ProEx Reports Second Quarter Results
Expands Foothills Land Position; New Exploration Concepts to be Tested
During Second Half
CALGARY, July 29 /CNW/ -
Three months ended Six months ended
June 30 June 30
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HIGHLIGHTS 2008 2007 2008 2007
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Operations Production
- Natural gas (mcf/d) 58,426 49,530 58,153 43,116
- Crude oil (bbls/d) 405 414 455 399
- Natural gas liquids
(bbls/d) 307 239 324 243
- Total production
(boe/d) 10,449 8,909 10,471 7,828
Average realized price
- Natural gas ($/mcf) 9.92 7.42 8.88 7.94
- Crude oil ($/bbl) 117.08 68.32 103.38 66.47
- Natural gas liquids
($/bbl) 100.01 66.29 90.19 63.75
Financial ($ thousands, except
per share amounts)
Petroleum and natural
gas revenue 61,949 37,347 110,736 65,871
Funds generated from
operations 31,867 18,628 57,936 36,536
- Basic per share 0.57 0.39 1.06 0.83
- Diluted per share 0.55 0.35 1.01 0.73
Net earnings 5,307 7,564 7,181 11,630
- Basic per share 0.09 0.16 0.13 0.27
- Diluted per share 0.09 0.14 0.13 0.23
Capital investment 19,155 143,598 83,914 194,087
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Bank debt and working
capital deficiency 131,097 88,411 131,097 88,411
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HIGHLIGHTS
- Year to date undeveloped lands have grown by 88,000 net acres through
farm-in and land purchases from industry competitors and crown
land sales. Undeveloped land holdings that we own and control now
total 517,000 acres.
- Production for the three months ended June 30, 2008 (the "Quarter"),
averaged 10,449 boe per day, up 17 percent, compared to 8,909 boe per
day in the same quarter in 2007. The second quarter production levels
were impacted by the 22 day turnaround of the Spectra McMahon gas
plant during June. This is a scheduled event that occurs every three
years. Production during July averaged approximately 12,000 boe per
day.
- Funds generated from operations for the Quarter were $31.9 million
compared to $18.6 million for the same period in 2007. Funds
generated from operations per diluted share were up 57 percent at
$0.55 diluted ($0.57 basic) compared to $0.35 diluted ($0.39 basic)
in the same period in 2007. The Company reported net earnings of
$5.3 million for the Quarter compared to $7.6 million during the same
period in 2007. Net earnings per share were $0.09 basic
($0.09 diluted) compared to $0.16 basic ($0.14 diluted) in the same
period in 2007.
- ProEx Energy Ltd.'s ("ProEx or The "Company") realized natural gas
prices averaged $9.92 per mcf during the Quarter ($9.29 per mcf after
hedging) compared to $7.42 per mcf during the same period in 2007.
North American natural gas prices have risen by approximately 30
percent since the end of the first quarter of 2008 reflecting the
strong fundamentals for natural gas.
- The Company ended the Quarter with total debt of $131.1 million on a
total credit facility of $225 million and is well positioned to
execute its capital investment program for 2008.
OPERATIONS
- Construction of the Caribou area river crossings and associated
facility projects were completed by mid April and together with other
pipeline and compression projects completed in the first quarter
contributed to the achievement of record production levels.
- The Company currently has five drilling rigs operating in the
B.C. Foothills. During the second half of 2008 a total of
approximately 40-45 natural gas tests will be drilled targeting
a portfolio of vertical and horizontal Halfway opportunities
as well as both exploration and delineation drilling in the
Cretaceous and Mississippian horizons.
- ProEx has commenced a drilling program to test the applicability of
horizontal drilling - multistage fracture technology in the Triassic
aged Halfway formation. Up to four horizontal tests will be conducted
during 2008 with the first underway in the Dogrib Pool. The Company
believes that this technology has the potential to result in material
cost savings on future development projects as well as adding
significant incremental reserves due to improved recovery and the
capture of resources which are not economic when vertically drilled.
- Three to four Mississippian targets in the Caribou area and
elsewhere on Company lands will be pursued following up on recent
successes during the first quarter while approximately 20 Cretaceous
opportunities will be drilled.
- Halfway and other Triassic exploration drilling will continue as
ProEx evaluates new concepts and geophysical anamolies on farm-in
and owned lands.
Exploration Update
ProEx drilled no wells during the Quarter due to normal spring breakup.
The focus was on analyzing and interpreting the newly acquired seismic data
recorded over the winter and integrating it with well and production data.
This allowed the Company to acquire additional contiguous lands within its
traditional Foothills fairway and now positions the Company for growth through
2009 and beyond.
In 2004, when ProEx began its exploration efforts on a limited landbase
in the Foothills, the entire focus was on the Halfway sands in crestal
anticlinal positions as identified by 3D seismic. Since that time, ProEx has
drilled over 180 Halfway tests and booked over 1/3 of a trillion cubic feet of
reserves. The Halfway zone still comprises approximately 65 percent of ProEx's
drill targets today. In addition, the exploration inventory has been
diversified to include the thick gas filled sands of the overlying Cretaceous
horizons that develop in flank positions to the anticlines as well as deeper
targets in the Mississippian Debolt formation. The Debolt was a prolific
producer for predecessor exploration companies in the 1950's to the 1970's in
the Foothills as the robust reserves found in Debolt pools made gas
exploration economic. While some of the larger obvious pools have been
exploited since that time, ProEx with over 2400 square kilometres of 3D data,
has identified numerous significant closed Debolt features that will be
drilled over the next several quarters. ProEx's exploration focus and dominant
land holdings position the Company to pursue equally economic natural gas
reservoirs, during the coming year, in the Foothills, including the Montney
silts, the Doig and Artex sands, the Baldonnel carbonates and potentially the
Nordegg shales. These zones are present throughout ProEx's entire exploration
fairway and have the potential to generate substantial production growth.
The Company's dominant and contiguous exploration land base continues to
grow with 51,000 net acres of land added via crown land sales and raw land
purchases from industry competitors during the Quarter. The property
acquisitions during the Quarter consisted of two separate transactions
amounting to $7.0 million to acquire undeveloped land from regional
competitors. Crown land sales during the Quarter were $1.3 million with an
additional $3.5 million invested during July adding 29,000 net acres to bring
the year to date additions to 88,000 net undeveloped acres (before consumption
and expiries). Total undeveloped land in British Columbia is now approximately
517,000 acres.
ProEx will utilize between five and seven rigs in the Foothills during
the second half of 2008 and through the upcoming winter season, concentrating
on an increasing variety of gas targets within its 120-mile long exploration
fairway. The Company has commenced its horizontal drilling program that will
utilize multi-stage fracture technology targeting the tight sands of the
Halfway formation. The Halfway formation has to date been developed utilizing
vertical wellbores in as many as 16 separate accumulations to date. While some
of these pools, such as West Beg have been developed with vertical wells, the
balance of the reservoirs have the potential for a combination of both
vertical and horizontal well bores to maximize reserve recoveries and value.
Horizontal drilling programs will be directed into the Bubbles, Julienne,
Caribou and Gundy/Cameron areas over the next nine months.
2008 Year to Date Drilling Results
Gross Wells Net Wells
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Gas Oil Dry Total Gas Oil Dry Total
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British Columbia
- Foothills region 25 - - 25 18.1 - - 18.1
- Fort St. John
Plains region 1 - - 1 0.2 - - 0.2
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Total 26 - - 26 18.3 - - 18.3
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Natural Gas Markets
The North American natural gas picture remains strong relative to the
comparable period in 2007. Although United States ("U.S.") natural gas
production has risen significantly as a result of onshore production growth
from resource plays, it has been offset by lower imports of LNG, lower
Canadian production and a rise in industrial demand. Natural gas demand should
also benefit from the movement towards the use of more environmentally
friendly fuels. Natural gas produces significantly less carbon dioxide than
burning other fuels and is becoming a fuel of choice in North America.
LNG imports to the U.S. remain low relative to the same period in 2007.
Higher priced markets in Europe and Asia continue to bid cargoes away from the
U.S. With the growth in LNG demand in other countries, industry analysts
expect LNG imports to remain low throughout the storage injection season.
The evidence of reduced Canadian natural gas drilling activity is showing
up in the form of weaker field receipts. Year-to-date field receipts in
Alberta and British Columbia combined are down approximately 470 million cubic
feet per day compared to 2007. On the demand side, oil sands development is
expected to continue to increase the demand for natural gas over the next
decade.
In the short term, natural gas prices will be dictated by the rate of
natural gas storage injections and the impact of weather expectations. Over
the longer term, natural gas will become more integrated into a global market
as a result of the continual growth in LNG capacity. The supply/demand balance
is expected to remain tight and relatively volatile with the impact of weather
being a key determinant of demand.
Hedging Update
ProEx employs an active risk management program to provide certainty to a
portion of its cash flow supporting its capital investment program. The
Company has hedged 40,000 gigajoules ("GJ") per day (approximately 35 mmcf per
day), or approximately 50 percent of its before royalty forecasted natural gas
production, for the period from April 1, 2008 through to October 31, 2008, at
an average net floor price of C$7.90 per mcf based on the Company's high heat
content natural gas production. The summer hedging program was completed using
a series of swaps and bull spread structures. The swap and bull spread
structure that ProEx utilizes sets a relatively high floor in the current
market and allows participation up to an equivalent average summer 2008 net
gas price of C$9.00 per mcf. The Company has also hedged 15,000 GJ's per day
of its natural gas volumes for the period November 1, 2008 to March 31, 2009
resulting in a net floor of $11.18 per mcf and a ceiling of $14.64 per mcf.
The Company recorded an unrealized loss of $9.7 million in the Quarter
and $19.5 million for the six months ended June 30, 2008 related to these
contracts. This compares to an unrealized gain of $5.2 million for the three
months ended June 30, 2007 and an unrealized gain of $1.2 million for the six
months ended June 30, 2007. During the Quarter the Company recorded a realized
loss on these instruments of $3.3 million.
Outlook
The Company is entering a very exciting period in its evolution where we
will be testing a number of concepts that have the potential to position the
Company for the next level of growth. During the balance of the year we will
be testing horizontal wells and multi stage fracture stimulation technology in
our traditional tight Halfway sands. We believe that the tight Halfway sands
exhibit many common characteristics with the Cretaceous Cadomin and certain
other Triassic sands to the south of our land position in British Columbia.
We plan on drilling up to four horizontal wells before the end of the year.
We also plan on testing our Mississippian success achieved at Caribou
elsewhere on our lands. The success of any one of these has the potential to
significantly increase our opportunity base. The balance of our program will
be split between exploration and development drilling.
We have continued to aggressively grow our exploration land position with
the selective acquisition of undeveloped lands from other regional players as
well as land sales and farm-in arrangements. We now own and control over
500,000 acres of undeveloped land in our Foothills region and control a
significant infrastructure of gathering and processing facilities in the area.
Exit rate production in 2008 is expected to be in the range of 14,000 to
15,000 boe per day. The Company's 2008 capital investment program will be
approximately $150 to $160 million. Approximately 65 percent will be directed
towards drilling and completions and includes the drilling of approximately 45
net wells.
The Company ended the Quarter with total debt of $131.1 million on a
total bank facility of $225 million. This credit capacity, combined with the
improved natural gas pricing environment, has the Company well positioned to
finance its planned 2008 program internally.
We believe the long term prospects for natural gas in North America
remain very bullish and we will continue to aggressively position the
Company's asset base in the Foothills of British Columbia to capitalize on
this opportunity.
On behalf of the Board of Directors,
(Signed) "David D. Johnson"
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David D. Johnson
President & Chief Executive Officer
July 29, 2008
Forward Looking Statements - Certain information regarding ProEx Energy
Ltd. set forth in this document, including management's assessment of ProEx
Energy Ltd.'s future plans and operations, contains forward-looking statements
that involve substantial known and unknown risks and uncertainties. These
forward-looking statements are subject to numerous risks and uncertainties,
certain of which are beyond ProEx Energy Ltd.'s control, including the impact
of general economic conditions, industry conditions, volatility of commodity
prices, currency fluctuations, imprecision of reserve estimates, environmental
risks, competition from other producers, the lack of availability of qualified
personnel or management, stock market volatility and ability to access
sufficient capital from internal and external sources. ProEx Energy Ltd.'s
actual results, performance or achievement could differ materially from those
expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any of the events anticipated by
the forward-looking statements will transpire or occur, or if any of them do
so, what benefits that ProEx Energy Ltd. will derive therefrom.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
The following discussion and analysis as provided by the Management of
ProEx Energy Ltd. ("ProEx" or the "Company") as of July 29, 2008, is to be
read in conjunction with the accompanying unaudited interim financial
statements and related notes for the three and six months ended June 30, 2008
and ProEx's audited financial statements, related notes and MD&A for the year
ended December 31, 2007. The financial data presented has been prepared in
accordance with Canadian generally accepted accounting principles ("GAAP").
The reporting and the measurement currency is the Canadian dollar.
Description of Company
ProEx is a Calgary based, natural gas focused, exploration and
development company, established on July 2, 2004. Primary operating areas
include the northeast British Columbia Foothills and Fort St. John Plains
regions. Shares of ProEx trade on the Toronto Stock Exchange ("TSX") under the
symbol PXE.
Relationship with Progress Energy Trust
The Company receives personnel and certain administrative and technical
services from Progress Energy Trust ("Progress") in connection with the
management, development, exploitation and operation of the assets of ProEx and
the marketing of its production. Progress provides these services in
accordance with the Technical Services Agreement entered into with ProEx as
described below. ProEx has granted performance shares and stock options to
Progress executives and employees and common shares under Progress' long term
incentive compensation plan ("LTI") to non-executive employees of Progress in
their capacity as service providers.
Under the terms of the LTI, non-executive Progress employees in their
capacity as service providers, may be granted LTI awards to be paid in common
shares of the Company. ProEx agreed to contribute to the LTI to ensure that
service providers retain incentives related to the success of ProEx. Awards
granted under the LTI will vest on the second anniversary date of the date of
grant. ProEx has agreed to reimburse Progress for this expense.
ProEx and Progress have joint interest in certain properties and
undeveloped land in the northeast British Columbia Foothills and Fort St. John
Plains regions. These joint interest properties are governed by standard
industry agreements and in addition the Company has entered into a protocol
arrangement ("Protocol Arrangement") with Progress that specifies how each
company will manage the joint lands in specifically identified areas of
interest. To ensure good governance practices, both ProEx and Progress have
each created independent committees of their Board of Directors to monitor
compliance with the Technical Services Agreement and the Protocol Arrangement.
Technical Services Agreement - The Technical Services Agreement has no
set termination date and will continue until terminated by either party with
one year prior written notice to the other party or some other date as
mutually agreed. The Company receives services including management,
development, exploitation, operations, administrative, and marketing, as well
as information technology systems from Progress on an expense reimbursement
basis, based on the Company's monthly capital activity and production levels
relative to the combined capital activity and production levels of both ProEx
and Progress.
Protocol Arrangement - The Protocol Arrangement identifies methods and
processes to be followed on both existing and new lands, joint facilities,
marketing, seismic and surface rights. The Protocol Arrangement also outlines
the practices to be followed in the event either party enters into areas
outside of the identified areas of interest.
On April 2, 2007, ProEx acquired certain interests in northeast British
Columbia Foothills assets previously acquired by Progress. ProEx's total
consideration, including transaction costs of $0.9 million was $136.4 million.
When considering the bid process for this acquisition, each of Progress and
ProEx identified assets that they were interested in acquiring and values that
they were willing to pay to acquire such assets. Progress made a single bid on
behalf of ProEx and Progress and the ultimate purchase was based on the prices
that each of Progress and ProEx were willing to pay for the assets that they
had selected to acquire. The resale of assets between Progress and ProEx was
based on these allocations. The technical services committee reviewed the
details of the transaction prior to the purchase and sale agreement being
signed. All lands are managed in accordance with the Protocol Arrangement.
On November 30, 2007, ProEx and Progress jointly acquired certain assets
in the Foothills region of British Columbia. The total cost of the acquisition
of $17.9 million was split in accordance with working interests held in the
surrounding area. As a result, ProEx acquired an 80 percent interest ($14.3
million) and Progress acquired a 20 percent interest in the assets ($3.6
million).
Non-GAAP Measures
The MD&A contains the term "funds generated from operations" and "funds
generated from operations per share" which do not have any standardized
meaning prescribed by Canadian GAAP. Management uses funds generated from
operations and funds generated from operations per share to analyze operating
performance and leverage and considers funds generated from operations to be a
key measure as it demonstrates the Company's ability to generate the cash
necessary to fund future capital investments and to repay debt. Funds
generated from operations should not be considered an alternative to, or more
meaningful than cash flow from operating activities as determined in
accordance with Canadian GAAP as an indicator of the Company's performance.
Therefore references to funds generated from operations or funds generated
from operations per share (basic and diluted) may not be comparable with the
calculation of similar measures for other entities. Funds generated from
operations per share is calculated using the basic and diluted weighted
average number of shares for the period. The reconciliation between funds
generated from operations and cash flow from operations after changes in
working capital for the three and six months ended June 30, 2008 and 2007 is
as follows:
Three months ended Six months ended
June 30 June 30
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($ thousands) 2008 2007 2008 2007
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Funds generated from operations 31,867 18,628 57,936 36,536
Changes in non-cash working capital 1,936 (200) 2,458 3,385
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Cash flow from operations after
changes in working capital 33,803 18,428 60,394 39,921
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Management uses certain industry benchmarks such as operating netback to
analyze financial and operating performance. This benchmark as presented does
not have any standardized meaning prescribed by Canadian GAAP and therefore
may not be comparable with the calculation of similar measures for other
entities. Management considers netbacks an important measure as it
demonstrates its profitability relative to current commodity prices. The
Company uses this measure to help evaluate its performance.
Boe Presentation
Barrels of oil equivalent ("boe") may be misleading, particularly if used
in isolation. A boe conversion ratio of six thousand cubic feet ("mcf") to one
barrel ("bbl") is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the
wellhead. All boe conversions in this report are derived by converting natural
gas to oil in the ratio of six mcf of gas to one barrel of oil.
Forward-Looking Information
Forward Looking Statements - Certain information regarding ProEx set
forth in this document, including Management's assessment of the Company's
future plans and operations, contains forward-looking statements that involve
substantial known and unknown risks and uncertainties. The use of any of the
words "anticipate", "continue", "estimate", "expect", "may", "will",
"project", "should", "believe" and similar expressions are intended to
identify forward looking statements. Such statements represent ProEx's
internal projections, estimates or beliefs concerning, among other things, an
outlook on the estimated amounts and timing of capital expenditures,
anticipated future debt, revenues or other expectations, beliefs, plans,
objectives, assumptions, intentions or statements about future events or
performance. These statements are only predictions and actual events or
results may differ materially. Although ProEx believes that the expectations
reflected in the forward-looking statements are reasonable, it cannot
guarantee future results, levels of activity, performance or achievement since
such expectations are inherently subject to significant business, economic,
competitive, political and social uncertainties and contingencies. Many
factors could cause ProEx's actual results to differ materially from those
expressed or implied in any forward-looking statements made by, or on behalf
of, ProEx.
In particular, forward-looking statements included in this MD&A include,
but are not limited to, statements with respect to the size of, and future net
revenues from, crude oil and natural gas reserves; the focus of capital
expenditures; expectations regarding the ability to raise capital and to
continually add to reserves through acquisitions and development; projections
of market prices and costs; the performance characteristics of the Company's
crude oil and natural gas properties; crude oil and natural gas production
levels; ProEx's future operating and financial results; capital expenditure
programs; supply and demand for crude oil and natural gas; average royalty
rates; grassroots development drilling and development drilling in its
operating regions; amount of general and administrative expenses; and
treatment under governmental regulatory regimes and tax laws. In addition,
statements relating to "reserves" or "resources" are deemed to be forward
looking statements, as they involve the implied assessment, based on certain
estimates and assumptions, that the resources and reserves described can be
profitably produced in the future.
These forward-looking statements are subject to numerous risks and
uncertainties, certain of which are beyond the Company's control, including
the impact of general economic conditions; volatility in market prices for
crude oil and natural gas; industry conditions; volatility of commodity
prices; currency fluctuation; imprecision of reserve estimates; liabilities
inherent in crude oil and natural gas operations; environmental risks;
incorrect assessments of the value of acquisitions and exploration and
development programs; competition from other producers; the lack of
availability of qualified personnel or management; changes in income tax laws
or changes in tax laws and incentive programs relating to the oil and gas
industry; hazards such as fire, explosion, blowouts, cratering, and spills,
each of which could result in substantial damage to wells, production
facilities, other property and the environment or in personal injury; stock
market volatility; ability to access sufficient capital from internal and
external sources and the other risks considered under "Risk Factors" in our
annual information form for the year ended December 31, 2007 which is
available on www.sedar.com.
With respect to forward-looking statements contained in this MD&A, ProEx
has made assumptions regarding: current commodity prices and royalty regimes;
availability of skilled labour; north American sulphur prices; timing and
amount of capital expenditures; future exchange rates; the price of oil and
natural gas; the impact of increasing competition; conditions in general
economic and financial markets; availability of drilling and related
equipment; effects of regulation by governmental agencies; royalty rates and
future operating costs.
Management has included the above summary of assumptions and risks
related to forward-looking information provided in this MD&A in order to
provide Shareholders with a more complete perspective on ProEx's future
operations and such information may not be appropriate for other purposes.
ProEx's actual results, performance or achievement could differ materially
from those expressed in, or implied by, these forward-looking statements and,
accordingly, no assurance can be given that any of the events anticipated by
the forward-looking statements will transpire or occur, or if any of them do
so, what benefits that the Company will derive there from. Readers are
cautioned that the foregoing lists of factors are not exhaustive. These
forward-looking statements are made as of the date of this MD&A and the
Company disclaim any intent or obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or results or otherwise, other than as required by applicable
securities laws.
RESULTS OF OPERATIONS
Asset Acquisition
On April 2, 2007, ProEx acquired certain interests in northeast British
Columbia Foothills assets previously acquired by Progress (the "Asset
Acquisition"). ProEx's total consideration, including transaction costs of
$0.9 million was $136.4 million. The Asset Acquisition was financed through an
equity offering of 8,050,000 common shares of the Company at a price of $12.45
per share for aggregate gross proceeds of $100.2 million ($95.6 million net of
issue costs). The remainder of the purchase price was financed through
increased bank debt.
The Asset Acquisition included approximately 2,000 boe per day of
production, 95 percent natural gas and approximately 80,000 net acres of
undeveloped land.
Production
The following is a summary of daily production for the periods indicated:
Three Months Ended Six Months Ended
June 30 June 30
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2008 2007 Change 2008 2007 Change
(%) (%)
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Natural gas (mcf/d) 58,426 49,530 18 58,153 43,116 35
Crude oil (bbls/d) 405 414 (2) 455 399 14
Natural gas liquids
(bbls/d) 307 239 28 324 243 33
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Total production
(boe/d) 10,449 8,909 17 10,471 7,828 34
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Sulphur sales (tons/d) 60 56 7 48 46 4
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The production for the Quarter was negatively impacted by the scheduled
plant turnaround at the Spectra owned McMahon gas processing facility in June.
The turnaround resulted in the facility being completely shut down for a 17
day period and a 5 day period with reduced service. This affected all British
Columbia production, except for production at the Green and Bubbles areas,
where volumes were redirected through the Jedney gas processing facility. The
McMahon facility was brought back into service on June 28, 2008. Production
during July averaged 12,000 boe per day.
Production for the three months ended June 30, 2008 (the "Quarter") of
10,449 boe per day was 17 percent higher than the 8,909 boe per day recorded
in the same period in 2007. Natural gas production of 58,426 mcf per day
during the Quarter was 18 percent higher than the 49,530 mcf per day recorded
for the same period in 2007. Crude oil and natural gas liquids production for
the Quarter increased nine percent to 712 bbls per day from 653 bbls per day
for the same period in 2007. For the six months ended June 30, 2008, ProEx's
production averaged 10,471 boe per day, a 34 percent increase over the
7,828 boe per day recorded in the same period in 2007. Current year to date
production consisted of 58,153 mcf per day of natural gas and 779 bbls per day
of oil and natural gas liquids. Production increases are a result of the
Company's successful exploration and development drilling program in addition
to approximately 2,000 boe per day of production added from the Asset
Acquisition beginning in the second quarter of 2007. The Company's production
portfolio was weighted 93 percent to natural gas, four percent to crude oil
and three percent to natural gas liquids.
Natural gas produced in certain areas of the Plains and Foothills region
of northeast British Columbia contain varying levels of hydrogen sulphide. The
processing of this natural gas results in sulphur as a by-product. For the
three and six months ended June 30, 2008, the Company sold 60 tons per day and
48 tons per day of sulphur, respectively (2007 - 56 tons per day and 46 tons
per day, respectively).
Pricing and Risk Management
Natural Gas Markets
ProEx's realized natural gas price in the Quarter and for the six months
ended June 30, 2008 was $9.92 and $8.88 per mcf, respectively (2007 - $7.42
and $7.94, per mcf, respectively) compared to the AECO daily index average of
$9.44 and $8.32 per mcf, respectively. ProEx markets its natural gas at a mix
of daily and monthly pricing. The higher realization reflects the higher heat
content of ProEx's natural gas stream.
Natural gas prices in all markets in North America rose continuously
through the Quarter based on bullish sector news. Factors supportive of the
higher prices include: lower liquefied natural gas ("LNG") imports given the
strong Asian and European demand; lower Canadian production; an extended
outage at the Independence Hub natural gas processing facility in the Gulf of
Mexico; and, the growing year-over-year natural gas storage deficit. As well,
natural gas prices have been supported by rising prices for competing fuels as
the price of WTI crude oil reached unprecedented levels during the Quarter.
The outlook for natural gas prices remains strong although natural gas
production in the U.S. has been rising, the supply-demand balance remains
tight as a result of lower imports of LNG, falling Canadian production and
rising industrial demand. Weather will continue to be a key determining factor
in consumption patterns for electric power generation for air conditioning
load in the summer.
Oil Markets
ProEx's realized prices for its liquids stream for the Quarter and for
the six months ended June 30, 2008 were $117.08 and $103.38 per bbl,
respectively (2007 - $68.32 and $66.47 per bbl, respectively) for crude oil
and $100.01 and $90.19 per bbl, respectively (2007 - $66.29 and $63.75 per
bbl, respectively) for natural gas liquids.
Crude oil prices remained volatile and experienced wide fluctuations
while setting record prices throughout the Quarter. Prompt month WTI crude oil
traded at approximately US$100.00 per bbl at the beginning of the Quarter and
closed the Quarter at approximately US$140.00 per bbl and reached an all-time
high of $145.85 after Quarter-end on July 3, 2008. Key factors contributing to
the volatility were the fluctuating U.S. dollar, unrest in the Middle East and
rebel strikes on petroleum infrastructure in Nigeria.
Global oil supply continues to be driven by geo-political events in the
Middle East and Africa, two key light oil producing regions. Although OPEC and
non-OPEC countries have moved to increase supply, it is typically a heavier,
sour grade of crude which requires upgrading while upgrading capacity
continues to be very tight in the consuming areas of the world. It is
anticipated that persistently high oil prices will have a dampening effect on
global economic growth.
Sulphur Markets
ProEx's realized net sulphur price for the Quarter and for the six months
ended June 30, 2008 was $388.35 and $323.42 per ton, respectively (2007 -
$15.60 net loss and $18.92 net loss per ton, respectively). ProEx markets its
sulphur through an arrangement with a sulphur marketing company and pays all
costs and fees associated with transportation, loading, storage and marketing
of its sulphur.
North American sulphur prices have risen sharply over the past year,
supported by rising global demand for agricultural products such as
fertilizers and other chemicals. Benchmark Florida sulphur prices have
averaged U.S. $70.00 per ton since 1990 but have risen to over U.S. $450 per
ton this year. Canadian prices have been even stronger with Vancouver prices
over $600 per ton, largely as a result of strong Asian demand. Canadian
sulphur production represents approximately 16 percent of global production.
The majority of the Canadian production comes from the oil and gas industry
where sulphur is a by-product of crude oil and natural gas and is removed
during processing.
Three Months Ended Six Months Ended
Average Benchmark Prices June 30 June 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Natural gas - Station No. 2
($/mcf daily index) 10.22 6.97 9.06 7.08
Natural gas - AECO
($/mcf daily index) 9.44 7.14 8.32 7.30
Natural gas - AECO
($/mcf monthly index) 10.31 7.44 9.14 7.48
Exchange rate (US$/Cdn$) 1.0070 1.0981 1.0100 1.1349
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
ProEx Realized Prices June 30 June 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Natural gas ($/mcf) 9.92 7.42 8.88 7.94
Crude oil ($/bbl) 117.08 68.32 103.38 66.47
Natural gas liquids ($/bbl) 100.01 66.29 90.19 63.75
Sulphur - net ($/ton) 388.35 (15.60) 323.42 (18.92)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Risk Management
The Company has entered into natural gas financial contracts for the
purpose of protecting its funds generated from operations from the volatility
of natural gas prices. For the Quarter, the Company's natural gas price risk
management program had a net realized loss of $3.3 million and $3.3 million
year to date (2007 - $0.04 million and $3.6 million, respectively).
On January 1, 2007 the Company adopted the new accounting standards
regarding the accounting for financial instruments. In addition to the
adoption of the new standards, Management elected not to use hedge accounting
and consequently recognizes the fair value of its natural gas financial
contracts at each reporting period with the change in the fair value being
classified as unrealized gains and losses in the statement of earnings.
On adoption, the Company recognized a current asset of $7.4 million for
the fair value of its natural gas derivative contracts with a corresponding
increase to accumulated other comprehensive income of $4.9 million (net of tax
of $2.5 million). The $4.9 million in accumulated other comprehensive income
was amortized through other comprehensive income and unrealized gain or loss
on the statement of earnings over the term of the contracts. For the three
months ended June 30, 2007, $0.8 million ($3.8 million year to date) was
amortized through other comprehensive income with a corresponding pre-tax
unrealized gain of $1.2 million ($5.7 million year to date). The balance in
accumulated other comprehensive income was fully amortized at December 31,
2007, therefore requiring no charge to other comprehensive income for the
period ended June 30, 2008.
The following table reconciles the Company's unrealized gain (loss) on
financial contracts:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Change in fair value of financial
instruments (9,657) 3,961 (19,472) (4,556)
Amortization of accumulated other
comprehensive income - 1,249 - 5,732
-------------------------------------------------------------------------
Unrealized gain (loss) on financial
instruments (9,657) 5,210 (19,472) 1,176
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company's financial derivative trading activities are conducted
pursuant to the Company's Risk Management Policy approved by the Board of
Directors. The Risk Management Policy has the objectives of reducing risk
exposure to budgeted annual funds generated from operations projections
resulting from uncertainty or changes in commodity prices, interest rates or
foreign exchange; limiting financial contract volumes up to a maximum of
50 percent of budgeted production, net of royalties (or higher subject to
Board of Director's approval); and limiting financial derivative trading
activity to counter-parties that provide sufficient collateral in support of
payment or have investment grade credit ratings.
ProEx's commodity risk management positions are described in Note 8 in
the unaudited interim financial statements. The Company has both summer and
winter financial derivative contracts in place for the current year, all of
which use swaps and bull spreads. The summer contracts for the period April
2008 to October 2008 are for a total of 40,000 gigajoules ("gj") per day with
an average net floor price (net of premiums to be paid) of $6.93 per gj and an
average net ceiling price of $7.93 per gj. The winter 2008/2009 contracts for
the period November 2008 to March 2009 total 15,000 gj's per day with an
average net floor price (net of premiums to be paid) of $9.78 per gj and an
average net ceiling price of $12.68 per gj.
Revenues
For the Quarter, total revenues increased 66 percent to $61.9 million
compared to $37.3 million for the same period in 2007. The increase was a
result of increased production from the successful capital program over the
past twelve months, and higher commodity prices. Natural gas revenue for the
Quarter increased 58 percent to $52.7 million from $33.4 million for the same
period in 2007, while crude oil sales increased 68 percent to $4.3 million
compared to $2.6 million in 2007 and natural gas liquids sales increased
100 percent to $2.8 million from $1.4 million for the same period in 2007. For
the six months ended June 30, 2008, revenues increased 68 percent to
$110.7 million from $65.9 million for the same period in 2007 due to higher
production volumes and higher commodity prices.
For the three and six months ended June 30, 2008, petroleum and natural
gas revenue included the following balances compared to the same periods in
2007:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Natural gas sales 52,737 33,406 94,005 58,422
Crude oil sales 4,314 2,575 8,569 4,802
Natural gas liquids sales 2,792 1,444 5,313 2,799
Sulphur sales (net) 2,106 (78) 2,849 (152)
-------------------------------------------------------------------------
Petroleum and natural gas revenue 61,949 37,347 110,736 65,871
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Royalties
Royalty expense consists of royalties paid to provincial governments,
freehold landowners and overriding royalty owners. For the Quarter, royalties
increased 51 percent to $13.0 million compared to $8.6 million for the same
period in 2007 due to higher revenues as a result of higher production and
commodity prices. The Company's average royalty rate for the Quarter was
20.9 percent compared to 23.1 percent in 2007. For the six months ended June
30, 2008, royalties increased to $23.6 million (21.3 percent average rate)
from $16.2 million (24.5 percent average rate) in 2007 due to higher revenues.
The decrease in the royalty rate is the result of marginal well and deep well
credits received during the Quarter and the lower royalty rates on the
properties acquired in the Asset Acquisition, which also included wells in
which ProEx previously paid gross over riding royalties. Management
anticipates, based on current commodity prices, the average royalty rate for
the remainder of 2008 will be approximately 20 to 23 percent.
Operating Expenses
Operating expenses during the Quarter were $5.5 million compared to
$4.3 million for the same period in 2007. For the six months ended June 30,
2008, operating expenses were $10.9 million compared to $7.2 million for the
same period in 2007. On a boe basis, operating expenses for the Quarter
increased nine percent to $5.82 compared to $5.35 for the same period in 2007.
For the six months ended June 30, 2008, operating costs per boe increased 12
percent to $5.70 from $5.11 recorded in the same period in 2007. The increase
on a per boe basis for the Quarter was due to less production to spread fixed
costs over as a result of the McMahon turnaround, as well as, additional
repair and maintenance work performed on the Company's facilities to coincide
with the turnaround. Management anticipates operating expenses for the
remainder of 2008 to be between $5.00 and $5.30 per boe.
Transportation Expenses
Transportation expenses for the Quarter increased 31 percent to
$4.8 million compared to the $3.6 million for the same period in 2007. For the
six months ended June 30, 2008, transportation expenses were $8.5 million
compared to $5.9 million for the same period in 2007. On a boe basis,
transportation expenses during the Quarter and for the six months ended
June 30, 2008 were $5.02 and $4.45 respectively compared to $4.48 and $4.14
respectively for the same periods in 2007. Higher per boe costs in the Quarter
are due to the decrease in production as a result of the McMahon turnaround.
Compounding the costs of the turnaround was the fact that transportation fees
had to be paid through the duration of the shutdown. The Company also paid
additional costs as it redirected production from the Green and Bubbles areas
through the Spectra-owned Jedney gas processing facility.
In British Columbia, there is an infrastructure owned by mid-stream
processing companies that enables gas producers to avoid facility construction
in exchange for regulated gathering, processing and transmission fees. This
all-in charge is included in transportation expenses.
Operating Netbacks
Although many wells produce both crude oil and natural gas, a well is
categorized as a natural gas well or an oil well based upon the higher
proportion of natural gas or crude oil production. The following table
summarizes the operating netbacks for natural gas and crude oil properties for
the Quarter and six month period ended June 30, 2008 compared to the same
periods in 2007:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Natural gas properties ($/mcf)
Sales price 10.24 6.79 9.20 7.63
Realized gain (loss) on financial
instruments (0.61) 0.01 (0.31) 0.44
Royalties (2.24) (1.78) (2.03) (1.91)
Operating expenses (0.92) (0.86) (0.90) (0.82)
Transportation expenses (0.86) (0.76) (0.76) (0.70)
-------------------------------------------------------------------------
Operating netback - natural gas
properties 5.61 3.40 5.20 4.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Crude oil properties ($/bbl)
Sales price 98.17 60.85 85.69 61.76
Royalties (18.07) (8.92) (16.34) (10.66)
Operating expenses (13.33) (9.83) (11.76) (8.90)
Transportation expenses (1.85) (2.19) (1.81) (2.25)
-------------------------------------------------------------------------
Operating netback - crude oil
properties 64.92 39.91 55.78 39.95
-------------------------------------------------------------------------
-------------------------------------------------------------------------
General and Administrative Expenses
For the Quarter, general and administrative expenses net of overhead
recoveries, ("G&A") increased 68 percent to $1.3 million compared to
$0.8 million for the same period in 2007. For the six months ended June 30,
2008, G&A expenses were $2.5 million compared to $1.5 million for the same
period in 2007. On a boe basis for the Quarter, G&A was $1.36 compared to
$0.95 recorded for the same period in 2007, and for the six month period, G&A
per boe was $1.33 compared to $1.05 for the same period in 2007.
The increase in G&A for the Quarter as compared to the same period in
2007 is primarily due to the increased size of the Company and the resulting
technical services fee from Progress. The Company receives services including
management, development, exploitation, operations, administrative, and
marketing, as well as information technology systems from Progress on an
expense reimbursement basis, based on the Company's monthly capital activity
and production levels relative to the combined capital activity and production
levels of both ProEx and Progress. Management anticipates G&A expense to
average between $1.10 per boe and $1.20 per boe for 2008.
The following table summarizes G&A for the Quarter and six month period
ended June 30, 2008 compared to the same periods in 2007:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Direct expenses 184 373 329 981
Technical services fee from
Progress 2,129 1,196 4,395 2,388
-------------------------------------------------------------------------
Gross G&A 2,313 1,569 4,724 3,369
Recoveries (680) (633) (1,771) (1,507)
Capitalized expenses (336) (162) (421) (379)
-------------------------------------------------------------------------
Total G&A 1,297 774 2,532 1,483
-------------------------------------------------------------------------
Total G&A ($boe) 1.36 0.95 1.33 1.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Long Term Incentive Compensation
For the Quarter, long term incentive compensation expense, relating to
outstanding stock options, Class B Performance Shares and Progress' LTI, was
$1.1 million ($1.18 per boe) compared to $0.5 million ($0.61 per boe) for the
same period in 2007. Year to date compensation expense was $2.0 million ($1.03
per boe) compared to $0.8 million ($0.55 per boe) for the same period in 2007.
The increase in compensation expense per boe in the Quarter and year to date
as compared to the same periods in the prior year is the result of the
issuance of 1,074,000 stock options during the third quarter of 2007, as well
as, the expense relating to the initial grant of the LTI, in May 2007.
During 2007, Progress' LTI was established for the benefit of Progress
employees. ProEx agreed to contribute to the LTI to ensure that service
providers retain incentives related to the success of ProEx. As at June 30,
2008, 185,030 common shares of ProEx have been granted to Progress employees,
in their capacity as service providers to ProEx, resulting in a total
compensation cost of $2.7 million. ProEx reimbursed Progress for this cost,
therefore the total compensation cost has been recorded as a prepaid expense
and $2.3 million will be amortized through long term incentive compensation
expense and $0.4 million will be capitalized equally over the two year vesting
period. Awards granted under the LTI will vest on the second anniversary date
of the date of grant.
Interest and Financing
For the Quarter, interest and financing charges were $1.7 million ($1.75
per boe) compared to $1.3 million ($1.52 per boe) for the same period in 2007.
For the six months ended June 30, 2008, interest and financing expenses were
$3.0 million ($1.60 per boe) compared to $1.8 million ($1.21 per boe) for the
same period in 2007. The increase in interest and financing charges for the
Quarter as compared to the same period in the prior year, is a result of
higher debt levels utilized to fund the capital investment program and a
portion of the Asset Acquisition. Details of ProEx's bank debt are described
in Note 4 in the unaudited interim financial statements.
Depletion, Depreciation and Accretion
For the Quarter, depletion and depreciation of property, plant and
equipment and the accretion of the asset retirement obligations ("DD&A") was
$14.7 million compared to $13.0 million for the same period in 2007. For the
six months ended June 30, 2008, DD&A expense was $29.1 million compared to
$21.1 million for the same period in 2007. The increase is due to the Asset
Acquisition. DD&A per boe for the Quarter was $15.43 per boe compared to
$16.04 per boe recorded for the same period in 2007. DD&A for the six month
period ended June 30, 2008 was $15.28 per boe compared to $14.89 per boe for
the same period in 2007.
Future Income Taxes
The provision for future income taxes for the Quarter was an expense of
$1.6 million compared to a $2.9 million expense for the same period in 2007.
For the six months ended June 30, 2008, the provision for future income taxes
was an expense of $1.1 million compared to $4.6 million for the same period in
2007. The lower taxes in the Quarter as compared to the same period in 2007 is
a result of lower pre-tax earnings, along with a general corporate tax rate
reduction in British Columbia from 12 percent to 11.5 percent on January 1,
2008 and a further reduction to 11 percent on January 1, 2009.
Net Earnings, Comprehensive Income and Funds Generated from Operations
The Company recorded net earnings for the Quarter of $5.3 million
compared to net earnings of $7.6 million during the same period in 2007. For
the six months ended June 30, 2008, net earnings were $7.2 million compared to
$11.6 million for the same period in 2007. Higher revenues were offset by the
realized and unrealized loss on financial instruments, as well as, higher
expenses.
Basic and diluted net earnings per share for the Quarter were $0.09 and
$0.09 respectively ($0.16 basic and $0.14 diluted for the same period in 2007)
and for the six months ended June 30, 2008, net earnings per basic and diluted
share were $0.13 and $0.13 respectively ($0.27 basic and $0.23 diluted for the
same period in 2007). Net earnings for the Quarter includes a $9.7 million
unrealized loss on financial instruments relating to the decrease in fair
market value of the Company's financial contracts.
Funds generated from operations were $31.9 million for the Quarter
compared to $18.6 million during the same period in 2007, while funds
generated from operations for the six months ended June 30, 2008 were $57.9
compared to $36.5 million for the same period in 2007. The increase was due to
higher revenues as a result of higher production and commodity prices.
Basic and diluted funds generated from operations per share for the
Quarter was $0.57 basic and $0.55 diluted, compared to $0.39 and $0.35
respectively during the same period in 2007. For the six month period ended
June 30, 2008, basic and diluted funds generated from operations per share
were $1.06 and $1.01 respectively compared to $0.83 and $0.73 respectively
during the same period in 2007. The increase in funds generated from
operations for both the Quarter and year to date as compared to the same
periods in the prior year is due to an 18 percent increase in production for
the Quarter and a 34 percent increase in production for the year to date.
Natural gas prices have also strengthened significantly from the comparable
prior period prices.
The following table summarizes the funds generated from operations and
net earnings on a boe basis for the Quarter and six month periods ended
June 30, 2008 compared to the same periods in 2007:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($/boe) 2008 2007 2008 2007
-------------------------------------------------------------------------
Petroleum and natural gas
revenues(1) 65.14 46.07 58.10 46.49
Royalties (13.63) (10.62) (12.38) (11.41)
-------------------------------------------------------------------------
51.51 35.45 45.72 35.08
Realized gain (loss) on financial
instruments (3.52) 0.05 (1.76) 2.52
-------------------------------------------------------------------------
47.99 35.50 43.96 37.60
Operating expenses (5.82) (5.35) (5.70) (5.11)
Transportation expenses(1) (5.02) (4.48) (4.45) (4.14)
-------------------------------------------------------------------------
Operating netback 37.15 25.67 33.81 28.35
General and administrative
expenses (1.36) (0.95) (1.33) (1.05)
Long term incentive - cash
component (0.31) (0.23) (0.29) (0.13)
Interest and financing expenses (1.75) (1.52) (1.60) (1.21)
Asset retirement expenditures(2) (0.22) 0.02 (0.22) (0.17)
-------------------------------------------------------------------------
Funds generated from operations 33.51 22.99 30.37 25.79
Asset retirement expenditures(2) 0.22 (0.02) 0.22 0.17
Unrealized gain (loss) on
financial instruments (10.16) 6.43 (10.22) 0.83
Long term incentive compensation
expense (0.87) (0.38) (0.73) (0.42)
Depletion, depreciation and
accretion expenses (15.43) (16.04) (15.28) (14.89)
-------------------------------------------------------------------------
Net earnings before taxes 7.27 12.98 4.36 11.48
Future income taxes (1.69) (3.63) (0.60) (3.27)
-------------------------------------------------------------------------
Net earnings 5.58 9.35 3.76 8.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes sulphur operating results with no associated production as
no conversion exists for tons to boe. On a boe basis for the Quarter
and for the six month period, petroleum and natural gas revenues
include $2.21 per boe and $1.49 per boe of net revenue from sulphur,
respectively (2007 - $0.10 loss per boe and $0.10 loss per boe,
respectively).
(2) Actual asset retirement costs incurred during the period are
classified for cash flow purposes as an operating item, however these
costs are not an expense of the period and are therefore added back
for purposes of determining net earnings.
The Company's funds generated from operations were $33.51 per boe for the
Quarter compared to $22.99 per boe for the same period in 2007. Net earnings
were $5.58 per boe for the Quarter compared to $9.35 per boe in the same
period in 2007. For the six month period ended June 30, 2008, funds generated
from operations were $30.37 per boe compared to $25.79 per boe in the same
period in 2007 while net earnings were $3.76 per boe compared to $8.21 per boe
during the same period in 2007. Higher funds generated from operations for the
Quarter and year to date as compared to the same periods in the prior year is
primarily due to the higher commodity prices and increased production. Lower
net earnings for the Quarter as compared to the same period in the prior year
is due to unrealized and realized losses on the Company's financial
instruments.
Capital Expenditures
The following table summarizes the capital investment for the Quarter and
the six month period ended June 30, 2008 compared to the same periods in 2007:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Land acquisitions and retention 1,665 290 3,914 3,101
Geological and geophysical 1,227 1,181 6,083 6,066
Drilling and completions 4,889 3,387 43,054 38,047
Equipping and facilities 4,410 1,733 23,897 9,621
Net property acquisitions
(dispositions) 6,964 137,007 6,966 137,251
-------------------------------------------------------------------------
Total net capital investment 19,155 143,598 83,914 194,086
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ProEx did not drill any wells during the Quarter. Drilling and
completions costs in the Quarter relate to the start of the third quarter
drilling and completions of the first quarter wells. Year-to-date, ProEx has
drilled 26 gross wells (18.3 net) with a 100 percent success rate.
Capitalization and Capital Resources
Common Share Information (thousands)
June 30, 2008 December 31, 2007
-------------------------------------------------------------------------
Six months ended weighted average
outstanding Common Shares
- Basic 54,655 47,326
- Diluted 57,346 52,702
Outstanding Securities
- Common Shares 57,847 52,528
- Common Share options 1,680 1,934
- Common Share warrants - 4,765
-------------------------------------------------------------------------
- Diluted Common Shares outstanding 59,527 59,227
-------------------------------------------------------------------------
- Class B Performance Shares - 551
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Outstanding Securities at July 28, 2008 (thousands)
- Common Shares 57,852
- Common Share options 1,675
-----------------------------------------------------
- Diluted Common Shares outstanding 59,527
-----------------------------------------------------
-----------------------------------------------------
In conjunction with the Asset Acquisition on April 2, 2007, ProEx issued
8,050,000 common shares at a price of $12.45 per share for aggregate gross
proceeds of $100.2 million ($95.6 million net of issue costs).
On September 12, 2007 ProEx issued 1,830,000 common shares at a price of
$13.70 per common share and 1,420,000 flow-through common shares at a price of
$17.65 per flow-through share. The aggregate proceeds, net of share issue
costs of $2.3 million ($1.6 million net of tax) were $47.8 million. Pursuant
to the flow-through share offering, ProEx will incur $25.1 million of
qualifying resource expenditures prior to December 31, 2008, to satisfy its
flow-through share obligation. ProEx renounced the qualifying resource
expenditures to holders of the flow-through shares effective December 31,
2007. The future income tax effect and reduction to share capital was
accounted for in the first quarter of 2008, the date that the Company filed
the renouncement documents with the tax authorities.
All outstanding common share warrants and Class B Performance shares
expired on June 28, 2008.
Total Market Capitalization
The Company's market capitalization at June 30, 2008 was $1.3 billion.
(thousands, except per share amounts) June 30, 2008 December 31, 2007
-------------------------------------------------------------------------
Common Shares outstanding 57,847 52,528
Share price ($)(1) 22.99 11.83
-------------------------------------------------------------------------
Total market capitalization ($) 1,329,903 621,406
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Represents the closing price on the Toronto Stock Exchange ("TSX").
Liquidity and Capital Resources
($ thousands) June 30, 2008 December 31, 2007
-------------------------------------------------------------------------
Working capital deficiency (surplus) (8,903) 14,105
Bank debt 140,000 96,881
-------------------------------------------------------------------------
Total debt 131,097 110,986
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At June 30, 2008 the Company had $140.0 million outstanding on its credit
facilities and a working capital surplus of $8.9 million, resulting in
$131.1 million of total debt. During the Quarter, the Company increased the
credit facility borrowing base from $185 million to $225 million. The credit
facilities consisted of a $215 million extendible revolving term credit
facility and a $10 million working capital credit facility with a syndicate of
Canadian chartered banks. The facilities are available on a revolving basis
for a period of at least 364 days until April 15, 2009, and such initial term
out date may be extended for further 364 day periods at the request of the
Company, subject to approval by the banks. Following the term out date, the
facilities will be available on a non-revolving basis for a one year term, at
which time the facilities would be due and payable. The facility is a
borrowing base facility that is determined based on, among other things, the
Company's current reserve report, results of operations, current and
forecasted commodity prices and the current economic environment.
The Company's investing activities in the Quarter consisted primarily of
expenditures on its capital program. Management anticipates that the Company
will continue to have adequate liquidity to fund future working capital and
budgeted capital expenditures during 2008 through a combination of cash flow
and additional debt. Should natural gas prices weaken for a protracted period,
the Company may choose to reduce budgeted capital expenditures. New equity, if
available and on favorable terms, may be utilized to expand exploration
programs.
QUARTERLY FINANCIAL SUMMARY
The following table highlights ProEx's performance for the quarterly
reporting periods from July 1, 2006 to June 30, 2008:
2008 2007
-------------------------------------------------------------------------
($ thousands,
except per share
amounts) June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31
-------------------------------------------------------------------------
Petroleum and
natural gas sales 61,949 48,787 38,057 28,231 37,347 28,524
Funds generated
from operations 31,867 26,069 22,098 15,176 18,628 17,907
- Per share
basic 0.57 0.49 0.42 0.31 0.39 0.45
- Per share
diluted 0.55 0.46 0.39 0.28 0.35 0.39
Net earnings 5,307 1,873 7,725 716 7,564 4,066
- Per share
basic 0.09 0.04 0.15 0.01 0.16 0.10
- Per share
diluted 0.09 0.03 0.14 0.01 0.14 0.09
Total assets 616,652 605,898 549,343 484,888 470,906 339,252
Bank debt and
working capital
deficiency 131,097 147,742 110,986 59,352 88,411 69,858
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006
-------------------------------------
($ thousands,
except per share
amounts) Dec 31 Sept 30
-------------------------------------
Petroleum and
natural gas sales 23,386 19,419
Funds generated
from operations 13,995 8,766
- Per share
basic 0.37 0.24
- Per share
diluted 0.32 0.21
Net earnings 4,293 2,627
- Per share
basic 0.11 0.07
- Per share
diluted 0.10 0.06
Total assets 290,307 246,227
Bank debt and
working capital
deficiency 27,838 41,499
-------------------------------------
-------------------------------------
Lower petroleum and natural gas revenue, funds generated from operations
and net earnings in the third quarter of 2006 was due to a sharp decline in
natural gas prices, while the following three quarters increased due to
consistent production growth and strengthening natural gas prices. The third
quarter of 2007 experienced declines in realized natural gas prices which was
reflected in the lower revenue, funds generated from operations and net
earnings. The three most recently completed quarters experienced increases in
realized natural gas prices and production which was reflected in the higher
revenues, and funds generated from operations. Net earnings in the first
quarter of 2008 was lower due to unrealized losses associated with the
Company's financial commodity contracts.
DISCLOSURE CONTROLS AND PROCEDURES
During the Quarter a new national instrument 52-109 was proposed that is
expected to be effective for ProEx's 2008 year end reporting. The proposed
rule includes the certification of the operating effectiveness of internal
controls over financial reporting ("ICFR"), requires the use of a control
framework to design and evaluate internal controls, provides specific guidance
regarding the documentation of controls, as well as the documentation on
testing and evaluating controls, and provides clarification regarding the
definition of a material weakness and conclusions on disclosure controls and
procedures when there is a material weakness in ICFR. ProEx has examined the
proposed rule and will be compliant on the effective date.
INTERNATIONAL FINANCIAL REPORTING STANDARDS
Early in 2008, the Canadian Accounting Standards Board confirmed the
convergence of Canadian GAAP to International Financial Reporting Standards
("IFRS") effective January 1, 2011. ProEx is assessing the impact of adopting
IFRS and is implementing plans for transition.
ADDITIONAL INFORMATION
Additional information relating to the Company is filed on SEDAR and can
be viewed at www.sedar.com. Information can also be obtained by contacting the
Company at ProEx Energy Ltd. 1200, 205 - 5th Avenue S.W., Calgary, Alberta,
Canada T2P 2V7 or by e-mail at ir@proexenergy.com. Information is also
accessible on the Company's web site at www.proexenergy.com.
PROEX ENERGY LTD.
BALANCE SHEETS
(Unaudited)
June 30, December 31,
($ thousands) 2008 2007
-------------------------------------------------------------------------
ASSETS
Current
Cash and short-term investments 7,220 -
Accounts receivable 19,077 20,091
Prepaid expenses and deposits 2,603 3,473
Future income taxes (Note 8) 5,890 -
-------------------------------------------------------------------------
34,790 23,564
Property, plant and equipment 581,862 525,779
-------------------------------------------------------------------------
616,652 549,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities 19,997 37,669
Fair value of financial instruments (Note 8) 19,472 -
-------------------------------------------------------------------------
39,469 37,669
Bank debt (Note 4) 140,000 96,881
Asset retirement obligations (Note 5) 6,584 5,691
Future income taxes 33,305 19,752
-------------------------------------------------------------------------
219,358 159,993
SHAREHOLDERS' EQUITY
Share capital and warrants (Note 6) 334,488 333,861
Contributed surplus (Note 6) 3,659 3,522
Retained earnings 59,147 51,967
-------------------------------------------------------------------------
397,294 389,350
-------------------------------------------------------------------------
616,652 549,343
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the financial statements
PROEX ENERGY LTD.
STATEMENTS OF NET EARNINGS, COMPREHENSIVE INCOME
AND RETAINED EARNINGS
(Unaudited)
Three Months Ended Six Months Ended
($ thousands, except per June 30 June 30
share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
REVENUES
Petroleum and natural gas 61,949 37,347 110,736 65,871
Royalties (12,962) (8,609) (23,594) (16,166)
-------------------------------------------------------------------------
48,987 28,738 87,142 49,705
Realized gain (loss) on financial
instruments (Note 8) (3,345) 38 (3,345) 3,573
Unrealized gain (loss) on financial
instruments (Note 8) (9,657) 5,210 (19,472) 1,176
-------------------------------------------------------------------------
35,985 33,986 64,375 54,454
-------------------------------------------------------------------------
EXPENSES
Operating 5,538 4,339 10,868 7,246
Transportation 4,778 3,635 8,477 5,867
General and administrative 1,297 774 2,532 1,483
Long term incentive compensation
(Note 6) 1,119 495 1,961 780
Interest and financing 1,664 1,235 3,045 1,725
Depletion, depreciation and
accretion 14,673 13,000 29,115 21,093
-------------------------------------------------------------------------
29,069 23,478 55,998 38,194
-------------------------------------------------------------------------
Net earnings before taxes 6,916 10,508 8,327 16,260
TAXES
Future income tax expense 1,609 2,944 1,146 4,630
-------------------------------------------------------------------------
NET EARNINGS 5,307 7,564 7,181 11,630
OTHER COMPREHENSIVE INCOME
Amortization of fair value of
financial instruments (Note 6) - (835) - (3,833)
-------------------------------------------------------------------------
COMPREHENSIVE INCOME 5,307 6,729 7,181 7,797
-------------------------------------------------------------------------
Retained earnings, beginning of
period 53,840 35,961 51,966 31,895
-------------------------------------------------------------------------
Retained earnings, end of period 59,147 43,525 59,147 43,525
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per share (Note 6)
Basic $0.09 $0.16 $0.13 $0.27
Diluted $0.09 $0.14 $0.13 $0.23
-------------------------------------------------------------------------
See accompanying notes to the financial statements
PROEX ENERGY LTD.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash provided by (used in)
OPERATING
Net earnings 5,307 7,564 7,181 11,630
Depletion, depreciation and
accretion 14,673 13,000 29,115 21,093
Unrealized loss (gain) on
financial instruments 9,657 (5,210) 19,472 (1,176)
Long term incentive
compensation (Note 6) 825 312 1,413 596
Asset retirement expenditures
(Note 5) (204) 18 (391) (237)
Future income taxes 1,609 2,944 1,146 4,630
-------------------------------------------------------------------------
31,867 18,628 57,936 36,536
Change in non-cash working
capital (Note 7) 1,936 (200) 2,458 3,385
-------------------------------------------------------------------------
33,803 18,428 60,394 39,921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FINANCING
Increase in bank debt 10,602 35,377 43,119 69,346
Issue of shares (net of share
issue costs) (Note 6) 3,932 96,715 5,866 96,978
Change in non-cash working
capital (Note 7) - (270) - (368)
-------------------------------------------------------------------------
14,534 131,822 48,985 165,956
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INVESTING
Deferred acquisition (Note 3) - 9,702 - -
Asset acquisition (Note 3) - (136,396) - (136,396)
Capital expenditures (19,155) (7,202) (83,914) (57,691)
Change in non-cash working
capital (Note 7) (21,962) (16,354) (18,245) (11,790)
-------------------------------------------------------------------------
(41,117) (150,250) (102,159) (205,877)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Change in cash and short-term
investments 7,220 - 7,220 -
Cash and short-term investments,
beginning of period - - - -
-------------------------------------------------------------------------
Cash and short-term investments,
end of period 7,220 - 7,220 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the financial statements
PROEX ENERGY LTD.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
ProEx Energy Ltd. ("ProEx" or the "Company") was incorporated on April 8,
2004 and commenced commercial operations on July 2, 2004 under a Plan of
Arrangement. Under the Plan of Arrangement various assets of Progress
Energy Trust ("Progress") were transferred to ProEx.
1. SUMMARY OF ACCOUNTING POLICIES
Nature of Business and Basis of Presentation
ProEx is involved in the exploration, development and production of
petroleum and natural gas in British Columbia. The financial statements
are stated in Canadian dollars and have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP").
The unaudited interim financial statements of the Company have been
prepared by Management in accordance with Canadian GAAP, following the
same accounting policies and methods of computation as the audited
financial statements of ProEx for the year ended December 31, 2007. The
disclosures provided below are incremental to those included with the
annual financial statements and certain disclosures which are normally
required to be included in the notes to the annual financial statements,
have been condensed or omitted. These unaudited interim financial
statements should be read in conjunction with the financial statements
and notes thereto in ProEx's annual report for the year ended December
31, 2007.
The preparation of financial statements in conformity with Canadian GAAP
requires Management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the period. Actual
results may differ from those estimates.
2. RELATIONSHIP WITH PROGRESS ENERGY TRUST
A technical services agreement ("Technical Service Agreement") is
currently in place between ProEx and Progress whereby Progress provides
personnel and certain administrative and technical services in connection
with the management, development, exploitation and operation of the
assets of ProEx and the marketing of its production. ProEx has granted
performance shares and stock options to executives and employees of
Progress and common shares under Progress' long-term incentive
compensation plan to the non-executive employees of Progress as service
providers. Progress provides these services to ProEx on an expense
reimbursement basis, based on ProEx's monthly capital activity and
production levels relative to the combined capital activity and
production levels of both Progress and ProEx. Total expenses reimbursed
by ProEx for the three and six month periods ended June 30, 2008 were
$2.1 million and $4.4 million respectively (2007 - $1.2 million and
$2.4 million respectively). As at June 30, 2008, accounts receivable
included $1.8 million (2007 - $3.1 million) receivable from Progress
which includes standard joint venture amounts. These amounts were
received subsequent to June 30, 2008.
On April 2, 2007, ProEx acquired certain interests in northeast British
Columbia Foothills assets previously acquired by Progress (the "Asset
Acquisition"). ProEx's total consideration, including transaction costs
of $0.9 million was $136.4 million. When considering the bid process for
the Asset Acquisition, each of Progress and ProEx identified assets that
they were interested in acquiring and values that they were willing to
pay to acquire such assets. Progress made a single bid on behalf of ProEx
and Progress and the ultimate purchase was based on the prices that each
of Progress and ProEx were willing to pay for the assets that they had
selected to acquire. The resale of assets from Progress to ProEx was
based on these allocations. The technical services committee reviewed the
details of the transaction prior to the purchase and sale agreement being
signed. All lands are managed in accordance with the Protocol
Arrangement.
Under the terms of Progress' long term incentive compensation plan (the
"LTI"), Progress employees in their capacity as service providers, may be
granted LTI awards to be paid in Common Shares of the Company. ProEx
agreed to contribute to the LTI to ensure that service providers retain
incentives related to the success of ProEx. Awards granted under the LTI
will vest on the second anniversary date of the date of grant. ProEx has
agreed to reimburse Progress for this expense. Refer to note 6 for
details of the long term incentive compensation plan.
3. ASSET ACQUISITION
On April 2, 2007, ProEx acquired interests in certain northeast British
Columbia Foothills assets previously acquired by Progress. ProEx's total
consideration, including transaction costs of $0.9 million was
$136.4 million. The full cost of the Asset Acquisition was recorded to
property, plant and equipment (including unproved property value of $16.0
million which is excluded from the calculation of depletion and
depreciation), and in addition, the Company recorded an asset retirement
obligation on the acquired assets of $1.9 million. The Asset Acquisition
was financed through an equity offering of 8,050,000 Common Shares of the
Company at a price of $12.45 per share for aggregate gross proceeds of
$100.2 million ($95.6 million net of issue costs). The remainder of the
purchase price was financed through bank debt.
4. BANK DEBT
At June 30, 2008, the Company's credit facilities consisted of a
$215 million extendible revolving term credit facility and a $10 million
working capital credit facility with a syndicate of Canadian chartered
banks. On April 15, 2008, the Company increased the credit facility
borrowing base from $185 million to $225 million. The facilities are
available on a revolving basis for a period of at least 364 days until
April 15, 2009, and such initial term out date may be extended for
further 364 day periods at the request of the Company, subject to
approval by the banks. Following the term out date, the facilities will
be available on a non-revolving basis for a one year term, at which time
the facilities would be due and payable. Various borrowing options are
available under the facilities including prime rate based advances and
banker's acceptance loans. The credit facilities are secured by a $500
million fixed and floating charge debenture on the assets of the Company.
The borrowing base is subject to semi-annual review by the banks.
5. ASSET RETIREMENT OBLIGATIONS
The total future asset retirement obligation was estimated based on the
Company's net ownership interest in all wells and facilities, the
estimated costs to abandon and reclaim the wells and facilities and the
estimated timing of the costs to be incurred in future periods. The total
undiscounted amount of the estimated cash flows required to settle the
asset retirement obligations is approximately $32.4 million which will be
incurred over the next 42 years with the majority of costs incurred
between 2008 and 2020. A credit adjusted risk-free rate of eight percent
was used to calculate the fair value of the asset retirement obligations.
The following reconciles the Company's asset retirement obligations:
Six Months Ended Year Ended
June 30 December 31
-------------------------------------------------------------------------
($ thousands) 2008 2007 2007
-------------------------------------------------------------------------
Balance, beginning of period 5,691 1,791 1,791
Liabilities incurred 1,044 848 1,819
Liabilities acquired - 1,899 1,990
Liabilities settled (391) (237) (341)
Accretion expense 240 133 432
-------------------------------------------------------------------------
Balance, end of period 6,584 4,434 5,691
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. SHARE CAPITAL
Authorized
Unlimited number of voting Common Shares, without nominal or par value
701,300 Class B Performance Shares, without nominal or par value
Issued Six Months Ended June 30
($ thousands - except 2008 2007
share amounts) Number Amount Number Amount
-------------------------------------------------------------------------
Common Shares
Balance, beginning
of period 52,527,916 332,128 39,690,659 189,820
Issued for
cash - - 8,050,000 100,223
Issued on exercise
of Options 226,966 3,494 21,000 284
Issued on exercise
of Warrants 4,588,658 5,025 785,991 1,375
Issued on exercise of
Class B Performance
Shares 503,871 357 - -
Forfeited - - - -
Flow through share
renouncement - (6,516) - (6,094)
Share issue costs,
net of tax of $1,423 - - - (3,153)
-------------------------------------------------------------------------
Balance, end
of period 57,847,411 334,488 48,547,650 282,455
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Warrants
Balance, beginning
of period 4,765,028 1,727 6,143,539 2,223
Exercised (4,760,236) (1,727) (785,991) (283)
Expired (4,792) - - -
-------------------------------------------------------------------------
Balance, end of period - - 5,357,548 1,940
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Class B Performance
Shares
Balance, beginning
of period 551,197 6 694,661 7
Exercised (551,197) (6) - -
Forfeited - - (95) (1)
-------------------------------------------------------------------------
Balance, end of
period - - 694,566 6
-------------------------------------------------------------------------
Total share capital
and warrants, at
end of period 334,488 284,401
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shares issued for cash
On April 2, 2007, ProEx issued 8,050,000 Common Shares at a price of
$12.45 per share for aggregate gross proceeds of $100.2 million
($95.6 million net of issue costs) to acquire the northeast British
Columbia assets. See note 3 for further disclosure on the Asset
Acquisition.
Warrants
Each Common Share purchase Warrant ("Warrant") entitled the holder to
purchase one Common Share at a price of $1.39 per share. For the three
and six month periods ended June 30, 2008, 3,643,571 and 4,760,236
Warrants were exercised respectively which resulted in the issue of
3,472,173 and 4,588,658 shares, respectively. The difference between the
Warrants exercised and shares issued was due to Warrant holders
exercising their right to receive fewer shares in lieu of payment of the
exercise price. All unexercised Warrants expired on June 28, 2008.
Class B Performance Shares
Each Class B Performance Share was convertible into a percentage of a
Common Share equal to the closing trading price of the Common Shares on
the TSX on the trading day prior to such conversion (the "Current Market
Price") less $1.39, if positive, divided by the Current Market Price.
Holders of Class B Performance Shares were not entitled to any voting
rights or to receive notice of or attend any meetings of the shareholders
of the Company, were not entitled to receive any dividends on the
performance shares and were not entitled upon any liquidation,
dissolution or winding-up of the Company to any return of capital other
than the payment of the redemption price for each performance share in
preference to the holders of Common Shares. All Class B Performance
Shares were exercised prior to their expiry on June 28, 2008.
Earnings per share
Net earnings per Common Share figures have been calculated using the
treasury stock method. The following table reconciles the denominators
used for the basic and diluted earnings per Common Share calculations.
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Weighted Average
Common Shares
Basic 56,375,541 47,939,821 54,655,401 43,873,634
Effect of warrants 869,597 5,339,263 2,339,907 5,380,934
Effect of stock options 181,602 51,190 91,303 40,183
Effect of Class B
Performance Shares 40,137 630,190 259,677 630,190
-------------------------------------------------------------------------
Diluted 57,466,877 53,960,464 57,346,288 49,924,941
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Long term incentive compensation
Stock options
At the Annual General Meeting held on April 29, 2008, the resolutions
approving amendments to the Company's stock option plan (the "Plan) and
the granting of unallocated options were withdrawn and not voted upon by
shareholders. As a result, no additional options have been granted since
this date. Management and the Board of Directors are currently in the
process of finalizing a new compensation plan with details to be
released in the third quarter.
Under the terms of the prior Plan, directors and officers of ProEx and
Progress employees in their capacity as service providers were granted
options to purchase Common Shares. Options granted under the Plan have a
term of five years to expiry and vest over a three year period. The
exercise price of each option equals the market price of the Company's
Common Shares on the date of grant.
The following table sets forth a reconciliation of the Plan activity for
the six months ended June 30, 2008.
Weighted
average
Number of exercise
options price ($)
-------------------------------------------------------------------------
Balance, beginning of period 1,933,501 12.63
Granted 100,000 15.07
Forfeited (126,667) 13.95
Exercised (226,966) 11.32
-------------------------------------------------------------------------
Balance, end of period 1,679,868 12.86
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes stock options outstanding and exercisable
under the Plan at June 30, 2008.
Options outstanding Options exercisable
-------------------------------------------------------------------------
Number Weighted
outstanding average Weighted Number Weighted
Range of at remaining average exercisable average
exercise period contractual exercise at period exercise
price end life price end price
-------------------------------------------------------------------------
$5.60 to
$7.95 207,000 1.09 5.64 207,000 5.64
$9.08 to
$13.40 160,668 2.37 12.54 66,833 12.23
$13.66 to
$16.50 1,312,200 3.90 14.04 52,367 14.66
-------------------------------------------------------------------------
1,679,868 3.34 12.86 326,200 8.42
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company accounts for its stock based compensation plan using the fair
value method. Under this method, a compensation cost is charged over the
vesting period for stock options and Class B Performance Shares granted
to officers and directors of ProEx and Progress employees in their
capacity as service providers, with a corresponding increase to
contributed surplus.
The fair value of the options granted during the period was estimated on
the date of grant using the Black-Scholes option pricing model with
weighted average assumptions and resulting values for grants as follows:
Assumptions Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Risk free interest rate (%) - 4.0 3.66 3.98
Expected life (years) - 3.00 3.00 3.00
Expected volatility (%) - 43 38 43
Weighted average fair value of
options granted ($) - 6.63 5.94 6.34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table reconciles the Company's contributed surplus:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Balance, beginning of period 3,761 1,721 3,522 1,453
Stock based compensation expense
Stock options 826 300 1,413 572
Class B Performance shares - 12 - 24
Exercise of stock options and
Class B Performance shares (928) (29) (1,276) (45)
-------------------------------------------------------------------------
Balance, end of period 3,659 2,004 3,659 2,004
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Long Term Incentive Compensation
Under the terms of Progress' long term incentive compensation plan (the
"LTI"), non-executive Progress employees in their capacity as service
providers, may be granted LTI awards to be paid in Common Shares of the
Company. ProEx agreed to contribute to the LTI to ensure that service
providers retain incentives related to the success of ProEx. Awards
granted under the LTI will vest on the second anniversary date of the
date of grant. ProEx has agreed to reimburse Progress for this expense,
therefore the total compensation cost of $2.7 million has been
included in prepaid expenses and $ 2.3 million will be amortized through
long term incentive compensation expense and $0.4 million will be
capitalized equally over the two year vesting period. At June 30, 2008
185,030 Common Shares of ProEx haven been granted to Progress employees
in their capacity as service providers.
Accumulated Other Comprehensive Income
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Balance, beginning of period - 1,949 - -
Fair value of financial
instruments upon initial adoption
of new accounting standard - - - 4,947
Fair value applicable to the
period, amortized to earnings - (835) - (3,833)
-------------------------------------------------------------------------
Balance, end of period - 1,114 - 1,114
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. SUPPLEMENTAL CASH FLOW INFORMATION
Changes in non-cash working capital
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Accounts receivable 3,599 (3,516) 1,014 1,353
Prepaid expenses and deposits 601 (2,421) 870 (3,238)
Accounts payables and accrued
liabilities (24,226) (10,887) (17,671) (6,888)
-------------------------------------------------------------------------
Change in non-cash working capital (20,026) (16,824) (15,787) (8,773)
Relating to:
Financing activities - (270) - (368)
Investing activities (21,962) (16,354) (18,245) (11,790)
Operating activities 1,936 (200) 2,458 3,385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest and taxes paid
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Interest received 8 64 19 64
Interest paid 1,363 1,254 3,399 1,714
Income and other taxes paid - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
8. FINANCIAL INSTRUMENTS
Fair value of financial instruments
The Company's financial instruments recognized in the balance sheet
consist of cash and short-term investments, accounts receivable, accounts
payable and accrued liabilities, bank debt and derivative natural gas
contracts ("financial instruments"). The fair value of these instruments,
excluding the derivative natural gas contracts, approximate their
carrying amounts due to their short terms to maturity or the indexed rate
of interest on the bank debt. The fair value of the natural gas contracts
is recognized on the balance sheet as described below.
Financial Derivative Contracts
ProEx has entered into derivative natural gas financial instruments for
the purpose of protecting its cash flow from operations (before changes
in non-cash working capital) from the volatility of natural gas prices.
For the Quarter, the Company's natural gas price risk management program
had a net realized loss of $3.3 million (2007 - gain of $0.04 million)
and for the six months ended June 30, 2008, the Company realized a net
loss of $3.3 million (2007 - gain of $3.6 million). The Company
recognizes the fair value of its commodity price contracts on the balance
sheet each reporting period with the change in fair value being
recognized as an unrealized gain or loss on the statement of earnings. At
June 30, 2008 the fair value was a liability of $19.5 million (2007 -
$2.8 million asset), resulting in an unrealized loss for the three and
six months ended June 30, 2008 of $9.7 million and $19.5 million,
respectively (2007 - $5.2 million gain and $1.2 million gain,
respectively).
At January 1, 2007 ProEx adopted the new accounting standards regarding
the recognition, measurement, disclosure and presentation of financial
instruments. The fair value of the derivative natural gas financial
instruments on adoption was $7.4 million of which $4.9 million was
included in accumulated other comprehensive income and $2.5 million was
charged to the future income tax liability. The amount in accumulated
other comprehensive income was amortized through the unrealized gain or
loss on financial instruments on the statement of earnings and other
comprehensive income over the term of the contracts. For the three months
ended June 30, 2007, $0.8 million ($3.8 million year to date) net of tax,
was charged to other comprehensive income with a corresponding unrealized
gain on financial instruments of $1.2 million ($5.7 million year to date)
and a charge to future income tax expense of $0.4 million ($1.9 million
year to date). The current future income tax asset as at June 30, 2008 of
$5.9 million represents the future income tax impact of the fair value of
financial instruments of $19.5 million.
The following table reconciles the Company's unrealized gain (loss) on
financial contracts:
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
($ thousands) 2008 2007 2008 2007
-------------------------------------------------------------------------
Change in fair value of financial
instruments (9,657) 3,961 (19,472) (4,556)
Amortization of accumulated
other comprehensive income - 1,249 - 5,732
-------------------------------------------------------------------------
Unrealized gain (loss) on
financial instruments (9,657) 5,210 (19,472) 1,176
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contracts outstanding in respect to financial instruments are as follows:
Pricing Strike Cost/
Natural Gas Volume Point Price ($gj) Premium Term
-------------------------------------------------------------------------
Swap - call Cdn$7.02- Apr 01/08 -
spread(1) 10,000 gj/d AECO Cdn$8.02 $0.37/gj Oct 31/08
Swap - call Cdn$7.12- Apr 01/08 -
spread(1) 10,000 gj/d AECO Cdn$8.12 $0.37/gj Oct 31/08
Swap - call Cdn$7.22- Apr 01/08 -
spread(1) 10,000 gj/d AECO Cdn$8.22 $0.37/gj Oct 31/08
Swap - call Cdn$7.83- Apr 01/08 -
spread(1) 10,000 gj/d AECO Cdn$8.83 $0.38/gj Oct 31/08
Swap - call Cdn$10.38- Nov01/08 -
spread(1) 5,000 gj/d AECO Cdn$13.38 $0.95/gj Mar 31/09
Swap - call Cdn$10.54- Nov01/08 -
spread(1) 5,000 gj/d AECO Cdn$13.54 $0.94/gj Mar 31/09
Swap - call Cdn$10.90- Nov01/08 -
spread(1) 5,000 gj/d AECO Cdn$13.90 $0.90/gj Mar 31/09
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Call spread strike prices indicate minimum floor and maximum ceiling
2008 AND 2007 SELECTED QUARTERLY INFORMATION
ProEx Energy Ltd.
FINANCIAL HIGHLIGHTS
Three months ended
($ thousands except
per share amounts) 2007 2008
-------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30
-------------------------------------------------------------------------
Income Statement
Petroleum and
natural gas
revenue 28,524 37,347 28,231 38,057 48,787 61,949
Funds generated
from operations 17,907 18,628 15,176 22,098 26,069 31,867
Per share
- basic 0.45 0.39 0.31 0.42 0.49 0.57
Per share
- diluted 0.39 0.35 0.28 0.39 0.46 0.55
Net earnings 4,066 7,564 716 7,725 1,873 5,307
Per share
- basic 0.10 0.16 0.01 0.15 0.04 0.09
Per share
- diluted 0.09 0.14 0.01 0.14 0.03 0.09
Balance Sheet
Capital
investment
Land
acquisitions
and retention 2,811 290 1,225 1,940 2,249 1,665
Geological and
geophysical 4,885 1,181 1,424 3,686 4,857 1,227
Drilling and
completions 34,660 3,387 26,409 45,483 38,167 4,889
Equipping and
facilities 7,888 1,733 4,934 8,232 19,487 4,410
Net property
acquisitions
(dispositions) 244 137,007 591 14,681 - 6,964
-------------------------------------------------------------------------
50,488 143,598 34,583 74,022 64,760 19,155
-------------------------------------------------------------------------
Total debt
Bank debt 59,772 95,149 53,777 96,881 129,398 140,000
Working
capital
deficiency
(surplus) 10,086 (6,738) 5,575 14,105 18,344 (8,903)
-------------------------------------------------------------------------
69,858 88,411 59,352 110,986 147,742 131,097
-------------------------------------------------------------------------
Shareholders'
equity 225,865 331,090 380,727 389,350 387,230 397,294
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shares
outstanding at
end of period
- Common 39,829 48,548 52,362 52,528 53,951 57,847
Weighted average
shares
outstanding for
the period
- Basic 39,768 47,940 49,318 52,121 52,931 56,376
- Diluted 45,820 53,960 54,575 56,776 57,204 57,467
Volume traded 13,855 16,492 12,650 10,157 20,540 28,581
Common share
price ($)
- High 15.49 16.74 15.25 14.91 16.97 24.20
- Low 11.83 14.02 12.79 11.10 11.57 15.41
- Closing 15.15 15.00 14.14 11.83 16.50 22.99
-------------------------------------------------------------------------
2008 AND 2007 SELECTED QUARTERLY INFORMATION
ProEx Energy Ltd.
OPERATIONAL HIGHLIGHTS
Three months ended
2007 2008
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March 31 June 30 Sept. 30 Dec. 31 March 31 June 30
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Production
Natural gas
(mcf/d) 36,631 49,530 48,082 52,917 57,880 58,426
Crude oil
(bbls/d) 384 414 438 590 506 405
Natural gas
liquids
(bbls/d) 246 239 225 270 341 307
Total
production
(boe/d) (6:1) 6,735 8,909 8,677 9,680 10,493 10,449
Pricing
Natural gas
($/mcf) 7.59 7.42 5.34 6.43 7.84 9.92
Crude oil
($/bbl) 64.46 68.32 77.64 83.77 92.41 117.08
Natural gas
liquids
($/bbl) 61.24 66.29 66.98 78.11 81.34 100.01
Highlights
($/boe)
Petroleum and
natural gas
revenues(1) 47.06 46.07 35.37 42.73 51.09 65.14
Realized gain
(loss) on
financial
instruments 5.83 0.05 3.89 1.41 - (3.52)
Royalties (12.47) (10.62) (7.95) (7.89) (11.13) (13.63)
Operating
expenses (4.80) (5.35) (5.09) (5.07) (5.58) (5.82)
Transportation
expenses (3.68) (4.48) (4.07) (4.06) (3.88) (5.02)
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Operating
netback 31.94 25.67 22.15 27.12 30.50 37.15
General and
administrative
expenses (1.17) (0.95) (1.16) (0.54) (1.29) (1.36)
Long term
incentive
compensation
expense (cash
component) - (0.23) (0.32) (0.34) (0.27) (0.31)
Interest and
financing
expenses (0.81) (1.52) (1.59) (1.37) (1.45) (1.75)
Asset retirement
expenditures (0.42) 0.02 (0.06) (0.06) (0.19) (0.22)
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Funds generated
from
operations 29.54 22.99 19.02 24.81 27.30 33.51
Unrealized
gain (loss)
on financial
instruments (6.65) 6.43 (0.41) (0.95) (10.28) (10.16)
Asset retirement
expenditures 0.42 (0.02) 0.06 0.06 0.19 0.22
Long term
incentive
compensation
expense (0.47) (0.38) (0.79) (1.00) (0.61) (0.87)
Depletion,
depreciation
and accretion
expenses (13.35) (16.04) (16.33) (14.98) (15.12) (15.43)
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Net earnings
before taxes 9.49 12.98 1.55 7.94 1.48 7.27
Future income
taxes
recovery
(expense) (2.78) (3.63) (0.65) (0.73) 0.48 (1.69)
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Net earnings 6.71 9.35 0.90 8.67 1.96 5.58
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(1) Includes sulphur net revenue with no associated production as there
is no conversion of tons to boe.
Gross Drilling
Results (No. of
wells)
Natural gas 19 - 15 30 26 -
Crude oil - - - - - -
Dry 5 - - 1 - -
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24 - 15 31 26 -
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Net Drilling
Results (No.
of wells)
Natural gas 12.8 - 10.3 19.2 18.3 -
Crude oil - - - - - -
Dry 2.4 - - 0.8 - -
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15.2 - 10.3 20.0 18.3 -
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Success rate (%) 84 - 100 96 100 n/a
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For further information: Additional information relating to the Company
is filed on SEDAR and can be viewed at www.sedar.com; Information can also be
obtained by contacting the Company at ProEx Energy Ltd. 1200, 205 - 5th Avenue
S.W., Calgary, Alberta, Canada T2P 2V7 or by e-mail at ir@proexenergy.com;
Information is also accessible on the Company's web site at
www.proexenergy.com
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