Canadian Oil

[kraftdinner]

Enerplus Resources earns $107.87-million in Q1


2007-05-04 05:45 MT - News Release

Mr. Gordon Kerr reports

ENERPLUS ANNOUNCES 2007 FIRST QUARTER OPERATING AND FINANCIAL RESULTS

Enerplus Resources Fund has released its results from operations for the period ending March 31, 2007. Highlights are as follows:


The company's efforts during the first quarter were focused on the execution of its internal development program and the expansion of its operations through the acquisition of over $240-million of additional assets in the Alberta oil sands and the United States.
Management is pleased to report that the company's operating and financial results to date are essentially meeting its expectations. Production volumes averaged approximately 86,000 barrels of oil equivalent per day, up slightly over the first quarter of 2006 and in line with the company's 2007 full-year guidance of 85,000 barrels of oil equivalent per day.
Cash flow from operations was slightly ahead of last year at $193.2-million, compared with $189.3-million in the first quarter of 2006.
Monthly cash distributions to unitholders were 42 cents per unit, a level that has been maintained over the past 19 months, and totalled $1.26 per unit for the quarter.
Through the company's development capital program, Enerplus invested $110-million during the first quarter with the majority of its spending focused on crude oil. The company drilled 106 gross wells (39.7 net), which was lower compared with the same quarter last year due to the deferral of the company's shallow gas and coal bed methane drilling programs. Despite the reduction in the total number of wells drilled, the company's capital spending is in line with expectations as the costs associated with drilling oil wells are higher than those for shallow natural gas.
The company's total capital spending for the year will increase marginally to approximately $415-million ($410-million as per its original guidance plus $5-million associated with the Kirby acquisition) as Enerplus will shift $30-million from its other Canadian conventional oil and gas projects to increase its United States program given the robust economics associated with the company's Sleeping Giant project.
With the decrease in capital spending programs across the industry this year, management is starting to see deflationary pressures on the cost of drilling and oil field services. At this point, it is premature to indicate what savings management may see throughout 2007, but the company will continue to actively manage its costs and may see greater capital efficiencies this year. Enerplus's operating costs at $8.53 per barrel of oil equivalent were slightly ahead of guidance; however, the company continues to expect full year operating costs to be $8.45 per barrel of oil equivalent.
The company's payout ratio for the quarter was 82 per cent, compared with the first quarter of 2006 at 79 per cent. This payout ratio is calculated using generally accepted accounting principles (GAAP) measures "cash flow from operating activities" versus the previous non-GAAP measure "funds flow from operations." The difference is that cash flow from operating activities includes changes in non-cash working capital, which can introduce volatility in reported cash flow and payout ratios. For example, during the first quarter, Enerplus had a working capital adjustment of approximately $26-million, which reduced the company's cash flow from operating activities relative to funds flow and increased its payout ratio relative to its previous methodology.
The company's debt-to-cash flow remains at a conservative 0.8 times.

Summary financial and operating highlights

In accordance with Canadian practice, production volumes, reserve volumes and revenues are reported on a gross basis, before deduction of Crown and other royalties, unless otherwise stated. Where applicable, natural gas has been converted to barrels of oil equivalent based on 6,000 cubic feet to one barrel of oil equivalent. The barrel-of-oil-equivalent rate is based on an energy-equivalent conversion method primarily applicable at the burner tip and does not represent a value equivalent at the wellhead. Use of barrels of oil equivalent in isolation may be misleading. Certain prior-year amounts have been restated to reflect current-year presentation. Readers are also urged to review the management's discussion and analysis and audited financial statements for more fulsome disclosure on the company's operations. These reports can be found on the company's website, the company's SEDAR profile and as part of the company's SEC filings.

The company's highest concentration of capital spending during the quarter occurred at the company's Sleeping Giant Bakken oil property in the United States Enerplus drilled nine gross wells (6.6 net wells) completing the company's original two wells per section drilling program in the heart of the field and continuing with the company's third well per section pilot program. Successful initial results from this pilot have resulted in an additional nine wells being added to this program for a total of 16 wells in 2007. In addition, Enerplus acquired seismic over the eastern portion of the field and are currently interpreting it to evaluate other opportunities in the deeper Red River formation. Enerplus completed five refracs during the quarter and added an additional nine refracs in the latter part of the year for a total of 16 planned for 2007. Results continue to be very positive in terms of increased rates and recovery. Given the increased opportunity and robust economics associated with the Sleeping Giant project, management is increasing the company's capital spending from $70-million to $100-million in 2007. Enerplus's total capital spending for the year will increase marginally to approximately $415-million ($410-million as per the company's original guidance plus $5-million associated with the Kirby acquisition) as the company will shift $30-million from the company's other Canadian conventional oil and gas projects to increased the company's United States program.

Acquisitions

On Jan. 31, Enerplus acquired additional assets in the United States with the purchase of a gross overriding royalty interest in the Jonah natural gas field in Wyoming for $61.3-million. This is a modest increase to the company's United States portfolio and establishes a new area with significant gas development potential. The attractiveness of this asset relates to the high cash flow per barrel of oil equivalent as the gross overriding royalty is not subject to deductions for operating costs, royalties or any future development capital. This acquisition also comes with an RLI of 15.9 years and significant future development opportunities from which Enerplus will benefit but will not be required to finance.

On March 22, Enerplus announced in Stockwatch the acquisition of a 90-per-cent interest in the Kirby Oil Sands Partnership located in the heart of the Athabasca oil sands fairway of Alberta for $182.5-million. This strategic acquisition provides Enerplus with additional long-term oil sands assets with steam-assisted gravity drainage (SAGD) development potential that management believes will add significant value for the company's unitholders in the years to come. Oil sands assets are a key resource play for Enerplus given their lower geologic risk and the scalable development associated with these types of assets. The addition of an operated SAGD project complements the company's existing portfolio of non-operated oil sands assets, which include the mining and SAGD projects on the Joslyn lease.

The Kirby oil sands leases cover a large land block of 43,360 gross acres (over 67 sections of land) near several other major SAGD development projects currently on production. An independent engineering assessment conducted by GLJ Petroleum Consultants Ltd. indicates a "best estimate" of contingent resources of 244 million barrels of bitumen (approximately 220 million barrels net to Enerplus). Enerplus's initial development plans include a 10,000-barrel-per-day SAGD project (9,000 barrels per day net) starting in 2011, with further expansion capability to a total of 30,000 barrels to 40,000 barrels per day of gross bitumen production (27,000 barrels to 36,000 barrels per day net to Enerplus) over time. Enerplus expect the project life of these SAGD developments to be in the order of 25 years. Enerplus's initial capital requirements to bring the first 10,000 barrels per day of production on stream are expected to be approximately $320-million net to Enerplus including estimates for cost inflation and contingencies. Further sustaining capital will be required over the remaining life of the projects.

The combined cost of these acquisitions was $243.8-million and was initially financed through the company's existing credit facilities. In conjunction with the Kirby transaction, Enerplus announced an equity offering of trust units which closed April 10, 2007, raising net proceeds of $200-million in addition to a private placement of 1.1 million units with the vendor representing consideration of $54.7-million. This total financing of $254.7-million maintains the company's healthy balance sheet and positions the company to execute other potential merger and acquisition opportunities through the year.

Canadian federal government trust tax proposal

The company has continued its lobby efforts against the federal government's proposal to implement a tax on income trusts as announced on Oct. 31, 2006. Despite recommendations from the federal finance committee released in February, which offered suggestions that would have reduced the impact of this proposal, the conservative government has not adjusted its original proposal and unfortunately elected to include the proposal as it existed together with the federal budget, which was passed in the House of Commons on March 19, 2007, into an implementation bill. This bill has received first reading in the House of Commons with the second reading and debate currently under way. Three readings in the House of Commons are required before a bill is voted upon. Enerplus encourages unitholders to continue to voice their concerns to their member of parliament and the Prime Minister.

Federal and provincial greenhouse gas emission reduction proposals

On March 8, the Alberta government introduced amendments to the provincial climate change and emissions management act (CCEMA) that would impose facility-specific targets intended to reduce greenhouse gas emissions. In addition, on April 26, the Canadian federal government announced its proposed plan to reduce emissions. Both of these plans reflect intensity-based reductions (expressed as a percentage of the facility's volume of emissions per unit of production) versus absolute reductions and will initially impact large, final emitters (LFE). Under the Alberta proposal, an LFE is defined as those facilities that are producing in excess of 100,000 tonnes of greenhouse gases per year.

The targets are designed to reduce emission intensity measured from different starting points under the two proposals but no earlier than 2003 for individual LFE. A number of mechanisms have been proposed to allow producers to mitigate the impact where the targeted reductions are not met including contributions to technology funds, offsetting credits earned at other outside covered sources and credit trading. Clarification and further detail surrounding regulations are still to come and the federal government has stated that they will work to harmonize the federal proposals with the provincial proposals such that they are not additive to the provincial obligations but rather incremental.

Early assessments are that the costs to producers will be well below $1 per produced barrel at targeted LFE. Enerplus do not anticipate a significant immediate impact on the company's existing operations and factored in a provision for emission-related costs in making the company's Kirby acquisition that management believes adequately reflects the impact of the proposals as put forward.

Future focus

The company continues to focus on the business of running a successful oil and gas operation which will serve the company well regardless of structure or commodity price environment. Enerplus has built a technically driven organization that is creating value for the company's unitholders by maximizing the potential within the company's existing assets and adding strategic assets to the company's portfolio. Enerplus has a high-quality, long-life asset base and a robust opportunity set which supports the company's yield-oriented model. Approximately 50 per cent of the company's production and 70 per cent of the company's reserves are resource play oriented. Enerplus's conventional oil and natural gas assets offer approximately $2-billion of future development potential across a diverse mix of quality assets and equates to between four and five years of development activity based upon the company's current spending levels providing the company with the opportunity to maintain its production volumes over this period.

In addition to the company's conventional opportunity set, it has the ability to grow via its oil sands assets and future mergers and acquisitions activity. Enerplus has a positive long-term price view for commodities and the acquisition of oil sands assets supports this view. Through the company's recent acquisition of Kirby and the company's existing interest in the Joslyn lease, Enerplus have over 443 million barrels of "best estimate" contingent resource potential net to Enerplus as well as 57 million barrels of proven-plus-probable reserves. Together these projects represent $3-billion of attractive future development potential, including both initial and sustaining capital. These projects provide the company with a clear strategic advantage over many other operators given their low geologic risk and the production and reserve profile that lies ahead. In total, the company's current oil sands opportunities have the potential to add over 60,000 barrels per day of production net to Enerplus over the next 10-plus years.

The company's healthy balance sheet and developments in the mergers and acquisitions market are supportive of additional acquisitions this year. The Canadian mergers and acquisitions market is improving for buyers and management is watching the United States market develop as U.S. upstream master limited partnerships enter the market. Enerplus's acquisition priorities this year were to acquire an operated SAGD project and to build the company's U.S. business.

Management believes that investor demographics, the current low-interest-rate environment, the demand for yield product and the company's asset base will continue to support a yield-oriented business model with a premium valuation over a traditional exploration and production model. Enerplus's lower-risk approach to the energy business, resource play focus and the company's disciplined acquisition strategy will serve the company well regardless of structure. In the event that the proposed tax on trusts is implemented, Enerplus believe there is significant value in the four-year tax exemption period and would use the company's tax pools and adopt the most advantageous structure to minimize its tax liabilities beyond that time.

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