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Daylight delivered record production of 22,810 barrels of oil equivalent ("boe") per day during Q1 2009, increasing production by 15% over our Q1 2008 production of 19,804 boe per day. This was accomplished as a result of the continued success of our capital program and Daylight's production being impacted for a full quarter by several key strategic transactions executed during the previous quarter. Daylight continues to provide solid execution of our business plan while maintaining a healthy balance sheet, delivering a conservative payout ratio of 48% on the strength of continued operational success and a very effective hedging program. A key component of our business plan is to continue to add to our portfolio of low geological risk, repeatable drilling locations while maintaining the financial flexibility to pursue additional strategic acquisition opportunities. Subsequent to Q1 2009, Daylight delivered on both of these goals by announcing an equity financing for $172 million and the proposed acquisition of Intrepid Energy Corporation ("Intrepid") with production of approximately 3,000 boe per day in Daylight's core West Central area. Intrepid's assets are direct "bolt-ons" to Daylight's core properties of Obed and Sylvan Lake and add a complementary West Central property at Whitecourt that includes multiple, low risk drilling opportunities. Included in the acquisition are over 75,000 net acres of undeveloped land. Daylight continues to actively review numerous additional opportunities in what we consider an attractive market for acquisitions of oil and gas assets.
Q1 2009 OPERATIONAL UPDATE
Daylight drilled 20 gross (6.1 net) wells during Q1 2009, focused primarily on our broad inventory of multi-zone Cretaceous opportunities across our Peace River Arch and West Central core areas in the Alberta Deep Basin. Drilling success was 100% for the quarter, reflecting the strong technical capabilities within Daylight and the low geological risk, repeatable nature of our drilling inventory. Wells drilled include both vertical and horizontal wells that continue to confirm the breadth of the geological play types we are pursuing in the Deep Basin including the Cadomin, Nikanassin, Montney and various Cretaceous horizons. Given the recovery of heavy oil prices late in Q1 2009, Daylight also drilled two wells in our Wildmere property in the Lloydminster zone. The Trust will now reduce the pace of our drilling program until Q3 2009 when we expect cost reductions will begin to take hold from service providers, allowing the Trust to focus on evaluating additional strategic acquisition opportunities in the interim. With the reduction in capital activity in the short term as Daylight focuses on transactions, and with spring breakup and a major plant turnaround in Kaybob occurring in Q2 2009, Daylight anticipates lower production in Q2 2009 near the lower end of our 2009 guidance range. However, Daylight maintains our full year guidance for 2009 of 22,500 - 23,500 boe per day prior to including the impact of the Intrepid acquisition. Daylight will update our guidance upon close of the Intrepid acquisition, currently anticipated to occur in mid June 2009.
In our Elmworth and Bilbo farmins, Daylight drilled 4 gross (1.4 net) wells during Q1 2009 and has now completed drilling on eight wells of our nine well earning program. The drilling of the final earning well was deferred to the third quarter of 2009 with the consent of the farmor and no change to the earning terms. The first of these wells came on stream in early March. Results of the wells drilled and completed to date have met our expectations both geologically and from preliminary production results. These strategic farmins have allowed Daylight to effectively utilize our capital to earn lands in our core areas and add to our future inventory of well locations.
On March 3, 2009 the Province of Alberta announced a three-point incentive program designed to stimulate the province's energy sector through a system of royalty credits and new well royalty reductions. Currently Crown royalties represent approximately 78% of Daylight's total royalties paid. As an operator with the majority of our drilling activity in the Province of Alberta and our focus on deep horizontal resource play wells, Daylight will be a major beneficiary of the three-point incentive program. Based on the above benefit, we announced during the quarter that the Trust had increased our 2009 capital budget to $125 - $140 million of expenditures.
DAYLIGHT RESOURCES TRUST - HIGHLIGHTS
- Q1 2009 production volumes were a record 22,810 boe per day, an increase of 15% from Q1 2008 volumes of 19,804 boe per day.
- Subsequent to the end of Q1 2009, Daylight announced an equity financing for gross proceeds of $172 million (including full exercise of the $22 million over-allotment option) and the proposed acquisition of Intrepid which produces approximately 3,000 boe per day within Daylight's core West Central area.
- The Trust continues to have an enviable hedging position in the current low commodity price environment with 42% of mid-range full year 2009 production guidance hedged at very favorable prices. During Q1 2009, Daylight recognized a realized gain of $25.3 million on derivative contracts and at March 31, 2009 had an unrealized mark to market gain on derivative contracts of $73.4 million.
- Reported payout ratio for Q1 2009 of 48% continues Daylight's strategy of conservative financial practices designed to position the Trust with a strong balance sheet.
FIRST QUARTER FINANCIAL RESULTS
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Financial Q1 Q4 Q1
(CDN$ thousands, except unit and per unit data) 2009 2008 2008
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Petroleum and natural gas revenues $ 71,893 $ 91,311 $113,986
Operating netback 56,316 58,266 68,763
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Funds from operations 44,895 50,075 58,667
Per unit - Basic 0.50 0.56 0.75
- Diluted 0.45 0.52 0.66
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Cash distributions declared 21,657 35,193 23,333
Per unit 0.24 0.39 0.30
Payout ratio 48% 70% 40%
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Capital expenditures 59,413 38,766 43,630
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Units outstanding (000s)
Basic 90,239 90,239 77,914
Diluted 106,517 106,050 94,096
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FIRST QUARTER OPERATIONAL RESULTS
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Operational
(Per boe amounts may not add exactly due to Q1 Q4 Q1
rounding) 2009 2008 2008
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Average daily production
Natural gas (mcf/d) 91,668 82,572 67,691
Light oil (bbls/d) 3,935 4,086 5,174
Heavy oil (bbls/d) 2,117 2,798 2,181
NGLs (bbls/d) 1,480 1,217 1,167
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Oil & NGLs (bbls/d) 7,532 8,101 8,522
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Combined (boe/d) 22,810 21,863 19,804
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Average prices received
Natural gas ($/mcf) $ 5.26 $ 7.06 $ 7.92
Light oil ($/bbl) 46.17 55.28 91.40
Heavy oil ($/bbl) 37.57 45.20 71.54
NGLs ($/bbl) 38.81 43.27 74.91
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Oil & NGLs ($/bbl) $ 42.31 $ 50.00 $ 84.06
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Combined ($/boe) $ 35.02 $ 45.40 $ 63.25
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$ per boe
Petroleum and natural gas revenues $ 35.02 $ 45.40 $ 63.25
Royalties (6.87) (9.35) (12.06)
Realized gain on derivative contracts 12.32 6.08 -
Operating expenses (11.91) (11.95) (12.08)
Transportation expenses (1.13) (1.20) (0.95)
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Operating netback $ 27.43 $ 28.98 $ 38.16
G&A - cash charge (3.35) (2.23) (2.04)
Cash financial charges (2.21) (1.84) (3.56)
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Funds from operations $ 21.87 $ 24.91 $ 32.56
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Q1 2009 FINANCIAL & OPERATING RESULTS
Production
- Q1 2009 production volumes were a record 22,810 boe per day, an increase of 4% from Q4 2008 volumes of 21,863 boe per day and 15% from Q1 2008 volumes of 19,804 boe per day.
- Given our Q1 2009 record production and the continued success of our capital program, the Trust is well on its way to meeting our 2009 production guidance of 22,500 to 23,500 boe per day.
- Heavy oil production volumes declined by approximately 650 bbls per day during Q1 2009 compared to Q4 2008. This was due to Daylight deferring the capital costs required to perform regular repairs to artificial lift equipment in our Wildmere and Chipman properties due to low prices during the quarter. The majority of these repairs were performed early in Q2 2009 as heavy oil prices recovered and the majority of this production is now back on stream.
- The Trust reached record production for the quarter through the continued operational success of our capital program and a series of highly strategic transactions executed during the second half of 2008.
Capital
- Daylight's Q1 2009 capital expenditures included the drilling of 20 gross (6.1 net) wells with a 100% success rate. This investment in Daylight's assets and the strategic acquisitions closed by the Trust during Q4 2008 resulted in Daylight's production increasing to a record level in Q1 2009.
- Capital expenditures for Q1 2009 increased to $59.4 million from $38.8 million in Q4 2008 and $43.6 million during Q1 2008. Capital expenditures for the full year 2009 are targeted to be between $125 and $140 million.
- Drilling activity in Q1 2009 focused on Daylight's key property of Elmworth developing both the Cadomin zone and multiple uphole Cretaceous sands. In addition, the Trust pursued opportunities in the Montney, the Bluesky and in multiple Cretaceous horizons within our large West Central land base and drilled for heavy oil in our East core property of Wildmere.
- Farmout drilling activity also continued at our Obed property, with 1 gross (0.7 net) well drilled during Q1 2009.
Hedges
- The Trust has financial hedges in place for 3,000 bbls of oil per day through zero premium collars with a floor price of Cdn$110.00 per bbl and an average ceiling price of Cdn$205.52 per bbl for the period August 1, 2008 to December 31, 2009. In addition, the Trust has natural gas hedges in place for the period January 1, 2009 to October 31, 2009, on a volume of 47,400 mcf per day (50,000 GJ per day) at an average price of $8.00 per mcf AECO ($7.59 per GJ). During Q1 2009, Daylight recognized a realized gain of $25.3 million on derivative contracts and at March 31, 2009 had an unrealized mark to market gain on derivative contracts of $73.4 million.
- These hedges represent 42% of Daylight's 2009 mid-range production volumes guidance, securing our cash flow in a low commodity price environment and providing the financial flexibility to pursue strategic opportunities that may arise.
Funds from Operations
- Funds from operations for Q1 2009 decreased to $44.9 million from $50.1 million for Q4 2008 and $58.7 for Q1 2008.
- This quarter over quarter and year over year decrease in funds from operations is a result of a significant decrease in commodity prices partially offset by increases in production, the Trust's high value hedging program and a decrease in royalties paid.
Operating Netback
- Daylight's Q1 2009 natural gas price was $5.26 per mcf, a 25% decrease below Q4 2008 natural gas price of $7.06 per mcf and a 34% decrease from the Q1 2008 natural gas price of $7.92 per mcf.
- Daylight's Q1 2009 light oil price was $46.17 per bbl while Q4 2008 light oil realized $55.28 per bbl, a decrease of 16%, and Q1 2008 light oil price of $91.40 per bbl, a decrease of 49%.
- Daylight's Q1 2009 heavy oil price of $37.57 per bbl, is 17% lower than the Q4 2008 heavy oil price of $45.20 per bbl and is 47% lower than the Q1 2008 heavy oil price of $71.54.
- Royalty rates decreased to 19.6% of revenue in Q1 2009 from 20.6% in Q4 2008, primarily due to lower commodity prices realized during Q1 2009, partially offset by the impact of the implementation of the Province of Alberta's New Royalty Framework ("NRF"). Royalty rates increased in Q1 2009 from 19.1% of revenue in Q1 2008 primarily due to implementation of the NRF.
- Operating expenses decreased slightly to $11.91/boe for Q1 2009 from $11.95/boe for Q4 2008 and decreased from Q1 2008 operating expenses of $12.08/boe. Daylight expects its operating costs to be approximately $11.50 per boe for the remainder of 2009.
- Operating netbacks decreased to $27.43/boe for Q1 2009 compared to $28.98/boe for Q4 2008 and $38.16/boe for Q1 2008.
Payout Ratio
- Q1 2009 payout ratio was 48%, down from 70% during Q4 2008 and up from 40% during Q1 2008.
- During Q1 2009, Daylight declared three monthly distributions of $0.08 per unit and declared that distributions would remain at this level through Q2 2009.
- Since inception of the Trust in November 2004 through Q1 2009, Daylight has provided a total of $494 million or $8.98 per unit of distributions to our Unitholders.
- Daylight targets a low distribution payout ratio balanced with an impactful investment of capital on our high quality assets with the goal of fully funding both with our funds from operations over the long term.
Balance Sheet and Financial Flexibility
- At the end of Q1 2009, Daylight's outstanding bank debt was $238.4 million up from $219.9 million at year end 2008 due to our active and successful Q1 2009 capital program.
- During Q1 2009, Daylight renewed our $350 million credit facility with an expanded syndicate of high quality lenders. Our expanded banking syndicate includes our seven previous banks plus two new banks that unanimously supported the renewal. Our credit facility has an annual renewal date of April 30, 2010.
- Subsequent to the end of Q1 2009, Daylight announced an equity financing for gross proceeds of $172 million (including full exercise of the $22 million over-allotment option), reducing our outstanding bank indebtedness and positioning the Trust to execute on strategic opportunities as they arise, including the acquisition of Intrepid.
Tax Pools and Safe Harbour
- Daylight has tax pools of approximately $949 million at March 31, 2009 which are available to shelter cash flow from income tax for many years beyond 2011.
- Current Safe Harbour capacity for the issuance of $0.8 billion (post $172 million equity financing) of new equity provides flexibility to execute on larger scale strategic opportunities as they arise.
The recent global economic downturn has affected all businesses and individuals including the Canadian oil and gas industry and Daylight. The slowing global economy has resulted in a decline in commodity prices and the unit price of Daylight and its peers. Looking forward, our industry will see the impact in its funds from operations, debt levels, capital expenditures, cash distributions and payout ratios. The Trust continues to be in a solid financial position at the end of Q1 2009, with a net debt to annualized cash flow ratio of 1.6 times, over $110 million of available capacity on our bank credit facility excluding our recent $172 million equity financing, an effective hedging program with 42% of guided 2009 production volumes hedged at attractive prices and an excellent portfolio of internal development prospects. The continued success of our oil and gas operations over the past year and the financial discipline we have exercised has positioned us quite favorably for the current economic circumstances. Using this financial flexibility, Daylight will continue to pursue selected strategic acquisitions and opportunities that create value for our Unitholders.
Daylight's high-end technical team integrates and emphasizes our exploitation, reservoir engineering, production optimization, geological and geophysical expertise to identify and capture reserves and production addition opportunities for the delivery of long term value creation to our Unitholders. Our team has developed a multi-year inventory of repeatable, low risk exploitation projects with substantial potential reserve additions on assets we currently own and control. Daylight's inventory includes a significant breadth of prospects across our high quality asset base.
With continued solid results, both operationally and financially, Daylight targets to substantially fund our capital expenditures and distributions with internally generated funds from operations over the longer term. This approach provides the Trust with the financial flexibility to execute on strategic opportunities.
An updated corporate presentation is available on Daylight's website at www.daylightenergy.ca.
Signed:
Anthony Lambert, President & CEO
May 6, 2009
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion & Analysis ("MD&A") is dated May 6, 2009 and should be read in conjunction with the accompanying unaudited interim consolidated financial statements and notes for the three months ended March 31, 2009 and 2008 as well as the MD&A and audited consolidated financial statements and notes for the years ended December 31, 2008 and 2007. The consolidated financial statements and other financial data presented have been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The following MD&A compares the results of the three months ended March 31, 2009 ("Q1 2009") to the three months ended December 31, 2008 ("Q4 2008") and to the three months ended March 31, 2008 ("Q1 2008"). All references are to Canadian dollars unless otherwise indicated.
NON-GAAP MEASURES
Daylight Resources Trust ("Daylight" or the "Trust") utilizes the following terms for measurement within the MD&A that do not have standardized prescribed meaning under GAAP and these measurements may not be comparable with the calculation of similar measurements of other entities.
"Funds from operations" and "funds from operations per unit" are terms utilized by Daylight to evaluate operating performance and assess leverage. Daylight considers funds from operations to be an important measure of Daylight's ability to generate the funds necessary to pay distributions, repay debt and finance capital expenditures. Funds from operations does not represent net income for the period nor should it be viewed as an alternative to net income or other measures of financial performance calculated in accordance with GAAP. All references to funds from operations throughout the MD&A are based on cash provided by operating activities before the change in non-cash operating working capital and asset retirement expenditures since Daylight believes the timing of collection, payment or incurrence of these items involves a high degree of discretion and as such these items are not useful for evaluating Daylight's operating performance. A reconciliation of cash provided by operating activities to funds from operations follows.
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(000s) Q1 Q4 Q1
2009 2008 2008
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Cash provided by operating activities $ 47,429 $ 47,416 $ 43,516
Change in non-cash operating working capital (3,545) 1,329 14,088
Asset retirement expenditures 1,011 1,330 1,063
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Funds from operations $ 44,895 $ 50,075 $ 58,667
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"Payout ratio" is a term utilized to evaluate financial flexibility and the capacity to fund distributions. Payout ratio is defined on a percentage basis as distributions declared divided by funds from operations. Daylight believes that a payout ratio above 100% is a concern as it indicates that no funds from operations are being retained to finance capital expenditures or to repay debt.
"Operating netback" is a term utilized by Daylight to evaluate the operating performance of petroleum and natural gas assets. The term operating netback is defined as petroleum and natural gas revenues less royalties, realized gain (loss) on derivative contracts, operating and transportation expenses.
"boe" is a term utilized by Daylight in relation to reserves or production to combine the volumetric measures of natural gas, light oil, heavy oil and natural gas liquids ("NGLs") to a common "barrel of oil equivalent" term of measurement. Natural gas volumes have been converted at the ratio of 6,000 cubic feet of natural gas to one boe and this conversion ratio is based upon an energy equivalent conversion method primarily applicable at the burner tip and does not represent value equivalence at the wellhead. Light oil, heavy oil and NGLs have been converted at the ratio of one barrel of these liquids to one boe. Use of the terms boe and amounts per boe without reference to the underlying commodity may be misleading.
FORWARD LOOKING STATEMENTS
Certain statements contained within this MD&A, and in certain documents incorporated by reference into this document, constitute forward-looking statements. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "budget", "plan", "continue", "estimate", "expect", "forecast", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. We believe the expectations reflected in these forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in, or incorporated by reference into, this MD&A should not be unduly relied upon. These statements speak only as of the date of this MD&A or as of the date specified in the documents incorporated by reference into this MD&A, as the case may be.
This MD&A, and the documents incorporated by reference, contain forward-looking statements pertaining to the following:
- the performance characteristics of our oil and natural gas properties;
- the size of our oil, natural gas liquids and natural gas reserves and production levels;
- estimates of future cash flow and distributions;
- projections of market prices and costs and the related sensitivities to distributions;
- drilling plans and timing of drilling, recompletion and tie-in of wells;
- weighting of production between different commodities;
- commodity prices, exchange rates and interest rates;
- expected levels of royalty rates, operating costs, general and administrative costs, costs of services and other costs and expenses;
- capital expenditure programs and other expenditures and the timing and method of financing thereof;
- supply of and demand for oil, natural gas liquids and natural gas;
- expectations regarding our ability to raise capital and to continually add to reserves through acquisitions and development;
- the existence, operation and strategy of our commodity price risk management program;
- the approximate and maximum amount of forward sales and hedging to be employed by us;
- our acquisition strategy, the criteria to be considered in connection therewith and the benefits to be derived therefrom;
- our ability to grow or sustain production and reserves through prudent management;
- the emergence of accretive growth opportunities and continued access to capital markets;
- our future operating and financial results;
- schedules and timing of certain projects and our strategy for future growth; and
- treatment under governmental and other regulatory regimes and tax, environmental and other laws.
In particular, this MD&A contains the following forward-looking statements pertaining to the following:
- production volumes;
- timing of cash flows;
- future oil and gas prices;
- operating costs;
- royalty rates;
- future development, exploration, and acquisition and development activities and related expenditures;
- the amount of future asset retirement obligations;
- future liquidity and future financial capacity;
- distributions to unitholders;
- future tax treatment of the Trust; and
- future structure of the Trust and its subsidiaries.
With respect to forward-looking statements contained in this MD&A and the documents incorporated by reference herein, we have made assumptions regarding, among other things:
- future oil and natural gas prices and differentials between light, medium and heavy oil prices;
- the continued availability of capital, undeveloped lands and skilled personnel;
- the costs of expanding our property holdings;
- the ability to obtain equipment in a timely manner to carry out exploration, development and exploitation activities;
- the ability to obtain financing on acceptable terms;
- the ability to add production and reserves through exploration, development and exploitation activities; and
- the continuation of the current tax and regulatory regime and other assumptions contained in this MD&A and the documents incorporated by reference herein.
The actual results could differ materially from those anticipated in these forward-looking statements as a result of the risk factors set forth below and elsewhere in this MD&A and the documents incorporated by reference into this document:
- volatility in market prices for oil, natural gas liquids and natural gas;
- counterparty credit risk;
- access to capital;
- changes or fluctuations in oil, natural gas liquids and natural gas production levels;
- liabilities inherent in oil and natural gas operations;
- adverse regulatory rulings, orders and decisions;
- attracting, retaining and motivating skilled personnel;
- uncertainties associated with estimating oil and natural gas reserves;
- competition for, among other things, capital, acquisitions of reserves, undeveloped lands, and services;
- incorrect assessments of the value of acquisitions and targeted exploration and development assets;
- fluctuations in foreign exchange or interest rates;
- stock market volatility, market valuations and the market value of the securities of Daylight;
- failure to realize the anticipated benefits of acquisitions;
- actions by governmental or regulatory authorities including changes in royalty structures and programs and income tax laws (including those relating to mutual fund trusts or investment eligibility) or changes in tax laws and incentive programs relating to the oil and gas industry and income trusts;
- limitations on insurance;
- changes in environmental or other legislation applicable to our operations, and our ability to comply with current and future environmental and other laws;
- geological, technical, drilling and processing problems and other difficulties in producing oil, natural gas liquids and natural gas reserves; and
- the other factors discussed under "Risks and Uncertainties" in the annual Management's Discussion and Analysis.
Statements relating to "reserves" or "resources" are by their nature deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the future.
Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statements contained in this MD&A and the documents incorporated by reference herein are expressly qualified by this cautionary statement. We do not undertake any obligation to publicly update or revise any forward-looking statements except as required by applicable securities law.
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HIGHLIGHTS
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Financial
(CDN$ thousands, except unit, per unit and Q1 Q4 Q1
operational data) 2009 2008 2008
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Petroleum and natural gas revenues $ 71,893 $ 91,311 $113,986
Royalties (14,111) (18,814) (21,733)
Realized gain on derivative contracts 25,285 12,230 -
Operating expenses (24,441) (24,038) (21,769)
Transportation expenses (2,310) (2,423) (1,721)
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Operating netback 56,316 58,266 68,763
G&A - cash charge (6,885) (4,483) (3,679)
Cash financial charges (4,536) (3,708) (6,417)
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Funds from operations 44,895 50,075 58,667
Per unit - Basic 0.50 0.56 0.75
- Diluted 0.45 0.52 0.66
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Cash provided by operating activities 47,429 47,416 43,516
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Net income 6,071 44,424 3,941
Per unit - Basic 0.07 0.50 0.05
- Diluted 0.07 0.48 0.05
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Cash distributions declared 21,657 35,193 23,333
Per unit 0.24 0.39 0.30
Payout ratio 48% 70% 40%
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Capital expenditures 59,413 38,766 43,630
Cash property acquisitions - 66,571 -
Non-cash property acquisitions - 26,887 -
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Market value of investments 2,013 2,285 15,172
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Bank debt 238,359 219,853 268,410
Working capital deficiency (1) 60,981 42,275 29,908
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Convertible debentures 115,836 115,201 120,170
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Total assets 1,077,667 1,058,195 949,143
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Units outstanding (000s) - Basic 90,239 90,239 77,914
- Diluted 106,517 106,050 94,096
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Operational (Per boe amounts may not add
exactly due to rounding)
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Average daily production
Natural gas (mcf/d) 91,668 82,572 67,691
Light oil (bbls/d) 3,935 4,086 5,174
Heavy oil (bbls/d) 2,117 2,798 2,181
NGLs (bbls/d) 1,480 1,217 1,167
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Oil & NGLs (bbls/d) 7,532 8,101 8,522
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Combined (boe/d) 22,810 21,863 19,804
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Average prices received
Natural gas ($/mcf) $ 5.26 $ 7.06 $ 7.92
Light oil ($/bbl) 46.17 55.28 91.40
Heavy oil ($/bbl) 37.57 45.20 71.54
NGLs ($/bbl) 38.81 43.27 74.91
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Oil & NGLs ($/bbl) $ 42.31 $ 50.00 $ 84.06
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Combined ($/boe) $ 35.02 $ 45.40 $ 63.25
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$ per boe
Petroleum and natural gas revenues $ 35.02 $ 45.40 $ 63.25
Royalties (6.87) (9.35) (12.06)
Realized gain on derivative contracts 12.32 6.08 -
Operating expenses (11.91) (11.95) (12.08)
Transportation expenses (1.13) (1.20) (0.95)
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Operating netback $ 27.43 $ 28.98 $ 38.16
G&A - cash charge (3.35) (2.23) (2.04)
Cash financial charges (2.21) (1.84) (3.56)
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Funds from operations $ 21.87 $ 24.91 $ 32.56
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Wells drilled - gross (net) 20 (6.1) 10 (3.2) 22 (8.9)
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(1) Excludes unrealized gain (loss) on derivative contracts and future
income tax liability.
RESULTS OF OPERATIONS
Daylight is an oil and natural gas energy trust applying a high-end technical and business execution team to a high quality asset base to provide sustainable production and reserves levels. Daylight operates in the Western Canadian Sedimentary Basin. Daylight's trust units, 8.5% Convertible Debentures Series A, 8.5% Convertible Debentures Series B, and 10.0% Convertible Debentures Series C trade on the Toronto Stock Exchange ("TSX") with the symbols DAY.UN, DAY.DB, DAY.DB.B, and DAY.DB.C respectively.
The continued global economic uncertainty and low commodity prices have affected the Canadian oil and gas industry and Daylight. During these challenging economic times, the Trust has maintained its strong financial position with a net debt to annualized cash flow ratio of 1.6 times, over $110 million of available capacity on our bank credit facility at March 31, 2009, and an extensive portfolio of internal development prospects. Subsequent to March 31, 2009, the Trust reached an agreement with a syndicate of underwriters to issue 24,630,000 trust units on a bought deal basis for gross proceeds of $172 million which includes the exercise of the over-allotment option (see "Liquidity and Capital Resources"). The Trust also announced the acquisition of a private oil and gas company to close in June 2009 subject to approvals (see "Capital Expenditures, Acquisitions and Divestitures"). The Trust will continue to pursue strategic opportunities as they arise with a focus on maintaining financial flexibility.
Production
Daylight's total production volumes for Q1 2009 averaged 22,810 boe per day, a 4% increase from Q4 2008. Q1 2009 production was comprised of 91,668 mcf per day of natural gas, 3,935 bbls per day of light oil, 2,117 bbls per day of heavy oil and 1,480 bbls per day of NGLs. Production for Q1 2009 increased 15% from Q1 2008 due to our successful capital expenditure program as well as the acquisition of Athlone Energy Ltd. ("Athlone") on September 17, 2008, the acquisition of West Central properties on October 31, 2008, the acquisition of Elmworth properties on December 1, 2008, net of the disposition of our Sturgeon Lake property on September 30, 2008.
With the continuing addition of new production volumes, Daylight expects production to average approximately 22,500 to 23,500 boe per day for 2009. Daylight's 2009 production guidance is based on the investment of $125 to $140 million in our 2009 internal capital program prior to the acquisition of a private oil and gas company. Updated production guidance will be provided upon the closing of the acquisition. See the "Capital Expenditures, Acquisitions and Divestitures" section of this MD&A for additional information on the acquisitions of Athlone, West Central properties, and Elmworth properties.
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Q1 Q4 Q1
2009 2008 2008
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Natural gas (mcf/d) 91,668 82,572 67,691
Light oil (bbls/d) 3,935 4,086 5,174
Heavy oil (bbls/d) 2,117 2,798 2,181
NGLs (bbls/d) 1,480 1,217 1,167
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Combined oil & NGLs (bbls/d) 7,532 8,101 8,522
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Combined all products (boe/d) 22,810 21,863 19,804
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Production replacement activities for calendar 2009 are focused on the following:
- Peace River Arch properties of Elmworth and Bilbo
- West Central properties of Obed, Pine Creek and Kaybob
Commodity Prices
Daylight's natural gas prices are influenced by both North American and, more recently, global supply and demand balance, seasonal changes, storage levels, the Canadian to US dollar exchange rate and transportation capacity constraints. Daylight's realized natural gas price has a high correlation to the Alberta benchmark price ("AECO") which provides pricing for natural gas based on heating value.
Daylight's oil prices are significantly influenced by global supply and demand conditions. Daylight's realized light oil price has a high correlation to the US benchmark West Texas Intermediate at Cushing, Oklahoma ("WTI") price and the Canadian to US dollar exchange rate. Canadian light oil prices, including the Edmonton par price, correlate to refinery postings that adjust WTI for the Canadian to US dollar exchange rate as well as transportation costs and quality differentials.
Daylight's realized heavy oil price is lower than its light oil price and the historical correlation with Edmonton par price and Bow River price, a heavy oil benchmark, is not overly strong. Heavy oil requires increased refining and other costs, such as condensate for transportation blending, which reduce the realized price of this product. For the first nine months of 2008, the Edmonton par price and Bow River price were very strong which resulted in an enhanced price realization by Daylight on its heavy oil production. In Q4 2008 and Q1 2009, the Edmonton par price and Bow River price dropped significantly resulting in lower realized prices by Daylight on its heavy oil production.
NGLs include condensate, pentane, butane and propane. Prices for NGLs have their own market dynamic with a relatively strong correlation to light oil prices for condensate and pentane, while butane and propane trade at varying discounts due to market conditions including supply and demand.
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Market prices Q1 Q4 Q1
2009 2008 2008
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AECO daily ($Cdn/mcf) $ 4.79 $ 6.62 $ 7.77
WTI ($US/bbl) 43.18 59.06 97.86
Edmonton par ($Cdn/bbl) 50.27 63.62 98.08
Bow River ($Cdn/bbl) 43.82 48.75 77.10
Exchange rate ($Cdn/$US) 0.8042 0.8277 0.9954
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Daylight prices realized Q1 Q4 Q1
2009 2008 2008
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Natural gas ($/mcf) $ 5.26 $ 7.06 $ 7.92
Light oil ($/bbl) 46.17 55.28 91.40
Heavy oil ($/bbl) 37.57 45.20 71.54
NGLs ($/bbl) 38.81 43.27 74.91
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Combined oil & NGLs ($/bbl) 42.31 50.00 84.06
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Combined all products ($/boe) $ 35.02 $ 45.40 $ 63.25
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Daylight's natural gas price during Q1 2009 was $5.26 per mcf, a 10% premium to AECO, which is a 25% decrease from the Q4 2008 natural gas price of $7.06 per mcf, a 7% premium to AECO. Daylight's Q1 2009 natural gas price was 34% lower than the Q1 2008 natural gas price of $7.92 per mcf, which is consistent with the 38% decrease to AECO between these two periods. During Q1 2009, the daily AECO pricing for natural gas ranged from a low of approximately $3.33 per mcf to a high of approximately $6.89 per mcf. Throughout the last half of 2008 and first three months of 2009, approximately half of Daylight's natural gas was sold at monthly index prices. Monthly index prices were significantly higher than average daily prices during this period, resulting in Daylight realizing a higher premium than usual. The volatility in natural gas prices can cause the premium realized to increase or decrease.
Daylight's Q1 2009 light oil realized $46.17 per bbl, 92% of Edmonton par, while Q4 2008 light oil realized $55.28 per bbl, 87% of Edmonton par, resulting in a quarter over quarter decrease of 16%. Due to the volatility of crude oil prices during Q4, Daylight experienced a larger than normal differential to Edmonton par. Daylight's light oil price for Q1 2009 was 49% lower than the Q1 2008 light oil price of $91.40 per bbl, which was 93% of Edmonton par. Changes in the Canadian dollar to US dollar exchange rate affect the Canadian dollar Edmonton par and Daylight's realized light oil price relative to the US dollar WTI, with a higher exchange rate generally reducing Edmonton par and Daylight's realized light oil price relative to WTI and a lower exchange rate generally increasing Edmonton par and Daylight's realized light oil price relative to WTI. The Canadian dollar to US dollar exchange rate for Q1 2009 was 0.8042 which generally put upward movement on Edmonton par and Daylight's realized light oil price in the quarter when compared to Q4 2008 with an exchange rate of 0.8277 and upward movement compared to Q1 2008 with an exchange rate of 0.9954.
Daylight's heavy oil production is concentrated at two properties, with Wildmere producing approximately 90% of Q1 2009 volumes and Chipman producing the remaining 10%. Daylight's Q1 2009 heavy oil price of $37.57 per bbl, 86% of Bow River, is 17% lower than the Q4 2008 heavy oil price of $45.20 per bbl, 93% of Bow River. Daylight's Q1 2009 heavy oil price was 47% lower than the Q1 2008 heavy oil price of $71.54 per bbl, also 93% of Bow River.
Daylight's combined oil and NGLs price during Q1 2009 was $42.31 per bbl, 15% lower than Q4 2008 and 50% lower than Q1 2008.
The impact of derivative contracts is recorded within Daylight's gain (loss) on financial instruments. As at March 31, 2009, Daylight had derivative contracts in place for a portion of natural gas production volumes for the period April 1, 2009 to October 31, 2009 and a portion of crude oil production volumes from April 1, 2009 through December 31, 2009. Please refer to the "Financial Instruments" section of this MD&A for further details.
Daylight's realized prices are expected to continue to correlate with market prices during 2009.
Revenue
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(000s) Q1 Q4 Q1
2009 2008 2008
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Natural gas $ 43,419 $ 53,632 $ 48,798
Light oil 16,351 20,782 43,036
Heavy oil 7,159 11,635 14,198
NGLs 5,170 4,846 7,955
Other (206) 416 (1)
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Total $ 71,893 $ 91,311 $ 113,986
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The 4% increase in Q1 2009 production offset by a 23% decrease in the price on a combined boe basis resulted in a 21% decrease in total revenue to $71.9 million from Q4 2008. Natural gas sales for Q1 2009 were $43.4 million, a decrease of 19% from Q4 2008. Light oil sales for Q1 2009 were $16.4 million, down 21% from Q4 2008. Heavy oil sales for Q1 2009 were $7.2 million, down 38% from Q4 2008, and NGLs sales for Q1 2009 were $5.2 million, up 7% from Q4 2008. Total revenue decreased 37% in Q1 2009 from Q1 2008, consistent with a 45% decrease in the average realized price on a combined boe basis partially offset by a 15% increase in production volumes.
Royalties
Royalty payments are made to the owners of the mineral rights on leases, which include provincial governments (Crown) and freehold landowners, as well as to other third parties by way of contractual overriding royalties.
In Alberta, royalties on natural gas and NGLs are charged by the government based on an established monthly Reference Price. The Reference Price is meant to reflect the average price for natural gas and NGLs in Alberta. Gas cost allowance, custom processing credits and other incentive programs reduce the effective royalty rate.
Overriding royalties are generally paid to third parties where Daylight has entered into agreements to earn an interest in their mineral rights by investing capital in their property.
Oil royalty rates are generally a function of production rates on a per well basis and prices. They are also subject to certain reductions and incentives. Oil Crown royalties in Alberta are generally satisfied by delivering the required volume of oil to the Alberta provincial government.
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Royalties by type (000s) Q1 Q4 Q1
2009 2008 2008
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Crown royalties $ 11,067 $ 15,315 $ 16,862
Freehold royalties 1,111 1,288 2,177
Overriding royalties 1,933 2,211 2,694
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Total $ 14,111 $ 18,814 $ 21,733
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$ per boe $ 6.87 $ 9.35 $ 12.06
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% of revenue 19.6 20.6 19.1
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Royalties by commodity (000s) Q1 Q4 Q1
2009 2008 2008
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Natural gas $ 7,283 $ 10,195 $ 8,464
Oil and NGLs 6,828 8,619 13,269
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Total $ 14,111 $ 18,814 $ 21,733
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Natural gas ($/boe) $ 5.30 $ 8.05 $ 8.24
Oil and NGLs ($/boe) 10.07 11.56 17.11
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Total ($/boe) $ 6.87 $ 9.35 $ 12.06
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Natural gas (% of revenue) 16.8 19.0 17.3
Oil and NGLs (% of revenue) 23.8 23.1 20.4
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Total (% of revenue) 19.6 20.6 19.1
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Overall royalty rates decreased to 19.6% of revenue in Q1 2009 from 20.6% of revenue in Q4 2008. Natural gas royalty rates decreased to 16.8% of revenue compared to 19.0% of revenue in Q4 2008 due to royalty holidays on certain deep gas wells. Oil and NGLs royalty rates increased to 23.8% of revenue during Q1 2009 as compared to 23.1% of revenue in Q4 2008. Total royalty rates increased to 19.6% of revenue for Q1 2009 compared with 19.1% of revenue for Q1 2008.
On October 25, 2007, the Alberta government introduced a proposed New Royalty Framework ("NRF") which took effect January 1, 2009. On April 10, 2008, the Alberta Government announced revisions to the NRF to increase royalty rates on conventional and non-conventional oil and natural gas production whereby royalty rates may increase to maximum rates of 50%, to introduce broader ranges of commodity prices in its sliding scale royalty calculations, and to eliminate royalty incentive and holiday programs with the exception of specific programs relating to deep oil and natural gas drilling, innovative technology and enhanced recovery programs. Subsequent to the legislation of the NRF in November 2008, the Transitional Royalty Plan ("TRP") was introduced in response to the economic downturn and declining commodity prices. The TRP offers reduced royalty rates for wells drilled on or later than November 19, 2008 which meet certain depth criteria. The TRP is in place for a maximum period of five years up to December 31, 2013.
On March 3, 2009, an incentive program designed to encourage the execution of new drilling projects in Alberta was announced in response to the slowdown in drilling activity throughout the province of Alberta. The three-point incentive program provides for a drilling royalty credit for new conventional oil and natural gas wells that initiate drilling on or after April 1, 2009 and that complete drilling by March 31, 2010. The three-point incentive program also provides a reduced royalty rate on new wells for the first year of production up to an established total production volume. This program is expected to positively impact the Trust. The Trust adjusted portions of its capital program for Q1 2009 wells to take advantage of this program.
Approximately 95% of Daylight's reserves and production are in Alberta, with the balance located in BC and Saskatchewan. Approximately 78% of current production is subject to Crown royalties, which are affected directly by the government royalty programs, and the remaining 22% of Daylight's 2009 royalties are related to freehold and override charges, which are not directly affected by these programs. Consequently, the NRF, TRP and the new three-point royalty incentive program will impact Daylight's royalty rates, the effect of which is dependent upon commodity prices.
Future reserve and production addition activities are expected to be significantly impacted by changes to the royalty system. The Trust's depth of prospect inventory allows Daylight to select capital expenditure programs that provide the greatest value to our unitholders in the context of the expected change to the royalty system.
Financial Instruments
Financial instruments comprise accounts receivable, investments, accounts payable and accrued liabilities, derivative contracts, cash distributions payable, bank debt, and convertible debentures. Unless otherwise noted, carrying values reflect the current fair value of the Trust's financial instruments due to the short term to maturity. The Trust's investments held for trading include the shares of Pegasus Oil & Gas Inc. ("Pegasus") and Trafalgar Energy Ltd. ("Trafalgar") (see "Investments" section below). The Trust also has an equity investment in Bengal Energy Ltd. ("Bengal") (see "Investments" section below). The investments held for trading have a fair value based on quoted market values of $0.8 million as at March 31, 2009. During Q1 2009 Daylight experienced a $0.1 million unrealized loss on these investments held for trading compared to a $4.6 million loss in Q4 2008. The investment in Bengal has a fair value based on quoted market value of $1.2 million as at March 31, 2009. At December 31, 2008, the investment in Bengal was written down to its market value.
The Trust's long-term debt bears interest at a floating market rate and accordingly, the fair market value approximates the carrying value. The convertible debentures outstanding at March 31, 2009, with a face value of $132.3 million, had a fair value based on quoted market value of $126.0 million. The convertible debentures outstanding at May 6, 2009, with a face value of $132.3 million, had a fair value based on quoted market value of $132.2 million.
The Trust may enter into financial or commodity derivative contracts to manage commodity prices, foreign exchange and interest rate risk. The current 12 month forward strip for AECO natural gas is approximately $5.20 per mcf and WTI oil is approximately US$63.00 per barrel which is equivalent to approximately $73.00 Canadian per barrel.
As at March 31, 2009, Daylight had the following derivative contracts in
place:
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Type of Contract Commodity Hedged Volume(3) Hedge Price Hedge Period
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Financial (Swap)(1) Natural gas 35,000 GJ/d Cdn$7.58/GJ Apr 1/09 to
Oct 31/09
Financial (Swap)(1) Natural gas 10,000 GJ/d Cdn$7.59/GJ Apr 1/09 to
Oct 31/09
Financial (Swap)(1) Natural gas 5,000 GJ/d Cdn$7.63/GJ Apr 1/09 to
Oct 31/09
Financial (Collar)(2) Crude oil 1,000 bbl/d Cdn$110.00 - Apr 1/09 to
$206.00/bbl Dec 31/09
Financial (Collar)(2) Crude oil 1,000 bbl/d Cdn$110.00 - Apr 1/09 to
$205.55/bbl Dec 31/09
Financial (Collar)(2) Crude oil 1,000 bbl/d Cdn$110.00 - Apr 1/09 to
$205.00/bbl Dec 31/09
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(1) Swap indicates fixed price.
(2) Collar price indicates floor (minimum) and ceiling (maximum).
(3) A GJ converts to a mcf at the rate of 1.055056 GJs per mcf.
Financial or commodity derivative contracts used to manage risk are subject to periodic settlements throughout the term of the instruments. Such settlements may result in a gain or loss which is recognized as a realized derivative gain or loss at the time of settlement. The mark-to-market value of a derivative contract outstanding at the end of a reporting period reflects the value of the derivative contracts based upon market conditions existing as of that date. Any change in value from that determined at the end of the prior period is recognized as an unrealized gain or loss on derivative contracts.
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(000s) Q1 Q4 Q1
2009 2008 2008
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Realized gain on derivative contracts $ 25,285 $ 12,230 $ -
Unrealized gain (loss) on derivative contracts 1,837 52,933 (22,270)
Unrealized loss on investments held for trading (103) (4,592) (133)
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