Advantage Announces 1st Quarter Results 2008
(TSX: AVN.UN, NYSE: AAV) CALGARY, May 14 /PRNewswire-FirstCall/ -- Advantage Energy Income Fund ("Advantage" or the "Fund") is pleased to announce its unaudited operating and financial results for the first quarter ended March 31, 2008.
Three months Three months Revenue before royalties(1) $ 188,505 $ 135,502
Operating (1) includes realized derivative gains and losses MESSAGE TO UNITHOLDERS Record Funds from Operations and Payout Ratio: - A record level of funds from operations during the first quarter 2008 Highly Successful First Quarter 2008 Drilling Program Confirms Pool - The Q1 2008 drilling program was highly successful and surpassed Looking Forward - Improving Commodity Prices could generate Surplus - With recent improvements in the natural gas pricing outlook and
The following Management's Discussion and Analysis ("MD&A"), dated as of May 14, 2008, provides a detailed explanation of the financial and operating results of Advantage Energy Income Fund ("Advantage", the "Fund", "us", "we" or "our") for the three months ended March 31, 2008 and should be read in conjunction with the consolidated financial statements contained within this interim report and the audited financial statements and MD&A for the year ended December 31, 2007. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and all references are to Canadian dollars unless otherwise indicated. All per barrel of oil equivalent ("boe") amounts are stated at a conversion rate of six thousand cubic feet of natural gas being equal to one barrel of oil or liquids. Non-GAAP Measures The Fund discloses several financial measures in the MD&A that do not have any standardized meaning prescribed under GAAP. These financial measures include funds from operations, funds from operations per Trust Unit and cash netbacks. Management believes that these financial measures are useful supplemental information to analyze operating performance, leverage and provide an indication of the results generated by the Fund's principal business activities prior to the consideration of how those activities are financed or how the results are taxed. Investors should be cautioned that these measures should not be construed as an alternative to net income, cash provided by operating activities or other measures of financial performance as determined in accordance with GAAP. Advantage's method of calculating these measures may differ from other companies, and accordingly, they may not be comparable to similar measures used by other companies. Funds from operations, as presented, is based on cash provided by operating activities before expenditures on asset retirement and changes in non-cash working capital. Funds from operations per Trust Unit is based on the number of Trust Units outstanding at each distribution record date. Cash netbacks are dependent on the determination of funds from operations and include the primary cash revenues and expenses on a per boe basis that comprise funds from operations. Funds from operations reconciled to cash provided by operating activities is as follows: Three months ended The information in this report contains certain forward-looking statements. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", "would" and similar expressions. These statements involve substantial known and unknown risks and uncertainties, certain of which are beyond Advantage's control, including: the impact of general economic conditions; industry conditions; changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced; fluctuations in commodity prices and foreign exchange and interest rates; stock market volatility and market valuations; volatility in market prices for oil and natural gas; liabilities inherent in oil and natural gas operations; uncertainties associated with estimating oil and natural gas reserves; competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions; changes in income tax laws or changes in tax laws, royalty regimes and incentive programs relating to the oil and gas industry and income trusts; geological, technical, drilling and processing problems and other difficulties in producing petroleum reserves; obtaining required approvals of regulatory authorities and other risk factors set forth in Advantage's Annual Information Form which is available at www.advantageincome.com and Three months ended (1) Based on Trust Units outstanding at each distribution record date. Cash provided by operating activities increased 62%, funds from operations increased 44%, and funds from operations per Trust Unit increased 15% for the three months ended March 31, 2008, as compared to the same period of 2007. Cash provided by operating activities and funds from operations were impacted by significantly increased revenues due to higher commodity prices and additional production from the acquisition of Sound Energy Trust ("Sound"), which closed on September 5, 2007. The financial and operating results from the acquired Sound properties are included in the three month period ended March 31, 2008, but are not included in the corresponding 2007 period. Funds from operations per Trust Unit increased for the three months ended March 31, 2008 compared to 2007 mainly due to higher commodity prices relative to the increased weighted average Trust Units outstanding. When compared to the fourth quarter of 2007, funds from operations increased 17% due to stronger commodity prices, offset by a modest decrease in production. Natural gas prices, excluding hedging, increased 4% and crude oil and NGL prices, excluding hedging, increased 51% for the three months ended March 31, 2008 compared to the same period of 2007. Natural gas prices, excluding hedging, increased 27% and crude oil and NGL prices, excluding hedging, increased 17% for the three months ended March 31, 2008 as compared to the immediate preceding quarter. The primary factor that causes significant variability of Advantage's cash provided by operating activities, funds from operations, and net income is commodity prices. Refer to the section "Commodity Prices and Marketing" for a more detailed discussion of commodity prices and our price risk management. Distributions Three months ended (1) Based on Trust Units outstanding at each distribution record date. Total distributions in the first quarter of 2008 were approximately equal to those for the same period in 2007. Although the Fund had more Trust Units outstanding during the first quarter of 2008, there was a 20% reduction in the monthly distribution per Trust Unit. For the period ended March 31, 2008, the monthly distribution was $0.12 per Trust Unit, equating to $0.36 for the quarter while the monthly distribution for the quarter ended March 31, 2007 was $0.15 per Trust Unit equating to $0.45 for the quarter. In December 2007, we decreased the monthly distribution to $0.12 per Trust Unit due to the continued weak natural gas prices at that time. To mitigate the persisting risk associated with low commodity prices and the resulting negative impact on cash flows, the Fund implemented a hedging program with 54% of natural gas production and 38% of crude oil production, net of royalties, hedged for 2008 (see "Commodity Price Risk" section for a more detailed discussion of our price risk management). As commodity prices have strengthened in early 2008, the current environment in combination with our hedging program provides strong support for continuation of the current distribution level. Distributions from the Fund to Unitholders are entirely discretionary and are determined by Management and the Board of Directors. We closely monitor our distribution policy considering forecasted cash flows, optimal debt levels, capital spending activity, working capital requirements, and other potential cash expenditures. Distributions are announced monthly and are based on the cash available after retaining a portion to meet such spending requirements. The level of distributions are primarily determined by cash flows received from the production of oil and natural gas from existing Canadian resource properties and will be susceptible to the risks and uncertainties associated with the oil and natural gas industry generally. If the oil and natural gas reserves associated with the Canadian resource properties are not supplemented through additional development or the acquisition of additional oil and natural gas properties, our distributions will decline over time in a manner consistent with declining production from typical oil and natural gas reserves. Therefore, distributions are highly dependent upon our success in exploiting the current reserve base and acquiring additional reserves. Furthermore, monthly distributions we pay to Unitholders are highly dependent upon the prices received for such oil and natural gas production. Oil and natural gas prices can fluctuate widely on a month-to-month basis in response to a variety of factors that are beyond our control. Declines in oil or natural gas prices will have an adverse effect upon our operations, financial condition, reserves and ultimately on our ability to pay distributions to Unitholders. The Fund attempts to mitigate the volatility in commodity prices through our hedging program. It is our long-term objective to provide stable and sustainable distributions to the Unitholders, while continuing to grow the Fund. However, given that funds from operations can vary significantly from month-to-month due to these factors, the Fund may utilize various financing alternatives, including our credit facility, as an interim measure to maintain stable distributions. Revenue Three months ended
Production Three months ended The Fund's total daily production averaged 33,133 boe/d for the three months ended March 31, 2008, an increase of 14% from the same period of 2007. In particular, crude oil production has increased 30%, which has been significantly beneficial due to higher crude oil pricing relative to natural gas. The increase in production is primarily attributable to the Sound acquisition, which closed September 5, 2007. Total daily production for the quarter was 3% lower compared to the fourth quarter of 2007, mainly due to natural declines and extreme cold weather conditions that caused brief production outages in late January and February. For 2008, we expect production to average approximately 32,000 to 34,000 boe/d, weighted 62% to natural gas. Commodity Prices and Marketing Natural Gas Realized natural gas prices, excluding hedging, were slightly higher for the three months ended March 31, 2008 than the same period of 2007. However, our realized natural gas price, excluding hedging, increased 27% as compared to the fourth quarter of 2007. As North America progressed through the 2007/2008 winter season, inventory levels that had been historically high over the last couple of years quickly reduced down to a normal five-year average. In addition, reduced liquefied natural gas imports into the US and the slowdown in natural gas drilling in Western Canada has provided upward price support. These developments have been encouraging and we continue to believe that the long-term pricing fundamentals for natural gas remain strong. These fundamentals include (i) the continued strength of crude oil prices, which has eliminated the economic advantage of fuel switching away from natural gas, (ii) significantly less natural gas drilling in Canada projected for 2008, which will reduce productivity to offset declines, (iii) the increasing focus on resource style natural gas wells, which have high initial declines and require a higher threshold economic price than conventional gas drilling and (iv) the demand for natural gas for the Canadian oil sands projects. Crude Oil and NGLs Three months ended Realized crude oil and NGLs prices, excluding hedging, increased 51% for the three months ended March 31, 2008, as compared to the same period of 2007. Advantage's crude oil prices are based on the benchmark pricing of West Texas Intermediate Crude ("WTI") adjusted for quality, transportation costs and $US/ $Canadian exchange rates. Advantage's realized crude oil price has not increased to the same extent as WTI, owing to the Canadian dollar achieving parity with the US dollar, and the widening of Canadian crude oil differentials relative to WTI. The price of WTI fluctuates based on worldwide supply and demand fundamentals. There has been significant price volatility experienced over the last several years whereby WTI has reached historic high levels. Many developments have resulted in the current price levels, including significant continuing geopolitical issues, general market speculation and ongoing supply concerns. As a result, prices have continued to increase, with WTI recently surpassing US$120/bbl. It is worth noting that demand has remained resilient even as the United States, the world's largest crude oil consumer, experiences an economic slowdown. Currently there is no consensus on how long a US slowdown may last and how it may affect crude oil pricing. Regardless whether the current price level is sustainable or a short-term anomaly, we believe that the pricing fundamentals for crude oil remain strong with many factors affecting the continued strength including (i) supply management and supply restrictions by the OPEC cartel, (ii) ongoing civil unrest in Venezuela, Nigeria, and the Middle East, (iii) strong world wide demand, particularly in China, India and the United States and (iv) North American refinery capacity constraints. Commodity Price Risk The Fund's operational results and financial condition will be dependent on the prices received for oil and natural gas production. Oil and natural gas prices have fluctuated widely during recent years and are determined by economic and, in the case of oil prices, political factors. Supply and demand factors, including weather and general economic conditions as well as conditions in other oil and natural gas regions, impact prices. Any movement in oil and natural gas prices could have an effect on the Fund's financial condition and therefore on the distributions to holders of Advantage Trust Units. As current and future practice, Advantage has established a financial hedging strategy and may manage the risk associated with changes in commodity prices by entering into derivatives. Although these commodity price risk management activities could expose Advantage to losses or gains, entering derivative contracts helps us to stabilize cash flows and ensure that our capital expenditure program is substantially funded by such cash flows. To the extent that Advantage engages in risk management activities related to commodity prices, it will be subject to credit risk associated with counterparties with which it contracts. Credit risk is mitigated by entering into contracts with only stable, creditworthy parties and through, frequent reviews of exposures to individual entities. The Fund has fixed the commodity price on anticipated production as follows: Approximate For the three month period ended March 31, 2008, we recognized in income a realized derivative gain of $2.4 million (March 31, 2007 - $6.2 million) upon the regular monthly settlement of these financial contracts. As at March 31, 2008, the fair value of the derivatives outstanding and to be settled from April 2008 to March 2009 was a net liability of approximately $59.0 million (December 31, 2007 - $2.2 million net asset). For the three months ended March 31, 2008, $61.2 million (March 31, 2007 - $12.0 million) was recognized in income as an unrealized derivative loss due to changes in the fair values of these contracts since December 31, 2007. The valuation of the derivatives is the estimated fair value to settle the contracts as at March 31, 2008 and is based on pricing models, estimates, assumptions and market data available at that time. As such, the recognized amounts are not cash and the actual gains or losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices as compared to the valuation assumptions. The Fund does not apply hedge accounting and current accounting standards require changes in the fair value to be included in the consolidated statement of income and comprehensive income as an unrealized derivative gain or loss with a corresponding derivative asset and liability recorded on the balance sheet. These derivative contracts will settle from April 2008 to March 2009 corresponding to when Advantage will receive revenues from production at similarly high prices. Royalties Three months ended Advantage pays royalties to the owners of mineral rights from which we have leases. The Fund currently has mineral leases with provincial governments, individuals and other companies. Royalties have increased in total for 2008 due to the increase in revenue from higher production and commodity prices. Royalties as a percentage of revenue, excluding hedging, decreased compared to the first quarter of 2007. As royalty rates are generally dependent on prices and individual well production levels, our average royalty rates will vary as the nature of our properties change through ongoing development activities and acquisitions. We expect the royalty rate to be in the range of 17% to 19% for 2008 given the current environment. Operating Costs Three months ended Total operating costs increased 33% for the three months ended March 31, 2008 compared to the first quarter of 2007. The increase in total operating costs is due mainly to the Sound acquisition with total operating costs increasing only 2% as compared to the fourth quarter of 2007. Operating costs per boe increased 15% for the three months ended March 31, 2008 compared to the three months ended March 31, 2007, due to increased operating costs per boe as a result of the higher percentage of oil properties from the Sound acquisition. Operating costs per boe increased just 7% compared to the fourth quarter of 2007 due to the modestly lower production and one-time incremental costs that are frequently incurred during the winter season, especially related to winter only access areas. We will continue to be opportunistic and proactive in pursuing programs that will improve our operating cost structure. Consistent with this strategy, the Fund entered hedges for power costs, one of our more significant operating costs, of 3.0 MW at $54.00/MWh for 2008. We expect that operating costs per boe will be in the range of $12.50 to $13.30 for the 2008 year. General and Administrative Three months ended General and administrative ("G&A") expense has increased 53% for the three months ended March 31, 2008 compared to the three months ended March 31, 2007 due to higher staff levels from the Sound acquisition and a one-time payment to terminate an office lease arrangement. Total G&A was relatively comparable to the fourth quarter of 2007. Management Internalization Three months ended In 2006, the Fund and the Manager reached an agreement to internalize the pre-existing management contract arrangement. As part of the agreement, Advantage agreed to purchase all of the outstanding shares of the Manager pursuant to the terms of the Arrangement, thereby eliminating the management fee and performance incentive effective April 1, 2006. The Trust Unit consideration issued in exchange for the outstanding shares of the Manager was placed in escrow for a 3-year period and is being deferred and amortized into income as management internalization expense over the specific vesting periods during which employee services are provided. The management internalization is lower for the quarter since one third vested and was paid in June 2007 while the remaining two thirds continues to be amortized to income. Interest Three months ended Total interest expense increased 50% and 30% per boe for the three months ended March 31, 2008 as compared to the three months ended March 31, 2007. These increases primarily reflect the additional debt assumed by the fund from the Sound acquisition on September 5, 2007. Interest expense versus the fourth quarter of 2007 was reasonably comparable. We monitor the debt level to ensure an optimal mix of financing and cost of capital that will provide a maximum return to our Unitholders. Our current credit facilities have been a favorable financing alternative with an effective interest rate of only 5.6% for the three months ended March 31, 2008. The Fund's interest rates are primarily based on short term Bankers Acceptance rates plus a stamping fee. Interest and Accretion on Convertible Debentures Three months ended Interest and accretion on convertible debentures has increased compared to 2007 due to Advantage assuming Sound's 8.75% and 8.00% convertible debentures on the acquisition. The increased interest and accretion from the additional debentures has been slightly offset by the maturation of the 10% convertible debentures with a face value of $1.4 million on November 1, 2007. The interest and accretion per boe for the quarter is slightly higher as our convertible debentures outstanding have somewhat increased relative to our level of production. Depletion, Depreciation and Accretion Three months ended Depletion and depreciation of fixed assets is provided on the "unit-of-production" method based on total proved reserves. Accretion represents the increase in the asset retirement obligation liability each reporting period due to the passage of time. The depletion, depreciation and accretion ("DD&A") provision has increased 20% for the three months ended March 31, 2008 compared to 2007 due to considerable increases in daily production volumes, mainly from the Sound acquisition. On a per boe basis, DD&A has only increased 4% as increases in our fixed assets from prior acquisitions and development activities have resulted in proved reserve additions similar to prior experience. We evaluate the recoverability of our petroleum and natural gas assets each reporting period to ensure the carrying amount does not exceed the fair value. When the carrying amount is not assessed to be recoverable, an impairment loss is recognized. There has been no impairment of the Fund's petroleum and natural gas properties under Canadian GAAP since inception. Taxes Current taxes paid or payable for the quarter ended March 31, 2008 amounted to $0.7 million, compared to $0.3 million expensed for the same period of 2007. The higher current taxes are due to the increased Saskatchewan properties and activity within these properties from the Sound acquisition. Current taxes primarily represent Saskatchewan resource surcharge, which is based on the petroleum and natural gas revenues within the province of Saskatchewan. Future income taxes arise from differences between the accounting and tax bases of the assets and liabilities. For the three months ended March 31, 2008, the Fund recognized a future income tax reduction of $22.7 million compared to $16.6 million for the same period of 2007. As at March 31, 2008, we had a future income tax liability balance of $44.1 million, compared to $66.7 million at December 31, 2007. Under the Fund's current structure, payments are made between the operating company and the Fund transferring income tax obligations to Unitholders and as a result no cash income taxes would be paid by the operating company or the Fund prior to 2011. However, the Specified Investment Flow-Through Entity ("SIFT") tax legislation was enacted on June 22, 2007 altering the tax treatment by subjecting income trusts to a two-tier tax structure, similar to that of corporations, whereby the taxable portion of distributions paid by trusts will be subject to tax at the trust level and at the Unitholder level. The rules are effective for tax years beginning in 2011 for existing publicly-traded trusts. The effect of the new tax law was recognized in the future income tax expense and liability for the year ended December 31, 2007. Canadian generally accepted accounting principles require that a future income tax liability be recorded when the book value of assets exceeds the balance of tax pools. Net Income (Loss) Three months ended
Cash Netbacks Three months ended Three months ended Funds from operations of Advantage for the quarter ended March 31, 2008 increased to $94.6 million from $65.6 million in the first quarter of 2007, due primarily to additional production from the Sound acquisition and greatly improved commodity prices. The cash netback per boe for the three months ended March 31, 2008 increased 25% to $31.37 from $25.14. The higher cash netback per boe is primarily due to stronger crude oil and natural gas prices, offset partially by higher operating costs and interest on bank indebtedness and convertible debentures. Operating costs have steadily increased over the past year due to significantly higher field costs associated with supplies and services that have resulted from the high level of industry activity, an overall industry labour cost increase, and higher relative operating costs from the Sound acquisition. The higher interest expense has been due to the additional bank indebtedness and convertible debentures assumed on the Sound acquisition relative to the corresponding production. When compared to the fourth quarter of 2007, funds from operations per boe increased 23%, clearly demonstrating the significant improvement in commodity prices. Contractual Obligations and Commitments The Fund has contractual obligations in the normal course of operations including purchases of assets and services, operating agreements, transportation commitments, sales contracts and convertible debentures. These obligations are of a recurring and consistent nature and impact cash flow in an ongoing manner. The following table is a summary of the Fund's remaining contractual obligations and commitments. Advantage has no guarantees or off-balance sheet arrangements other than as disclosed. Payments due by period ($ millions) Total 2008 2009 2010 2011 2012 (2) Bank indebtedness of $563.5 million has been excluded from the Liquidity and Capital Resources The following table is a summary of the Fund's capitalization structure. ($000, except as otherwise indicated) March 31, 2008 Unitholders' Equity and Convertible Debentures Advantage has utilized a combination of Trust Units, convertible debentures and bank debt to finance acquisitions and development activities. As at March 31, 2008, the Fund had 139.3 million Trust Units outstanding. During the three months ended March 31, 2008, 1,006,673 Trust Units were issued as a result of the Premium Distribution(TM), Distribution Reinvestment and Optional Trust Unit Purchase Plan (the "Plan"), generating $9.6 million reinvested in the Fund and representing an approximate 20% participation rate (for three months ended March 31, 2007, 1,069,989 Trust Units were issued under the Plan, generating $12.4 million reinvested in the Fund). As at May 14, 2008, Advantage had 139.6 million Trust Units issued and outstanding. At both March 31, 2008 and December 31, 2007, the Fund had $224.6 million convertible debentures outstanding that were immediately convertible to 9.8 million Trust Units based on the applicable conversion prices. During the period ended March 31, 2008, $25,000 debentures were converted resulting in the issuance of 1,001 Trust Units. As at May 14, 2008, the convertible debentures outstanding have not changed from March 31, 2008. Advantage has a Trust Units Rights Incentive Plan for external directors as approved by the Unitholders of the Fund. A total of 500,000 Trust Units have been reserved for issuance under the plan with an aggregate of 400,000 rights granted since inception. The initial exercise price of rights granted under the plan may not be less than the current market price of the Trust Units as of the date of the grant and the maximum term of each right is not to exceed ten years with all rights vesting immediately upon grant. At the option of the rights holder, the exercise price of the rights can be adjusted downwards over time based upon distributions paid by the Fund to Unitholders. As at May 14, 2008, 150,000 Trust Unit Rights remain outstanding. Bank Indebtedness, Credit Facility and Other Obligations At March 31, 2008, Advantage had bank indebtedness outstanding of $563.5 million. The Fund has a $710 million credit facility agreement consisting of a $690 million extendible revolving loan facility and a $20 million operating loan facility. The current credit facilities are secured by a $1 billion floating charge demand debenture, a general security agreement and a subordination agreement from the Fund covering all assets and cash flows. Bank indebtedness increased $16.1 million since December 31, 2007 as a significant portion of our 2008 capital expenditure program was incurred during the first quarter. Advantage had a working capital deficiency of $35.4 million as at March 31, 2008. Our working capital includes items expected for normal operations such as trade receivables, prepaids, deposits, trade payables and accruals as well as the current portion of capital lease obligations and convertible debentures. Working capital varies primarily due to the timing of such items, the current level of business activity including our capital program, commodity price volatility, and seasonal fluctuations. Advantage has no unusual working capital requirements. We do not anticipate any problems in meeting future obligations as they become due given the strength of our funds from operations. It is also important to note that working capital is effectively integrated with Advantage's operating credit facility, which assists with the timing of cash flows as required. Advantage has capital lease obligations on various pieces of equipment used in its operations. The total amount of principal obligation outstanding at March 31, 2008 is $6.6 million, bearing interest at rates ranging from 5.5% to 6.7%, and is secured by the related equipment. The leases expire at dates ranging from December 2009 to August 2010. Capital Expenditures Three months ended
For the three month period ended March 31, 2008, the Fund spent a net $66.9 million and drilled a total of 38 net (53 gross) wells at a 98% success rate. Total capital spending in the quarter included $16.8 million at Martin Creek, $9.2 million at Glacier, $7.8 million at Nevis, $6.2 million at Sousa, $6.0 million at Willesden Green, $4.8 million at Brazeau, $3.2 million at Chip Lake, and $2.5 million at Southeast Saskatchewan. The following table summarizes the various funding requirements during the three months ended March 31, 2008 and 2007 and the sources of funding to meet those requirements. Sources and Uses of Funds Three months ended Quarterly Performance 2008 2007 Average prices Total revenues (before
Average prices Total revenues (before
Critical Accounting Estimates The preparation of financial statements in accordance with GAAP requires Management to make certain judgments and estimates. Changes in these judgments and estimates could have a material impact on the Fund's financial results and financial condition. Management relies on the estimate of reserves as prepared by the Fund's independent qualified reserves evaluator. The process of estimating reserves is critical to several accounting estimates. The process of estimating reserves is complex and requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing development and production activities becomes available and as economic conditions impact crude oil and natural gas prices, operating costs, royalty burden changes, and future development costs. Reserve estimates impact net income through depletion and depreciation of fixed assets, the provision for asset retirement costs and related accretion expense, and impairment calculations for fixed assets and goodwill. The reserve estimates are also used to assess the borrowing base for the Fund's credit facilities. Revision or changes in the reserve estimates can have either a positive or a negative impact on net income and the borrowing base of the Fund. Management's process of determining the provision for future income taxes, the provision for asset retirement obligation costs and related accretion expense, and the fair values assigned to any acquired company's assets and liabilities in a business combination is based on estimates. These estimates are significant and can include reserves, future production rates, future crude oil and natural gas prices, future costs, future interest rates, future tax rates and other relevant assumptions. Revisions or changes in any of these estimates can have either a positive or a negative impact on asset and liability values and net income. In accordance with GAAP, derivative assets and liabilities are recorded at their fair values at the reporting date, with unrealized gains and losses recognized directly into net income and comprehensive income in the same period. The fair value of derivatives outstanding is an estimate based on pricing models, estimates, assumptions and market data available at that time. As such, the recognized amounts are not cash and the actual gains or losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices as compared to the valuation assumptions. Controls and Procedures The Fund has established procedures and internal control systems to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Management of the Fund is committed to providing timely, accurate and balanced disclosure of all material information about the Fund. Disclosure controls and procedures are in place to ensure all ongoing reporting requirements are met and material information is disclosed on a timely basis. The Chief Executive Officer and Vice-President, Finance and Chief Financial Officer, individually, sign certifications that the financial statements, together with the other financial information included in the regular filings, fairly present in all material respects the financial condition, results of operations, and cash flows as of the dates and for the periods presented in the filings. The certifications further acknowledge that the filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the filings. During the three months ended March 31, 2008, there were no significant changes that would materially affect, or are reasonably likely to materially affect, the internal controls over financial reporting. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements and even those systems determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation. Further, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Outlook The Fund's 2008 Budget, as approved by the Board of Directors, retains a high degree of activity and focus on drilling in many of our key properties where a high level of success was realized through 2007. Capital has also been directed to delineate the Montney natural gas resource play at Glacier in Northwest Alberta and to accommodate facility expansions and enhanced recovery schemes as necessary. For 2008, we are forecasting production to be in the range of 32,000 to 34,000 boe/d. Advantage's 2008 capital expenditures budget is estimated to be approximately $125 to $145 million with approximately 143 gross (88 net) wells. A highly successful winter program has been completed at Martin Creek, Glacier, Nevis and Willesden Green and will be followed by a relatively even paced program in Q3 and Q4 of 2008 in several other properties. Capital spending is estimated to be split evenly between oil and gas activities. Per unit operating costs on an annual basis are expected to range between the $12.50 to $13.30/boe range. Advantage is continuing with several operating cost reduction initiatives throughout 2008 to help offset these increases and we have begun to realize some key achievements in this area. We expect industry servicing and maintenance costs to generally remain stable in 2008 with some potential for natural gas related costs to increase during the latter part of 2008 if natural gas pricing continues to improve. On October 25, 2007, the Alberta Provincial Government announced changes to royalties for conventional oil, natural gas and oil sands that will become effective January 1, 2009. Preliminary indications are that the changes will have a negligible impact on Advantage since we have a significant number of lower rate wells within our long life properties producing in Alberta. Advantage also has a significant Horseshoe Canyon coal bed methane drilling inventory that can be pursued which will also have a favorable royalty treatment due to lower rate per well characteristics. Our exposure in Northeast British Columbia and Saskatchewan also affords us further flexibility with mitigating the royalty impact in our capital program. We expect our royalty rates to range from 17% to 19% in 2008. Advantage's funds from operations in 2008 will continue to be impacted by the volatility of crude oil and natural gas prices and the $US/$Canadian exchange rate. Additional hedging has been completed for 2008 to i) stabilize cash flows and ii) ensure that the Fund's capital program is substantially funded out of cash flow. Approximately 54% of our natural gas production, net of royalties, is now hedged for the 2008 calendar year at a floor of $7.52 Canadian per mcf. Advantage has also hedged 38% of its 2008 crude oil production, net of royalties, at an average price of $94.07 Canadian per bbl. Advantage will continue to follow its strategy of acquiring properties that provide low risk development opportunities and enhance long-term cash flow. Advantage will also continue to focus on low cost production and reserve additions through low to medium risk development drilling opportunities that have arisen as a result of the acquisitions completed in prior years and from the significant inventory of drilling opportunities that has resulted from the Ketch and Sound acquisitions. Looking forward, Advantage's high quality assets combined with a greater than five year conventional drilling inventory, exposure to the Montney natural gas resource play and excellent tax pools provides many options for the Fund and we are committed to maximizing value generation for our Unitholders. Additional Information Additional information relating to Advantage can be found on SEDAR at www.sedar.com and the Fund's website at CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets March 31, December 31, see accompanying Notes to Consolidated Financial Statements Consolidated Statements of Income (Loss), Comprehensive Income (Loss) Three months Three months Consolidated Statements of Cash Flows Net income (loss) $ (24,122) $ 341 Units issued, net of costs (note 7) (42) 104,100 Expenditures on property and equipment (66,903) (49,696) see accompanying Notes to Consolidated Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2008 (unaudited) All tabular amounts in thousands except as otherwise indicated. The interim consolidated financial statements of Advantage Energy Income
(a) Capital disclosures On January 1, 2008, the Fund adopted CICA Handbook Section 1535, (b) Comparative figures Certain comparative figures have been reclassified to conform to the 2. Fixed Assets Accumulated 3. Capital Lease Obligations The Fund has capital leases on a variety of fixed assets. Future
The balance of debentures outstanding at March 31, 2008 and changes 9.00% 8.25% 8.75% 7.50% 6.50% 7.75% 8.00% Total 5. Bank Indebtedness Advantage has a credit facility agreement with a syndicate of 6. Asset Retirement Obligations A reconciliation of the asset retirement obligations is provided Three months (a) Unitholders' capital (i) Authorized Unlimited number of voting Trust Units (ii) Issued Number of Units Amount --------------------------------------------------------------------- 139,272,855 $ 2,045,618 During the three months ended March 31, 2008, 1,006,673 Trust Units (b) Contributed surplus Three months Number Price The calculation of basic and diluted net income (loss) per Trust Unit Three months Three months FIRST AND FINAL ADD TO FOLLOW
CONTACT: Investor Relations, Toll free: 1-866-393-0393; ADVANTAGE ENERGY
2008-05-14 23:12:42 0362125 PRNEWSWIRE
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