Attention Business/Financial Editors:
Penn West announces first quarter results
PENN WEST ENERGY TRUST (TSX - PWT.UN; NYSE - PWE) is pleased to
announce its results for the first quarter ended March 31, 2007
CALGARY, May 7 /CNW/ -
Operations
- Production averaged 128,447 boe per day in the first quarter of 2007
compared to 96,713 boe per day in the same period of 2006.
- Crude oil and NGL production averaged 71,716 barrels per day and
natural gas production averaged 340 mmcf per day in the first quarter
of 2007.
- Penn West invested $216 million on capital development that included
$17 million of net property acquisitions and drilled 61 net wells in
the first quarter with a success rate of 95 percent.
Financial
- Cash flow of $311 million ($1.31 per unit, basic) in the first
quarter of 2007 was 28 percent higher than cash flow of $243 million
($1.49 per unit, basic) realized in the first quarter of 2006, for
the most part due to higher production as a result of the Petrofund
merger reflected from July 1, 2006 forward.
- Net income decreased to $96 million ($0.41 per unit, basic) in the
first quarter of 2007 from $144 million ($0.88 per unit, basic) in
the first quarter of 2006, mainly due to higher depletion charges as
a result of the Petrofund merger, a reduction of unrealized gains on
commodity contracts and higher financing costs.
- For the third consecutive quarter, operating costs were held flat.
- In April 2007, as previously announced, Penn West added a
$250 million demand credit facility to increase its bank lines and
also priced the proposed private placement of US$475 million of
notes.
Distributions
- Penn West's Board of Directors recently resolved to keep our
distribution level at $0.34 per unit, per month based on current
forecasts of commodity prices, production and currently planned 2007
capital expenditures.
Distribution Tax Update
- On March 29, 2007, the Government of Canada introduced legislation
that includes the proposed changes to the taxation of income trusts.
Under the undue expansion guidance provided by the Government,
Penn West can increase its equity by approximately $10 billion over
the four-year transition period without prematurely triggering the
proposed tax. Penn West will remain active with various parties
pursuing a re-evaluation of the tax proposals. We will also continue
to review various tax efficient structural alternatives.
Long-term Project Updates
- During the first quarter of 2007, Penn West drilled 16 horizontal
wells and 15 stratigraphic test wells in its Peace River Oil Sands
project. We have begun to tie-in producing wells to recently
constructed production facilities to increase netbacks by reducing
trucking costs. On April 11, 2007, we closed the previously announced
acquisition of producing light oil and natural gas properties,
undeveloped lands, additional infrastructure and all weather roads in
the project area. The acquired infrastructure will be important for
the future development of the area.
- During the quarter, we continued to explore an integrated approach to
both enhancing light oil recovery rates from large, legacy oil pools
and developing conventional resources of heavy oil. A water
alternating CO(2) scheme at our Pembina pilot project was initiated
and we are continuing with detailed engineering work to expand the
pilot to utilize horizontal well technology. At Joffre, CO(2)
injection into two new patterns was initiated in the quarter as
planned.
HIGHLIGHTS
Three months ended March 31
($ millions, except per unit and ---------------------------------
production amounts) 2007 2006 % change
-------------------------------------------------------------------------
Financial
Gross revenues(1) $ 582.4 $ 433.9 34
Cash flow 311.3 243.2 28
Basic per unit 1.31 1.49 (12)
Diluted per unit 1.30 1.47 (12)
Net income 96.3 144.4 (33)
Basic per unit 0.41 0.88 (53)
Diluted per unit 0.40 0.87 (54)
Capital expenditures, net 215.9 158.0 37
Bank debt at period-end 1,402.2 610.4 130
Distributions paid $ 242.1 $ 156.9 54
Operations
Daily production
Natural gas (mmcf/d) 340.4 266.9 28
Light oil and NGL (bbls/d) 49,106 31,541 56
Conventional heavy oil (bbls/d) 22,610 20,685 9
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Total production (boe/d) 128,447 96,713 33
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Average sales price
Natural gas ($/mcf) $ 7.59 $ 8.12 (7)
Light oil and NGL ($/bbl) 59.49 62.09 (4)
Conventional heavy oil ($/bbl) $ 41.03 $ 30.76 33
Netback per boe
Sales price $ 50.08 $ 49.23 2
Risk management 0.29 0.62 (53)
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Net sales price 50.37 49.85 1
Royalties 9.33 9.36 -
Operating expenses 10.70 9.88 8
Transportation 0.53 0.66 (20)
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Netback $ 29.81 $ 29.95 -
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The above information includes measures not defined under generally
accepted accounting principles, including cash flow and netback. Cash
flow is cash flow from operating activities before changes in non-cash
working capital, and asset retirement expenditures. Please refer to the
calculation of cash flow table on the first page of the Management's
Discussion and Analysis for a reconciliation of cash flow from operating
activities to cash flow. Barrels of oil equivalent (boe) are based on six
mcf of natural gas equalling one barrel of oil (6:1). Netback is a per
unit of production measure of operating margin used in capital allocation
decisions.
(1) Gross revenues include realized gains and losses on commodity
contracts.
DRILLING PROGRAM
Three months ended March 31
--------------------------------------------
2007 2006
--------------------------------------------
Gross Net Gross Net
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Natural gas 49 21 68 59
Oil 53 37 41 34
Dry 4 3 10 10
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Total wells 106 61 119 103
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Success Rate 95% 90%
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UNDEVELOPED LANDS
As at March 31
---------------------------------
2007 2006 % change
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Gross acres (000s) 3,996 4,342 (8)
Net acres (000s) 3,577 4,140 (14)
Average working interest 90% 95% (5)
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FARM-OUT ACTIVITY
Three months ended March 31
---------------------------------
2007 2006
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Wells drilled on farm-out lands(1) 90 22
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(1) Wells drilled on Penn West lands, including re-completions and
re-entries, by independent operators pursuant to farm-out agreements.
CORE AREAS
Undeveloped land
Net wells drilled as at March 31, 2007
for the three months (thousands of
Core Area ended March 31, 2007 net acres)
-------------------------------------------------------------------------
Central 35 1,217
Plains 24 1,336
Northern 2 1,024
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61 3,577
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TRUST UNIT DATA
Three months ended March 31
---------------------------------
(millions of units) 2007 2006 % change
-------------------------------------------------------------------------
Weighted average
Basic 237.4 163.5 45
Diluted 239.4 165.8 44
Outstanding as at March 31
Basic 238.0 163.8 45
Basic plus trust unit rights 252.7 173.4 46
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LETTER TO OUR UNITHOLDERS
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During the first quarter of 2007, Penn West Energy Trust executed a first
quarter capital program of $216 million that included several minor asset
acquisitions and dispositions and worked diligently to optimize and maximize
production from our conventional assets. We continue our focus on containing
our operating costs in an inflationary environment and advancing toward the
commercialization of our long-term projects including the Peace River Oil
Sands Project and enhanced light oil recovery from some of the largest legacy
light oil pools in North America. In April 2007, we initiated measures to
diversify our capital structure.
Our production in the first quarter of 2007 was 128,447 barrels of oil
equivalent per day compared to 129,915 in the fourth quarter of 2006, and
96,713 in the first quarter of 2006. The production, revenue and cash flow
increases compared to the first quarter of 2006 were due in part to the
Petrofund merger we closed on June 30, 2006. Compared to the fourth quarter of
2006, our first quarter 2007 production was reduced by downtime for
optimization activities and facility modifications at our Wildboy and Firebird
natural gas properties in Northern Alberta. Cash flow of $311 million
($1.31�per unit basic) was higher than that of the fourth quarter of 2006 due
to higher commodity prices driven by an extremely cold February, which reduced
natural gas inventory levels leading to a recovery in natural gas prices. Our
initiatives aimed at containing the industry-wide operating cost escalation of
the past several years once again produced results this quarter. For the third
straight quarter, we have kept our operating costs essentially flat. This in
part enabled Penn West to realize a six percent higher netback of $29.81 per
barrel of oil equivalent compared to the fourth quarter of 2006. With current
forward strip prices, we forecast our 2007 payout ratio will fall within our
targeted range of 60% to 70% at the current distribution rate of $0.34 per
unit, per month. We also spent $10 million on our environmental programs in
the first quarter and maintained our commitment to health and safety and
community investment programs.
At the Peace River Oil Sands Project, we drilled 16 new horizontal wells
and 15 stratigraphic test wells in the first quarter of 2007 to continue the
delineation of our 300,000 net acres of oil sands leases in the area.
Utilizing the results of our recent stratigraphic test wells, we updated our
resources estimate in the area and confirmed our estimated heavy oil resources
in place in the area of 6.8 billion barrels(1) on 240 of our 475 sections of
land. In April 2007, we also closed the previously announced $329 million
asset acquisition that included 3,000 barrels of light oil per day and
6�million cubic feet per day of natural gas production situated in our project
area. The acquisition also included 190,000 net acres of undeveloped oil and
natural gas leases and added important infrastructure including a sales line
connected 10,000 barrel per day oil processing facility, a natural gas plant
and compression facility with a design capacity of 33 million cubic feet per
day and associated all-weather roads.
We continue to explore an integrated approach to both enhancing light oil
recovery rates from large legacy oil fields and developing non-conventional
resources of heavy oil. Our aim is to secure a source of CO(2) that can be
pipelined to the Pembina, South Swan Hills or other large oil fields to both
increase oil recovery factors and permanently sequester greenhouse gases. At
the same time, we aim to secure both a market for our future production from
the Peace River Oil Sands and the future pipeline capacity to deliver it.
During the first quarter of 2007, we commenced a water alternating CO(2)
scheme at our Pembina CO(2) pilot project and our on going monitoring program
will use a series of 3-D seismic shoots to evaluate the results. By the end of
2007, we plan to apply horizontal well technology at the pilot project. At
Joffre, CO(2) injection into two new patterns commenced as planned in the
first quarter of 2007.
We recently took actions to diversify our capital structure and increase
our debt capacity. We added a $250 million unsecured, demand facility with the
same pricing levels as our $1.9 billion syndicated, unsecured credit facility.
As previously announced, we also priced the proposed private placement of
notes totaling US$475 million.
The proposed income trust distribution tax was included in the Ways and
Means motion to incorporate aspects of the Federal Budget tabled by the
Government of Canada on March 19, 2007. Legislation that includes the proposed
tax received First Reading in the House of Commons on March 29, 2007. Penn
West continues to analyze all potential future strategies and organizational
structures to enhance unitholder value in the future. We continue to actively
support the Coalition of Canadian Energy Trusts as it continues to work toward
better awareness of the important role that energy trusts play in supporting
the continued success of the energy industry in Canada. Additionally, the
Canadian Association of Income Trust Investors has been set up as a grassroots
organization of investors impacted by the Federal Government's tax proposal.
Interested investors can obtain membership information by visiting their
website at www.caiti.info.
On behalf of the board and staff of Penn West Energy Trust, I also wish
to thank our unitholders for their continuing support of our initiatives to
unlock the value in our conventional assets and long-term projects.
On behalf of the Board of Directors,
(signed)
William E. Andrew
President and CEO
Calgary, Alberta
May 4, 2007
(1) Represents the mid case. Using the definitions set out in the
Canadian Oil and Gas Handbook, these resources are considered
"Discovered Resources". As Penn West is in the early stages of the
project, these resources have not been classified into more specific
categories. There is no certainty that a significant portion of these
resources will be recovered or that a significant portion of the
resources will be economically or technically feasible to produce in
the future. Discovered resources are those quantities of oil and gas
estimated on a given date to be remaining in, plus those quantities
already produced from, known accumulations. Discovered resources
consist of economic and uneconomic resources with the estimated
future recoverable portion classified as reserves or contingent
resources.
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the three months ended March 31, 2007
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This management's discussion and analysis ("MD&A") of financial
conditions and results of operations should be read in conjunction with the
unaudited interim consolidated financial statements of Penn West Energy Trust
("Penn West", "the Trust", "we" or "our") for the three months ended March 31,
2007 included in this press release, and the audited consolidated financial
statements and MD&A for the year ended December 31, 2006. The date of this
MD&A is May 4, 2007.
All dollar amounts contained in this MD&A are expressed in millions of
Canadian dollars unless noted otherwise.
Please refer to our disclaimer on forward-looking statements at the end
of this MD&A. The calculations of barrels of oil equivalent ("boe") are based
on a conversion ratio of six thousand cubic feet of natural gas to one barrel
of crude oil. This could be misleading if used in isolation as it is based on
an energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.
Measures including cash flow, cash flow per unit-basic, cash flow per
unit-diluted, netbacks, operating netbacks and distributable cash from
operations included in this MD&A are not defined in generally accepted
accounting principles ("GAAP") and do not have a standardized meaning
prescribed by GAAP; accordingly, they may not be comparable to similar
measures provided by other issuers. Management utilizes cash flow, netbacks
and operating netbacks to assess financial performance, to allocate its
capital among alternative projects and to assess our capacity to fund
distributions and future capital programs. Distributable cash from operations
is utilized to assess the appropriateness of distribution levels.
Reconciliations of non-GAAP measures to their nearest measure prescribed by
GAAP are provided below.
Calculation of Cash Flow
Three months ended March 31
-----------------------------
($ millions, except per unit amounts) 2007 2006
-------------------------------------------------------------------------
Cash flow from operating activities $ 296.8 $ 207.7
Increase in non-cash working capital 4.8 28.6
Asset retirement expenditures 9.7 6.9
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Cash flow $ 311.3 $ 243.2
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Basic per unit $ 1.31 $ 1.49
Diluted per unit $ 1.30 $ 1.47
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Quarterly Financial Summary
($ millions, except per unit and production amounts) (unaudited)
Penn West Energy Trust
----------------------------------------------
Mar. 31 Dec. 31 Sept. 30 June 30
Three months ended 2007 2006 2006 2006
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Gross revenues(1) $ 582.4 $ 578.5 $ 636.0 $ 452.5
Cash flow 311.3 303.3 365.6 264.7
Basic per unit 1.31 1.23 1.55 1.59
Diluted per unit 1.30 1.22 1.53 1.56
Net income 96.3 122.9 177.8 220.5
Basic per unit 0.41 0.44 0.66 1.34
Diluted per unit 0.40 0.44 0.65 1.31
Distributions declared 242.4 241.5 240.7 167.6
Per unit 1.02 1.02 1.02 1.02
Production
Liquids(2) (bbls/d) 71,716 70,819 69,215 48,599
Natural gas (mmcf/d) 340.4 354.6 359.1 267.9
Total (boe/d) 128,447 129,915 129,059 93,242
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Penn West Energy Trust
----------------------------------------------
Mar. 31 Dec. 31 Sept. 30 June 30
Three months ended 2006 2005 2005 2005
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Gross revenues(1) $ 433.9 $ 554.5 $ 535.0 $ 424.2
Cash flow 243.2 332.6 334.9 257.0
Basic per unit 1.49 2.03 2.06 1.58
Diluted per unit 1.47 2.03 2.04 1.49
Net income 144.4 241.1 209.5 59.7
Basic per unit 0.88 1.48 1.29 0.37
Diluted per unit 0.87 1.46 1.27 0.34
Distributions declared 162.0 151.8 127.3 42.4
Per unit 0.99 0.93 0.78 0.26
Production
Liquids(2) (bbls/d) 52,226 51,953 51,634 50,633
Natural gas (mmcf/d) 266.9 277.5 289.0 295.7
Total (boe/d) 96,713 98,205 99,802 99,910
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(1) Gross revenues include realized gains and losses on commodity
contracts.
(2) Includes crude oil and natural gas liquids.
Proposed Tax on Income Trusts
On March 29, 2007, legislation that includes proposed changes to the
taxation of publicly traded income trusts received First Reading in the House
of Commons. Commencing in 2011, taxes at estimated corporate tax rates were
proposed on distributions that do not represent a return on capital by
disallowing these distributions as a deduction in the calculation of the
trust's taxable income. Guidance for "undue expansion" previously announced
remains administrative in nature; however under the guidance we can increase
our equity by approximately $10 billion without prematurely triggering the
proposed tax. Hearings of the House of Commons' Finance Committee were held
that resulted in recommendations of a longer transitional period and a lower
rate of tax. The hearings, however, did not appear to change the tax proposals
to date. The tax proposals, when and if enacted into law, could have some or
all of the following impacts, and Penn West could take some or all of the
following actions:
- If structural or other similar changes are not made, the after-tax
distribution yield in 2011 to taxable Canadian investors will remain
approximately the same, however, the distribution yield in 2011 to
tax-deferred Canadian investors (RRSPs, RRIFs, pension plans, etc.)
and foreign investors would fall by an estimated 31.5 percent and
26.5 percent, respectively;
- A portion of Penn West's cash flow could be allocated to the payment
of cash distribution taxes, or other forms of tax, and would not be
available for distribution or re-investment;
- It could be determined that it is more economic for Penn West to
change to a corporate structure to facilitate investing a higher
proportion or all of its cash flow in exploration and development
projects. Such a conversion and change to capital programs could
result in a significant reduction to or elimination of distributions
and/or dividends;
- It could be determined that it is more economic to remain in the
trust structure and pay corporate income taxes rather than the
proposed distribution tax and pay all or a portion of our
distributions on a return of capital basis at a potentially
significantly lower payout ratio;
- Other strategic alternatives could be determined to be more economic
than any of the above; and/or
- Income trusts would likely then be considered taxable entities for
future income tax accounting purposes. The recording of an additional
future income tax liability would likely be required and the change
in the future income tax liability would likely be material.
The table below, provided by the Government of Canada in a backgrounder
accompanying its October 31, 2006 announcement, shows a simplified comparison
of the effects of the proposed changes to investor tax rates in 2011;
Current System Proposed System
----------------------------------------------
Income Income
portion portion
of trust Large of trust Large
distri- corporation distri- corporation
Investor butions (dividend) butions (dividend)
-------------------------------------------------------------------------
Taxable Canadian
individuals(1) 46% 46% 45.5% 45.5%
Canadian tax-exempt
investors 0% 32% 31.5% 31.5%
Taxable U.S. investors(2) 15% 42% 41.5% 41.5%
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(1) All rates in the table are as of 2011, and include both entity- and
investor-level tax (as applicable). Rates for "taxable Canadian
individuals" assume that top personal income tax rates apply and that
provincial governments increase their dividend tax credit for
dividends of large corporations.
(2) Canadian taxes only. U.S. tax will also apply in most cases, net of
any foreign tax credits.
Our Board of Directors and management team are reviewing the impact, if
any, of the proposals on our business strategy.
RESULTS OF OPERATIONS
Production
Three months ended March 31
----------------------------------
Daily production 2007 2006 % change
-------------------------------------------------------------------------
Natural gas (mmcf/d) 340.4 266.9 28
Light oil and NGL (bbls/d) 49,106 31,541 56
Conventional heavy oil (bbls/d) 22,610 20,685 9
-------------------------------------------------------------------------
Total production (boe/d)(1) 128,447 96,713 33
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(1) Barrels of oil equivalent (boe) are based on six mcf of natural gas
being equal to one barrel of oil (6:1)
The increase in production was generally due to the Petrofund merger
closing at the end of June 2006, and to our development and optimization
programs. Production in the first quarter of 2007 was slightly below the
129,915 boe/d produced in the fourth quarter of 2006. Cold weather in February
and the downtime at our Wildboy and Firebird natural gas properties for
optimization activities and facility modifications contributed to the
decrease.
We strive to maintain an approximately balanced portfolio of liquids and
natural gas production provided it is economic to do so. We believe a balance
by product helps to reduce exposure to price volatility that can affect a
single commodity. In the first quarter of 2007, crude oil and NGL production
averaged 71,716 barrels per day (56 percent of production) and natural gas
production averaged 340.4 mmcf per day (44 percent of production).
We invested $215.9 million on capital expenditures and drilled 61 net
wells in the first quarter of 2007. Drilling activity was focused in the
Central and Plains areas.
Commodity Markets
Natural Gas
Record cold U.S. weather in February 2007 resulted in high storage
withdrawals that reduced storage levels below the prior year. This storage
level re-balancing, combined with lower drilling activity that lowered field
receipts and increased gas consumption by the Alberta oil sands, resulted in a
continuing recovery of natural gas prices in the first quarter of 2007. Spot
natural gas prices at AECO in the first quarter of 2007 increased by $1.10 per
mcf or 17 percent from the prior quarter to average $7.46 per mcf. Spot
natural gas prices were $1.81 per mcf or 20 percent lower than the first
quarter of 2006.
Crude Oil
Due to concerns related to crude oil inventory levels resulting from mild
winter weather in January 2007, crude oil prices were relatively weak early in
the first quarter of 2007. After January 2007, crude oil prices strengthened
due to strong demand partly driven by record cold U.S. weather in February
2007, geopolitical tension in Iran and declining OPEC production. The
benchmark West Texas Intermediate price averaged US$58.16 per barrel in the
first quarter of 2007, which was a decrease of US$2.05 per barrel from the
prior quarter, however the forward strip prices are currently well above the
first quarter average price. The Edmonton par price for light, sweet crude oil
strengthened relative to WTI in the quarter as the Canadian dollar weakened
relative to the US dollar, although it has since more than recovered. Heavy
oil differentials continued to narrow relative to WTI, with Bow River
differentials averaging US$15.26 per barrel in the first quarter of 2007
compared to US$20.46 per barrel in the previous quarter.
Average Sales Prices Received
Three months ended March 31
----------------------------------
2007 2006 % change
-------------------------------------------------------------------------
Natural gas ($/mcf) $ 7.59 $ 8.12 (7)
Risk management ($/mcf) 0.06 0.22 (73)
-------------------------------------------------------------------------
Natural gas net ($/mcf) 7.65 8.34 (8)
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Light oil and liquids ($/bbl) 59.49 62.09 (4)
Risk management ($/bbl) 0.36 - -
-------------------------------------------------------------------------
Light oil and liquids net ($/bbl) 59.85 62.09 (4)
-------------------------------------------------------------------------
Conventional heavy oil ($/bbl) 41.03 30.76 33
-------------------------------------------------------------------------
Weighted average ($/boe) 50.08 49.23 2
Risk management ($/boe) 0.29 0.62 (53)
-------------------------------------------------------------------------
Weighted average net ($/boe) $ 50.37 $ 49.85 1
-------------------------------------------------------------------------
Operating Netbacks
Three months ended March 31
----------------------------------
2007 2006 % change
-------------------------------------------------------------------------
Natural gas
Production (mmcf/day) 340.4 266.9 28
Operating netback ($/mcf):
Sales price $ 7.59 $ 8.12 (7)
Risk management(2) 0.06 0.22 (73)
Royalties 1.65 1.78 (7)
Operating costs 1.04 0.94 11
Transportation 0.20 0.23 (13)
-------------------------------------------------------------------------
Netback $ 4.76 $ 5.39 (12)
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Light oil and NGL
Production (bbls/day) 49,106 31,541 56
Operating netback ($/bbl):
Sales price $ 59.49 $ 62.09 (4)
Risk management(2) 0.36 - -
Royalties 10.42 10.43 -
Operating costs 15.14 15.41 (2)
-------------------------------------------------------------------------
Netback $ 34.29 $ 36.25 (5)
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Conventional heavy oil
Production (bbls/day) 22,610 20,685 9
Operating netback ($/bbl):
Sales price $ 41.03 $ 30.76 33
Royalties 5.59 4.85 15
Operating costs 12.09 10.55 22
Transportation 0.08 0.15 (47)
-------------------------------------------------------------------------
Netback $ 23.27 $ 15.21 53
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Total liquids
Production (bbls/day) 71,716 52,226 37
Operating netback ($/bbl):
Sales price $ 53.67 $ 49.68 8
Risk management(2) 0.25 - -
Royalties 8.90 8.22 8
Operating costs 14.18 13.48 5
Transportation 0.02 0.06 (67)
-------------------------------------------------------------------------
Netback $ 30.82 $ 27.92 10
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Combined totals
Production (boe/day)(1) 128,447 96,713 33
Operating netback ($/boe):
Sales price $ 50.08 $ 49.23 2
Risk management(2) 0.29 0.62 (53)
Royalties 9.33 9.36 -
Operating costs 10.70 9.88 8
Transportation 0.53 0.66 (20)
-------------------------------------------------------------------------
Netback $ 29.81 $ 29.95 -
-------------------------------------------------------------------------
(1) Boe or barrels of oil equivalent are based on six mcf of natural gas
being equal to one barrel of oil (6:1).
(2) Realized component of risk management.
Production Revenues
Revenues from the sale of crude oil, NGL and natural gas consisted of the
following:
Three months ended March 31
----------------------------------
($ millions) 2007 2006 % change
-------------------------------------------------------------------------
Natural gas $ 234.4 $ 200.4 17
Light oil and NGL 264.5 176.2 50
Conventional heavy oil 83.5 57.3 46
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Gross revenues(1) $ 582.4 $ 433.9 34
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(1) Gross revenues include realized gains and losses on commodity
contracts.
The increase in revenue resulted from higher production volumes due to
the Petrofund merger and 33 percent higher conventional heavy oil prices,
partially offset by lower natural gas prices.
Increases (Decreases) in Production Revenues
($ millions)
-------------------------------------------------------------------------
Gross revenues - January 1 - March 31, 2006 $ 433.9
Increase in light oil and NGL production 98.2
Decrease in light oil and NGL prices
(including realized risk management) (9.9)
Increase in conventional heavy oil production 5.3
Increase in conventional heavy oil prices 20.9
Increase in natural gas production 55.1
Decrease in natural gas prices
(including realized risk management) (21.1)
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Gross revenues - January 1 - March 31, 2007 $ 582.4
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Royalties
Three months ended March 31
----------------------------------
2007 2006 % change
-------------------------------------------------------------------------
Royalties ($ millions) $ 107.9 $ 81.5 32
Average royalty rate (%) 19 19 -
$/boe $ 9.33 $ 9.36 -
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Expenses
Three months ended March 31
----------------------------------
($ millions) 2007 2006 % change
-------------------------------------------------------------------------
Operating $ 123.7 $ 85.9 44
Transportation 6.1 5.8 5
Financing 16.2 6.4 153
Equity-based compensation $ 4.8 $ 3.0 60
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Three months ended March 31
----------------------------------
($/boe) 2007 2006 % change
-------------------------------------------------------------------------
Operating $ 10.70 $ 9.88 8
Transportation 0.53 0.66 (20)
Financing 1.40 0.74 89
Equity-based compensation $ 0.41 $ 0.34 21
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Operating
With the continued strong draw of skilled labour and services by the
large oil sands projects in Northern Alberta, oil and natural gas producers in
the Western Canada Sedimentary Basin continued to experience inflationary
pressure on operating costs in the first quarter of 2007. A higher proportion
of liquids production, combined with base production declines and
interruptions, also contributed to higher per unit operating costs in 2007
than the comparative first quarter 2006 period. The addition of the Petrofund
assets effective July 1, 2006, with higher operating costs due to a higher
proportion of light oil than the Penn West properties, also contributed to the
increase.
During the latter part of 2006, as natural gas prices fell from close to
record highs, some significant oil and natural gas companies cut their capital
programs, helping to reduce demand for oilfield services, particularly
drilling rigs. This, combined with internal Penn West initiatives specifically
targeted at reducing operating costs, resulted in the operating cost per
barrel of oil equivalent in the first quarter of 2007 being approximately
equal to the third and fourth quarters of 2006.
A realized gain of $2.0 million (2006 - $1.6 million) on our electricity
contracts has been included in the operating costs.
Financing
The 2007 increase in interest expense was due to both an increase in the
average outstanding debt balance and increases in short-term interest rates
over 2006. We have historically used short-term money market instruments to
realize lower interest rates at the shorter end of the yield curve. The short
end of the yield curve has increased due to rate increases by the central
banks in Canada and the United States.
Interest and other financing costs for the quarter ended March 31, 2007
increased to $16.2 million from $6.4 million in the same period in 2006. The
increased average loan balance was principally due to the $610 million of debt
assumed with the Petrofund merger on June 30, 2006.
Equity-Based Compensation
Penn West has a trust unit rights incentive plan. Compensation expense
related to this plan is based on the fair value of trust unit rights issued,
determined using the Binomial Lattice option-pricing model. The fair value of
rights issued is expensed on a straight-line basis over the expected life of
the rights.
The equity-based compensation expense was $4.8 million for the
three�months ended March 31, 2007, of which $1.3 million was charged to
operating expense and $3.5 million was charged to general and administrative
expense (2006 - $3.0 million, $0.8 million and $2.2 million respectively).
Compensation expense subsequent to the trust conversion is based on the fair
value of rights issued and is amortized over the remaining vesting periods on
a straight-line basis.
General and Administrative Expenses
Three months ended March 31
----------------------------------
($ millions, except per boe amounts) 2007 2006 % change
-------------------------------------------------------------------------
Gross $ 21.0 $ 12.1 74
Per boe 1.82 1.39 31
Net 13.8 7.0 97
Per boe $ 1.19 $ 0.81 47
-------------------------------------------------------------------------
Increases in total and per boe general and administrative costs in 2007
were due to higher staff levels following the Petrofund merger and higher
compensation costs. The cost of hiring, compensating and retaining employees
and consultants, including the recruitment of professional staff dedicated to
optimizing and controlling field operating costs, is continuing to increase
due to strong demand for staff, particularly those with specialized training
and experience. Increasing costs related to regulatory compliance also
contributed to the increase.
Depletion, Depreciation and Accretion ("DD&A")
Three months ended March 31
----------------------------------
($ millions, except per boe amounts) 2007 2006 % change
-------------------------------------------------------------------------
Depletion of oil and natural gas
assets(1) $ 209.0 $ 106.8 96
Accretion of asset retirement
obligation(2) 5.9 5.7 4
-------------------------------------------------------------------------
Total DD&A 214.9 112.5 91
-------------------------------------------------------------------------
DD&A expense per boe $ 18.59 $ 12.92 44
-------------------------------------------------------------------------
(1) Includes depletion of the capitalized portion of the asset retirement
obligation.
(2) Represents the accretion expense on the asset retirement obligation
during the period.
Higher DD&A expense in 2007 versus 2006 was due to the Petrofund merger
in 2006. The merger was accounted for as a purchase with the purchase price
allocated to the net assets acquired. The purchase price allocation to oil and
natural gas assets significantly increased our consolidated depletion base per
unit and hence our depletion rate.
Taxes
Three months ended March 31
----------------------------------
($ millions) 2007 2006 % change
-------------------------------------------------------------------------
Capital $ 3.4 $ 4.1 (17)
Future income recovery (44.4) (9.9) 348
-------------------------------------------------------------------------
$ (41.0) $ (5.8) 607
-------------------------------------------------------------------------
The increase in the current quarter future income tax recovery compared
to the first quarter of 2006 was due to lower pre-tax income and higher income
allocations to the Trust due to higher distributions.
Under our current structure, the operating entities make interest and
royalty payments to the Trust, which transfers taxable income to the Trust to
eliminate income subject to corporate and other income taxes in the operating
entities. Under the terms of its trust indenture, the Trust is required to
distribute amounts equal to at least its taxable income. In the event that the
Trust has undistributed taxable income in a taxation year, an additional
special taxable distribution, subject to certain withholding taxes, would be
required by the terms of its trust indenture.
If the proposed distribution tax is enacted, and if Penn West's structure
is not changed, the trust will become a taxable entity and, in 2011 and
subsequent years, future income tax recoveries will no longer be recorded for
income transfers to the trust.
Cash Flow and Net Income
Three months ended March 31
---------------------------------------
2007 2006 % change
-------------------------------------------------------------------------
Cash flow(1) ($ millions) $ 311.3 $ 243.2 28
Basic per unit 1.31 1.49 (12)
Diluted per unit 1.30 1.47 (12)
Net income ($ millions) 96.3 144.4 (33)
Basic per unit 0.41 0.88 (53)
Diluted per unit $ 0.40 $ 0.87 (54)
-------------------------------------------------------------------------
(1) Cash flow is a non-GAAP measure. See "Calculation of Cash Flow".
Cash flow realized in 2007 to date increased from the comparable 2006
period due to higher production volumes resulting from the Petrofund merger
and higher conventional heavy oil prices offset by higher operating and
financing costs.
Net income decreased from 2006 levels due to higher DD&A following the
Petrofund merger and the reduction of unrealized gains on commodity contracts
offset by higher future income tax recoveries.
Capital Expenditures
Three months ended March 31
-----------------------------
($ millions) 2007 2006
-------------------------------------------------------------------------
Property acquisitions (dispositions), net $ 17.1 $ (2.1)
Land acquisition and retention 2.9 13.4
Drilling and completions 121.5 96.9
Facilities and well equipping 67.4 47.0
Geological and geophysical 3.7 1.3
CO(2) pilot costs 1.5 1.1
Administrative 1.8 0.4
-------------------------------------------------------------------------
Capital expenditures $ 215.9 $ 158.0
-------------------------------------------------------------------------
We drilled 61 net wells in the first quarter of 2007, resulting in 21 net
natural gas wells and 37 net oil wells with a success rate of 95 percent. Our
drilling activities were focused in the Central and Plains areas.
CO(2) pilot costs represent capital expenditures related to the Pembina
CO(2) pilot project, including the cost of injectants, for which no reserves
have been booked.
On June 30, 2006, we merged with Petrofund. The fair value of the oil and
gas properties acquired of $3.3 billion was added to property, plant and
equipment and the remaining $0.7 billion of the purchase price was attributed
to goodwill. Goodwill was recorded to reflect that we increased our production
capacity to levels which made us the largest conventional oil and gas royalty
trust in North America, that we increased our exposure to light oil giving us
a better future product balance as we increase our future production from the
Peace River Oil Sands, that we increased our reserve life index and we gained
technological access to, and staff with experience in, resource plays
including the Weyburn CO(2) project and coalbed methane.
Our farm-out program is ongoing; since 2005, 362 wells have been drilled
on Penn West's lands, including re-completions and re-entries, by independent
operators who incur drilling, completions and other capital costs on these
plays. In the first quarter of 2007, 90 wells were drilled on our farm-out
lands.
In addition to the above capital expenditures, $8.4 million was
capitalized in relation to future income taxes on minor acquisitions in the
Swan Hills area, to reflect the acquisition of less tax basis than the
purchase price, and $2.9 million was capitalized from additions to asset
retirement obligations.
Business Risks
Market Risk Management
We are exposed to normal market risks inherent in the oil and natural gas
business, including commodity price risk, credit risk, interest rate risk and
foreign currency risk. From time to time, we attempt to minimize exposure to a
portion of these risks using financial instruments.
Commodity Price Risk
We have substantial exposure to commodity price fluctuations. Crude oil
prices are influenced by worldwide factors such as OPEC actions, supply and
demand fundamentals, and political events. Oil prices, North American natural
gas supply and demand factors and storage levels influence natural gas prices.
Pursuant to our policies, we may, from time to time, manage these risks
through the use of costless collars or other financial instruments up to a
maximum of 50 percent of forecast sales volumes, net of royalties, for a
two-year period or up to 75 percent of forecast sales volumes, net of
royalties, for a one-year period.
For a current summary of outstanding oil and natural gas hedging
contracts, please refer to our website at www.pennwest.com.
Credit Risk
Credit risk is the risk of loss if purchasers or counterparties do not
fulfill their contractual obligations. All of our receivables are with
customers in the oil and natural gas industry and are subject to normal
industry credit risk. In order to limit the risk of non-performance of
counterparties to derivative instruments, we contract only with organizations
with high credit ratings or by obtaining security in certain circumstances.
Interest Rate Risk
We currently maintain our debt in floating-rate bank facilities,
resulting in exposure to fluctuations in short-term interest rates. From time
to time, we may increase the certainty of future interest rates using
financial instruments to swap floating interest rates for fixed rates or to
collar interest rates. In 2006, we entered into interest rate swaps that fix
the interest rate for two years at 4.36 percent on $100 million of bank debt.
We also recently announced the pricing of notes totaling $475 million.
Foreign Currency Rate Risk
Prices received for sales of crude oil are referenced to, or denominated
in, US dollars, and thus realized oil prices are generally impacted by
Canadian to United States exchange rates. When we consider it appropriate, we
may use financial instruments to fix or collar future exchange rates. At
March�31, 2007, we had no financial instruments outstanding related to foreign
exchange rates.
Greenhouse Gas and Air Emissions Legislation
The Alberta Government has introduced legislation that will enable the
province to regulate emissions of Greenhouse Gases. The regulations may
require facilities that emit over 100,000 tonnes of CO2E/yr (total Greenhouse
Gases in terms of CO2 equivalent) to reduce their emissions intensity
(quantity of gases released per unit of production) by 12 percent starting
July 1, 2007. Penn West currently does not operate any facilities that are
over the current threshold but it does have a working interest in some
facilities that do exceed the threshold.
The Federal Government has also released their regulatory framework to
reduce emissions of both Greenhouse Gases and four smog-forming pollutants
with targets coming into force in 2010 and 2015, respectively. Clarification
surrounding the regulations is expected in mid summer 2007 with the
regulations to be finalized by 2010.
There are multiple compliance mechanisms under both the Alberta and
Federal plans including making contributions to technology funds, emissions
trading, and offset credits.
Penn West is in the process of fully evaluating the impact of these
regulations. There will be a cost associated with complying with these
regulations, but we believe that the cost will be minor. We believe that these
new regulations may result in increased interest in CO2 capture,
transportation and storage technologies and infrastructure and may assist in
the development of our CO2 enhanced oil recovery projects in our light oil
pools in Alberta. In the meantime, we will continue our current activities to
reduce our emissions intensity, improve our energy efficiency and develop CO2
injection and sequestration infrastructure.
Liquidity and Capital Resources
Capitalization
March 31, 2007 December 31, 2006
-------------------------------------------------------------------------
($ millions) % %
-------------------------------------------------------------------------
Trust units issued,
at market $ 8,085 84.0 $ 8,435 86.0
Bank loan - long term 1,402 14.6 1,285 13.1
Working capital
deficiency (1) 137 1.4 86 0.9
-------------------------------------------------------------------------
Total enterprise
value $ 9,624 100.0 $ 9,806 100.0
-------------------------------------------------------------------------
(1) Current assets minus current liabilities.
During 2007, we paid distributions of $242.1 million compared to
distributions of $156.9 million in the same period of 2006. This is due to
the higher payout ratio in 2007 and the additional units issued as
consideration for the Petrofund merger in 2006.
Under the terms of its current trust indenture, the Trust is required to
make distributions to unitholders in amounts at least equal to its taxable
income. Distributions may be monthly or special and in cash or in trust units
at the discretion of our Board of Directors. To the extent that additional
cash distributions are paid and capital programs are not adjusted, debt levels
may increase. In the event that a special distribution in the form of trust
units is declared, the terms of the trust indenture require that the
outstanding units be consolidated immediately subsequent to the distribution.
The number of outstanding trust units would remain at the number outstanding
immediately prior to the unit distribution, plus those sold to fund the
payment of withholding taxes, and an amount equal to the distribution would be
allocated to the unitholders as a taxable distribution.
Our philosophy is to retire approximately 10 percent of our opening asset
retirement obligation annually, using our cash flow. Due to the extent of our
environmental programs, we believe no benefit would arise from the initiation
of a reclamation fund. We believe our program is sufficient to meet or exceed
existing environmental regulations and best industry practices. In the event
of significant changes to the environmental regulations or the cost of
environmental activities, a higher portion of cash flow would be required to
fund our environmental expenditures.
Bank debt at March 31, 2007 was $1,402.2 million compared to
$1,285.0�million at December 31, 2006. Penn West Petroleum Ltd.'s unsecured,
extendible, three-year revolving syndicated credit facility has an aggregate
borrowing limit of $1.8 billion plus a $100 million swing line facility with
stamping fees ranging from 60 - 115 basis points and standby fees ranging from
12.5 - 22.5 basis points depending on our ratio of consolidated bank debt to
earnings before interest, taxes and depreciation and depletion ("EBITDA"). The
syndicated facility expires on August 25, 2009.
On April 18, 2007, the Company announced it had entered into an
additional $250 million unsecured, demand credit facility and has priced a
proposed offering of notes to be issued on a private placement basis,
primarily in the United States, with an aggregate principal amount of US
$475�million. The demand credit facility is priced at the same rates as the
Company's existing syndicated credit facility and expires on December 31,
2008. The Company intends to use the proceeds of the notes to repay a portion
of its outstanding bank debt under its credit facilities.
On March 31, 2007, the Company was in compliance with all of the
financial covenants under the credit facility. The financial covenants under
the syndicated credit facility are as follows:
- Consolidated bank debt to EBITDA shall be less than 3:1 except in
certain circumstances and shall not exceed 3.5:1;
- Consolidated total debt to EBITDA shall be less than 4:1; and
- Consolidated bank debt to total trust capitalization shall not exceed
50 percent except in certain circumstances and shall not exceed
55 percent.
Reconciliation of Cash Flow from Operating Activities to Distributable
Cash from Operations
Penn West has elected to voluntarily present distributable cash from
operations based on guidance contained in the Canadian Institute of Chartered
Accountants' related November 2006 draft interpretive release. In the draft
release, sustainability concepts are discussed and distributable cash from
operations is defined as cash flow from operating activities less adjustments
for productive capacity maintenance, long-term unfunded contractual
obligations and the effect of any foreseeable financing matters, related to
debt covenants, which could impair our ability to pay distributions or
maintain productive capacity.
Three months ended March 31
-----------------------------
($ millions, except per unit amounts) 2007 2006
-------------------------------------------------------------------------
Cash flow from operating activities $ 296.8 $ 207.7
Productive capacity maintenance(1) (198.8) (160.1)
-------------------------------------------------------------------------
Distributable cash from operations 98.0 47.6
Proceeds from the issue of trust units(2) 28.5 19.6
Bank borrowings and working capital changes 115.9 94.8
-------------------------------------------------------------------------
Cash distributions declared $ 242.4 $ 162.0
Accumulated cash distributions, beginning 1,133.3 321.5
-------------------------------------------------------------------------
Accumulated cash distributions, ending $ 1,375.7 $ 483.5
-------------------------------------------------------------------------
Distributable cash from operations per unit,
basic 0.41 0.29
Distributable cash from operations per unit,
diluted 0.41 0.29
Distributable cash payout ratio(3) 2.47 3.03
-------------------------------------------------------------------------
Distributions declared per unit $ 1.02 $ 0.99
Distributions declared as a percentage of
net income 252% 112%
Distributions declared as a percentage of
cash flow 78% 67%
-------------------------------------------------------------------------
(1) Please refer to our discussion of productive capacity maintenance
below.
(2) Consists of proceeds from the Distribution Reinvestment and Optional
Purchase Plan, the Trust Unit Rights Incentive Plan and the Trust
Unit Savings Plan.
(3) Represents cash distributions declared divided by distributable cash
from operations.
We strive to fund both distributions and maintenance capital programs
primarily from cash flow. We initially budget our capital programs at
approximately 40 - 50 percent of forecast annual cash flow. We believe that
proceeds from the Distribution Re-investment and Optional Purchase Plan should
be used to fund capital expenditures of a longer-term nature. Over the medium
term, additional borrowings and equity issues may be required from time to
time to fund a portion of our distributions or maintain or increase our
productive capacity. On a longer-term basis, adjustments to the level of
distributions and/or capital expenditures to maintain or increase our
productive capacity may be required based on forecast levels of distributable
cash from operations and capital efficiency.
Productive capacity maintenance is the amount of capital funds required
in a period for an enterprise to maintain its ability to generate future cash
flow from operating activities at a constant level. As commodity prices can be
volatile and short-term variations in production levels are often experienced
in our industry, we define our productive capacity as production on a barrel
of oil equivalent basis. A quantifiable measure for these short-term
variations is not objectively determinable or verifiable due to various
factors including the inability to distinguish natural production declines
from the effect of production additions resulting from capital and
optimization programs, and the effect of temporary production interruptions.
As a result, the adjustment for productive capacity maintenance in our
calculation of distributable cash from operations is our actual capital
expenditures during the period excluding the cost of any asset acquisitions or
proceeds of any asset dispositions. We believe that our current capital
programs will be sufficient to maintain our productive capacity in the medium
term and set our hurdle rates for evaluating potential development and
optimization projects accordingly.
Our calculation of distributable cash from operations has no adjustment
for long-term unfunded contractual obligations. We believe our only
significant long-term unfunded contractual obligation at this time is for
asset retirement obligations. Cash flow from operating activities, used in our
distributable cash from operations calculation, includes a deduction for
actual abandonment expenditures during the period. We believe that our
philosophy, to retire approximately 10 percent of our opening asset retirement
obligation on an annual basis, is sufficient to fund our asset retirement
obligations over the life of our reserves.
We currently have no financing restrictions caused by our debt covenants.
We regularly monitor our current and forecast debt levels to ensure debt
covenants are not exceeded.
($ millions, except indicators) To March 31, 2007
-------------------------------------------------------------------------
Cumulative distributable cash from operations(1) $ 1,116.4
Issue of trust units 155.4
Bank borrowing and working capital change 103.9
-------------------------------------------------------------------------
Cumulative cash distributions declared(1) $ 1,375.7
-------------------------------------------------------------------------
Distributable cash payout ratio(2) 1.23
-------------------------------------------------------------------------
(1) Subsequent to the trust conversion on May 31, 2005.
(2) Represents cumulative cash distributions declared divided by
cumulative distributable cash from operations.
Financial Instruments
We currently have WTI crude oil collars on approximately 26,000 barrels
per day from April 1 to December 31, 2007 and 10,000 barrels per day from
January 2008 to June 2008. The collars on the 26,000 barrels per day to
December 2007 have an average floor price of US$56.10 per barrel and an
average ceiling price of US$83.61 per barrel. The 2008 WTI crude oil collars
have an average floor price of US$60.00 per barrel and an average ceiling
price of US$94.55 per barrel. In addition, Penn West has AECO natural gas
collars on approximately 73 mmcf per day from April 1 to October 31, 2007 with
an average floor price of $7.63 per mcf and an average ceiling price of $9.68
per mcf.
In the second quarter of 2006, we entered into interest rate swaps that
fix the interest rate for two years at approximately 4.36 percent on
$100�million of bank debt.
Other financial instruments outstanding at March 31, 2007 are Alberta
electricity contracts, which fix 2007 electricity costs on 67 megawatts at
$49.55 per megawatt hour and for 2008 on 2 megawatts at $57.00 per megawatt
hour.
Mark to market amounts on all financial instruments outstanding on
March�31, 2007 are summarized in note 8 to the unaudited interim consolidated
financial statements. Please refer to Penn West's website at www.pennwest.com
for details of financial instruments currently outstanding.
Outlook
The outlook for oil and natural gas prices remains strong compared to
historical levels. For 2007, we are forecasting capital expenditures of
$600�million to $700 million excluding acquisitions, to fund the drilling of
260 - 280 net wells. Estimated average 2007 production is forecast between
131,000�boe per day and 135,000 boe per day. Based on a forecast WTI oil price
of US$59.00 per barrel, a $7.25 per mcf natural gas price at AECO and an
exchange rate of CAD$1.00 equals US$0.86 for 2007, cash flow for 2007 is
forecast to be between $1.3 billion and $1.5 billion.
Sensitivity Analysis
Estimated sensitivities to selected key assumptions on 2007 financial
results before considering hedging impacts are outlined in the table below.
Impact on Impact on
cash flow(1) net income(1)
-------------------------------------------------------------------------
($ millions, except
per unit amounts)
Change of: Change $ millions $/unit $ millions $/unit
-------------------------------------------------------------------------
Price per barrel
of liquids $1.00 23.5 0.10 16.5 0.07
Liquids
production 1,000 bbls/day 14.7 0.06 5.5 0.02
Price per mcf
of natural gas $0.10 9.8 0.04 6.9 0.03
Natural gas
production 10 mmcf/day 15.5 0.07 2.8 0.01
Effective
interest rate 1% 15.4 0.06 9.0 0.04
Exchange rate
($US per $CAD) $0.01 23.7 0.10 16.6 0.07
-------------------------------------------------------------------------
(1) The impact on cash flow and net income is computed based on 2007
forecast commodity prices and production volumes. The impact on net
income assumes that the distribution levels are not adjusted for
changes in cash flow thus changing the incremental tax rate.
Contractual Obligations and Commitments
We are committed to certain payments over the next five calendar years as
follows:
($ millions) 2007 2008 2009 2010 2011 Thereafter
-------------------------------------------------------------------------
Transportation $ 12.2 $ 8.6 $ 4.8 $ 2.1 $ 0.1 $ -
Transportation
($US) 1.7 2.3 2.3 2.3 2.3 8.6
Power infrastructure 4.7 3.8 3.8 3.8 3.8 7.6
Drilling rigs 5.2 7.7 2.4 1.2 - -
Purchase
obligations(1) 9.9 13.3 13.3 13.3 13.3 54.3
Office lease $ 9.7 $ 17.9 $ 17.5 $ 15.1 $ 14.3 $ 117.4
-------------------------------------------------------------------------
(1) These amounts represent estimated commitments of $92.7 million for
CO(2) purchases and $24.6 million for processing fees related to
interests in the Weyburn Unit.
On February 9, 2007, Penn West announced it had entered into an agreement
to acquire conventional oil and natural gas assets. The transaction closed on
April 11, 2007 following the receipt of regulatory approvals. The purchase
price of the asset package totaled approximately $329 million and was funded
by bank debt.
Our syndicated credit facility expires on August 25, 2009 and our demand
credit facility expires on December 31, 2008. If we were not successful in
renewing or replacing them, we would be required to repay all amounts then
outstanding on the facilities. As we maintain our leverage ratios at
relatively modest levels, we believe we will be successful in renewing or
replacing our credit facilities on acceptable terms.
Equity Instruments
-------------------------------------------------------------------------
Trust units issued:
As at March 31, 2007 238,010,228
Issued on exercise of trust unit rights 29,545
Issued to employee savings plan 40,059
Issued pursuant to distribution re-investment plan 250,464
-------------------------------------------------------------------------
As at May 4, 2007 238,330,296
-------------------------------------------------------------------------
Trust unit rights outstanding:
As at March 31, 2007 14,692,064
Granted 98,745
Exercised (29,545)
Forfeited (178,162)
-------------------------------------------------------------------------
As at May 4, 2007 14,583,102
-------------------------------------------------------------------------
Disclosure Controls and Procedures
We have established a Disclosure Committee that is responsible for
ensuring that our disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed by us is
recorded, processed, summarized and reported within the time periods specified
under Canadian securities laws, and that our controls and procedures are
designed to ensure that information is accumulated and communicated to
management, including the President and Chief Executive Officer and the Chief
Financial Officer, to allow timely decisions regarding required disclosure.
Our Disclosure Committee includes selected members of senior management,
including the Chief Executive Officer, the Chief Operating Officer and the
Chief Financial Officer.
As at March 31, 2007, an evaluation of the effectiveness of our
disclosure controls and procedures, as defined under Multilateral Instrument
52-109, was completed. The evaluation was completed under the supervision of
the Disclosure Committee and with the participation of management. As at
March�31, 2007, the design and operating effectiveness of our disclosure
controls and procedures were assessed by our Chief Executive Officer and Chief
Financial Officer to be operating effectively.
Internal Controls Over Financial Reporting
We have assembled a team of qualified and experienced staff and
consultants who have been working on compliance with the applicable
regulations regarding internal control over financial reporting. As we are
listed in both Canada and the United States, the recent changes in Canada to
remove the requirement for auditor attestation and to extend the timing of
CEO/CFO certification of the effective operation of internal control over
financial reporting to 2008 will not affect us. We became a registrant of the
U.S. Securities and Exchange Commission and listed on the New York Stock
Exchange in June 2006. We are not required to certify or obtain auditor
attestation of the operating effectiveness of our internal control over
financial reporting until we file our 2007 year-end audited financial
statements. To date, all significant financial reporting processes have been
documented, assessed, and the resulting modifications to our systems of
internal control over financial reporting have been substantially completed.
Based on this work to date, no changes were made during the quarter ended
March 31, 2007 that materially affected, or would be reasonably likely to
materially affect, our internal control over financial reporting.
Accounting Changes and Pronouncements
Effective January 1, 2007, the Trust adopted CICA Handbook Section 1530 -
"Comprehensive Income", Section 3861 - "Financial Instruments - Disclosure and
Presentation", Section 3865 - "Hedges", Section 3855 - "Financial Instruments
- Recognition and Measurement", and Section 3251 - "Equity". The adoption of
these standards has had no material impact on the Trust's net earnings or cash
flows.
Financial Instruments
Financial instruments are required to be measured at fair value on the
balance sheet upon initial recognition of the instrument. Measurement in
subsequent periods depends on whether the financial instrument has been
classified in one of the following categories: held-for-trading,
available-for-sale, held-to-maturity, loans and receivables, or other
financial liabilities as defined under Section 3855.
Subsequent measurement and changes in fair value will depend on initial
classification, as follows: held-for-trading financial assets are measured at
fair value and changes in fair value are recognized in net earnings;
available-for-sale financial instruments are measured at fair value with
changes in fair value recorded in other comprehensive income ("OCI") until the
investment is derecognized or impaired at which time the amounts would be
recorded in net earnings.
The adoption of these standards did not change the Trust's accounting for
financial instruments. Cash and cash equivalents are designated as
held-for-trading and are measured at carrying value, which approximates fair
value due to the short-term nature of these instruments. Accounts receivable
and accrued revenues are designated as loans and receivables. Accounts payable
and accrued liabilities and long-term debt are designated as other
liabilities. Risk management assets and liabilities are derivative financial
instruments classified as held-for-trading.
Embedded Derivatives
An embedded derivative is a component of a hybrid contract, which is a
host contract plus an embedded derivative. They are separated from the host
contract and accounted for as a derivative only if certain conditions are met.
These include: i) the economic characteristics and risks of the embedded
derivative are not closely related to the economic characteristics and risks
of the host contract, ii) if the embedded derivative separated meets the
definition of a derivative, and iii) the hybrid contract is not measured at
fair value or classified as held for trading. The Trust currently has no
material embedded derivatives.
Comprehensive Income
Comprehensive income is defined as the change in equity from transactions
and other events from non-owner sources. It consists of net earnings and OCI.
OCI refers to items recognized in comprehensive income that are excluded from
net earnings calculated in accordance with generally accepted accounting
principles. The Trust currently has no items requiring separate disclosure on
the Statement of Comprehensive Income.
Two new Canadian accounting standards have been issued, CICA 3862,
Financial Instruments-Disclosure and CICA 1535, Capital Disclosure, which will
require additional disclosure in the Trust's financial statements commencing
January 1, 2008 about the Trust's financial instruments as well as its capital
and how it is managed.
Related-Party Transactions
In the first quarter of 2007, we paid $0.5 million (first quarter 2006 -
$0.3 million) of legal fees to a law firm of which a partner is also one of
our directors.
Off-Balance-Sheet Financing
We have off-balance-sheet financing arrangements consisting of operating
leases. The details of the operating lease payments are summarized in the
Contractual Obligations and Commitments section.
Forward-Looking Statements
In the interest of providing Penn West's unitholders and potential
investors with information regarding Penn West, including management's
assessment of Penn West's future plans and operations, certain statements
contained in this document constitute forward-looking statements or
information (collectively "forward-looking statements") within the meaning of
the "safe harbour" provisions of applicable securities legislation.
Forward-looking statements are typically identified by words such as
"anticipate", "continue", "estimate", "expect", "forecast", "may", "will",
"project", "could", "plan", "intend", "should", "believe", "outlook",
"potential", "target" and similar words suggesting future events or future
performance. In addition, statements relating to "reserves" or "resources" are
deemed to be forward-looking statements as they involve the implied
assessment, based on certain estimates and assumptions, that the reserves and
resources described exist in the quantities predicted or estimated and can be
profitably produced in the future. In particular, this document contains
forward-looking statements pertaining to, without limitation, the following:
the nature of the proposed changes to the taxation of income trusts in Canada,
the impact on our business and unitholders of the proposed tax changes and the
different actions that we might take in response to the proposed tax changes;
the stability and growth potential of our asset base; drilling plans;
production estimates; netback estimates; our business strategy, including our
strategy in respect of our Peace River Oil Sands project and enhanced oil
recovery projects; product balance; hedging, credit risk, interest rate risk
and foreign currency rate risk management strategies; the sufficiency of our
environmental program; funding sources for distributions and distribution
levels; forecast payout ratios; the funding of our asset retirement
obligations; our outlook for oil and natural gas prices; our forecast 2007 net
capital expenditures and the allocation and funding thereof; our proposed
private placement of notes and the use of proceed thereof; our budget for oil
prices, natural gas prices and the USD/CAD exchange rate for 2007; our
forecast cash flow; our belief that we will be successful in renewing or
replacing our credit facilities on acceptable terms when it expires; and the
quantity and recoverability of our oil and natural gas reserves and resources.
With respect to forward-looking statements contained in this document, we
have made assumptions regarding, among other things: future oil and natural
gas prices and differentials between light, medium and heavy oil prices;
future oil and natural gas production levels; future exchange rates; the
amount of future cash distributions that we intend to pay; the cost of
expanding our property holdings; our ability to obtain equipment in a timely
manner to carry out development activities; our ability to market our oil and
natural gas successfully to current and new customers; the impact of
increasing competition; our ability to obtain financing on acceptable terms;
the closing of the proposed note offering; and our ability to add production
and reserves through our development and exploitation activities.
Although Penn West believes that the expectations reflected in the
forward-looking statements contained in this document, and the assumptions on
which such forward-looking statements are made, are reasonable, there can be
no assurance that such expectations will prove to be correct. Readers are
cautioned not to place undue reliance on forward-looking statements included
in this document, as there can be no assurance that the plans, intentions or
expectations upon which the forward-looking statements are based will occur.
By their nature, forward-looking statements involve numerous assumptions,
known and unknown risks and uncertainties that contribute to the possibility
that the predictions, forecasts, projections and other forward-looking
statements will not occur, which may cause Penn West's actual performance and
financial results in future periods to differ materially from any estimates or
projections of future performance or results expressed or implied by such
forward-looking statements. These risks and uncertainties include, among other
things: volatility in market prices for oil and natural gas; the impact of
weather conditions on seasonal demand and ability to execute capital programs;
risks inherent in oil and gas operations; uncertainties associated with
estimating reserves and resources; competition for, among other things,
capital, acquisitions of reserves, resources, undeveloped lands and skilled
personnel; incorrect assessments of the value of acquisitions; geological,
technical, drilling and processing problems; general economic conditions in
Canada, the U.S. and globally; industry conditions, including fluctuations in
the price of oil and natural gas; royalties payable in respect of our oil and
natural gas production; changes in government regulation of the oil and
natural gas industry, including environmental regulation; fluctuations in
foreign exchange or interest rates; unanticipated operating events that can
reduce production or cause production to be shut-in or delayed; failure to
obtain industry partner and other third-party consents and approvals when
required; stock market volatility and market valuations; OPEC's ability to
control production and balance global supply and demand of crude oil at
desired price levels; political uncertainty, including the risks of
hostilities, in the petroleum producing regions of the world; the need to
obtain required approvals from regulatory authorities from time to time;
failure to realize the anticipated benefits of acquisitions, including the
merger with Petrofund Energy Trust; failure to complete the proposed note
offering; changes in tax law; and the other factors described under "Business
Risks" in this document and in Penn West's public filings (including our
Annual Information Form) available in Canada at www.sedar.com and in the
United States at www.sec.gov. Readers are cautioned that this list of risk
factors should not be construed as exhaustive.
The forward-looking statements contained in this document speak only as
of the date of this document. Except as expressly required by applicable
securities laws, Penn West does not undertake any obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The forward-looking statements
contained in this document are expressly qualified by this cautionary
statement.
Additional Information
Additional information relating to Penn West including Penn West's Annual
Information Form is available on SEDAR at www.sedar.com.
Penn West Energy Trust
Consolidated Balance Sheets
As at As at
March December
($ millions, unaudited) 31, 2007 31, 2006
-------------------------------------------------------------------------
Assets
Current
Accounts receivable $ 250.7 $ 268.7
Risk management (note 8) 14.3 54.0
Other 45.4 56.0
-------------------------------------------------------------------------
310.4 378.7
-------------------------------------------------------------------------
Property, plant and equipment (note 3) 7,057.2 7,039.0
Goodwill 652.0 652.0
-------------------------------------------------------------------------
7,709.2 7,691.0
-------------------------------------------------------------------------
$ 8,019.6 $ 8,069.7
-------------------------------------------------------------------------
Liabilities and unitholders' equity
Current
Accounts payable and accrued liabilities $ 366.2 $ 384.1
Distributions payable 80.9 80.6
-------------------------------------------------------------------------
447.1 464.7
Bank loan (note 4) 1,402.2 1,285.0
Asset retirement obligations (note 5) 338.2 339.1
Future income taxes 756.6 792.6
-------------------------------------------------------------------------
2,944.1 2,881.4
-------------------------------------------------------------------------
Unitholders' equity
Unitholders' capital (note 6) 3,741.1 3,712.4
Contributed surplus (note 6) 21.0 16.4
Retained earnings 1,313.4 1,459.5
-------------------------------------------------------------------------
5,075.5 5,188.3
-------------------------------------------------------------------------
Subsequent events (note 4 and 11) $ 8,019.6 $ 8,069.7
-------------------------------------------------------------------------
See accompanying notes to the unaudited interim consolidated financial
statements.
Penn West Energy Trust
Consolidated Statements of Income and Retained Earnings
Three months ended March 31
($ millions, except per unit amounts, -----------------------------
unaudited) 2007 2006
-------------------------------------------------------------------------
Revenues
Oil and natural gas $ 579.0 $ 428.5
Royalties (107.9) (81.5)
-------------------------------------------------------------------------
471.1 347.0
Risk management gain (loss) (note 8)
Realized 3.4 5.4
Unrealized (35.0) 13.3
-------------------------------------------------------------------------
439.5 365.7
-------------------------------------------------------------------------
Expenses
Operating (note 7) 125.0 86.7
Transportation 6.1 5.8
General and administrative (note 7) 17.3 9.2
Financing 16.2 6.4
Depletion, depreciation and accretion (note 3) 214.9 112.5
Risk management loss - unrealized (note 8) 4.7 6.5
-------------------------------------------------------------------------
384.2 227.1
-------------------------------------------------------------------------
Income before taxes 55.3 138.6
-------------------------------------------------------------------------
Taxes
Capital 3.4 4.1
Future income recovery (44.4) (9.9)
-------------------------------------------------------------------------
(41.0) (5.8)
-------------------------------------------------------------------------
Net income $ 96.3 $ 144.4
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 1,459.5 $ 1,605.7
Net income 96.3 144.4
Distributions declared (242.4) (162.0)
-------------------------------------------------------------------------
Retained earnings, end of period $ 1,313.4 $ 1,588.1
-------------------------------------------------------------------------
Net income per unit
Basic $ 0.41 $ 0.88
Diluted $ 0.40 $ 0.87
-------------------------------------------------------------------------
See accompanying notes to the unaudited interim consolidated financial
statements.
Penn West Energy Trust
Consolidated Statements of Cash Flows
Three months ended March 31
($ millions, unaudited) 2007 2006
-------------------------------------------------------------------------
Operating activities
Net income $ 96.3 $ 144.4
Depletion, depreciation and accretion (note 3) 214.9 112.5
Future income tax recovery (44.4) (9.9)
Equity-based compensation (note 7) 4.8 3.0
Risk management (note 8) 39.7 (6.8)
Asset retirement expenditures (9.7) (6.9)
Change in non-cash working capital (4.8) (28.6)
-------------------------------------------------------------------------
296.8 207.7
-------------------------------------------------------------------------
Investing activities
Additions to property, plant and equipment (215.9) (158.0)
Change in non-cash working capital 15.5 19.2
-------------------------------------------------------------------------
(200.4) (138.8)
-------------------------------------------------------------------------
Financing activities
Increase in bank loan 117.2 68.4
Issue of equity 5.7 2.7
Distributions paid (219.3) (140.0)
-------------------------------------------------------------------------
(96.4) (68.9)
-------------------------------------------------------------------------
Change in cash - -
Cash, beginning of period - -
-------------------------------------------------------------------------
Cash, end of period $ - $ -
-------------------------------------------------------------------------
Interest paid $ 13.4 $ 5.8
Income and capital taxes paid $ 3.3 $ 3.5
-------------------------------------------------------------------------
See accompanying notes to the unaudited interim consolidated financial
statements.
Notes to the Unaudited Interim Consolidated Financial Statements
(All tabular amounts are in $ millions except numbers of units, per unit
amounts, percentages and various figures in Note 8.)
1. Structure of Penn West
Penn West is an open-ended, unincorporated investment trust governed by
the laws of the Province of Alberta. The purpose of Penn West is to
indirectly explore for, develop and hold interests in petroleum and
natural gas properties through investments in securities of subsidiaries
and royalty interests in oil and natural gas properties. Penn West owns
100 percent of the common shares, directly or indirectly, of the entities
that carry on the oil and natural gas business of Penn West. The
activities of these entities are financed through interest-bearing notes
from Penn West and third-party debt as described in the notes to the
unaudited interim consolidated financial statements.
Pursuant to the terms of net profit interest agreements (the "NPIs"),
Penn West is entitled to payments from certain subsidiary entities equal
to essentially all of the proceeds of the sale of oil and natural gas
production less certain specified deductions. Under the terms of the
NPIs, the deductions are in part discretionary, include the requirement
to fund capital expenditures and asset acquisitions, and are subject to
certain adjustments for asset dispositions.
Under the terms of its trust indenture, Penn West is required to make
distributions to unitholders in amounts at least equal to its taxable
income consisting of interest on notes, the NPIs, and any inter-corporate
distributions and dividends received, less certain expenses.
2. Significant accounting policies and basis of presentation
These unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles and are consistent with the accounting policies described in
the notes to the audited consolidated financial statements of Penn West
for the year ended December 31, 2006. These financial statements should
accordingly be read in conjunction with Penn West's audited consolidated
financial statements and notes thereto for the year ended December 31,
2006.
Effective January 1, 2007, the Trust adopted CICA Handbook
Section 1530 - "Comprehensive Income", Section 3861 - "Financial
Instruments - Disclosure and Presentation", Section 3865 - "Hedges",
Section 3855 - "Financial Instruments - Recognition and Measurement", and
Section 3251 - "Equity". The adoption of these standards has had no
material impact on the Trust's net earnings or cash flows.
Financial Instruments
Financial instruments are required to be measured at fair value on the
balance sheet upon initial recognition of the instrument. Measurement in
subsequent periods depends on whether the financial instrument has been
classified in one of the following categories: held-for-trading,
available-for-sale, held-to-maturity, loans and receivables, or other
financial liabilities as defined under Section 3855.
Subsequent measurement and changes in fair value will depend on initial
classification, as follows: held-for-trading financial assets are
measured at fair value and changes in fair value are recognized in net
earnings; available-for-sale financial instruments are measured at fair
value with changes in fair value recorded in other comprehensive income
("OCI") until the investment is derecognized or impaired at which time
the amounts would be recorded in net earnings.
The adoption of these standards did not change the Trust's accounting for
financial instruments. Cash and cash equivalents are designated as held-
for-trading and are measured at carrying value, which approximates fair
value due to the short-term nature of these instruments. Accounts
receivable and accrued revenues are designated as loans and receivables.
Accounts payable and accrued liabilities and long-term debt are
designated as other liabilities. Risk management assets and liabilities
are derivative financial instruments classified as held-for-trading.
Embedded Derivatives
An embedded derivative is a component of a hybrid contract, which is a
host contract plus an embedded derivative. They are separated from the
host contract and accounted for as a derivative only if certain
conditions are met. These include: i) the economic characteristics and
risks of the embedded derivative are not closely related to the economic
characteristics and risks of the host contract, ii) if the embedded
derivative separated meets the definition of a derivative, and iii) the
hybrid contract is not measured at fair value or classified as held for
trading. The Trust currently has no material embedded derivatives.
Comprehensive Income
Comprehensive income is defined as the change in equity from transactions
and other events from non-owner sources. It consists of net earnings and
OCI. OCI refers to items recognized in comprehensive income that are
excluded from net earnings calculated in accordance with generally
accepted accounting principles. The Trust currently has no items
requiring separate disclosure on the Statement of Comprehensive Income.
Two new Canadian accounting standards have been issued, CICA 3862,
Financial Instruments-Disclosure and CICA 1535, Capital Disclosure, which
will require additional disclosure in the Trust's financial statements
commencing January 1, 2008 about the Trust's financial instruments as
well as its capital and how it is managed.
3. Property, plant and equipment
March 31, December 31,
2007 2006
-------------------------------------------------------------------------
Oil and natural gas properties,
including production and
processing equipment $ 9,891.4 $ 9,666.0
Other 19.0 17.2
-------------------------------------------------------------------------
9,910.4 9,683.2
-------------------------------------------------------------------------
Accumulated depletion and depreciation (2,853.2) (2,644.2)
-------------------------------------------------------------------------
Net book value $ 7,057.2 $ 7,039.0
-------------------------------------------------------------------------
Other than Penn West's net share of capital overhead recoveries, no
general and administrative expenses are capitalized. In 2007, additions
to property, plant and equipment included a $2.9 million increase related
to additions to asset retirement obligation and an $8.4 million addition
for future income taxes recorded on minor property acquisitions.
An impairment test was performed on the costs capitalized to oil and
natural gas properties at March 31, 2007. The estimated undiscounted
future net cash flows from proved reserves, using forecast prices,
exceeded the carrying amount of the oil and natural gas property
interests and the cost of unproved properties.
4. Bank loan
March 31, December 31,
2007 2006
-------------------------------------------------------------------------
Bankers' acceptances and prime rate loans $ 1,402.2 $ 1,285.0
-------------------------------------------------------------------------
As at March 31, 2007, the Company had an unsecured, extendible,
three-year revolving syndicated credit facility with an aggregate
borrowing limit of $1.8 billion plus a $100 million swing line facility,
both of which expire on August 25, 2009. The credit facility contains
provisions for stamping fees on bankers' acceptances and LIBOR loans and
standby fees on unutilized credit lines that vary depending on certain
consolidated financial ratios.
Letters of credit totaling $0.2 million (December 31, 2006 -
$0.4 million) were outstanding on March 31, 2007 that reduced the amount
otherwise available to be drawn on the swing line facility.
On April 18, 2007, the Company announced it had entered into an
additional $250 million unsecured, demand credit facility and has priced
a proposed offering of notes to be issued on a private placement basis,
primarily in the United States, with an aggregate principal amount of
US $475 million. The demand credit facility is priced at the same rates
as the Company's existing syndicated credit facility and expires on
December 31, 2008.
5. Asset retirement obligations
The total inflated and undiscounted amount to settle Penn West's asset
retirement obligations at March 31, 2007 was $2.2 billion (December 31,
2006 - $2.2 billion). The asset retirement obligation was determined by
applying an inflation factor of 2.0 percent (2006 - 2.0 percent) and the
inflated amount was discounted using a credit-adjusted rate of
7.0 percent (2006 - 7.0 percent) over the expected useful life of the
underlying assets, currently extending up to 50 years into the future
with an average life of 23 years. Future cash flows from operating
activities are expected to fund the obligations.
Changes to asset retirement obligations were as follows:
2007 2006
-------------------------------------------------------------------------
Balance, beginning of period $ 339.1 $ 192.4
Liabilities incurred during the period 2.9 2.6
Liabilities settled during the period (9.7) (6.9)
Accretion charges 5.9 5.7
-------------------------------------------------------------------------
Balance, end of period $ 338.2 $ 193.8
-------------------------------------------------------------------------
6. Unitholders' equity
Unitholders' capital Units Amount
-------------------------------------------------------------------------
Balance, December 31, 2005 163,290,013 $ 561.0
Issued on exercise of trust unit rights(1) 407,750 10.6
Issued to employee trust unit savings plan 295,449 12.3
Issued to distribution reinvestment plan 2,459,870 96.1
Issued on Petrofund merger 70,673,137 3,032.4
-------------------------------------------------------------------------
Balance, December 31, 2006 237,126,219 3,712.4
Issued on exercise of trust unit rights(1) 67,575 1.8
Issued to employee trust unit savings plan 114,335 4.1
Issued to distribution reinvestment plan 702,099 22.8
-------------------------------------------------------------------------
Balance, March 31, 2007 238,010,228 $ 3,741.1
-------------------------------------------------------------------------
Contributed surplus 2007 2006
-------------------------------------------------------------------------
Balance, beginning of period $ 16.4 $ 5.5
Equity-based compensation expense 4.8 11.3
Net benefit on rights exercised(1) (0.2) (0.4)
-------------------------------------------------------------------------
Balance, end of period $ 21.0 $ 16.4
-------------------------------------------------------------------------
(1) Upon exercise of trust unit rights, the net benefit is reflected as a
reduction of contributed surplus and an increase to unitholders'
capital.
Three months ended March 31
Units Outstanding -----------------------------
(millions of units) 2007 2006
-------------------------------------------------------------------------
Weighted average:
(Three months ended March 31)
Basic 237.4 163.5
Diluted 239.7 165.8
Outstanding: (as at March 31)
Basic 238.0 163.8
Basic plus trust unit rights 252.7 173.4
-------------------------------------------------------------------------
In 2007, 5.8 million rights (2006 - 0.3 million) were excluded in
calculating the weighted average number of diluted trust units as they
were considered anti-dilutive.
7. Equity-based compensation
Trust unit rights incentive plan
Penn West has a unit rights incentive plan that allows Penn West to issue
rights to acquire trust units to directors, officers, employees and other
service providers. Under the terms of the plan, the number of trust units
reserved for issuance shall not exceed 10 percent of the aggregate number
of issued and outstanding trust units of Penn West. Unit right exercise
prices are administrated to be equal to the volume-weighted average
trading price of the trust units on the Toronto Stock Exchange for the
five trading days immediately prior to the date upon which the unit
rights are granted. If certain conditions are met, the exercise price per
unit may be reduced by deducting from the grant price the aggregate of
all distributions, on a per unit basis, paid by Penn West after the grant
date. Rights granted under the plan prior to November 13, 2006 vest over
a five-year period and expire six years after the date of the grant.
Rights granted subsequent to this date for the most part vest over a
three-year period and expire four years after the date of the grant.
Three months Year ended
ended March 31, December 31,
2007 2006
---------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
Trust unit rights unit rights price unit rights price
-------------------------------------------------------------------------
Outstanding,
beginning of
period 11,284,872 $ 27.76 9,447,625 $ 28.45
Granted 3,791,031 33.73 3,257,622 39.77
Exercised (67,575) 22.73 (407,750) 24.65
Forfeited (316,264) 31.83 (1,012,625) 33.38
-------------------------------------------------------------------------
Balance before
reduction of
exercise price 14,692,064 29.24 11,284,872 30.89
Reduction of
exercise price
for distributions
paid - (1.02) - (3.13)
-------------------------------------------------------------------------
Outstanding, end
of period 14,692,064 $ 28.22 11,284,872 $ 27.76
-------------------------------------------------------------------------
Exercisable, end
of period 1,464,405 $ 24.30 1,125,300 $ 23.16
-------------------------------------------------------------------------
Penn West recorded compensation expense of $4.8 million for the
three months ended March 31, 2007, of which $1.3 million was charged to
operating expense and $3.5 million was charged to general and
administrative expense (2006 - $3.0 million, $0.8 million and
$2.2 million respectively). Compensation expense subsequent to the trust
conversion is based on the fair value of rights issued and is amortized
over the remaining vesting periods on a straight-line basis.
The Binomial Lattice option-pricing model was used to determine the fair
value of trust unit rights granted with the following weighted average
assumptions:
Three months ended March 31, 2007 Three-year vesting period
-------------------------------------------------------------------------
Average fair value of trust unit
rights granted (per unit) $ 6.42
Expected life of trust unit rights (years) 3.0
Expected volatility (average) 24.1%
Risk-free rate of return (average) 4.0%
Distribution yield 12.0%
-------------------------------------------------------------------------
In 2006, the Black-Scholes option-pricing model was used to determine the
fair value of trust unit rights granted with the following weighted
average assumptions:
Three months ended March 31, 2006 Five-year vesting period
-------------------------------------------------------------------------
Average fair value of trust unit rights
granted (per unit)
Directors and officers $ nil
Other employees $ 9.76
Expected life of trust unit rights (years)
Directors and officers 5.0
Other employees 4.5
Expected volatility (average) 20.0%
Risk free rate of return (average) 4.0%
Expected distribution rate nil(1)
-------------------------------------------------------------------------
(1) The expected distribution rate is presumed to be nil as it is
expected that future distributions will provide a corresponding
reduction to the exercise price of trust unit rights.
Trust unit savings plan
Penn West has an employee trust unit savings plan for the benefit of all
employees. Under the savings plan, employees may elect to contribute up
to 10 percent of their salary. Penn West matches employee contributions
at a rate of $1.50 for each $1.00. Both the employee's and Penn West's
contribution are used to acquire Penn West trust units. These trust units
may be issued from treasury at the five-day volume weighted average
month-end trading price on the Toronto Stock Exchange or purchased in the
open market.
8. Financial instruments
Changes in the fair value of all outstanding financial commodity, power
and interest rate contracts are reflected on the balance sheet with a
corresponding unrealized gain or loss in income.
The following table reconciles the changes in the fair value of financial
instruments outstanding on March 31, 2007:
Risk management March 31, 2007
-------------------------------------------------------------------------
Balance, December 31, 2006 $ 54.0
Unrealized gain (loss) on financial instruments:
Commodities (35.0)
Electricity contracts (4.8)
Interest rate swaps 0.1
-------------------------------------------------------------------------
Fair value, end of period $ 14.3
-------------------------------------------------------------------------
Penn West had the following financial instruments outstanding as at
March 31, 2007:
Notional Remaining Market
volume term Pricing value
-------------------------------------------------------------------------
Crude oil
WTI Costless Apr/07 - US$ 60.00 to
Collars 1,000 bbls/d Jun/07 $73.10/bbl $ (0.1)
WTI Costless Apr/07 - US$ 60.00 to
Collars 1,000 bbls/d Jun/07 $80.00/bbl -
WTI Costless Apr/07 - US$ 56.00 to
Collars 25,000 bbls/d Dec/07 $83.80/bbl (3.2)
WTI Costless Jan/08 - US$ 60.00 to
Collars 10,000 bbls/d Jun/08 $94.55/bbl 4.0
Natural gas
AECO Costless Apr/07 - $7.63 to
Collars 73,400 mcf/d Oct/07 $9.68/mcf 0.8
Electricity
Alberta Power
Pool Swaps 67 MW 2007 $49.55/MWh 12.5
Alberta Power
Pool Swaps 2 MW 2008 $57.00/MWh 0.4
Interest rate Apr/07 -
swaps $100.0 Mar/08 4.356% (0.1)
-------------------------------------------------------------------------
Total $ 14.3
-------------------------------------------------------------------------
A realized gain of $2.0 million (2006 - $1.6 million) on the electricity
contracts has been included in the operating costs.
The Company entered into interest rate swaps to fix its interest rate
exposure on debt instruments. Realized gains and losses on the interest
rate swaps are charged to interest expense. In the period the fixed rate
and the floating rate were approximately equal resulting in no reportable
gain or loss being charged to interest rate expense in relation to the
interest rate swaps.
9. Income taxes
On March 29, 2007, the Government of Canada introduced legislation that
includes a proposed new distribution tax on publicly traded income
trusts. Under the proposed rules, effective for the 2011 tax year,
distributions representing return on capital would no longer be
deductible for income tax purposes by certain publicly traded income
trusts, including Penn West, and would be taxed on the amount of the
distribution at an estimated corporate tax rate. To date, the tax
proposals have not been substantively enacted and the impact on Penn
West's organizational structure or current and future income taxes is not
currently determinable.
10. Related-party transactions
During the first three months of 2007, Penn West paid $0.5 million
(2006 - $0.3 million) of legal fees to a law firm of which a partner is
also a director of Penn West.
11. Subsequent event
On February 9, 2007, Penn West announced it had entered into an agreement
to acquire conventional oil and natural gas assets. The transaction
closed on April 11, 2007 following the receipt of regulatory approvals.
The purchase price of the asset package totaled approximately
$329 million.
Investor Information
-------------------------------------------------------------------------
Penn West Energy Trust is a senior oil and natural gas income trust based
in Calgary, Alberta that trades on the Toronto Stock Exchange under the
symbol PWT.UN and on the New York Stock Exchange under the symbol PWE.
A conference call will be held to discuss Penn West's results at
2:00 p.m. Mountain Daylight Time, 4:00 p.m. Eastern Daylight Time, on
Monday, May 7th, 2007. The North American conference call number is
800-733-7560 toll-free or 416-644-3416 in the Toronto area. A taped
recording will be available until May 17th, by dialing 877-289-8525 or
416-640-1917 and entering pass code 21225491 followed by the pound sign.
This call will be broadcast live on the Internet and may be accessed
directly on the Penn West website www.pennwest.com or at the following
URL: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID 1789480.
%SEDAR: 00022266E
%CIK: 0001334388
For further information: PENN WEST ENERGY TRUST, Suite 2200, 425 - First
Street S.W., Calgary, Alberta, T2P 3L8, Phone: (403) 777-2500, Fax: (403)
777-2699, Toll Free: (866) 693-2707, Website: www.pennwest.com; Investor
Relations, Phone: (888) 770-2633, E-mail: investor_relations@pennwest.com,
William Andrew, President and CEO, Phone: (403) 777-2502, E-mail:
bill.andrew@pennwest.com
