CALGARY, ALBERTA -- 08/02/07 --
Pengrowth Corporation, administrator of Pengrowth Energy Trust (TSX: PGF.UN)(NYSE: PGH) (collectively "Pengrowth"), is pleased to announce the interim unaudited operating and financial results for the three month and six month periods ended June 30, 2007.
Pengrowth reported net income of $271.7 million ($1.11 per trust unit) in the second quarter of 2007 compared to a net loss of $69.8 million ($0.29 per trust unit) in the first quarter of 2007 and net income of $110.1 million ($0.69 per trust unit) in the same period last year. Net income in the quarter included a $147.7 million increase in earnings due to a future tax recovery. The future tax recovery was recorded as a result of the enactment of the previously announced tax on income trusts, asset dispositions in the quarter and a reduction in the federal income tax rate.
During the second quarter of 2007, Pengrowth generated distributable cash of $196.9 million versus $199.4 million in the first quarter of 2007 and $152.3 million in the second quarter of 2006. Distributions paid or declared to unitholders in the second quarter of 2007 totaled $184.3 million or $0.75 per trust unit reflecting a payout ratio of 94 percent. Pengrowth's distributions remain unchanged at $0.25 per trust unit per month, up to and including our most recently announced August 15, 2007 distribution.
Daily production remained relatively stable in the second quarter of 2007 at 89,633 boe per day when compared to the first quarter of 2007 and increased approximately 59 percent when compared to the second quarter of 2006. The increase is primarily due to the Carson Creek, Esprit Trust and the CP properties acquisitions, SOEP compression and contributions from our ongoing development activities. Pengrowth anticipates full year average daily production in the range of 85,000 boe per day to 87,500 boe per day including the expected divestiture of 8,900 boe per day of production at the time of sale.
Development capital for the second quarter of 2007 totaled $44.4 million with approximately 82 percent spent on drilling and completions. Pengrowth participated in drilling 34 gross (15.3 net) wells with a success rate of 94 percent. In addition, Pengrowth participated in the drilling of three injection and one water disposal well (0.9 net).
During 2007, Pengrowth intends to dispose of approximately $450 million of non-core properties. In the first half of this year, Pengrowth completed asset sales for proceeds of approximately $282 million. The proceeds were used to partially repay the $600 million bridge facility.
Subsequent to the end of second quarter, Pengrowth closed a U.S. $400 million offering of notes issued on a private placement basis on July 26, 2007 in the United States. The private placement consists of 6.35 percent notes due in 2017. The notes are unsecured and rank equally with Pengrowth's bank facilities and existing term notes.
Note regarding currency: all figures contained within this report are quoted in Canadian dollars unless otherwise indicated.
President's Message
To our valued unitholders,
The second quarter of 2007 marked further progress in Pengrowth's continued transformation and I am pleased to present the unaudited quarterly results for the three months and six months ended June 30, 2007. Pengrowth performed well during the second quarter. We continued to see positive results from our operations and remain well positioned for a generally favourable second half of 2007.
In my annual letter dated February 26, 2007, we set out a number of goals and objectives for the trust in 2007 and I would like to take this opportunity to update our progress on each of these key targets at this pivotal mid-year mark.
2007 key targets include:
1) Execution of a $275 million capital development program that is focused on asset optimization and organic growth.
2) Full integration of the assets and people associated with the Carson Creek, Esprit Trust and CP properties acquisitions in order to fully exploit those opportunities identified by our operations teams.
3) Completion of our property disposition program.
4) Continuing to make distributions to unitholders while executing a prudent business model.
Pengrowth remained focused on development opportunities during the quarter and continued to achieve encouraging results. Pengrowth's capital development program totaled approximately $44.4 million in the second quarter with approximately 82 percent directed towards drilling and completions. Pengrowth participated in drilling 34 gross wells (15.3 net) with a success rate of 94 percent. In addition, we participated in the drilling of three injectors and one water disposal well (0.9 net).
Production for the second quarter of 2007 remained relatively stable with average daily production of 89,633 barrels of oil equivalent (boe) per day when compared to the first quarter of 2007 and increased approximately 59 percent when compared to the second quarter of 2006. The increase is mainly attributable to production additions associated with the Carson Creek, Esprit Trust and CP properties acquisitions which closed in the second half of 2006 and early 2007 and were augmented by our capital development program. These additions served to nearly offset natural production declines and the impact of our divestiture program. Based on these results, Pengrowth has increased its forecast for average 2007 production to the range of 85,000 to 87,500 boe per day.
Integration activities associated with the Carson Creek, Esprit Trust and CP properties acquisitions continued into the second quarter. The Carson Creek and Esprit properties have been completely integrated into our asset teams. Work is being done to reroute some gas from Carson Creek to Judy Creek and evaluation is underway for potentially moving all the gas from this area to Judy Creek. These optimizations are expected to result in significant operating cost savings.
Optimization of gas processing has been identified for the Harmattan and Olds properties which will significantly reduce costs incurred due to third party arrangements. Pengrowth has been successful in the hiring of a significant number of experienced technical staff to work on these opportunities. Pengrowth took over full management of the CP properties in June after completion of the transition services contract from ConocoPhillips. Upside in the Deer Mountain, Goose River & Red Earth properties has been identified with projects underway for the third and fourth quarters.
Pengrowth has one of the strongest property portfolios in the energy trust sector. In conjunction with the integration of the new assets into our operations, we have realized the opportunity to high-grade our asset base through a targeted disposition program of approximately $450 milllion of non-core assets producing approximately 8,900 boe per day at the time of sale.
In the first half of the year, Pengrowth completed asset sales of approximxately $282 million. The proceeds were used to partially repay the $600 million bridge facility associated with the CP properties acquisition and Pengrowth now anticipates our disposition program to be completed prior to year end 2007. Pengrowth's remaining high quality, long-life assets provide the trust with a stable production profile.
Oil and gas sales remained reasonably favourable during the second quarter benefiting from Pengrowth's balanced production mix. On July 31, 2007, WTI oil prices reached a new record closing level of U.S. $78.22 per barrel. However, offsetting the strength in crude oil has been the recent decline in natural gas prices to the U.S. $6.00 to $6.50 per mmbtu range. In addition, the relative strength of the Canadian dollar in relation to the U.S. dollar to the $0.95 range has moderated the effect on oil and gas prices in Canadian dollars. As a result, distributable cash decreased slightly to $196.9 million when compared to the first quarter of 2007 in which $199.4 million was recorded.
Distributions to unitholders during the quarter totaled $0.75 per trust unit and Pengrowth has maintained the monthly distribution at $0.25 per trust unit since December 31, 2005. However, distributions can and may fluctuate in the future. Distributable cash is derived mainly from producing and selling our oil, natural gas and related products and as such, distributable cash is highly dependent on commodity prices. Pengrowth's board of directors will continue to examine distributions on a monthly basis while considering overall market conditions to set the distribution level each month.
I am pleased to report that we have made significant progress on our key targets in 2007 and we continue to seek opportunities through acquisition, industry consolidation, development and synergies to add value on behalf of our unitholders. As such, it remains paramount that the trust retain the necessary financial flexibility to capitalize on future growth opportunities. Accordingly, Pengrowth has taken steps to reduce indebtedness and strengthen its financial position.
On June 15, 2007, Pengrowth increased its syndicated bank facility to $1.2 billion of available credit and extended the maturity date to June 16, 2010. On July 13, 2007, with proceeds from Pengrowth's increased bank facility, Pengrowth fully repaid the remaining $322 million outstanding on the $600 million bridge facility due January 22, 2008 obtained in conjunction with the CP properties acquisition.
Also subsequent to quarter-end, Pengrowth closed a U.S. $400 million offering of notes issued on a private placement basis on July 26, 2007 in the United States. The private placement consists of 6.35 percent notes due in 2017. The notes are unsecured and rank equally with Pengrowth's bank facilities and existing term notes and we intend to use the net proceeds of the notes to reduce amounts outstanding on our bank facilities which will increase our unused credit capacity. This increased financial flexibility gives Pengrowth unused credit capacity at this time of approximately $580 million which should allow us to complete future value-adding transactions should they arise.
The second quarter showcased our team's commitment to seek out opportunities to add value on behalf of unitholders through the successful execution of our 2007 key targets thus far. I am pleased with the accomplishments our team achieved during the period and I believe we are well positioned both operationally and financially for continued success in 2007.
James S. Kinnear, Chairman, President and Chief Executive Officer
August 1, 2007
Summary of Financial and Operating Results
(thousands, except per unit Three Months ended June 30
amounts) 2007 2006 % Change
---------------------------------------------------------------------------
INCOME STATEMENT
Oil and gas sales $ 443,977 $ 283,532 57
Net income (loss) $ 271,659 $ 110,116 147
Net income (loss) per trust unit $ 1.11 $ 0.69 61
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CASH FLOW
Cash flows from operating
activities(1) $ 249,960 $ 126,800 97
Cash flows from operating
activities per trust unit $ 1.02 $ 0.79 29
Distributable cash(i)(2) $ 196,934 $ 152,266 29
Distributable cash per
trust unit(i)(2) $ 0.80 $ 0.95 (16)
Distributions paid or declared $ 184,327 $ 120,597 53
Distributions paid or declared
per trust unit $ 0.75 $ 0.75 -
Payout ratio(i) (2) 94% 79% 15
Capital expenditures $ 49,467 $ 47,999 3
Capital expenditures per
trust unit $ 0.20 $ 0.30 (33)
Weighted average number of
trust units outstanding 245,127 160,592 53
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BALANCE SHEET
Working capital
Property, plant and equipment
Long term debt
Trust unitholders' equity
Trust unitholders' equity per
trust unit
Number of trust units outstanding
at period end
---------------------------------------------------------------------------
DAILY PRODUCTION
Crude oil (barrels) 27,083 20,342 33
Heavy oil (barrels) 7,254 4,869 49
Natural gas (mcf) 280,667 150,976 86
Natural gas liquids (barrels) 8,519 5,952 43
Total production (boe) 89,633 56,325 59
TOTAL PRODUCTION (mboe) 8,157 5,126 59
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PRODUCTION PROFILE
Crude oil 30% 36%
Heavy oil 8% 9%
Natural gas 52% 45%
Natural gas liquids 10% 10%
---------------------------------------------------------------------------
AVERAGE REALIZED PRICES (after
commodity risk management)
Crude oil (per barrel) $ 71.81 $ 72.67 (1)
Heavy oil (per barrel) $ 43.52 $ 50.07 (13)
Natural gas (per mcf) $ 7.61 $ 6.76 13
Natural gas liquids (per barrel) $ 56.42 $ 58.92 (4)
Average realized price per boe $ 54.39 $ 54.91 (1)
Summary of Financial and Operating Results
(thousands, except per unit Six Months ended June 30
amounts) 2007 2006 % Change
---------------------------------------------------------------------------
INCOME STATEMENT
Oil and gas sales $ 876,085 $ 575,428 52
Net income (loss) $ 201,825 $ 176,451 14
Net income (loss) per trust unit $ 0.82 $ 1.10 (25)
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CASH FLOW
Cash flows from operating
activities(1) $ 386,389 $ 283,160 36
Cash flows from operating
activities per trust unit $ 1.58 $ 1.77 (11)
Distributable cash(i)(2) $ 396,328 $ 293,135 35
Distributable cash per
trust unit(i)(2) $ 1.62 $ 1.83 (11)
Distributions paid or declared $ 367,861 $ 240,899 53
Distributions paid or declared
per trust unit $ 1.50 $ 1.50 -
Payout ratio(i)(2) 93% 82% 11
Capital expenditures $ 148,252 $ 123,060 20
Capital expenditures per trust unit $ 0.61 $ 0.77 (21)
Weighted average number of trust
units outstanding 244,745 160,372 53
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BALANCE SHEET
Working capital $ (444,394) $ (97,150) 357
Property, plant and equipment $4,633,861 $2,081,403 123
Long term debt $1,038,328 $ 488,310 113
Trust unitholders' equity $2,913,152 $1,430,850 104
Trust unitholders' equity per
trust unit $ 11.86 $ 8.90 33
Number of trust units outstanding
at period end 245,560 160,777 53
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DAILY PRODUCTION
Crude oil (barrels) 27,271 20,800 31
Heavy oil (barrels) 7,015 4,943 42
Natural gas (mcf) 278,096 154,407 80
Natural gas liquids (barrels) 9,215 6,101 51
Total production (boe) 89,850 57,578 56
TOTAL PRODUCTION (mboe) 16,263 10,422 56
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PRODUCTION PROFILE
Crude oil 30% 36%
Heavy oil 8% 8%
Natural gas 52% 45%
Natural gas liquids 10% 11%
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AVERAGE REALIZED PRICES (after
commodity risk management)
Crude oil (per barrel) $ 69.52 $ 67.91 2
Heavy oil (per barrel) $ 42.57 $ 39.52 8
Natural gas (per mcf) $ 7.76 $ 7.77 -
Natural gas liquids (per barrel) $ 52.81 $ 58.57 (10)
Average realized price per boe $ 53.85 $ 54.98 (2)
(1) Prior year restated. See Note 1 to financial statements
(2) Prior year restated to conform to presentation adopted in current year
- See the section entitled "Non-GAAP Financial Measures".
Summary of Trust Unit Trading Data
Three Months ended Six Months ended
June 30 June 30
(thousands, except per
trust unit amounts) 2007 2006 2007 2006
TRUST UNIT TRADING
(Class A)
PGH (NYSE)
High $ 19.84 U.S. $ 25.00 U.S. $ 19.84 U.S. $ 25.15 U.S.
Low $ 16.45 U.S. $ 21.85 U.S. $ 15.82 U.S. $ 21.50 U.S.
Close $ 19.09 U.S. $ 24.09 U.S. $ 19.09 U.S. $ 24.09 U.S.
Value $ 428,571 U.S. $ 336,990 U.S. $ 877,712 U.S. $ 653,208 U.S.
Volume 23,668 14,277 50,301 27,698
PGF.A (TSX)(i)
High $ - $ 28.50 $ - $ 28.96
Low $ - $ 24.20 $ - $ 24.20
Close $ - $ 26.70 $ - $ 26.70
Value $ - $ 47,608 $ - $ 81,449
Volume - 1,810 - 3,054
TRUST UNIT TRADING
(Class B)
PGF.B (TSX)(i)
High $ - $ 26.05 $ - $ 26.05
Low $ - $ 22.41 $ - $ 20.71
Close $ - $ 26.05 $ - $ 26.05
Value $ - $ 459,628 $ - $ 879,690
Volume - 18,982 - 37,321
PGF.UN (TSX)(i)
High $ 21.04 $ - $ 21.04 $ -
Low $ 18.82 $ - $ 18.62 $ -
Close $ 20.27 $ - $ 20.27 $ -
Value $ 561,471 $ - $1,306,290 $ -
Volume 28,348 - 66,090 -
(i) July 27, 2006, Pengrowth's Class A trust units and Class B trust
units were consolidated into a single class of trust units whereas
the Class A trust units were delisted from the Toronto Stock
Exchange and the Class B trust units were renamed as trust units and
their trading symbol changed to PGF.UN.
The following discussion of financial results should be read in conjunction with the interim unaudited consolidated financial statements for the six months ended June 30, 2007 and the audited consolidated financial statements for the year ended December 31, 2006 of Pengrowth Energy Trust and is based on information available to August 1, 2007.
Frequently Recurring Terms
For the purposes of this discussion, we use certain frequently recurring terms as follows: the "Trust" refers to Pengrowth Energy Trust, the "Corporation" refers to Pengrowth Corporation, "Pengrowth" refers to the Trust and its subsidiaries and the Corporation on a consolidated basis and the "Manager" refers to Pengrowth Management Limited.
Pengrowth uses the following frequently recurring industry terms in this discussion: "bbls" refers to barrels, "boe" refers to barrels of oil equivalent, "mboe" refers to a thousand barrels of oil equivalent, "mcf" refers to thousand cubic feet, "gj" refers to gigajoule and "mmbtu" refers to million British thermal units.
Advisory Regarding Forward-Looking Statements
This discussion contains forward-looking statements within the meaning of securities laws, including the "safe harbour" provisions of Canadian securities legislation and the United States Private Securities Litigation Reform Act of 1995. Forward-looking information is often, but not always, identified by the use of words such as "anticipate", "believe", "expect", "plan", "intend", "forecast", "target", "project", "guidance" "may", "will", "should", "could", "estimate", "predict" or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking statements in this discussion include, but are not limited to, statements with respect to: reserves, 2007 production, production additions from Pengrowth's 2007 development program, the impact on production of divestitures in 2007, royalty obligations, 2007 operating expenses, future income taxes, goodwill, asset retirement obligations, taxability of distributions, remediation and abandonment expenses, capital expenditures, new head office expenses, general and administration expenses, proceeds from the disposal of properties and the impact of the proposed changes to the Canadian tax legislation. Statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the reserves described exist in the quantities predicted or estimated and can profitably be produced in the future.
Forward-looking statements and information are based on Pengrowth's current beliefs as well as assumptions made by and information currently available to Pengrowth concerning anticipated financial performance, business prospects, strategies, regulatory developments, future oil and natural gas commodity prices and differentials between light, medium and heavy oil prices, future oil and natural gas production levels, future exchange rates, the proceeds of anticipated divestitures, the amount of future cash distributions paid by Pengrowth, the cost of expanding our property holdings, our ability to obtain equipment in a timely manner to carry out development activities, our ability to market our oil and natural gas successfully to current and new customers, the impact of increasing competition, our ability to obtain financing on acceptable terms and our ability to add production and reserves through our development and exploitation activities. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: the volatility of oil and gas prices; production and development costs and capital expenditures; the imprecision of reserve estimates and estimates of recoverable quantities of oil, natural gas and liquids; Pengrowth's ability to replace and expand oil and gas reserves; environmental claims and liabilities; incorrect assessments of value when making acquisitions; increases in debt service charges; the loss of key personnel; the marketability of production; defaults by third party operators; unforeseen title defects; fluctuations in foreign currency and exchange rates; inadequate insurance coverage; compliance with environmental laws and regulations; changes in tax laws; the failure to qualify as a mutual fund trust; and Pengrowth's ability to access external sources of debt and equity capital. Further information regarding these factors may be found under the heading "Business Risks" herein and under "Risk Factors" in Pengrowth's most recent Annual Information Form (AIF), and in Pengrowth's most recent consolidated financial statements, management information circular, quarterly reports, material change reports and news releases. Copies of the Trust's Canadian public filings are available on SEDAR at www.sedar.com . The Trust's U.S. public filings, including the Trust's most recent annual report form 40-F as supplemented by its filings on form 6-K, are available at www.sec.gov.
Pengrowth cautions that the foregoing list of factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Pengrowth, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Furthermore, the forward-looking statements contained in this discussion are made as of the date of this discussion and Pengrowth does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. The forward-looking statements contained in this discussion are expressly qualified by this cautionary statement.
Critical Accounting Estimates
As discussed in Note 1 to the financial statements, the financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period ended.
The amounts recorded for depletion, depreciation and amortization of injectants and the provision for asset retirement obligations, goodwill and future taxes are based on estimates. The ceiling test calculation is based on estimates of proved reserves, production rates, oil and natural gas prices, future costs and other relevant assumptions. As required by National Instrument 51-101 (NI 51-101) Standards of Disclosure for Oil and Gas Activities, Pengrowth uses independent qualified reserve evaluators in the preparation of reserve evaluations. By their nature, these estimates are subject to measurement uncertainty and changes in these estimates may impact the consolidated financial statements of future periods. The amounts recorded for the fair value of risk management contracts and the unrealized gains or losses on the change in fair value are based on estimates. These estimates can change significantly from period to period.
Non-GAAP Financial Measures
This discussion refers to certain financial measures that are not determined in accordance with GAAP in Canada or the United States. These measures do not have standardized meanings and may not be comparable to similar measures presented by other trusts or corporations. Measures such as funds generated from operations, funds generated from operations per trust unit, distributable cash, distributable cash per trust unit, payout ratio and operating netbacks do not have standardized meanings prescribed by GAAP. We discuss these measures because we believe that they facilitate the understanding of the results of our operations and financial position.
Conversion and Currency
When converting natural gas to equivalent barrels of oil within this discussion. Pengrowth uses the industry standard of six thousand cubic feet to one barrel of oil equivalent. Barrels of oil equivalent may be misleading, particularly if used in isolation; a conversion ratio of six mcf of natural gas to one boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Production volumes, revenues and reserves are reported on a company interest gross basis (before royalties) in accordance with Canadian practice. All amounts are stated in Canadian dollars unless otherwise specified.
OVERVIEW
Production for the second quarter of 2007 was 89,633 boe per day compared to 90,068 boe per day in the prior quarter reflecting a full quarter of additional volumes from the January 2007 ConocoPhillips (the "CP properties") acquisition and internal development and was offset by planned maintenance shutdowns and property divestments. For the six months ended June 30, 2007, production was 89,850 boe per day compared to 57,578 boe per day in the prior year. This increase is primarily due to additional volumes from acquisitions made in the second half of 2006 and early 2007. Pengrowth had net income for the second quarter of $271.7 million due in part to an unrealized mark-to-market gain on outstanding commodity contracts of $79.7 million resulting from the change in the fair value of the contracts during the period and a future income tax reduction in the amount of $147.7 million (see Taxes section for additional information). These non-cash amounts do not affect distributable cash for the quarter which was $196.9 million compared to $199.4 million in the prior quarter and $152.3 million in the second quarter of 2006.
RESULTS OF OPERATIONS
This discussion contains the results of Pengrowth Energy Trust and its subsidiaries.
Production
Average daily production remained relatively stable in the second quarter of 2007 compared to the first quarter of 2007. The slight decrease is primarily attributable to additional volumes from the CP properties acquisition which closed on January 22, 2007 being offset by planned maintenance shutdowns and non-core property divestments. In comparison to the second quarter of 2006, average daily production increased approximately 59 percent. In addition to the volumes from the CP properties acquisition, the increase is largely due to the Carson Creek and Esprit Trust acquisitions which were completed late in the third quarter and in the fourth quarter of 2006, respectively, and contributions from ongoing development activities. Daily production for the first half of 2007 increased approximately 56 percent compared to the same period of 2006. This is primarily due to the previously mentioned acquisitions made in the third and fourth quarters of 2006 and in January 2007.
At this time, Pengrowth anticipates 2007 full year production of 85,000 to 87,500 boe per day. This estimate reflects expected divestitures during the year of approximately 8,900 boe per day of production at the time of sale. The above estimate excludes the impact from any potential future acquisitions.
Daily Production
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, Mar 31, June 30, June 30, June 30,
2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Light crude oil (bbls) 27,083 27,461 20,342 27,271 20,800
Heavy oil (bbls) 7,254 6,773 4,869 7,015 4,943
Natural gas (mcf) 280,667 275,495 150,976 278,096 154,407
Natural gas liquids (bbls) 8,519 9,918 5,952 9,215 6,101
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Total boe per day 89,633 90,068 56,325 89,850 57,578
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Light crude oil production decreased one percent in the second quarter of 2007 compared to the first quarter of 2007. Property divestments in the second quarter more than offset the additional volumes from a full quarter of the CP properties acquisition. Production volumes increased 33 percent in the second quarter of 2007 compared to the second quarter of 2006 and 31 percent for the first half of 2007 compared to the same period in 2006. This increase is primarily due to the addition of approximately 8,700 bbls per day from the CP properties, Esprit Trust and Carson Creek acquisitions that more than offset natural production declines.
Heavy oil production increased seven percent in the second quarter of 2007 compared to the first quarter of 2007 and 49 percent compared to the second quarter of 2006. Production increased 42 percent in the first half of 2007 versus the first half of 2006. Additional volumes from the CP properties acquisition were partially offset by production declines and property divestments.
Natural gas production increased two percent compared to the first quarter of 2007. Additional volumes due to the Sable Offshore Energy Project (SOEP) compression project and the CP properties acquisition mostly offset impacts from planned maintenance shutdowns, property divestments and natural declines. In addition to the above increases, second quarter production increased 86 percent compared to the second quarter of 2006 due to the Esprit Trust and Carson Creek acquisitions, partially offset by production decline. Production for the first half of 2007 increased 80 percent from the first half of 2006.
Natural gas liquids (NGLs) production decreased 14 percent versus the first quarter of 2007. The main reason for the decrease was lower NGL production being sold at Judy Creek compared to the first quarter of 2007 because additional volumes were being used to meet miscible flooding requirements. Compared to the second quarter of 2006, production is up approximately 43 percent due to additional volumes from the Esprit Trust, Carson Creek and CP properties acquisitions. Production for the first half of 2007 increased 51 percent due to the acquisitions.
Pricing and Commodity Risk Management
Compared to the prior quarter, higher U.S. dollar benchmark prices for crude oil and liquids were partially offset by lower natural gas market prices and the strengthening of the Canadian dollar.
As part of our financial management strategy, Pengrowth uses forward price swap and option contracts to manage its exposure to commodity price fluctuations, to provide a measure of stability to monthly cash distributions and to partially secure returns on significant new acquisitions. Thus, in conjunction with the CP properties acquisition, Pengrowth increased the volume of commodity price risk management contracts. Pengrowth has committed approximately 15,000 bbls per day and 9,300 bbls per day of crude oil and 100,000 mcf per day and 60,000 mcf per day of natural gas for the remainder of 2007 and 2008, respectively. Each $1 per barrel change in future oil prices would result in approximately $6 million change in the value of the crude contracts. Similarly, each $0.50 per mcf change in future natural gas prices would result in a $19 million change in the value of the natural gas contracts.
In prior periods, hedge accounting was followed for commodity risk management contracts entered into prior to May 2006 and therefore fair valuation and recording of these contracts was not required by GAAP. Pengrowth has not designated currently outstanding commodity contracts as hedges for accounting purposes and therefore must record these contracts on the balance sheet at their fair value and recognize changes in fair value on the statement of income as unrealized commodity risk management gains or losses. There will continue to be volatility in earnings to the extent that the fair value of commodity contracts fluctuates, however, these non-cash amounts do not impact Pengrowth's operating cash flows. Realized commodity risk management gains or losses are recorded in oil and gas sales on the statement of income.
Average Realized Prices
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, Mar 31, June 30, June 30, June 30,
(Cdn$) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Light crude oil (per bbl) 69.61 63.59 75.67 66.59 70.27
after realized commodity
risk management 71.81 67.24 72.67 69.52 67.91
Heavy oil (per bbl) 43.52 41.54 50.07 42.57 39.52
Natural gas (per mcf) 7.41 7.59 6.69 7.50 7.72
after realized commodity
risk management 7.61 7.91 6.76 7.76 7.77
Natural gas liquids
(per bbl) 56.42 49.67 58.92 52.81 58.57
----------------------------------------------------------------------------
Total per boe 53.10 51.22 55.80 52.17 55.71
after realized commodity
risk management 54.39 53.30 54.91 53.85 54.98
----------------------------------------------------------------------------
Benchmark prices
WTI oil (U.S.$ per bbl) 64.98 58.23 70.72 61.63 67.13
AECO spot gas
(Cdn$ per gj) 6.99 7.07 5.95 7.03 7.37
NYMEX gas (U.S.$ per
mmbtu) 7.55 6.77 6.76 7.16 7.87
Currency (U.S.$/Cdn$) 0.90 0.87 0.89 0.88 0.88
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Realized Commodity Risk Management Gains (Losses)
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, Mar 31, June 30, June 30, June 30,
2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Light crude oil ($ millions) 5.5 9.0 (5.6) 14.5 (8.9)
Light crude oil ($ per bbl) 2.20 3.65 (3.00) 2.93 (2.36)
Natural gas ($ millions) 5.1 7.8 1.0 12.9 1.3
Natural gas ($ per mcf) 0.20 0.32 0.07 0.26 0.05
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Combined ($ millions) 10.6 16.8 (4.6) 27.4 (7.6)
Combined ($ per boe) 1.29 2.08 (0.89) 1.68 (0.73)
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Commodity price contracts in place at June 30, 2007 are detailed in Note 14 to the consolidated financial statements. Additionally, the fair value of the outstanding contracts has been recorded on the balance sheet as a net asset of $32.8 million at period end. An unrealized loss of $4.3 million resulting from the change in fair value from January 1 to June 30, 2007 has been recognized on the statement of income (January 1 to June 30, 2006 - $3.4 million loss). An unrealized gain of $79.7 million resulting from the change in fair value from April 1 to June 30, 2007 has been recognized on the statement of income (April 1 to June 30, 2006 - $3.4 million loss).
Oil and Gas Sales - Contribution Analysis
($ millions) Three months ended Six months ended
----------------------------------------------------------------------------
Sales June 30, % of Mar 31, % of June 30, % of June 30, % of June 30, % of
Revenue 2007 total 2007 total 2006 total 2007 total 2006 total
----------------------------------------------------------------------------
Light
crude
oil 177.0 40 166.2 38 134.6 47 343.2 39 255.7 45
Natural
gas 194.3 44 196.2 46 92.8 33 390.5 45 217.2 38
Natural
gas
liquids 43.8 10 44.3 10 31.9 11 88.1 10 64.7 11
Heavy
oil 28.6 6 25.4 6 22.2 8 54.0 6 35.4 6
Brokered
sales/
sulphur 0.3 - - - 2.0 1 0.3 - 2.4 -
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Total
oil and
gas
sales 444.0 432.1 283.5 876.1 575.4
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Oil and Gas Sales - Price and Volume Analysis
The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales, including the impact of realized commodity risk management activity, for the second quarter of 2007 compared to the first quarter of 2007.
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Light Natural Heavy
($ millions) oil gas NGL oil Other Total
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Quarter ended March 31, 2007 166.2 196.2 44.3 25.4 - 432.1
Effect of change in product
prices 14.8 (4.9) 5.2 1.3 - 16.4
Effect of change in sales
volumes (0.4) 5.7 (5.8) 2.1 - 1.6
Effect of change in realized
commodity risk management
activities (3.5) (2.7) - - - (6.2)
Other (0.1) - 0.1 (0.2) 0.3 0.1
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Quarter ended June 30, 2007 177.0 194.3 43.8 28.6 0.3 444.0
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The following table illustrates the effect of changes in prices and volumes on the components of oil and gas sales, including the impact of realized commodity risk management activity, for the first six months of 2007 compared to the same period of 2006.
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Light Natural Heavy
($ millions) oil gas NGL oil Other Total
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Period ended June 30, 2006 255.7 217.2 64.7 35.4 2.4 575.4
Effect of change in product
prices (18.2) (11.1) (9.6) 3.9 - (35.0)
Effect of change in sales
volumes 82.3 172.8 33.0 14.8 - 302.9
Effect of change in realized
commodity risk management
activities 23.4 11.6 - - - 35.0
Other - - - (0.1) (2.1) (2.2)
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Period ended June 30, 2007 343.2 390.5 88.1 54.0 0.3 876.1
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Processing and Other Income
Three months ended Six months ended
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June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2007 2007 2006 2007 2006
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Processing, interest & other
income 5.0 4.7 4.1 9.7 7.9
$ per boe 0.62 0.58 0.80 0.60 0.76
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Processing, interest and other income is primarily derived from fees charged for processing and gathering third party gas, road use and oil and water processing.
This income represents the partial recovery of operating expenses reported separately.
Royalties
Three months ended Six months ended
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June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Royalty expense 84.0 81.6 45.3 165.6 110.6
$ per boe 10.30 10.06 8.84 10.18 10.61
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Royalties as a percent of
sales 18.9% 18.9% 16.0% 18.9% 19.2%
Royalties include Crown, freehold and overriding royalties as well as mineral taxes. The royalty rate for the second quarter of 2007 has increased from the second quarter of 2006. The lower royalty rate in the second quarter of 2006 was due to a $5 million positive adjustment to the SOEP royalties. The royalty rate for the first half of 2007 is lower than the same period in 2006 and should continue to decrease primarily from the CP properties' average royalty rate of approximately 15 percent.
The outlook for 2007 is that royalties will average approximately 19 percent of Pengrowth's sales.
Operating Expenses
Three months ended Six months ended
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June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Operating expenses 112.1 101.0 58.0 213.1 112.0
$ per boe 13.74 12.46 11.32 13.10 10.75
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Operating expenses increased eleven percent from the first quarter of 2007 or ten percent on a per boe basis. Higher maintenance and a full quarter of expenses related to the CP properties acquisition increased expenses $4 million. In addition, increased expenses were due to higher maintenance expenses at Quirk Creek, Judy Creek and Nipisi. Expenses for the second quarter of 2007 compared to the same period of 2006 increased $54 million. Operating expenses related to the CP properties ($25 million or $15.51 per boe), Esprit ($16 million or $12.58 per boe), and Carson Creek ($6 million or $13.91 per boe) acquisitions accounted for 87 percent of the increase. In addition, increased operations personnel and maintenance costs at Quirk Creek resulted in higher expenses. Operating expenses for the first half of 2007 compared to the first half of 2006 increased 90 percent or $101 million. In addition to the CP properties, Esprit Trust, Carson Creek and Dunvegan acquisitions ($89 million), higher maintenance at Swan Hills and Weyburn, a planned maintenance shutdown at Quirk Creek in June 2007, partly offset by lower utility costs at Tangleflags and Nipisi.
Operating expenses include costs incurred to earn processing and other income which are reported separately.
Pengrowth expects total operating expenses for 2007 of approximately $410 million or $13.00 per boe.
Net Operating Expenses
Three months ended Six months ended
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June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Net operating expenses 107.0 96.3 53.9 203.3 104.1
$ per boe 13.12 11.88 10.51 12.50 9.99
Included in the table above are operating expenses net of the previously reported processing and other income.
Transportation Costs
Three months ended Six months ended
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June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Light oil transportation 0.8 0.4 0.5 1.2 1.0
$ per bbl 0.34 0.17 0.27 0.25 0.27
Natural gas transportation 2.3 2.2 1.2 4.5 2.5
$ per mcf 0.09 0.09 0.09 0.09 0.09
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Pengrowth incurs transportation costs for its product once the product enters a feeder or main pipeline to the title transfer point. The transportation cost is dependant upon third party rates and distance the product travels on the pipeline prior to changing ownership or custody. Oil transportation costs increased in the second quarter of 2007 due to additional transportation incurred related to the CP properties. Pengrowth has the option to sell some of its natural gas directly to premium markets outside of Alberta by incurring additional transportation costs. Pengrowth sells most of its natural gas without incurring significant additional transportation costs. Similarly, Pengrowth has elected to sell approximately 65 percent of its crude oil at market points beyond the wellhead but at the first major trading point, requiring minimal transportation costs.
Amortization of Injectants for Miscible Floods
Three months ended Six months ended
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June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Purchased and capitalized 5.9 4.7 6.7 10.6 17.3
Amortization 8.6 9.5 8.5 18.1 16.5
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The cost of injectants (primarily natural gas and ethane) purchased for injection in miscible flood programs is amortized equally over the period of expected future economic benefit. The cost of injectants purchased in 2006 and 2007 is amortized over a 24 month period. As of June 30, 2007, the balance of unamortized injectant costs was $27.8 million.
The amount purchased and capitalized was lower in the first half of 2007 compared to the same period in 2006 due to the timing of the program. It is expected that the program will increase in upcoming quarters and therefore higher amounts will be purchased. The value of Pengrowth's proprietary injectants is not recorded as an asset or a sale; the cost of producing these injectants is included in operating expenses.
Operating Netbacks
There is no standardized measure of operating netbacks and therefore operating netbacks, as presented below may not be comparable to similar measures presented by other companies. Certain assumptions have been made in allocating operating expenses, other production income, other income and royalty injection credits between light crude, heavy oil, natural gas and natural gas liquids production.
Pengrowth recorded an average operating netback of $29.56 per boe in the second quarter of 2007 compared to $29.87 per boe in the first quarter of 2007 and $33.94 per boe for the second quarter of 2006. The decrease over the second quarter of 2006 is mainly due to slightly lower commodity prices and higher operating costs and royalties. The decrease from the first half of 2006 to the first half of 2007 is a result of lower commodity prices and higher operating costs which are partially offset by lower royalties.
The sales price used in the calculation of operating netbacks is after realized commodity risk management.
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Three months ended Six months ended
Combined Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per boe) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Sales price 54.39 53.30 54.91 53.85 54.98
Other production income 0.04 - 0.41 0.02 0.24
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54.43 53.30 55.32 53.87 55.22
Processing, interest and
other income 0.62 0.58 0.80 0.60 0.76
Royalties (10.30) (10.06) (8.84) (10.18) (10.61)
Operating expenses (13.74) (12.46) (11.32) (13.10) (10.75)
Transportation costs (0.39) (0.32) (0.35) (0.35) (0.34)
Amortization of injectants (1.06) (1.17) (1.67) (1.11) (1.58)
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Operating netback 29.56 29.87 33.94 29.73 32.70
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Three months ended Six months ended
Light Crude Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per bbl) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Sales price 71.81 67.24 72.67 69.52 67.91
Other production income 0.08 0.04 1.07 0.06 0.56
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71.89 67.28 73.74 69.58 68.47
Processing, interest and
other income 0.34 0.35 0.50 0.34 0.54
Royalties (11.90) (9.88) (11.27) (10.89) (9.22)
Operating expenses (14.77) (13.14) (12.17) (13.95) (11.53)
Transportation costs (0.34) (0.17) (0.27) (0.25) (0.27)
Amortization of injectants (3.51) (3.84) (4.61) (3.67) (4.38)
----------------------------------------------------------------------------
Operating netback 41.71 40.60 45.92 41.16 43.61
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Three months ended Six months ended
Heavy Oil Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per bbl) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Sales price 43.52 41.54 50.07 42.57 39.52
Processing, interest and
other income 0.18 0.18 0.16 0.19 0.27
Royalties (5.33) (5.23) (4.75) (5.29) (3.14)
Operating expenses (15.37) (13.15) (16.03) (14.30) (15.09)
----------------------------------------------------------------------------
Operating netback 23.00 23.34 29.45 23.17 21.56
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----------------------------------------------------------------------------
Three months ended Six months ended
Natural Gas Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per mcf) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Sales price 7.61 7.91 6.76 7.76 7.77
Other production income - - 0.01 - 0.01
----------------------------------------------------------------------------
7.61 7.91 6.77 7.76 7.78
Processing, interest
and other income 0.16 0.15 0.23 0.16 0.20
Royalties (1.47) (1.67) (0.93) (1.57) (1.75)
Operating expenses (2.15) (2.01) (1.66) (2.08) (1.60)
Transportation costs (0.09) (0.09) (0.09) (0.09) (0.09)
----------------------------------------------------------------------------
Operating netback 4.06 4.29 4.32 4.18 4.54
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----------------------------------------------------------------------------
Three months ended Six months ended
NGLs Netbacks June 30, Mar 31, June 30, June 30, June 30,
($ per bbl) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Sales price 56.42 49.67 58.92 52.81 58.57
Royalties (17.53) (14.05) (17.67) (15.67) (21.97)
Operating expenses (13.57) (12.02) (10.20) (12.74) (9.41)
----------------------------------------------------------------------------
Operating netback 25.32 23.60 31.05 24.40 27.19
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Interest
Interest expense decreased eight percent to $21.6 million in the second quarter from $23.4 million in the first quarter of 2007. Interest expense increased $15.1 million from $6.5 million in the second quarter of 2006, reflecting a higher average debt level resulting from the CP properties and Esprit Trust acquisitions combined with higher interest rates and standby fees in the quarter. Approximately 20 percent of Pengrowth's outstanding long term debt as at June 30, 2007 incurs interest expense payable in U.S. dollars and therefore remains subject to fluctuations in the U.S. dollar exchange rate.
General and Administrative (G&A) Expenses
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Cash G&A expense 14.7 15.1 8.1 29.8 15.6
$ per boe 1.81 1.86 1.59 1.83 1.50
Non-cash G&A expense 1.5 1.7 0.6 3.2 1.9
$ per boe 0.18 0.22 0.11 0.20 0.18
----------------------------------------------------------------------------
Total G&A 16.2 16.8 8.7 33.0 17.5
Total G&A ($ per boe) 1.99 2.08 1.70 2.03 1.68
----------------------------------------------------------------------------
The cash component of G&A for the second quarter of 2007 compared to the first quarter of 2007 decreased three percent. In comparison to the second quarter of 2006, the cash component increased $6.6 million due to the transition services fee associated with the CP properties acquisition ($1.4 million), additional salaries and benefits resulting from the recent acquisitions ($2.3 million), higher rent and other professional fees. Cash G&A increased $14.2 million in the first half of 2007 compared to the same period of 2006. This is due to additional salaries and benefits resulting from the recent acquisitions ($5.3 million), the CP transition services fee ($3.0 million), legal fees associated with ongoing litigation ($0.8 million) and professional fees associated with tax matters ($0.9 million), higher rent and other professional fees. The CP transition contract finished on May 31, 2007.
The non-cash component of G&A represents the compensation expense associated with Pengrowth's long term incentive programs including trust unit rights and deferred entitlement units. The increase in the second quarter and the first half of 2007 versus the same periods in 2006 is due to the significant increase in the number of employees due to recent acquisitions.
Management Fees
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, Mar 31, June 30, June 30, June 30,
($ millions) 2007 2007 2006 2007 2006
----------------------------------------------------------------------------
Management Fee 3.0 3.2 3.4 6.2 7.6
$ per boe 0.37 0.39 0.65 0.38 0.73
----------------------------------------------------------------------------
Commencing July 1, 2006, for the remaining three year term, the maximum fees payable to the Manager are limited to 60 percent of the fees that would have been payable under the original agreement or $12 million plus certain expenses, whichever is lower. The current agreement expires on June 30, 2009 and does not contain a further right of renewal.
Taxes
In determining its taxable income, the Corporation deducts payments made to the Trust, effectively transferring the income tax liability to unitholders thus reducing the Corporation's taxable income to nil. Under the Corporation's current distribution policy, at the discretion of the Board, funds can be withheld from distributable cash to fund future capital expenditures, repay debt or other corporate purposes. In the event withholdings increased sufficiently, the Corporation could become subject to taxation on a portion of its income in the future. This can be mitigated through various options including the issuance of additional trust units, increased tax pools from additional capital spending, modifications to the distribution policy or potential changes to the corporate structure.
The CP properties acquisition resulted in Pengrowth recording an additional future tax liability of $310.6 million, representing the difference between the tax basis and the fair value assigned to the acquired assets.
Bill C-52 Budget Implementation Act 2007
On October 31, 2006, the Minister of Finance announced legislative tax proposals which modify the taxation of certain flow-through entities including mutual fund trusts and their unitholders (the "October 31 Proposals"). The October 31 Proposals apply to a specified investment flow-through (SIFT) trust and apply a tax at the trust level on distributions of certain income from such SIFT trust at a rate of tax comparable to the combined federal and provincial corporate tax rate. These distributions will be treated as dividends to the trust unitholders.
On March 19, 2007, the Government of Canada tabled in Parliament Bill C-52 Budget Implementation Act 2007 which contains the October 31 Proposals. As of June 22, 2007, Bill C-52 received Royal Assent thereby legislating
