Learn to trade in these market conditions - Click here Just Released!
Second Quarter 2008 Highlights
- Achieved record production of 6,202 barrels of oil equivalent per day (boe/d), marking the fifth consecutive quarter of production growth.
- Generated record funds from operations (cash flow) of $20.0 million ($0.29 per share), a 74 percent increase over $11.5 million ($0.17 per share) in the comparative quarter of 2007.
- Reduced net debt to 1.2 times annualized second quarter funds from operations, down from 1.8 times at the end of 2007. Net debt amounted to $97.2 million at the end of the second quarter.
- On July 29, 2008, the Company's lenders increased Delphi's credit facilities to $140 million, up from $125 million.
Financial Highlights ($ thousands except per unit amounts) Three Months Ended Six Months Ended June 30 June 30 % % 2008 2007 Change 2008 2007 Change ---------------------------------------------------------------------------- Petroleum and natural gas sales 38,569 24,779 56 70,781 46,753 51 Per boe 68.33 50.63 35 63.45 53.22 19 Funds from operations 19,965 11,469 74 37,024 22,134 67 Per boe 35.37 23.44 51 33.18 25.19 32 Per share - Basic 0.29 0.17 71 0.54 0.34 59 Per share - Diluted 0.28 0.17 65 0.53 0.34 56 Net earnings (loss) 49 797 (94) (690)(10,856) (94) Per boe 0.09 1.63 (94) (0.62) (12.36) (95) Per share - Basic - 0.01 (100) (0.01) (0.17) (94) Per share - Diluted - 0.01 (100) (0.01) (0.17) (94) Capital invested 7,489 4,311 74 33,987 20,307 67 Disposition of properties 2,950 - 100 2,950 - 100 Net capital invested 4,539 4,311 5 31,037 20,307 53 Acquisition of properties 3,850 10,871 (65) 3,850 10,871 (65) Total capital 8,389 15,182 (45) 34,887 31,178 (12) June 30, Dec. 31, % 2008 2007 Change Debt plus working capital deficiency (1) 97,172 100,658 (3) Total assets 323,791 311,735 4 Shares outstanding (000's) Basic 69,120 68,070 2 Diluted 73,862 73,551 - ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) excludes risk management asset or liability and the related current future income tax asset. Operational Highlights Three Months Ended Six Months Ended June 30 June 30 % % Production 2008 2007 Change 2008 2007 Change ---------------------------------------------------------------------------- Natural gas (mcf/d) 31,898 26,967 18 31,838 24,327 31 Crude oil (bbls/d) 368 423 (13) 378 395 (4) Natural gas liquids (bbls/d) 517 461 12 444 404 10 ---------------------------------------------------------------------------- Total (boe/d) 6,202 5,379 15 6,129 4,854 26 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
MESSAGE TO SHAREHOLDERS
Delphi Energy Corp. continued to achieve record production in the second quarter of 2008, with average daily production increasing for the fifth consecutive quarter. Production increased 43 percent year over year from an average of 4,322 barrels of oil equivalent per day (boe/d) in the first quarter of 2007 to 6,202 boe/d. Natural gas production comprised 87 percent of the Company's overall production which, combined with the increase in natural gas prices, contributed to record funds from operations (cash flow) in the second quarter.
The increase in natural gas prices in the second quarter of 2008 continues a trend which began in September 2007 when AECO was $4.48 per thousand cubic feet (mcf). While partially influenced by the strength of crude oil price increases, natural gas price increases are predominantly based on supply and demand fundamentals in the North American market. During the period, liquefied natural gas (LNG) imports to the United States remained below the historical average and well below record injections in the spring of 2007, as world prices for natural gas provided greater economic returns to offshore U.S. producers. Natural gas injections into storage in the United States through the second quarter resulted in storage levels being approximately 13 percent below last year's levels and approximately one percent below the five-year historical average. The continuing increase in crude oil prices has also had a positive effect on the rise in natural gas prices. During the second quarter, the AECO average daily spot price ranged from $8.55 per mcf early in the quarter to $11.77 per mcf at the end of the quarter.
Crude oil prices maintained momentum in the second quarter of 2008, approaching U.S. $145 per barrel late in the quarter. This increase can be attributed to continued strong global demand, production disruptions, geopolitical unrest in major producing regions and the devaluation of the U.S. dollar. The outlook for oil remains strong despite its lofty heights and growing concerns over the U.S. and global economies. For Canadian producers, the realized price for light crude oil is very similar to the price of West Texas Intermediate due to the Canadian dollar continuing to remain around parity with the U.S. dollar.
Funds from operations in the second quarter of 2008 were a record $20.0 million ($0.29 per basic share), compared to $11.5 million ($0.17 per basic share) in the same period of 2007. This is a result of strong cash netbacks from the increasing natural gas price environment and the Company's significant leverage to increasing natural gas prices. The second quarter of 2008 was the first quarter in the past 10 in which Delphi's risk management program resulted in a realized loss on hedging contracts. For the three months ended June 30, 2008, Delphi recognized approximately $2.8 million in realized losses on Canadian dollar denominated physical contracts, included in natural gas revenue, and recognized a realized loss of approximately $0.4 million on financial contracts and U.S. denominated physical contracts. For the six months ended June 30, 2008 the Company has recognized approximately $1.8 million in realized losses on hedging contracts. Despite the realized loss on risk management activities, Delphi recorded net earnings of $49,000 in the second quarter of 2008 as increased revenues helped offset the loss on hedging contracts.
The Company is focused on ensuring its capital program provides near-term production growth at attractive capital metrics. As a result of spring break-up, the Company's summer drilling program commenced late in the second quarter. Completion of first quarter projects and the late start-up of summer drilling resulted in a capital program for the second quarter of $7.5 million, with one well being drilled and subsequent completion operations continuing into the third quarter. Proceeds from the disposition of a minor property in North East British Columbia of $3.0 million resulted in a net capital program of $4.5 million in the quarter. In addition, the Company provided a $3.9 million cash deposit towards the acquisition of oil and natural gas properties. Excess cash flow over net capital and the cash deposit was used to pay down the Company's net debt.
With the reduction in net debt the Company's financial position continues to strengthen. At June 30, 2008, the Company had net debt, excluding the risk management liability and related current future income tax asset, of $97.2 million, down 11 percent from $109.7 million at March 31, 2008. The reduction in net debt was anticipated due to strong natural gas prices, production growth and a limited capital program in the second quarter because of spring break-up. Based on annualized second quarter funds from operations, Delphi improved its net debt ratio to 1.2 times funds flow from 1.6 times at the end of the first quarter. Net debt includes bank debt plus working capital deficiency excluding the risk management asset or liability and the related current future income tax asset. The annual credit review by the Company's lenders has also been completed. On July 29, 2008 the lenders renewed the production credit facility at $130.0 million and continue to make available the $10.0 million development credit facility. With the recent closing of Delphi's acquisition of properties in the Peace River Arch, described below, the Company has a strong enough cash flow and credit capacity of approximately $37.0 million to potentially expand the capital program.
On June 26, 2008, the Company announced the acquisition of oil and natural gas properties for $38.1 million, after closing adjustments, in the Peace River Arch area of North West Alberta and North East British Columbia. At the same time, the Company announced an equity offering of 6,316,000 common shares at $2.85 per share and 3,530,000 flow-through shares at $3.40 per share for proceeds of approximately $30.0 million ($28.1 million net). The financing transaction closed on July 17, 2008 and the acquisition of the properties was concluded on July 30, 2008. The acquisition was funded by the net proceeds of the equity offering and the Company's credit facilities.
OPERATIONAL REVIEW
As previously indicated, Delphi's second quarter capital program was limited in scope because of restricted surface access associated with spring break-up. The Company drilled and cased one well (1.0 net) in Hythe with completion and tie-in operations continuing into the third quarter. Additional Hythe activities included initiating the completion and tie-in operations on one well (1.0 net) drilled in the first quarter, spudding one well (1.0 net) late in the second quarter and several minor well reactivation / optimization projects. The Company has also received regulatory approval for downspacing on 45 sections of land in the Hythe area allowing two wells per section. The immediate benefits of downspacing include accelerated development of higher quality reservoirs and capital savings associated with location building, rig moves and wellsite equipping and tie-ins. At Bigstone, the Company spudded one well (0.6 net) and initiated several recompletion projects that are ongoing into the third quarter. Minor well, facility and gas gathering system maintenance and optimization projects were initiated at Fontas, East Central Alberta and North East British Columbia.
The Company is currently operating two drilling rigs at Hythe and Bigstone. At Hythe, the Company plans to drill six wells (6.0 net) during the third quarter on a range of prospects, including a shallow Doe Creek oil play, conventional multi-zone Cretaceous gas sands and horizontal wells targeting the Bluesky, Cadomin, Dunvegan and Nikanassin formations. The initial round of drilling will focus on conventional vertical wells to collect the necessary information to optimize future development of the area and to assist in fine-tuning the drilling and completion operations for two horizontal wells to be drilled later in the third quarter. Preliminary results are encouraging, and the Company looks forward to providing specific results as they become available. Looking beyond the current capital program, the Company has initiated the process of licensing an additional 11 horizontal wells (8.3 net) that could be drilled in the fourth quarter of 2008 or first quarter of 2009.
At Bigstone, the Company is drilling the first of two wells (1.1 net) planned for the third quarter. In addition, three recompletions are in progress to evaluate new fracture stimulation technologies in existing pools and pool extensions. Once again, preliminary results have been encouraging and continued success will result in a major recompletion program on existing wellbores and additional drilling to extend the current pool boundaries.
As noted, Delphi's acquisition of oil and natural gas properties in the Peace River Arch area of North West Alberta and North East British Columbia closed on July 30, 2008, adding approximately 650 boe/d of predominantly natural gas. At closing, the Company elected to participate in drilling one well (0.1 net) in Valhalla, a recompletion attempt on one well (0.1 net) in Pouce Coupe and a three well (0.7 net) reactivation program in the Clayhurst area. Multiple reactivation and optimization projects are in the planning stage, with execution planned for late Q3 or early Q4 2008. In addition, the technical teams have begun to assemble an inventory of drillable prospects for execution in late Q4 2008 or early Q1 2009.
OUTLOOK
Positive drilling results and continued production growth, coupled with improved natural gas prices and secure financial resources, continue to favorably influence Delphi's capital investment decisions. Delphi expects to spend a net capital program of approximately $60.0 million in 2008 - 81 to 84 percent of anticipated 2008 cash flow - drilling 20 to 25 wells. The majority of the capital will be directed towards drilling and completion activities in the Bigstone, Noel and Hythe core areas, with minimal capital being directed at the recently acquired assets. In Hythe, the Company will be pursuing development of the resource potential in the Bluesky, Cadomin, Dunvegan and Nikanassin formations. The Company holds approximately 86 sections of land in the area with an average working interest of 72 percent.
Production guidance for 2008 has been increased to between 6,350 and 6,550 boe/d. This increase is primarily a result of the acquisition of oil and natural gas properties in the Peace River Arch. Delphi's guidance for the third quarter of 2008 has been established at an average of 6,400 to 6,600 boe/d, a 14 percent increase over the third quarter of 2007.
Funds from operations for 2008 are now forecast to be between $71.5 million ($0.97 per share) and $74.0 million ($1.01 per share), up from $60.0 to $65.0 million ($0.87 to $0.95 per share) as a result of increased production from the acquisition and expected higher average natural gas prices. The Company has a year-end net debt target of less than $100.0 million on an average AECO price of $8.50 per mcf for 2008. Delphi's independent reserves evaluator, GLJ Petroleum Consultants Ltd., recently revised its future price forecast. Based on this updated price forecast the net asset value of the Company, including the recent acquisition of oil and natural gas properties, discounted at 8 per cent would increase to over $4.00 per share from $2.91 per share, as calculated and reported in the Company's 2007 annual report.
Delphi has a significant inventory of defined and repeatable conventional prospects concentrated within its core areas of operation. The multi-zone nature of Delphi's core areas and recently approved downspacing provisions contribute to the Company's large development drilling inventory. Delphi continues to pursue emerging technologies to enhance recoveries of existing reserves as well as untapped natural gas resources within the Company's current land holdings. Delphi is fully engaged in an active third and fourth quarter capital program and looks forward to reporting further positive results in the coming quarters.
CONFERENCE CALL
A conference call is scheduled for 9:00 a.m. Mountain Time (11:00 a.m. Eastern Time) on Thursday, July 31, 2008. The conference call number is 1-866-300-7687 or 416-641-6121. A brief presentation by Brian Kohlhammer, VP Finance & CFO and Michael Kaluza, Chief Operating Officer 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 August 7, 2008. To access the replay, dial 1-800-408-3053 or 416-695-5800. The passcode is 3265797.Delphi's second quarter 2008 financial statements and management's discussion and analysis are available on Delphi's website at www.delphienergy.ca and will be available on SEDAR at www.sedar.com within 24 hours.
Delphi Energy is a Calgary-based company that explores, develops and produces oil and natural gas in Western Canada. The Company is managed by a proven technical team. Delphi trades on the Toronto Stock Exchange under the symbol DEE.
This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", may", "will", "should", believe", "intends", "forecast", "plans", "guidance" and similar expressions are intended to identify forward-looking statements or information.
More particularly and without limitation, this press release contains forward looking statements and information relating to the Company's risk management program, petroleum and natural gas production, future funds flow from operations, capital programs, natural gas prices and debt levels. The forward-looking statements and information are based on certain key expectations and assumptions made by Delphi, including expectations and assumptions relating to prevailing commodity prices and exchange rates, applicable royalty rates and tax laws, future well production rates, the performance of existing wells, the success of drilling new wells, the capital availability to undertake planned activities and the availability and cost of labour and services.
Although the Company believes that the expectations reflected in such forward-looking statements and information are reasonable, it can give no assurance that such expectations will prove to be correct. Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the oil and gas industry in general such as operational risks in development, exploration and production, delays or changes in plans with respect to exploration or development projects or capital expenditures, the uncertainty of estimates and projections relating to production rates, costs and expenses, commodity price and exchange rate fluctuations, marketing and transportation, environmental risks, competition, the ability to access sufficient capital from internal and external sources and changes in tax, royalty and environmental legislation. Additional information on these and other factors that could affect the Company's operations or financial results are included in reports on file with the applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com). The forward-looking statements and information contained in this press release are made as of the date hereof for the purpose of providing the readers with the Company's expectations for the coming year. The forward-looking statements and information may not be appropriate for other purposes. Delphi undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
A barrel of oil equivalent (boe), derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil, may be misleading, particularly if used in isolation. A boe conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Non-GAAP Measures. The MD&A contains the terms "funds from operations", "funds from operations per share" and "netbacks" which are not recognized measures under Canadian generally accepted accounting principles. The Company uses these measures to help evaluate its performance. Management considers netbacks an important measure as it demonstrates its profitability relative to current commodity prices. Management uses funds from operations to analyze performance and considers it a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and to repay debt. Funds from operations is a non-GAAP measure and has been defined by the Company as net earnings plus the addback of non-cash items (depletion, depreciation and accretion, stock-based compensation, future income taxes and unrealized gain/(loss) on risk management activities) and excludes the change in non-cash working capital related to operating activities and expenditures on asset retirement obligations and reclamation. The Company also presents funds from operations per share whereby amounts per share are calculated using weighted average shares outstanding consistent with the calculation of earnings per share. Delphi's determination of funds from operations may not be comparable to that reported by other companies nor should it be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with Canadian GAAP.
MANAGEMENT DISCUSSION AND ANALYSIS
(all tabular amounts are expressed in thousands of dollars, except per unit amounts)
The management discussion and analysis has been prepared by management and reviewed and approved by the Board of Directors of Delphi Energy Corp. ("Delphi" or "the Company"). The discussion and analysis is a review of the financial results of the Company based upon accounting principles generally accepted in Canada. Its focus is primarily a comparison of the financial performance for the three and six months ended June 30, 2008 and 2007 and should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2007. The discussion and analysis has been prepared as of July 24, 2008.
OPERATION AND FINANCIAL HIGHLIGHTS
Delphi Energy Corp. continued to achieve production growth in the second quarter of 2008 with average daily production increasing on a quarter over quarter basis for the fifth consecutive quarter from an average of 4,322 barrels of oil equivalent per day (boe/d) in the first quarter of 2007 to 6,202 boe/d, an increase of 43 percent over the period. Second quarter sales volumes represent record quarterly production. Natural gas production comprised 87 percent of the Company's average production which coupled with the increase in natural gas prices contributed to record funds from operations (cash flow) in the second quarter.
Funds from operations in the second quarter of 2008 were a record $20.0 million or $0.29 per basic share, compared to $11.5 million or $0.17 per basic share in the second quarter of 2007, as a result of strong cash netbacks from an increasing natural gas price environment and the benefit of the Company's significant leverage to increasing natural gas prices. The second quarter of 2008 was the first quarter in the past 10 in which Delphi's risk management program resulted in a realized loss on hedging contracts. For the three months ended June 30, 2008, Delphi recognized approximately $2.8 million in realized losses on Canadian dollar denominated physical contracts, included in natural gas revenue, and recognized a realized loss of approximately $0.4 million on financial contracts and U.S. dollar denominated physical contracts. For the six months ended June 30, 2008 the Company has recognized approximately $1.8 million in realized losses on hedging contracts.
The Company is focused on ensuring its capital program provides near term production growth at attractive capital metrics. As a result of spring break-up, the Company's summer drilling program commenced late in the second quarter. Completion of first quarter projects and the late start-up of summer drilling resulted in a capital program for the second quarter of $7.5 million, with one well being drilled with completion operations continuing into the third quarter. Proceeds on the disposition of a minor property in North East British Columbia of $3.0 million resulted in a net capital program of $4.5 million in the quarter. In addition, the Company provided a $3.9 million cash deposit towards the acquisition of oil and natural gas properties. Excess cash flow over net capital and the cash deposit was used to pay down the Company's net debt.
With the reduction in net debt, the Company's financial position continued to strengthen in the second quarter of 2008. At June 30, 2008, the Company had net debt, excluding the risk management liability and the related current future income taxes of $97.2 million, down from $109.7 million at March 31, 2008. The reduction in net debt was anticipated due to strong natural gas prices, production growth and a planned lower capital program in the second quarter due to spring break-up. On an annualized second quarter funds from operations basis, Delphi improved its net debt to funds flow ratio to 1.2 times from 1.6 times at the end of the first quarter. Net debt includes bank debt plus working capital deficiency excluding the risk management asset or liability and the related current future income tax asset. The annual credit review by the Company's lenders has also been completed. As of July 29, 2008, the lenders have renewed the production credit facility at $130.0 million and continue to make available the $10.0 million development credit facility. With the recent closing of the acquisition, described below, the Company has strong cash flow and credit capacity of approximately $37.0 million to potentially expand the capital program.
On June 26, 2008, the Company announced the proposed acquisition of oil and natural gas properties for $38.1 million, after closing adjustments, in the Peace River Arch area of North West Alberta and North East British Columbia. At the same time, the Company also announced an equity offering of 6,316,000 common shares at $2.85 per share and 3,530,000 flow-through shares at $3.40 per share for proceeds of approximately $30.0 million (net proceeds of $28.1 million). The financing transaction was closed on July 17, 2008 and subsequently the acquisition of the properties was concluded on July 30, 2008. The acquisition was funded by the net proceeds of the equity offering and the Company's credit facilities.
BUSINESS ENVIRONMENT Benchmark Prices Three Months Ended Six Months Ended June 30 June 30 % % 2008 2007 Change 2008 2007 Change ---------------------------------------------------------------------------- Natural Gas NYMEX (US $/mmbtu) 10.69 7.53 42 9.39 7.36 28 AECO (CDN $/mcf) 10.22 7.09 44 9.10 7.25 26 Crude Oil West Texas Intermediate (US $/bbl) 123.98 65.02 91 110.94 61.63 80 Edmonton Light (CDN $/bbl) 126.07 73.78 71 111.79 70.84 58 Foreign Exchange Rate Canadian to US dollar 1.01 1.10 (8) 1.01 1.13 (11) US to Canadian dollar 0.99 0.91 9 0.99 0.88 13 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Natural Gas
United States natural gas prices are commonly referenced to the New York Mercantile Exchange Henry Hub in Louisiana (NYMEX) while Canadian natural gas prices are typically referenced to the Canadian Alberta Energy Company interconnect with the TransCanada Alberta system (AECO). Natural gas prices are influenced more by North American supply and demand than global fundamentals, however, with the growth in natural gas liquefaction and regasification facilities around the world this North American supply and demand balance has become subject to disruption. The increase in capacity of natural gas liquefaction and regasification facilities has resulted in natural gas in North America becoming a more global commodity with influences from world weather conditions and global supply in the form of liquefied natural gas (LNG) delivered to the United States.
In the second quarter of 2008, natural gas prices continued to increase, a trend which had begun from the lows of $4.48 per thousand cubic feet (mcf) for AECO in September 2007. While partially influenced by the strength of crude oil price increases, natural gas price increases are predominantly based on supply and demand fundamentals in the North American market. In the first quarter, with global natural gas prices considerably higher than the prices in the United States, LNG imports to the U.S. throughout the winter were less than average and significantly less than the peak imports during the summer of 2007. Cold winter weather persisted to the end of March 2008 in the major natural gas consuming regions of central Canada and the northeast United States. By the end of the natural gas withdrawal season, an increase of over 400 billion cubic feet had been taken out of natural gas storage compared to the previous withdrawal season. Natural gas in storage in the United States had been drawn down below five year average levels, a key measure of supply. In the second quarter, LNG imports to the United States continued to remain below the historical average, also well below the record injections in the spring of 2007, as world prices for natural gas provided greater economic returns to offshore U.S. producers. Natural gas injections into storage in the United States through the second quarter have resulted in storage levels being approximately 13 percent below last year's levels at this time and approximately one percent below the five year historical average. The continuing increase in crude oil prices has also had a positive affect on the rise in natural gas prices. During the second quarter, the AECO average daily spot price ranged from a low of $8.55 per mcf early in the quarter to a high of $11.77 per mcf at the end of the second quarter. For internal forecasting purposes, looking toward the remainder of 2008, Delphi anticipates AECO natural gas prices will now average approximately $8.00 to $8.50 per mcf.
Crude Oil
West Texas Intermediate at Cushing, Oklahoma (WTI) is the benchmark reference for North American crude oil prices. Canadian crude oil prices are based upon postings, primarily at Edmonton, Alberta and represent the WTI price adjusted for quality and transportation differentials as well as the US/CDN dollar exchange rate.
The second quarter of 2008 maintained the momentum for crude oil prices which continued to increase, approaching U.S. $145.00 per barrel late in the second quarter, on continued strong global demand, production disruptions, never ending geopolitical unrest in major producing regions and the devaluation of the U.S. dollar. The outlook for oil remains strong despite its lofty heights and growing concerns over the U.S. and global economies. For Canadian producers the realized price for light crude oil is very similar to the price of West Texas Intermediate due to the Canadian dollar continuing to remain around parity with the U.S. dollar. For internal forecasting purposes, Delphi now anticipates WTI to average between U.S. $100.00 to $110.00 per barrel and the Canadian dollar to remain at, or near, par with the U.S. dollar throughout 2008.
Prices for heavy oil and other lesser quality crude oils trade at a discount or differential to light crude oil due to the additional costs in the refining process. The average differential in the second quarter of 2008 was $21.43 per barrel compared to $21.02 per barrel in the second quarter of 2007. The increase in the average differential, offset by higher light oil prices, resulted in Bow River crude prices averaging $104.63 per barrel compared to $50.91 per barrel in the second quarter of 2007.
Industry Cost of Services
For oil and gas producers lower costs of services existed through the 2007/2008 winter drilling season with a significant improvement in the skill level of the oilfield crews and fewer equipment breakdowns due to maintenance of the equipment through the summer and fall of 2007. The higher crude oil and natural gas prices experienced in 2008 so far are expected to lead to increased demand for oilfield services and equipment and higher costs of services heading into the busy winter drilling season.
FINANCIAL STRATEGY
The Company maintains an active risk management program as an integral part of its overall financial strategy to mitigate volatility in funds from operations resulting from fluctuating commodity prices. The strategy takes advantage of the upward swings in natural gas prices as a result of the changes in demand/supply fundamentals and/or the movement of significant financial assets invested in the natural gas market as a pure commodity play. Delphi's risk management program consists of both fixed price contracts and costless collars, which provide downside protection and the opportunity to share in the upside if market prices increase above the floor price for the costless collar. If market prices are above fixed price contracts or the ceiling price of costless collars, the Company would continue to achieve its downside protection while realizing losses on these hedging contracts. Currently, Delphi has hedged approximately 42 percent of its before-royalty natural gas production at a predominantly AECO based average floor price of $7.99 per mcf for the remaining two quarters of 2008. Delphi has a strategy of hedging between 40 to 50 percent of its natural gas production as long as demand/supply fundamentals indicate volatile markets in the future. As the Company's financial condition improves and/or demand/supply fundamentals move toward equilibrium or reduced supply, Delphi will manage its hedging program accordingly to take advantage of exposure to higher natural gas commodity prices.
Delphi continues to direct efforts at maintaining or reducing its controllable costs. Increasing production at its various operating fields through Company owned infrastructure reduces fixed costs on a per boe basis and improves netbacks. Field operators are encouraged to undertake preventative maintenance on field infrastructure and wellsite equipment to minimize production downtime and prevent significant operating costs associated with repairs. In a cost environment which continues to be affected by quality labour shortages and increasing costs of supplies, the Company strives to achieve improvement in its costs of production and at a minimum maintain current production costs.
Maintaining or improving strong operating netbacks per boe through the risk management program and the control of costs associated with production operations, allows the Company to pursue its planned capital program with greater confidence that financial flexibility will be maintained while incurring capital expenditures to grow production volumes. The Company expects to maintain a minimum operating netback per boe in the $29.00 - $31.00 range as it has in the past three years. The risk management program has been and will continue to be an integral part of ensuring operating netbacks in this range during periods of price volatility and excess natural gas supply.
The annual capital expenditure program will continue to be slightly less than forecast funds from operations. Additional capital may be approved as a result of incremental cash from greater than expected production growth, higher than forecast cash netbacks or other sources of financing.
Delphi continues to be focused on reducing its leverage and improving its financial flexibility through net debt reduction or increasing funds flow growth resulting in a lower net debt to annualized quarterly funds from operations ratio. The Company is focused on achieving its internal target range for this ratio of 1.3 to 1.5 times.
SELECTED INFORMATION The following table sets forth certain information of the Company for the past eight consecutive quarters. Jun. 30 Mar. 31 Dec. 31 Sept. 30 Jun. 30 2008 2008 2007 2007 2007 ---------------------------------------------------------------------------- Production Natural gas (mcf/d) 31,898 31,777 30,610 28,196 26,967 Oil (bbl/d) 368 387 346 579 423 Natural gas liquids (bbl/d) 517 372 420 422 461 ---------------------------------------------------------------------------- Barrels of oil equivalent (boe/d) 6,202 6,056 5,868 5,700 5,379 Financial ($ thousands except per unit amounts) Petroleum and natural gas revenue 38,569 32,212 26,632 24,548 24,779 Funds from operations 19,965 17,059 13,747 12,600 11,469 Per share - basic 0.29 0.25 0.20 0.19 0.17 Per share - diluted 0.28 0.25 0.20 0.18 0.17 Net earnings (loss) 49 (739) 1,732 (1,348) 797 Per share - basic - (0.01) 0.03 (0.02) 0.01 Per share - diluted - (0.01) 0.03 (0.02) 0.01 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Mar. 31 Dec. 31 Sept. 30 2007 2006 2006 ---------------------------------------------------------------------------- Production Natural gas (mcf/d) 21,658 24,919 25,403 Oil (bbl/d) 366 388 444 Natural gas liquids (bbl/d) 346 441 412 ---------------------------------------------------------------------------- Barrels of oil equivalent (boe/d) 4,322 4,982 5,090 Financial ($ thousands except per unit amounts) Petroleum and natural gas revenue 21,974 22,928 21,587 Funds from operations 10,665 11,817 10,902 Per share - basic 0.17 0.19 0.18 Per share - diluted 0.17 0.19 0.18 Net earnings (loss) (11,653) 290 658 Per share - basic (0.18) - 0.01 Per share - diluted (0.18) - 0.01 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Production for the last eight consecutive quarters reflects the following events: The change in production volumes from the third quarter of 2006 to the first quarter of 2007 was due to a reduced capital program leading to production declines and the disposition of several minor, non-operated properties in the latter half of 2006. In 2007 success at Bigstone, Alberta throughout the year and Noel, British Columbia in the third quarter complemented the mid-year start up of production at Tower Creek, Alberta resulting in consistent quarter over quarter production growth. Production increased in the first half of 2008 due to a successful winter program in the core areas. Revenue and funds from operations reflect the cycle of natural gas prices and production volumes.
Natural gas prices over the past two years have reflected the cyclical nature of demand. Higher prices in the winter months, reflecting demand for heating, weaken through the summer months as production is placed in storage for the upcoming heating season demand. Natural gas prices in the second quarter of 2008 did not follow the cyclical trend expected, as prices continued to increase coming out of the winter heating season due to concerns over natural gas supply in storage and the continued increase in crude oil prices. In the first quarter of 2007, net earnings were significantly reduced by the impairment of goodwill in the amount of $12.1 million. In the first half of 2008, the Company achieved record cash flow of $37.0 million or $0.54 per share, due to continued production growth and increasing natural gas and crude oil prices.
DRILLING RESULTS Three Months Ended Six Months Ended June 30, 2008 June 30, 2008 Gross Net Gross Net ---------------------------------------------------------------------------- Natural gas wells 1.0 1.0 11.0 8.0 Oil wells - - 1.0 1.0 ---------------------------------------------------------------------------- Total wells 1.0 1.0 12.0 9.0 Success rate (%) 100 100 100 100 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The Company had another successful quarter with the drill bit resulting in a drilling success rate of 100 percent. The Company has in excess of one hundred drilling locations identified within its core areas of operations. CAPITAL INVESTED Three Months Ended Six Months Ended June 30 June 30 % % 2008 2007 Change 2008 2007 Change ---------------------------------------------------------------------------- Land - 13 (100) - 13 (100) Seismic - 85 (100) 3 214 (99) Drilling and completions 4,115 2,100 96 22,611 12,744 77 Equipping and facilities 2,321 1,822 27 9,248 5,800 59 Capitalized expenses 1,030 195 428 1,667 1,165 43 Other 23 96 (76) 458 371 23 ---------------------------------------------------------------------------- Capital invested 7,489 4,311 74 33,987 20,307 67 Disposition of properties (2,950) - 100 (2,950) - 100 ---------------------------------------------------------------------------- Net capital invested 4,539 4,311 5 31,037 20,307 53 ---------------------------------------------------------------------------- Acquisition of properties 3,850 10,871 (65) 3,850 10,871 (65) Total capital 8,389 15,182 (45) 34,887 31,178 12 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
As a result of spring break-up, the Company's summer drilling program commenced late in the second quarter. Completion of first quarter projects and the late start-up of summer drilling resulted in a gross capital program for the second quarter of $7.5 million. Proceeds on the disposition of a minor property in North East British Columbia of $3.0 million resulted in a net capital program of $4.5 million in the quarter. In addition the Company was required to provide a $3.9 million cash deposit towards the acquisition of oil and gas properties which closed on July 30, 2008.
Year to date, the Company has directed the majority of capital to the drilling and completion of six wells at Bigstone, four wells at Hythe in Alberta and two wells at Noel, British Columbia.
PRODUCTION Three Months Ended Six Months Ended June 30 June 30 % % 2008 2007 Change 2008 2007 Change ---------------------------------------------------------------------------- Natural gas (mcf/d) 31,898 26,967 18 31,838 24,327 31 Crude oil (bbls/d) 368 423 (13) 378 395 (4) Natural gas liquids (bbls/d) 517 461 12 444 404 10 ---------------------------------------------------------------------------- Total (boe/d) 6,202 5,379 15 6,129 4,854 26 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Production for the three months ended June 30, 2008 (the "Quarter") averaged 6,202 boe/d representing an increase of 15 percent over the comparative period primarily due to the successful drilling and optimization programs at Bigstone, Hythe and other core areas. Delphi continues to deliver quarter over quarter organic growth and is well positioned for future production increases within its core assets. The Company's production portfolio for the six months ended June 30, 2008 was weighted 87 percent to natural gas, six percent to crude oil and seven percent to natural gas liquids.
Crude oil production was 13 percent lower for the three months ended June 30, 2008 primarily due to downtime in east central Alberta and natural production declines in the Bigstone area.
The increase in production of natural gas liquids is consistent with the increase in natural gas volumes.
REALIZED SALES PRICES Three Months Ended Six Months Ended June 30 June 30 2008 2007 % Change 2008 2007 % Change ---------------------------------------------------------------------------- AECO ($/mcf) 10.22 7.09 44 9.10 7.25 26 Heating content and marketing ($/mcf) 0.64 0.65 (2) 0.54 0.69 (22) Gain(loss) on physical contracts ($/mcf) (0.97) 0.45 - (0.28) 0.88 - Gain(loss) on financial contracts ($/mcf) (0.12) 0.01 - (0.03) 0.01 - ---------------------------------------------------------------------------- Realized gas price ($/mcf) 9.77 8.20 19 9.32 8.83 6 Realized oil price ($/bbl) 116.36 59.24 96 100.27 56.39 78 Realized natural gas liquids price ($/bbl) 103.10 56.61 82 96.14 52.91 82 ---------------------------------------------------------------------------- Total realized sales price ($/boe) 68.33 50.63 35 63.45 53.22 19 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
For the three and six months ended June 30, 2008, Delphi had a realized loss from its risk management program of $3.2 million and $1.8 million, respectively. For the quarter, the realized loss was $1.09 per mcf with physical contracts contributing $0.97 per mcf and financial contracts contributing $0.12 per mcf. For the six months ended June 30, 2008, the average realized gas price was six percent higher than the comparable period due to an increase in the price of natural gas.
Excluding hedges, the Company continues to receive higher than the AECO spot price on natural gas sales due to the high heating content of its natural gas production and the sale of approximately 3,500 million British thermal units (mmbtu) per day on the Alliance pipeline which is priced at the Chicago Monthly Index.
The following table outlines the premium (discount) Delphi realized on natural gas prices compared to the average quarterly AECO price due to the risk management program, quality of production and gas marketing arrangements. The second quarter of 2008 was the first quarter in the past ten quarters in which Delphi realized a net hedging loss in its risk management program.
Jun. 30 Mar. 31 Dec. 31 Sept. 30 2008 2008 2007 2007 ---------------------------------------------------------------------------- Natural Gas Price Delphi realized ($/mcf) 9.77 8.91 7.61 7.20 AECO average ($/mcf) 10.22 7.97 6.15 5.14 Premium(discount) to AECO (4%) 12% 24% 40% Hedging gain (loss) ($000's) (3,153) 1,371 2,996 3,875 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Jun. 30 Mar. 31 Dec. 31 Sept. 30 2007 2007 2006 2006 ---------------------------------------------------------------------------- Natural Gas Price Delphi realized ($/mcf) 8.20 9.61 8.41 7.20 AECO average ($/mcf) 7.06 7.40 6.90 6.04 Premium(discount) to AECO 16% 30% 22% 19% Hedging gain (loss) ($000's) 1,130 2,780 2,987 3,532 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Delphi's oil production is slightly better than medium grade oil; therefore the Company's average price fluctuates with the quality differential. Increased production of light oil at Bigstone continues to high grade the Company's quality of crude oil resulting in pricing more reflective of light oil. Realized natural gas liquids prices have increased due to the increase in the price received for condensate, the primary component of the Company's natural gas liquid production.
RISK MANAGEMENT ACTIVITIES
Delphi enters into both financial and physical commodity contracts as part of its risk management program to manage commodity price fluctuations designed to ensure sufficient cash is generated to fund its capital program particularly when commodity prices are extremely volatile. Delphi makes a concerted effort to hedge production volumes at prices greater than the upper limit of the historical three to five year AECO price range of $5.25 to $8.40 per mcf and is quick to react to price aberrations such as those experienced at the end of 2005. Another component of the risk management program is to layer fixed price contracts in over a period of time, as opposed to locking in a significant portion of volumes at any one point in time, to take advantage of unexpected price spikes. For natural gas production, Delphi has hedged approximately 42 percent of its before-royalty natural gas production at a predominately AECO based average floor price of $7.99 per mcf for the remainder of 2008.
With respect to financial contracts, which are derivative financial instruments, management has elected not to use hedge accounting and consequently records the fair value of its natural gas financial contracts on the balance sheet at each reporting period with the change in the fair value being classified as unrealized gains and losses in the statement of earnings. The changes in the fair value of the United States (US) dollar denominated physical contracts are also classified as unrealized gains and losses in the statement of earnings.
The Company recognized an unrealized non-cash loss of $7.6 million on financial contracts and US dollar denominated physical contracts in the first half of 2008. The fair values of these contracts are based on an approximation of the amounts that would have been paid to or received from counterparties to settle the contracts outstanding at the end of the period having regard to forward prices and market values provided by independent sources. Due to the inherent volatility in commodity prices, actual amounts realized may differ from these estimates.
The Company has fixed the price applicable to future production through the following contracts.
Type of Quantity Contract Price Time Period Commodity Contract Contracted ($/unit) ---------------------------------------------------------------------------- April 2008 - October 2008 Natural Gas Physical 4,000 GJ/d $7.21 fixed April 2008 - October 2008 Natural Gas Physical 3,000 GJ/d $7.61 fixed April 2008 - October 2008 Natural Gas Physical 2,000 mmbtu/d U.S. $8.00 fixed April 2008 - October 2008 Natural Gas Financial 1,000 GJ/d $8.07 fixed April 2008 - October 2008 Natural Gas Financial 1,000 GJ/d $8.07 fixed April 2008 - $7.75 floor/ October 2008 Natural Gas Financial 1,000 GJ/d $9.55 ceiling April 2008 - December 2008 Natural Gas Physical 2,000 GJ/d $7.82 fixed April 2008 - March 2009 Natural Gas Physical 2,000 GJ/d $7.30 fixed November 2008 - March 2009 Natural Gas Physical 4,000 GJ/d $7.46 fixed November 2008 - March 2009 Natural Gas Financial 2,000 GJ/d $7.62 fixed November 2008 $7.00 floor/ - March 2009 Natural Gas Physical 2,000 GJ/d $8.05 ceiling November 2008 - March 2009 Natural Gas Physical 2,000 mmbtu/d U.S. $9.00 fixed November 2008 $8.00 floor/ - March 2009 Natural Gas Financial 1,000 GJ/d $11.07 ceiling April 2009 - October 2009 Natural Gas Physical 1,000 GJ/d $7.08 fixed April 2009 - $8.25 floor/ October 2009 Natural Gas Physical 2,000 GJ/d $10.00 ceiling April 2009 - October 2009 Natural Gas Physical 1,000 mmbtu/d U.S. $8.18 fixed April 2009 - October 2009 Natural Gas Physical 2,000 GJ/d $8.59 fixed ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The Company accounts for its Canadian dollar physical sales contracts, which were entered into and continue to be held for the purpose of delivery of production, in accordance with its expected sale requirements as executory contracts on an accrual basis rather than as non-financial derivatives.
The combination of the significant increase in natural gas prices over the past three months and the Alberta royalty changes, which become effective January 1, 2009, have caused the Company to be very cautious in executing additional risk management contracts for 2009. Based on past natural gas pricing cycles, the Company would have normally executed additional contracts at forward prices which were available over the past several months. However, in light of the possibility that natural gas prices may increase even further and the proposed new royalty rates which will result in a greater percentage of the prices going to the Alberta government, the Company is concerned about the effect this combination may have on the Company's natural gas netbacks on hedged volumes if natural gas prices do increase substantially going forward. Evaluation of the proper time and form of contract continues.
REVENUE Three Months Ended Six Months Ended June 30 June 30 2008 2007 % Change 2008 2007 % Change ---------------------------------------------------------------------------- Natural gas 28,373 20,100 41 54,002 38,828 39 Crude oil 3,897 2,280 71 6,898 4,032 71 Natural gas liquids 4,851 2,375 104 7,769 3,869 101 Sulphur 1,783 - 100 2,299 - 100 Realized gain (loss) on risk management (335) 24 - (187) 24 - ---------------------------------------------------------------------------- Total 38,569 24,779 56 70,781 46,753 51 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The increase in revenue over the comparative periods is attributed to the increase in production volumes and the increase in crude oil and natural gas prices. For the three months ended June 30, 2008 revenue increased 56 percent over the comparative period due to a 15 percent increase in production volumes and a 19 percent increase in the realized natural gas price.
ROYALTIES Three Months Ended Six Months Ended June 30 June 30 2008 2007 % Change 2008 2007 % Change ---------------------------------------------------------------------------- Total 8,346 3,843 117 14,208 7,051 102 Per boe 14.79 7.85 88 12.74 8.03 59 Percent of total revenue including hedges 21.5 15.5 39 20.0 15.1 33 Percent of total revenue excluding hedges 20.0 16.3 23 19.6 16.4 20 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
The Company pays royalties to provincial governments (Crown), freeholders, which can be individuals or companies, and other oil and gas operators that own surface or mineral rights. Crown royalty rates are calculated on a sliding scale based on commodity prices and individual well production rates. Royalty rates can change due to price fluctuations or changes in production volumes on a well by well basis subject to a minimum and maximum rate restriction ascribed by the Crown. For the three months ended June 30, 2008, royalties as a percentage of revenue increased over the comparative period due to Tower Creek coming off royalty holiday, hedge losses realized compared to gains in comparative period and increased commodity prices realized in the quarter. Delphi is expecting royalties as a percentage of revenue, before hedging, to be between 20 and 22 percent in 2008.
OPERATING EXPENSES Three Months Ended Six Months Ended June 30 June 30 2008 2007 % Change 2008 2007 % Change ---------------------------------------------------------------------------- Total 6,168 4,798 29 11,321 8,635 31 Per boe 10.93 9.80 12 10.15 9.83 3 ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
Operating expenses on a per boe basis for the three and six month period ended June 30, 2008, increased 12 percent and three percent respectively, over the comparative periods. The increase in operating costs is primarily due to a high level of workover and maintenance activity in 2008 compared to 2007. In addition, the Company incurred significant cost adjustments for prior years from the facility operator on the newly acquired Hythe property. Delphi expects operating costs to be $8.50 to $9.00 per boe for the remainder of 2008.
TRANSPORTATION EXPENSES Three Months Ended Six Months Ended June 30 June 30 2008 2007 % Change 2008 2007 % Change ---------------------------------------------------------------------------- Total 1,548 1,902 (19) 3,125 3,231 (3) Per boe 2.74 3.89 (29) 2.80 3.68 (24) ---------------------------------------------------------------------------- ----------------------------------------------------------------------------
In British Columbia, infrastructure is owned by Spectra Energy that enables natural gas producers to avoid facility construction in exchange for regulated gathering, processing and transmission fees. This all-in charge is included in transportation expenses.
On a
More News:
Market Updates |
Stock Alerts |
All Trading News |
Stock Index
About TradingMarkets | Contact | Advertise | Careers | Link to Us | Site Map | Help | Terms & Conditions | Privacy Policy | Return Policy | Testimonials | Feedback
