $3.0 million, net of tax, was charged to other
comprehensive income with a corresponding unrealized gain on financial
instruments of $4.5 million and a charge to future income tax expense of
$1.5 million.
The following table reconciles the Company's unrealized gain (loss) on
financial contracts:
Three Months Ended
March 31
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($ thousands) 2008 2007
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Change in fair value of financial instruments (9,814) 8,517
Amortization of accumulated other comprehensive income - (4,483)
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Unrealized gain/(loss) on financial instruments (9,814) (4,034)
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Contracts outstanding in respect to financial instruments are as follows:
Pricing Strike Cost/
Natural Gas Volume Point Price ($gj) Premium Term
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Swap - call Cdn$7.02- Apr 01/08-
spread(1) 10,000 gj/d AECO Cdn$8.02 $0.37/gj Oct 31/08
Swap - call Cdn$7.12- Apr 01/08-
spread(1) 10,000 gj/d AECO Cdn$8.12 $0.37/gj Oct 31/08
Swap - call Cdn$7.22- Apr 01/08-
spread(1) 10,000 gj/d AECO Cdn$8.22 $0.37/gj Oct 31/08
Swap - call Cdn$7.83- Apr 01/08-
spread(1) 10,000 gj/d AECO Cdn$8.83 $0.38/gj Oct 31/08
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(1) Call spread strike prices indicate minimum floor and maximum ceiling
2008 AND 2007 SELECTED QUARTERLY INFORMATION
ProEx Energy Ltd.
FINANCIAL HIGHLIGHTS
Three months ended
($ thousands except
per share amounts) 2007 2008
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March 31 June 30 Sept. 30 Dec. 31 March 31
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Income Statement
Petroleum and natural
gas revenue 28,524 37,347 28,231 38,057 48,787
Funds generated from
operations 17,907 18,628 15,176 22,098 26,069
Per share - basic 0.45 0.39 0.31 0.42 0.49
Per share - diluted 0.39 0.35 0.28 0.39 0.46
Net earnings 4,066 7,564 716 7,725 1,873
Per share - basic 0.10 0.16 0.01 0.15 0.04
Per share - diluted 0.09 0.14 0.01 0.14 0.03
Balance Sheet
Capital investment
Land acquisitions and
retention 2,811 290 1,225 1,940 2,249
Geological and
geophysical 4,885 1,181 1,424 3,686 4,857
Drilling and
completions 34,660 3,387 26,409 45,483 38,167
Equipping and
facilities 7,888 1,733 4,934 8,232 19,487
Net property
acquisitions
(dispositions) 244 137,007 591 14,681 -
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50,488 143,598 34,583 74,022 64,760
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Total debt
Bank debt 59,772 95,149 53,777 96,881 129,398
Working capital
deficiency (surplus) 10,086 (6,738) 5,575 14,105 18,344
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69,858 88,411 59,352 110,986 147,742
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Shareholders' equity 225,865 331,090 380,727 389,350 387,230
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Shares outstanding at
end of period
- Common 39,829 48,548 52,362 52,528 53,951
Weighted average shares
outstanding for
the period
- Basic 39,768 47,940 49,318 52,121 52,931
- Diluted 45,820 53,960 54,575 56,776 57,204
Volume traded 13,855 16,492 12,650 10,157 20,540
Common share price ($)
- High 15.49 16.74 15.25 14.91 16.97
- Low 11.83 14.02 12.79 11.10 11.57
- Closing 15.15 15.00 14.14 11.83 16.50
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2008 AND 2007 SELECTED QUARTERLY INFORMATION
ProEx Energy Ltd.
OPERATIONAL HIGHLIGHTS
Three months ended
2007 2008
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March 31 June 30 Sept. 30 Dec. 31 March 31
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Production
Natural gas (mcf/d) 36,631 49,530 48,082 52,917 57,880
Crude oil (bbls/d) 384 414 438 590 506
Natural gas liquids
(bbls/d) 246 239 225 270 341
Total production
(boe/d) (6:1) 6,735 8,909 8,677 9,680 10,493
Pricing
Natural gas ($/mcf) 7.57 7.40 5.36 6.48 7.98
Crude oil ($/bbl) 64.46 68.32 77.64 83.77 92.41
Natural gas liquids
($/bbl) 61.24 66.29 66.98 78.11 81.34
Highlights ($/boe)
Petroleum and natural
gas revenues 47.06 46.07 35.37 42.73 51.09
Realized gain on
financial instruments 5.83 0.05 3.89 1.41 -
Royalties (12.47) (10.62) (7.95) (7.89) (11.13)
Operating expenses (4.80) (5.35) (5.09) (5.07) (5.58)
Transportation expenses (3.68) (4.48) (4.07) (4.06) (3.88)
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Operating netback 31.94 25.67 22.15 27.12 30.50
Interest income - 0.08 - 0.01 -
General and
administrative expenses (1.17) (0.95) (1.16) (0.54) (1.29)
Long term incentive
compensation expense
(cash component) - (0.23) (0.32) (0.34) (0.27)
Interest and financing
expenses (0.81) (1.60) (1.59) (1.38) (1.45)
Asset retirement
expenditures (0.42) 0.02 (0.06) (0.06) (0.19)
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Funds generated from
operations 29.54 22.99 19.02 24.81 27.30
Unrealized gain/(loss)
on financial
instruments (6.65) 6.43 (0.41) (0.95) (10.28)
Asset retirement
expenditures 0.42 (0.02) 0.06 0.06 0.19
Long term incentive
compensation expense (0.47) (0.38) (0.79) (1.00) (0.61)
Depletion, depreciation
and accretion expenses (13.35) (16.04) (16.33) (14.98) (15.12)
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Net earnings before
taxes 9.49 12.98 1.55 7.94 1.48
Future income taxes
recovery (expense) (2.78) (3.63) (0.65) (0.73) 0.48
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Net earnings 6.71 9.35 0.90 8.67 1.96
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Gross Drilling Results
(No. of wells)
Natural gas 19 - 15 30 26
Crude oil - - - - -
Dry 5 - - 1 -
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24 - 15 31 26
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Net Drilling Results
(No. of wells)
Natural gas 12.8 - 10.3 19.2 18.3
Crude oil - - - - -
Dry 2.4 - - 0.8 -
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15.2 - 10.3 20.0 18.3
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Success rate (%) 84 - 100 96 100
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ContactsAdditional information relating to the Company is filed on SEDAR and can be viewed at www.sedar.com. Information can also be obtained by contacting the Company at ProEx Energy Ltd.
1200
205 - 5th Avenue S.W.
Calgary
Alberta
Canada
T2P 2V7 or by e-mail at ir@proexenergy.com. Information is also accessible on the Company's web site at www.proexenergy.com
535.02 (5.57%)