Western Oil Sands earns $63.37-million in 2006
2007-02-22 08:32 ET - News Release
Mr. Robert Puchniak reports
WESTERN OIL SANDS ANNOUNCES 2006 YEAR END RESULTS
Western Oil Sands Inc. has released its financial and operating results for the fourth quarter and the year ended Dec. 31, 2006.
Noteworthy operating and financial achievements during 2006 included:
* Fourth quarter production averaged 35,515 barrels per day net to Western, comparable with the record production of 35,600 barrels per day achieved in the fourth quarter of 2005.
* Annual production averaged 27,500 barrels per day net to Western, despite the two-month production interruption due to the full turnaround at the mine and upgrader in the second quarter.
* Near-record annual cash flow from operations of $228.4-million, with record quarterly cash flow from operations of $110.5-million in the third quarter.
* Capital expenditures totalled $301.3-million, which were financed primarily through cash flow from operations supplemented in part by a modest increase in Western's revolving credit facility.
* Proved and probable reserves increased 86 per cent from the prior year to 577 million barrels and a best estimate of contingent resources of 891 million barrels.
* The lands associated with Western's proved and probable reserves represent only about 11 per cent of the more than 69,000 net acres in which Western has the right to participate.
* The permit application for the Muskeg River mine expansion was approved in December, 2006.
Fourth quarter 2006
The completion of the first full turnaround at both the mine and the upgrader in the second quarter of 2006 set the stage for strong production in the latter half of 2006. Fourth quarter production averaged 35,500 barrels per day net to Western, representing the second consecutive quarter of significant production volumes. Production in the fourth quarter nearly eclipsed the record set in the third quarter of 2005, where production averaged 35,600 barrels per day net to Western.
During the fourth quarter, cash flow from operations of $91.1-million financed virtually all the capital expenditures during the quarter, however, lower underlying crude prices and wider heavy crude oil differentials contributed to lower overall price realizations. Crude oil averaged $60.21 (U.S.) per barrel, considerably lower than the average crude prices experienced in the prior three quarters. The crude oil heavy differential widened to approximately 35 per cent of West Texas Intermediate (WTI) compared with the prior two quarters, where observed differentials approximated 26 per cent to 28 per cent of West Texas Intermediate. As underlying crude oil prices decline, there is a corresponding decrease in Western's cash flow and profitability since Western's revenues are sensitive to fluctuations in crude oil prices.
A weakening of the United States/Canadian exchange rate, which results in more Canadian funds received on United States denominated crude sales, partially offset the negative impacts of the changes in crude oil prices and the heavy differential. The average exchange rate for the fourth quarter was 87.78 U.S. cents compared with 89.19 U.S. cents for the third quarter of 2006. Due to these factors, Western's sales price realizations totalled $55.08 per barrel in the fourth quarter compared with $67.42 per barrel for the third quarter. In the fourth quarter of 2006, operating costs were reduced to $20.12 per processed barrel compared with $22.38 per processed barrel in the third quarter. This reduction in per unit costs is largely the result of increased production in the fourth quarter compared with the previous quarter which provides greater economies of scale, partially offset by a 6-per-cent increase in underlying natural gas prices in the fourth quarter.
HIGHLIGHTS
Three months ended Year ended
Dec. 31, Dec. 31,
2006 2005 2006 2005
Operating data (bbl/d)
Bitumen production 35,515 35,572 27,500 31,994
Synthetic crude sales 45,594 47,751 37,326 42,534
Operating expense
per processed
barrel ($/bbl) 20.12 23.44 28.38 22.06
Production
As a result of successful and ongoing production optimization initiatives at both the mine and upgrader, the project has increased the calendar day average production to a range of 165,000 to 175,000 barrels per day in recent quarters, with a near-term goal of increasing production to approximately 200,000 barrels per day by 2009. For short-term intervals the mine has achieved production rates in excess of 215,000 barrels per day.
Revenue
Western achieved record gross crude oil sales revenue of $983.6-million in fiscal 2006 compared with $910.3-million in 2005, including $825.4-million (2005 -- $777.9-million) from proprietary production at an average realized price of $60.51 per barrel (2005 -- $49.91 per barrel). Record sales revenues were achieved largely due to a 21-per-cent increase in Western's realized crude oil price as a result of the continued strength in world crude oil prices partially offset by a 14-per-cent decrease in bitumen production due to the full planned plant turnaround and repair of a conveyor belt during the year. During 2006, Western had no proprietary barrels subject to financial hedge instruments and, consequently, enjoyed the full appreciation of the underlying in WTI through the synthetic crude oil sales. A careful and deliberate decision was made to not hedge any barrels in 2006 as the capital expenditures were not large relative to the capital spending profile in subsequent years. In 2005, gross revenues were reduced by $110.4-million due to out-of-the-money fixed priced swap contracts on a portion of Western's proprietary production and, as a result, Western's crude oil price realization was reduced by $7.11 per barrel.
Western's crude oil sales were subject to an overall quality differential of $12.82 per barrel (2005 -- $12.27 per barrel) off of the Edmonton PAR benchmark crude oil price of $73.33 per barrel in 2006. The quality differential has increased marginally from the prior year due to a heavier than normal sales mix associated with the period prior to, and immediately following, the full plant turnaround. During this period, the Upgrader was not running at optimal conversion rates resulting in a heavier blend of synthetic crude oil. This was offset by a general narrowing of the heavy crude oil differential during 2006 which helped maintain higher oil sands revenues and realized synthetic crude oil sales prices. The heavy crude oil differential averaged 35 per cent of WTI prices, or $22.58 per barrel in 2006 compared with 39 per cent or $21.83 per barrel in 2005.
Operating costs
Western's share of the project's operating costs totalled $286.3-million in 2006 (2005 -- $250.4-million) including $40.2-million associated with the cost of the turnaround. Also included in this amount are costs associated with removing overburden at the Mine and transporting bitumen from the mine to the upgrader. On a per processed barrel of bitumen basis, unit operating costs were $28.38 per barrel based on average production of 27,500 barrels per day in 2006 compared with $22.06 per barrel based on average production of 31,994 barrels per day in 2005. Excluding the impact of the turnaround, operating costs were $24.50 per processsed barrel for 2006, compared with $22.06 per processed barrel for the prior year period. However, unit operating costs per processed barrel in 2006 are impacted by lower annual production rates compared with the prior year period.
Higher unit operating costs in 2006 were largely due to higher input costs for materials and supplies in an escalating commodity price environment, offset in part by lower natural gas costs during 2006 compared with the previous year. On a unit basis, natural gas costs were $4.07 per processed barrel compared with $5.04 per processed barrel in 2005. This 19-per-cent decrease is consistent with the 18 per cent decrease in the market price for natural gas over the same time periods, indicating a similar gas intensity for the project over the last several years. Unit operating costs in 2006 were also impacted by repair costs and associated lost production stemming from a tear in the conveyor belt at the mine in the first quarter.
Operating costs, on both an absolute basis and on a per unit basis, were impacted significantly by the first full turnaround of the project in 2006. This process extended for a period of 56 days during the second quarter and, for a large part of that time, little or no production was recorded. Turnaround activities added $3.88 per processed barrel in 2006.
Net earnings
Net earnings were $63.4-million (39 cents per share) in 2006 compared with $149.4-million (93 cents per share) in 2005. This year-over-year decrease is in large part due to the full turnaround completed during 2006, together with a $72.1-million unrealized risk management loss ($49.9-million after tax) associated with marking to market Western's strategic crude oil hedging program for 2007 through to 2009 compared with an unrealized risk management gain of $13.5-million in 2005 ($8.9-million after tax). Earnings for the year reflect $300,000 of unrealized foreign exchange gains on Western's $450-million (U.S.) senior secured notes and option premium liability, a $72.1-million unrealized loss on risk management activities and a future income tax expense of $16.7-million. Earnings before interest, taxes, depreciation, depletion and amortization, stock-based compensation, accretion on asset retirement obligation, foreign exchange gains, and risk-management gains were $276.9-million. Cash flow from operations, before changes in non-cash working capital, was $228.4-million ($1.42 per share) in 2006 compared with $244.2 million ($1.52 per share) in 2005. Robust commodity prices, together with sustained reliable operations over the course of the year, excluding the effects of the full turnaround, resulted in substantial EBITDAX which was predominantly used to assist in the funding of early stage capital for expansion 1.
Liquidity and financial position
Western maintained a strong financial position in 2006, largely due to robust commodity prices during the majority of the year, combined with strong production in the months following the turnaround. It is important to note that this credit profile was maintained after considering the full impact of the plant turnaround, where little or no production was recorded for a portion of the second quarter, and while operating and capital costs of the business continued during this period. This financial position provides the company with a solid foundation to finance the share of the capital costs associated with expansion 1, while maintaining the base project.
During 2006, Western's capital costs of $301.3-million were financed primarily through cash flow from operations. The balance was financed by $36 million of incremental borrowings under the revolving credit facility and working capital. Total amounts drawn under the revolving credit facility were $77-million at year-end. At Dec. 31, 2006, Western had $253-million in unused working capital capacity. A key barometer of the financial strength of a company is its debt to total capitalization ratio. For Western, this ratio has continued to improve from a high of 66 per cent in 2003 to 48 per cent in 2006. This level provides the basis for additional borrowings, should Western elect to do so, to finance upcoming capital initiatives including expansion 1 of the Athabasca oil sands project and activities related to in situ evaluation.
The hedging program implemented in 2005 provides greater cash flow certainty during during those years where significant AOSP capital expenditures for expansion 1 are expected. Incremental debt may be required to fund future expansion phases and other initiatives as they arise. Throughout these expansion efforts, the company expects to maintain a fiscally prudent capital structure which employs both debt and potentially equity capital should the need arise. Western's view is that it is well positioned to finance its share of the AOSP expansion 1, together with future upstream expansions of the AOSP, while at the same time be in a position to finance growth associated with Western's in situ development, downsteam initiative and Kurdistan opportunity.
Capital expenditures
Net capital expenditures totalled $301.3-million in 2006 compared with $46.8-million in 2005. Of this total, AOSP initiatives accounted for $251 million, including $187.4-million for expansion 1 which includes $2.8-million in capitalized interest. Under the terms of the joint venture agreement, Western is responsible for its 20-per-cent share of the capital costs related to expansion 1. Western also incurs capital expenditures related to the evaluation of in situ leases for its operated properties as well as Chevron's Ells River project, both of which are included in the joint venture pursuant to the participation and area of mutual interest. Capital expenditures of $15.2-million related to WesternZagros' Ltd.'s initiative in Kurdistan were also incurred in 2006. The AOSP, and the expansion plans associated with this asset, will continue to drive Western's capital expenditures going forward, particularly as the AOSP embarks on its continuous construction expansion strategy.
Outlook for 2007
For 2007, Western remains focused on its key initiatives: the AOSP and the execution of expansion 1; in situ evaluation and development of both Western's in situ leases and the Chevron-operated Ells River project; evaluating and identifying downstream integration opportunities; and supporting WesternZagros as it pursues its initiative in Kurdistan.
Western's 2007 capital budget is $715-million, $655-million of which relates directly to the AOSP, $35-million is budgeted for in situ exploration and development for both Chevron's and Western's in situ leases, $20-million is directed to WesternZagros' initiative in Kurdistan and $5-million is allocated to other corporate capital items. Of the total budget, $555-million or 78 per cent is allocated to expansion 1 of the AOSP. Capital expenditures relating to expansion 1 are expected to continue to grow over the next couple of years as development efforts accelerate. Western anticipates its share of production from the AOSP to average approximately 33,000 to 35,000 barrels per day in 2007. Western is actively evaluating capitalization strategies and structures in order to finance its share of forecasted capital expenditures which for AOSP expansion 1, is anticipated to comprise solely of cash flow from operations together with incremental borrowings. If commodity prices continue to weaken as observed in the early part of 2007, Western's strategic hedging program implemented in fall of 2005 provides downside protection on the majority of its 2007 production and maintain a base level of cash flow. This program is monitored on a continuing basis to ensure its specific components continue to achieve the overall objectives.
Western anticipates research and business development expenses to be approximately $67-million in 2007, with 52 per cent of this amount dedicated to projects at the joint venture level. The balance is earmarked for technology efforts which may benefit mining and in situ extraction and recovery techniques, assessments and reviews associated with identifying a downstream opportunity for Western's share of bitumen production, in situ development and corporate administrative expenses stemming from efforts in Kurdistan.
In 2007, Western will continue to pursue downstream integration opportunities to maximize value from its growing oil sands resources and undeveloped acreage position. Related to these initiatives, Western intends to explore and pursue alternatives that enhance the full value of the assets and future growth potential. This may result in an acquisition or sale of assets, merger or other corporate transaction. Western's advisers, Goldman, Sachs & Co., and TD Securities Inc., will be assisting in these activities which may involve contacting third parties. There can be no assurances that any of these activities will result in the consummation of an agreement or transaction or result in any change to Western's current continuing business strategy.
Future expansions
Subsequent to year-end, on Jan. 24, 2007, Western announced (in Stockwatch) future growth plans for the AOSP with proposed permit applications that would enable production from expansions 3 through 5 of the project. These plans would see minable production increasing to approximately 770,000 barrels per day or 154,000 barrels per day net to Western. These volumes, together with anticipated production of in excess of 50,000 barrels per day from in situ development, would increase Western's share of total bitumen production to more than 200,000 barrels per day over the next 15 to 20 years. The company also sees potential for mining expansions, beyond expansion 5, based on the resource potential of the unevaluated leases associated with the AOSP.
Seeking early stakeholder and regulator support is fundamental to the AOSP's growth strategy. The public disclosure documents were issued in order to start the process of the AOSP's next phase of oil sands development, including the proposed Jackpine mine expansion, and an additional mine, called Pierre River mine, on the west side of the Athabasca River. The AOSP's growth strategy includes the approved Muskeg River mine permit at 270,000 barrels per day and the approved Jackpine mine permit at 200,000 barrels per day. The Jackpine mine expansion is a proposed expansion of the Jackpine mine to 300,000 barrels per day, representing expansions 1 through 3. The Pierre River mine represents expansions 4 and 5, initially on leases 9 and 17. Actual timing for these expansion projects will depend on market conditions, key economic indicators, the ability to meet sustainable development criteria and the outcome of the regulatory process.
Conference call notice
Western will host a conference call and webcast at 7 a.m. Mountain Time, Feb. 22, 2007. To participate in the conference call, it is advised to call 10 minutes prior to start time. Dial 416-644-3421 in the Toronto area or toll-free at 800-732-1073. A replay of the conference call will be available approximately two hours after the event until March 1, 2007. To listen to the audio replay in the Toronto area, dial 416-640-1917 (pass code: 21218781, followed by the number sign) or toll-free at 877-289-8525 (pass code: 21218781, followed by the number sign). The simultaneous audio webcast will be available on Western's website.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Year ended Dec. 31
(thousands of dollars)
2006 2005
Revenues 983,560 910,330
Less purchased feedstocks and transportation (353,522) (318,934)
----------- -----------
630,038 591,396
----------- -----------
Expenses
Royalties 4,064 4,005
Operating 286,325 250,389
Research and business development 34,863 10,657
General and administrative 28,456 14,491
Insurance 11,497 7,995
Interest 50,017 58,165
Accretion on asset retirement obligation 1,256 562
Depreciation, depletion and amortization 61,560 50,738
----------- -----------
478,038 397,002
----------- -----------
Earnings before other income
(expense) and income taxes 152,000 194,394
Other income (expense)
Foreign exchange gain 49 15,561
Risk management gain (loss) (72,118) 13,450
----------- -----------
Earnings before income taxes 79,931 223,405
Income tax expense 16,561 73,956
----------- -----------
Net earnings 63,370 149,449
----------- -----------
Retained earnings at beginning of year 161,181 11,732
----------- -----------
Retained earnings at end of year 224,551 161,181
=========== ===========
Net earnings per share
Basic 0.39 0.93
=========== ===========
Diluted 0.39 0.92
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