Message to Shareholders
Delphi Energy continued to achieve production growth in the third quarter of 2008. The Company realized record average daily production of 6,409 barrels of oil equivalent per day (boe/d), an increase of three percent from 6,202 boe/d in the second quarter of 2008 and 12 percent greater than the comparative period in 2007. Production restrictions due to scheduled facility maintenance during the third quarter of 2008 were offset by the initial benefits of Delphi�s $37.9 million acquisition of producing properties on July 24.
Natural gas prices declined significantly in the third quarter of 2008 from the highs reached at the end of the second quarter. While partially influenced by the strength of crude oil price changes, natural gas price changes are predominantly based on supply and demand fundamentals in the North American market. The continuing increase in crude oil prices through the end of the second quarter had a positive effect on the rise in natural gas prices, reaching a high of $11.77 per mcf for AECO near the end of the second quarter. In the third quarter, the collapse of all commodity prices began on the heels of financial and economic turmoil in the credit and capital markets. In the case of natural gas, hurricane activity in the Gulf of Mexico was minimal, storage levels increased as domestic U.S. natural gas production continued to grow and summer temperatures were moderate, resulting in lower demand for electricity through natural-gas fired power plants to operate air conditioners. During the third quarter, the AECO average daily spot price declined from $11.83 per mcf early in the quarter to $5.79 per mcf at the end of the third quarter.
Crude oil prices experienced a significant drop from the peak in mid July for West Texas Intermediate (WTI) of more than U.S. $145.00 per barrel to a range of between U.S. $60.00 to $70.00 per barrel in late October. For the three months ended September 30, 2008, WTI averaged $117.97 per barrel.
Funds from operations in the third quarter of 2008 were $18.2 million, or $0.24 per basic share, compared to $12.6 million, or $0.19 per basic share in the third quarter of 2007. This increase in cash flow was a result of higher cash netbacks from an improved oil and natural gas price environment and growth in production volumes. For the three months ended September 30, 2008, Delphi recognized approximately $200,000 in realized losses on Canadian dollar denominated physical contracts included in natural gas revenue and recognized a realized gain of approximately $100,000 on financial contracts and U.S. dollar denominated physical contracts. For the nine months ended September 30, 2008 the Company has recognized approximately $1.8 million in realized losses on financial and physical hedging contracts. Delphi recorded net earnings of $6.7 million in the third quarter of 2008, primarily due to an unrealized gain on risk management activities of $5.4 million after taxes.
Outlook
Delphi continues to expect production for the fourth quarter of 2008 to average between 6,800 and 7,000 boe/d, an 18 percent increase over the fourth quarter 2007.
Based upon an average realized natural gas price of approximately $8.25 per mcf, funds from operations (cash flow) for 2008 are forecast to be between $71.5 million ($0.97 per share) and $74.0 million ($1.01 per share), a 49 percent increase from $48.5 million ($0.72 per share) in 2007 as a result of increased production volumes and higher commodity prices. The Company expects its debt to cash flow ratio to be approximately 1.4 to 1 at December 31, 2008, with debt plus working capital of approximately $100.0 million on credit facilities of $140.0 million.
Upon closing of the acquisition in July, Delphi provided production guidance of 7,700 to 8,300 boe/d for 2009 based on an average AECO natural gas price of $8.00 per mcf, generating approximately $75.0 to $80.0 million of cash flow with the capital program for 2009 in the context of the cash flow generated. A lower average AECO price would result in reduced cash flow and capital program leading to a potential decrease in production guidance.
Positive drilling results and continued production growth, coupled with secure financial resources continue to favorably influence Delphi's capital investment decisions. The Company looks forward to reporting further positive results for the fourth quarter as part of its annual operational and financial results release in mid March 2009.
Conference Call
A conference call is scheduled for 9:00 a.m. Mountain Time (11:00 a.m. Eastern Time) on Thursday, November 6, 2008. The conference call number is 1-866-300-4047 or 416-641-6137. A brief presentation by David Reid, President and CEO and Brian Kohlhammer, VP Finance & CFO, will be followed by a question and answer period.
If you are unable to participate in the conference call, a taped broadcast will be available until November 13, 2008. To access the replay, dial 1-800-408-3053 or 416-695-5800. The passcode is 3272784.
For the full release, please visit Delphi's website at: http://www.delphienergy.ca
Additional Information
Additional information about Delphi is available on the Canadian Securities Administrators� System for Electronic Distribution and Retrieval (SEDAR) at www.sedar.com, at the Company�s website at www.delphienergy.ca or by contacting the Company at Delphi Energy Corp. Suite 300, 500 � 4th Avenue S.W., Calgary, Alberta, T2P 2V6 or by e-mail at info@delphienergy.ca.
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