Vermilion Energy Trust Reports Third Quarter Results for the Three and Nine Month Periods Ended September 30, 2009
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CALGARY, Alberta--(BUSINESS WIRE)-- Vermilion Energy Trust ("Vermilion" or the "Trust") (TSX - VET.UN) is pleased to report interim operating and unaudited financial results for the three and nine month periods ended September 30, 2009.
Third Quarter Highlights:
-- Recorded production of 30,418 boe/d in the third quarter of 2009,
compared to 32,238 boe/d recorded in the second quarter of 2009.
Vermilion shut-in approximately 1,000 boe/d of equivalent production in
Canada in response to low natural gas prices which resulted in a 350
boe/d average reduction in third quarter volumes. Unscheduled down time
in Australia due to a gas lift compressor failure resulted in a 350
boe/d shortfall in production from the Wandoo field. The remainder of
the third quarter production decrease was due to natural declines.
-- Generated fund flows from operations of $69.3 million ($0.89 per unit)
in the third quarter of 2009 as compared to $85.5 million ($1.10 per
unit) in the second quarter of 2009. The decrease in fund flows from
operations reflects lower production volumes and the absence of one-time
factors that benefitted second quarter results. A significant build in
crude oil inventories in Australia during the third quarter resulted in
a deferral of fund flows from operations of approximately $0.03 per unit
in the quarter.
-- Successfully drilled and completed the first of a three well program in
the Netherlands. Vermilion has completed sustained tests on the Vinkega
#1 well at gross rates in excess of 30 mmcf/d from two separate
formations. The well was drilled on the Gorredijk concession in which
Vermilion holds a 42.3% interest. A full development and production plan
will be submitted for regulatory approval, and production from this well
is not expected until late 2010.
-- Completed a multi-stage fracture treatment of a horizontal gas well in
the Drayton Valley resulting in initial flow rates of approximately 600
boe/d from this 100% working interest well. Vermilion continues to
develop a large inventory of tight gas candidates and Cardium oil
candidates in the Drayton Valley region.
-- Total net debt increased from $236.7 million at the end of the second
quarter of 2009 to $440.0 million at the end of the third quarter of
2009, reflecting the initial payment for the Corrib asset acquisition
and Vermilion's share of capital expenditures on this project effective
January 1, 2009. Non-Corrib development capital spending totalled $29.0
million in the third quarter.
-- Subsequent to the end of the quarter, Vermilion issued 7,282,000 trust
units at $30.90 per unit generating net proceeds of $213.8 million. The
proceeds of the equity offering will be used to reduce bank indebtedness
which will leave Vermilion in a strong financial position to take
advantage of future acquisition opportunities.
-- Verenex Energy Inc. ("Verenex"), in which Vermilion holds 18,760,540
common shares representing a 42% equity ownership position (38% on a
fully diluted basis), has entered into a definitive arrangement
agreement (the "Agreement") with the Libyan Investment Authority (the
"LIA") pursuant to which the LIA, through a subsidiary, has agreed to
acquire all of the Verenex shares issued and outstanding upon completion
of the transaction at a price per share in cash equal to $7.09 plus any
positive net working capital at the time of completion of the
transaction. The transaction will be completed by way of plan of
arrangement (the "Arrangement"), to be submitted to the holders of
Verenex securities (Verenex shares, options and performance warrants)
for approval at a meeting scheduled for December 11, 2009.
-- Generated a positive total return to investors of 24.2% for the nine
month period ended September 30, 2009.
Conference Call and Audio Webcast Details:
Vermilion will discuss these results in a conference call to be held on Friday, November 6, 2009. The conference call will begin at 9:00 AM MST (11:00 AM EST). To participate, you may call toll free 1.877.407.9205 (North America) or 1.201.689.8054 (International). The conference call will also be available on replay by calling 1.877.660.6853 (North America) or 1.201.612.7415 (International) using account number 286 and conference ID number 333653. The replay will be available until midnight eastern time on November 13, 2009.
You may also listen to the audio webcast by clicking http://www.investorcalendar.com/IC/CEPage.asp?ID=149991 or visit Vermilion's website at http://www.vermilionenergy.com/ir/eventspresentations.cfm.
HIGHLIGHTS
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
Financial ($000's CDN except 2009 2008 2009 2008
unit and per unit amounts)
Petroleum and natural gas $ 150,183 $ 245,712 $ 459,207 $ 816,576
revenue
Fund flows from operations 69,311 131,834 223,217 441,577
Per unit, basic 1 0.89 1.73 2.86 5.78
Capital expenditures 50,781 37,402 119,208 105,971
Acquisitions, including
acquired working capital 182,581 959 200,129 46,387
deficiency
Net debt 439,968 222,185
Reclamation fund contributions
and asset retirement costs 1,019 12,697 5,285 14,988
incurred
Cash distributions per unit 0.57 0.57 1.71 1.71
Distributions declared 40,677 39,810 121,366 118,652
Less DRIP - - - 18,453
Net distributions 40,677 39,810 121,366 100,199
% of fund flows from 58.7% 30% 54.4% 27%
operations distributed, gross
% of fund flows from 58.7% 30% 54.4% 23%
operations distributed, net
Total net distributions,
capital expenditures,
reclamation fund contributions $ 92,477 $ 89,909 $ 245,859 $ 221,158
and asset retirement costs
incurred
% of fund flows from 133% 68% 110% 50%
operations
% of fund flows from
operations (excluding capital 102% 68% 100% 50%
expenditures on the Corrib
project)
Trust units outstanding 1
Adjusted basic 78,502,530 76,904,192
Diluted 79,989,918 79,149,782
Weighted average trust units
outstanding 1
Adjusted basic 78,126,260 76,387,515
Diluted 78,920,821 78,114,281
Unit trading
High $ 34.00 $ 45.50
Low $ 20.02 $ 31.00
Close $ 29.58 $ 34.06
Operations
Production
Crude oil (bbls/d) 17,762 17,479 18,462 17,848
Natural gas liquids (bbls/d) 1,568 1,563 1,564 1,590
Natural gas (mcf/d) 66,524 77,305 71,007 80,834
Boe/d (6:1) 30,418 31,927 31,860 32,910
Average reference price
WTI ($US/bbl) $ 68.30 $ 117.98 $ 57.00 $ 113.29
Brent ($US/bbl) 68.27 114.78 57.15 111.02
AECO ($CDN/mcf) 2.94 7.74 3.77 8.62
Netherlands reference 4.58 8.06 6.05 7.24
(Euro/GJ)
Foreign exchange rate 0.91 0.96 0.85 0.98
($US/$CDN)
Foreign exchange rate 0.64 0.64 0.63 0.65
(Euro/$CDN)
Average selling price
Crude oil and natural gas 70.00 100.83 63.94 112.93
liquids ($CDN/bbl)
Natural gas ($CDN/mcf) 4.20 9.71 5.66 9.71
Netbacks per boe (6:1)
Operating netback 32.19 56.31 32.76 61.69
Fund flows netback 24.79 44.86 25.67 48.97
Operating costs $ 12.24 $ 12.10 $ 11.81 $ 11.31
1 Includes trust units issuable for outstanding exchangeable shares based on the
period end exchange ratio
The above table includes non-GAAP measures which may not be comparable to other companies. Please see "Non-GAAP Measures" under MD&A section for further discussion.
THIRD QUARTER OUTLOOK
Vermilion anticipates fourth quarter 2009 production will be slightly below third quarter 2009 levels reflecting normal declines, some continued shut-in of Canadian gas volumes and some temporary, drilling-related shut-ins of production in the Netherlands. Vermilion expects to meet or exceed its previously stated full-year guidance of between 30,000 boe/d and 31,000 boe/d for 2009.
Development capital spending for 2009 is expected to be approximately $195 million, including $50 million of development expenditures related to the Corrib natural gas project that have not been booked as part of the initial acquisition cost. During the fourth quarter of 2009 Vermilion anticipates it will drill and complete two additional wells in the Netherlands, participate in the drilling of one to two Cardium horizontal wells in Canada and participate in the drilling of a horizontal Notikewin well.
Vermilion's Board of Directors has approved an initial capital program ranging from $295 million to $330 million for 2010 that includes approximately $145 million of development expenditures related to the Corrib natural gas project. The Corrib natural gas project in Ireland is expected to increase Vermilion's production by approximately 9,000 boe/d once first gas is achieved and could add $200 million per year in additional fund flows from operations net to Vermilion, based on current forward pricing curves for UK natural gas. On November 2, 2009, the Corrib Gas partners received a detailed letter from An Bord Pleanala (the "Board") in respect of their application for a modified onshore pipeline route. The partners note the Board's provisional view that "it would be appropriate to approve the proposed onshore pipeline development should alterations be made to the proposed development". The Corrib Gas partners will now give detailed consideration to the Board's specific requests for further information and modifications to the route. The Corrib partners have until February 5, 2010 to respond to ABP's concerns.
Depending on the level and timing of capital expenditures in 2010, Vermilion expects production volumes to range between 29,000 boe/d and 31,000 boe/d for the year. Exit production rates for 2010 are expected to be at the higher end of this guidance due to the timing of production tie-ins on several projects including Netherlands and Australian drilling programs.
Vermilion's Canadian development programs have begun to focus on horizontal technology plays, including Cardium oil wells and selected liquid-rich tight gas reservoirs that populate Vermilion's Drayton Valley portfolio. Vermilion has developed a significant inventory of opportunity on its existing land base in this area. To date, over 40 prospective Cardium oil sections, each which could support up to four horizontal wells and 45 horizontal tight gas locations have currently been identified and the inventory level continues to grow as we work in the area. Additional details regarding these plays can be found on our most recent investor presentation on our website. Workovers and recompletions of multiple-zone, tight gas reservoirs will also remain a mainstay of the Canadian capital program, although the level of activity will depend on the strength of natural gas prices.
In France, Vermilion is working toward the development of a pilot enhanced oil recovery ("EOR") flood for the Chaunoy Field in the Paris Basin. Most of the work in 2010 will be reservoir and equipment related, with the initial CO2 pilot flood not scheduled to begin until 2011. Results from the initial flood, which will determine the viability of the commercial advancement of a full EOR plan, are not expected until 2012. The Chaunoy field is estimated to have contained initial oil in place of 230 million boe of which approximately 78 million boe has been recovered to date (34%). A successful CO2 flood could increase the recovery factor from this reservoir by up to 10%.
In the Netherlands, Vermilion successfully drilled and tested its first exploration well at Vinkega on the Gorredijk concession in which Vermilion holds a 42.3% interest and is drilling two developmental wells at Middelburen (92.5% working interest) and Middenmeer (92.5% working interest). If successful, the latter two wells could be completed and tied in during the first half of 2010, while the Vinkega well will not be tied in before late 2010. The Vinkega well tested at sustained rates in excess of 30 mmcf/d and is expected to add to Vermilion's net production volumes in 2011 in the Netherlands. Full delineation of this pool may require the drilling of additional wells and Vermilion currently has approval for the second well in this pool if it is required. The success Vermilion has recorded in drilling the first Netherlands prospect which we have categorized as "small e" exploration provides incentive to continue with this program. Vermilion currently has an inventory of more than 30 prospects in the Netherlands and current plans are to potentially drill the next exploration well at de Hoeve (42.3% working interest) in 2010. Vermilion has begun the process of licensing the next four wells for drilling in late 2010 and in 2011 and is pursuing three additional locations for 2012. Additional details with respect to Vermilion's prospect inventory can be found on our most recent investor presentation on our website.
In Australia, Vermilion plans to drill three additional wells in the Wandoo Field in 2010, including two flank wells and an attic oil well. The cost of this three well program is forecasted to be approximately $45 million as compared to the $50 million spent for the two wells completed in December 2008. Those wells continue to produce at combined rates of nearly 1,400 boe/d compared to an initial combined rate of over 2,000 boe/d. Wandoo production is expected to experience normal annual declines of between 15 percent and 20 percent until the new wells are drilled in late 2010. The new wells are anticipated to add combined production in excess of 1,500 boe/d.
Vermilion is planning to convert from a trust to a corporation by the end of September 2010, and plans to maintain its current business strategy which provides a high yield and measured growth to investors. At present, the Trust plans to maintain current distribution levels, however as the payment will take the form of a dividend, taxable investors will benefit from a significant increase in the related after tax value.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is Management's Discussion and Analysis (MD&A) dated November 4, 2009 of Vermilion's operating and financial results as at and for the three and nine month periods ended September 30, 2009 compared with the corresponding periods in the prior year. This discussion should be read in conjunction with the unaudited interim consolidated financial statements for the period ended September 30, 2009 and the Trust's audited consolidated financial statements for the years ended December 31, 2008 and 2007, together with accompanying notes, as contained in the Trust's 2008 Annual Report.
NON-GAAP MEASURES
This report includes non-GAAP ("Generally Accepted Accounting Principles") measures as further described herein. These measures do not have standardized meanings prescribed by GAAP and therefore may not be comparable with the calculations of similar measures for other entities.
"Fund flows from operations" represents cash flows from operating activities before changes in non-cash operating working capital and asset retirement costs incurred. Management considers fund flows from operations and per unit calculations of fund flows from operations (see discussion relating to per unit calculations below) to be key measures as they demonstrate the Trust's ability to generate the cash necessary to pay distributions, repay debt, fund asset retirement costs and make capital investments. Management believes that by excluding the temporary impact of changes in non-cash operating working capital, fund flows from operations provides a useful measure of the Trust's ability to generate cash that is not subject to short-term movements in operating working capital. As fund flows from operations also excludes asset retirement costs incurred, it assists management in assessing the ability of the Trust to fund current and future asset retirement costs. The most directly comparable GAAP measure is cash flows from operating activities. Fund flows from operations is reconciled to cash flows from operating activities below:
Three Months Ended Nine Months Ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
Cash flows from $ 88,297 $ 168,251 $ 146,132 $ 517,152
operating activities
Changes in non-cash
operating working (20,005) (39,403) 71,800 (80,852)
capital
Asset retirement 1,019 2,986 5,285 5,277
costs incurred
Fund flows from $ 69,311 $ 131,834 $ 223,217 $ 441,577
operations
"Acquisitions, including acquired working capital deficiency" is the sum of "Acquisition of petroleum and natural gas properties" and "Corporate acquisition, net of cash acquired" as presented in the Trust's consolidated statements of cash flows plus any working capital deficiencies acquired as a result of those acquisitions. Management considers acquired working capital deficiencies to be an important element of a property or corporate acquisition. Acquisitions, including acquired working capital deficiency is reconciled below:
Three Months Ended Nine Months Ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
Acquisition of
petroleum and
natural gas
properties from $ 125,074 $ 959 $ 142,622 $ 46,387
consolidated
statements of cash
flows
Corporate
acquisition, net of
cash acquired from - - - -
consolidated
statements of cash
flows
Working capital
deficiencies
acquired from
investments and 57,507 - 57,507 -
acquisitions (see
financial statement
notes for relevant
period)
Acquisitions,
including acquired $ 182,581 $ 959 $ 200,129 $ 46,387
working capital
deficiency
"Net debt" is the sum of long-term debt and working capital excluding the amount due pursuant to acquisition as presented in the Trust's consolidated statements. Net debt is used by management to analyze the financial position and leverage of the Trust. Net debt is reconciled below to long-term debt which is the most directly comparable GAAP measure:
As At As At As At
($000's) Sept 30, 2009 Dec 31, 2008 Sept 30, 2008
Long-term debt $ 374,729 $ 197,651 $ 282,711
Current liabilities 198,939 250,275 214,903
Current assets (133,700) (240,173) (275,429)
Net debt $ 439,968 $ 207,753 $ 222,185
"Cash distributions per unit" represents actual cash distributions declared per unit by the Trust during the relevant periods.
"Net distributions" is calculated as distributions declared for a given period less proceeds received by the Trust pursuant to the Distribution Reinvestment Plan ("DRIP"). Distributions both before and after DRIP are reviewed by management and are also assessed as a percentage of fund flows from operations to analyze how much of the cash that is generated by the Trust is being used to fund distributions. The DRIP program was suspended on May 14, 2008, resulting in no proceeds in the current year. Net distributions is reconciled below to distributions declared, the most directly comparable GAAP measure:
Three Months Ended Nine Months Ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
Distributions $ 40,677 $ 39,810 $ 121,366 $ 118,652
declared
Issue of trust units
pursuant to the - - - (18,453)
distribution
reinvestment plan
Net distributions $ 40,677 $ 39,810 $ 121,366 $ 100,199
"Total net distributions, capital expenditures, reclamation fund contributions and asset retirement costs incurred" is calculated as the addition of net distributions as determined above plus the following amounts for the relevant periods from the Trust's consolidated statements of cash flows: "Drilling and development of petroleum and natural gas properties", "Contributions to reclamation fund" and "Asset retirement costs incurred." This measure is reviewed by management and is also assessed as a percentage of fund flows from operations to analyze the amount of cash that is generated by the Trust that is available to repay debt and fund potential acquisitions. This measure is reconciled to the relevant GAAP measures below:
Three Months Ended Nine Months Ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
Distributions $ 40,677 $ 39,810 $ 121,366 $ 118,652
declared
Issue of trust units
pursuant to the - - - (18,453)
distribution
reinvestment plan
Drilling and
development of
petroleum and 50,781 37,402 119,208 105,971
natural gas
properties
Contributions to - 9,711 - 9,711
reclamation fund
Asset retirement 1,019 2,986 5,285 5,277
costs incurred
$ 92,477 $ 89,909 $ 245,859 $ 221,158
"Netbacks" are per-unit of production measures used in operational and capital allocation decisions.
"Adjusted basic trust units outstanding" and "Adjusted basic weighted average trust units outstanding" are used in the per unit calculations on the Highlights schedule of this document and are different from the most directly comparable GAAP figures in that they include amounts related to outstanding exchangeable shares at the period end exchange ratio. As the exchangeable shares will eventually be converted into units of the Trust, management believes that their inclusion in the calculation of basic rather than only diluted per unit statistics provides meaningful information. "Diluted trust units outstanding" is the sum of "Adjusted basic trust units outstanding" plus outstanding awards under the Trust's Unit Rights Incentive Plan and the Trust Unit Award Incentive Plan, based on current performance factor estimates. These measures are reconciled to the relevant GAAP measures below:
As At As At
Sept 30, 2009 Sept 30, 2008
Trust units outstanding 71,410,933 69,845,521
Trust units issuable pursuant to exchangeable 7,091,597 7,058,671
shares outstanding
Adjusted basic trust units outstanding 78,502,530 76,904,192
Potential trust units issuable pursuant to unit 1,487,388 2,245,590
compensation plans
Diluted trust units outstanding 79,989,918 79,149,782
As At As At
Sept 30, 2009 Sept 30, 2008
Basic weighted average trust units outstanding 70,963,460 69,322,375
Trust units issuable pursuant to exchangeable 7,162,800 7,065,140
shares outstanding
Adjusted basic weighted average trust units 78,126,260 76,387,515
outstanding
FORWARD-LOOKING INFORMATION
This document contains forward-looking financial and operational information as to the Trust's internal projections and expectations relating to future events or performance. In some cases, forward-looking information can be identified by terminology such as "may", "will", "should", "expects", "projects", "anticipates" and similar expressions. These statements represent management's expectations concerning future operating results or the economic performance of the Trust and are subject to a number of risks and uncertainties that could materially affect results. These risks include, but are not limited to future commodity prices, exchange rates, interest rates, geological risk, reserves risk, political risk, product demand and transportation restrictions, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or results expressed by such forward-looking statements. Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those predicted.
OPERATIONAL ACTIVITIES
In Canada, the Trust participated in the drilling of four wells (2.17 net) during the third quarter of 2009, resulting in two standing wells awaiting tie-in (1.2 net), one gas well (0.3 net) and one abandoned well (0.67 net). Vermilion completed a multistage fracture treatment on a well in Drayton Valley that yielded initial production of approximately 4 mmcf/d. Vermilion has plans for additional multi-stage completions of horizontal wells in the fourth quarter of 2009.
In France, Vermilion continues a steady program of workovers and recompletions providing a stabilizing influence on production.
In the Netherlands, Vermilion drilled and completed an exploration well at Vinkega in the third quarter. The well is currently being tested and has produced at rates in excess of 30 mmcf/d from two separate formations. A full development plan for this new discovery will be submitted for regulatory approval, after which the well will be tied in to production facilities. First production from the Vinkega well is anticipated near the end of 2010.
In Australia, the Wandoo B platform was shut down for a few days during the third quarter to repair a failed gas lift compressor. Preparation and planning for the 2010 drilling program is in progress.
PRODUCTION
Average production in Canada during the third quarter of 2009 was 3,601 bbls/d of oil and NGLs and 45.7 mmcf/d of natural gas (11,212 boe/d) compared to 3,769 bbls/d of oil and NGLs and 51.1 mmcf/d of natural gas (12,288 boe/d) in the second quarter of 2009. Reduced third quarter 2009 production resulted from a combination of normal declines and the voluntary shut-in of up to 1,000 boe/d due to low gas prices during the quarter. All but 200 boe/d of that production has been reinstated, but the impact on daily average production for the third quarter was 350 boe/d.
Production in France averaged 8,257 boe/d in the third quarter of 2009, slightly lower than the 8,628 boe/d produced in the second quarter of 2009. Third quarter 2009 production was impacted by two, non-operated gas compressor failures at Vic Bihl and higher than expected declines from some of the Cazaux field workovers. An ongoing workover and recompletion program is expected to hold production stable through the end of 2009.
Netherlands volumes averaged 3,351 boe/d in the third quarter of 2009, roughly equal to the 3,391 boe/d recorded in the second quarter of 2009. Some minor downtime is projected in the fourth quarter related to production shut-in for the drilling of the Middenmeer and Middelburen wells, which could impact fourth quarter production by as much as 200 boe/d.
Australia production averaged 7,598 boe/d in the third quarter of 2009, compared to 7,931 boe/d in the second quarter of 2009. The failure of a gas lift compressor, and subsequent downtime to repair the same resulted in an approximate loss of 350 boe/d during the quarter. Fourth quarter 2009 volumes are projected to remain at approximately 7,500 boe/d.
Three Months Ended Sept 30, Nine Months Ended Sept 30,
2009 2009
Oil & Natural Total Oil & Natural Total
NGLs Gas NGLs Gas
(bbls/d) (mmcf/d) (boe/d) % (bbls/d) (mmcf/d) (boe/d) %
Canada 3,601 45.67 11,212 37 3,705 48.78 11,834 37
France 8,111 0.87 8,257 27 8,255 1.03 8,426 27
Netherlands 20 19.98 3,351 11 23 21.20 3,557 11
Australia 7,598 - 7,598 25 8,043 - 8,043 25
Total 19,330 66.52 30,418 100 20,026 71.01 31,860 100
Production
Three Months Ended Sept 30, Nine Months Ended Sept 30,
2008 2008
Oil & Natural Total Oil & Natural Total
NGLs Gas NGLs Gas
(bbls/d) (mmcf/d) (boe/d) % (bbls/d) (mmcf/d) (boe/d) %
Canada 4,113 51.48 12,693 40 4,215 51.38 12,778 39
France 8,682 1.14 8,872 28 8,541 1.17 8,737 27
Netherlands 27 24.69 4,142 13 24 28.28 4,737 14
Australia 6,220 - 6,220 19 6,658 - 6,658 20
Total 19,042 77.31 31,927 100 19,438 80.83 32,910 100
Production
FINANCIAL REVIEW
During the three and nine month periods ended September 30, 2009, the Trust generated fund flows from operations of $69.3 million and $223.2 million, respectively. For the same periods in 2008 the Trust generated fund flows from operations of $131.8 million and $441.6 million, respectively. The year over year decrease in fund flows from operations of $62.5 million and $218.4 million is largely the result of lower average commodity prices. The GAAP measure, cash flows from operating activities similarly decreased year over year to $88.3 million and $146.1 million for the three and nine month periods ended September 30, 2009 versus $168.3 million and $517.2 million for the same periods in 2008.
During the three and nine month periods ended September 30, 2009, the price of WTI crude oil averaged US $68.30 per bbl and US $57.00 per bbl, respectively (three and nine month periods ended September 30, 2008, US $117.98 per bbl and US $113.29 per bbl, respectively). For the three and nine month periods ended September 30, 2009 the AECO price for gas averaged CDN $2.94 per mcf and CDN $3.77 per mcf, respectively (three and nine month periods ended September 30, 2008, CDN $7.74 per mcf and CDN $8.62 per mcf, respectively). On a year over year basis, the average prices for both oil and gas are significantly lower in 2009 than 2008.
The increase in the Trust's net debt to $440.0 million from $207.8 million at December 31, 2008 is a result of the Trust's planned capital program and the Corrib acquisition for $194.3 million including the acquired working capital deficiency. For the same reasons, the Trust's long-term debt has increased to $374.7 million at September 30, 2009 from $197.7 million at December 31, 2008. On October 30, 2009, the Trust closed the sale of 7,282,000 trust units at a price of $30.90 per trust unit resulting in net proceeds of $213.8 million after deducting the underwriters' fee. These funds will be used to reduce outstanding indebtedness and to fund development capital programs and prospective acquisitions.
For the three and nine month periods ended September 30, 2009 total net distributions, capital expenditures, reclamation fund contributions and asset retirement costs incurred as a percentage of fund flows from operations was 133% and 110%, respectively (three and nine month periods ended September 30, 2008, 68% and 50%, respectively). The year over year increase in this ratio relates to the lower fund flows from operations recorded in the three and nine months ended September 30, 2009 versus the same periods in 2008 which is a result of lower average commodity prices.
CAPITAL EXPENDITURES
On July 30, 2009 the Trust completed its previously announced acquisition of an 18.5% non-operated interest in the Corrib gas field located off the northwest coast of Ireland. The cash consideration paid was $136.8 million including a US $10 million deposit paid to the vendor during the second quarter of 2009. Pursuant to the terms of the acquisition agreement, the Trust will make an additional future payment to the vendor, the amount of which will be between US $135 million and US $300 million depending on the date when first commercial gas is achieved.
Production from Corrib is expected to increase Vermilion's volumes by approximately 9,000 boe/d once the field reaches peak production. The project, which includes both offshore and onshore pipeline segments and a significant natural gas processing facility, is in the late stages of development and is expected to commence production between late 2010 and the end of 2011.
Total capital spending, including acquisitions for the three and nine month periods ended September 30, 2009 was $175.9 million and $261.8 million, respectively (three and nine month periods ended September 30, 2008, $38.4 million and $152.4 million, respectively). The year over year increases for the three and nine month periods ended September 30, 2009 primarily relate to the Corrib acquisition of $136.8 million.
Non-acquisition related capital spending has increased largely as a result of post acquisition capital spending on the Corrib project. Pursuant to the agreement, Vermilion assumed its share of future capital expenditure obligations in order to reach first gas effective from January 1, 2009, which are anticipated to range up to US $300 million net to the Trust. These capital costs are primarily related to the completion of the facilities necessary to bring this gas on-stream.
Three Months Ended Nine Months Ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
Land $ 4,787 $ 896 $ 8,204 $ 2,869
Seismic 411 3,062 1,560 10,543
Drilling and 7,501 13,400 32,150 30,438
completion
Production equipment 27,214 12,370 45,296 40,159
and facilities
Recompletions 4,837 4,381 13,384 11,881
Other 6,031 3,293 18,614 10,081
50,781 37,402 119,208 105,971
Acquisitions
(excluding acquired 125,074 959 142,622 46,387
working capital
deficiency)
Total $ 175,855 $ 38,361 $ 261,830 $ 152,358
REVENUE
Revenue for the three and nine month periods ended September 30, 2009 was $150.2 million and $459.2 million, respectively (three and nine month periods ended September 30, 2008, $245.7 million and $816.6 million, respectively).
Vermilion's combined crude oil and NGL price was $70.00 per boe in the third quarter of 2009, a decrease of 31% over the $100.83 per boe reported in the third quarter of 2008. The natural gas price realized was $4.20 per mcf in the third quarter of 2009 compared to $9.71 per mcf in the third quarter of 2008, a 57% decrease year over year. Vermilion's lower revenue year over year was primarily driven by lower average commodity prices in 2009 versus 2008.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe and per mcf)
Crude oil & NGLs $ 124,497 $ 176,643 $ 349,556 $ 601,463
Per boe $ 70.00 $ 100.83 $ 63.94 $ 112.93
Natural gas 25,686 69,069 109,651 215,113
Per mcf $ 4.20 $ 9.71 $ 5.66 $ 9.71
Petroleum and $ 150,183 $ 245,712 $ 459,207 $ 816,576
natural gas revenue
Per boe $ 53.67 $ 83.65 $ 52.80 $ 90.56
The following table summarizes Vermilion's ending inventory positions for
France and Australia for the most recent four quarters:
As at As at As at As at
Sept 30, 2009 June 30, 2009 Mar 31, 2009 Dec 31, 2008
France (bbls) 147,043 151,488 214,384 62,323
France ($000's) $ 4,459 $ 4,706 $ 7,097 $ 3,421
Australia (bbls) 246,311 137,518 334,838 317,877
Australia ($000's) $ 7,499 $ 4,143 $ 9,402 $ 8,746
DERIVATIVE INSTRUMENTS Vermilion manages a component of its risk exposure through prudent commodity and currency economic hedging strategies. Vermilion had the following financial derivatives in place at September 30, 2009: Risk Management: Oil Funded Cost bbls/d US$/bbl Collar - BRENT 2009 US $1.00/bbl 260 $100.50 - $200.00 Call Spread - BRENT 2009 - 2011 US $5.73/bbl 700 $ 65.00 - $ 85.00 2010 US $4.94/bbl 1,100 $ 65.00 - $ 85.00 2011 US $6.08/bbl 960 $ 65.00 - $ 85.00 Risk Management: Natural Gas Funded Cost GJ/d C$/GL SWAP - AECO 2009 $0.00/GJ 5,000 $2.89
The impact of Vermilion's economic hedging program increased the fund flows netback for the nine month period ended September 30, 2009 by $0.46 per boe ($0.39 per boe in the quarter). This compares to a hedging cost of $1.39 per boe for the first nine months of 2008 ($1.51 per boe in the quarter).
ROYALTIES
Consolidated royalties per boe for the three and nine month periods ended September 30, 2009 were $8.30 and $7.25, respectively (three and nine month periods ended September 30, 2008, $12.03 and $14.24, respectively). As a percent of revenue for the three and nine month periods ended September 30, 2009, royalties were 15% and 14%, respectively (three and nine month periods ended September 30, 2008, 14% and 16%, respectively).
In Australia, royalties, as a percentage of revenue for the three and nine month periods ended September 30, 2009 were 26% and 24%, respectively (three and nine month periods ended September 30, 2008, 22% and 29%, respectively). Royalties are reduced by capital investment in the country and as such, third quarter royalties as a percent of revenue increased as compared to the prior year as a result of lower levels of capital spending in 2009. The year to date decrease is attributable to the impact of lower commodity pricing in the royalty formula coupled with a recovery of previously paid royalties related to prior periods.
In Canada, royalties as a percent of revenue for the three and nine month periods ended September 30, 2009 decreased to 18% and 13%, respectively (three and nine month periods ended September 30, 2008, 21% and 20%, respectively). The year over year decrease is attributable to the impact of lower commodity prices in 2009 versus the same periods in 2008 combined with additional gas cost allowance recoveries related to prior periods realized during the second quarter of 2009.
In France, the primary portion of the royalties levied is based on units of production and therefore is not subject to changes in commodity prices. Accordingly, as commodity prices were lower for the three and nine month periods ended September 30, 2009 compared to the same periods in 2008, royalties, as a percent of revenue, increased to 8% and 8%, for those periods, respectively (three and nine month periods ended September 30, 2008, 7% and 6%, respectively).
Production in the Netherlands is not subject to royalties.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe and per mcf)
Crude oil & NGLs $ 21,992 $ 25,975 $ 59,673 $ 101,075
Per boe $ 12.37 $ 14.83 $ 10.92 $ 18.98
Natural gas 1,248 9,365 3,366 27,288
Per mcf $ 0.20 $ 1.32 $ 0.17 $ 1.23
Royalties $ 23,240 $ 35,340 $ 63,039 $ 128,363
Per boe $ 8.30 $ 12.03 $ 7.25 $ 14.24
OPERATING COSTS
Consolidated operating costs per boe for the three and nine month periods ended September 30, 2009 were $12.24 and $11.81, respectively (three and nine month periods ended September 30, 2008, $12.10 and $11.31, respectively). Canadian operating costs have remained at a relatively consistent level on a per boe basis for the three and nine month periods ended September 30, 2009 at $10.10 and $10.01, respectively (three and nine month periods ended September 30, 2008, $10.38 and $10.34, respectively).
Operating costs in France on a per boe basis increased for the three and nine month periods ended September 30, 2009 to $11.67 and $11.77, respectively (three and nine month periods ended September 30, 2008, $10.11 and $10.08, respectively). The increase is attributable to increased fuel and electricity costs combined with higher facility maintenance expenditures.
Australian operating costs on a per boe basis for the three and nine month periods ended September 30, 2009 have decreased to $14.98 and $13.00, respectively (three and nine month periods ended September 30, 2008, $17.18 and $14.17, respectively). The decrease is attributable to higher production levels in 2009 which reflects the impact of two wells drilled and placed on production late in 2008.
In the Netherlands, operating costs on a per boe basis for the three and nine month periods ended September 30, 2009 have increased to $14.63 and $15.23, respectively (three and nine month periods ended September 30, 2008, $14.00 and $12.18, respectively). The increase is due to lower production resulting from the temporary shut-in of production at Harlingen in mid-July 2008 as a result of subsidence concerns combined with planned and unplanned shutdowns that occurred in the second quarter of 2009.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe and per mcf)
Crude oil & NGLs $ 22,730 $ 22,050 $ 66,110 $ 61,831
Per boe $ 12.78 $ 12.59 $ 12.09 $ 11.61
Natural gas 11,526 13,489 36,639 40,160
Per mcf $ 1.88 $ 1.90 $ 1.89 $ 1.81
Operating $ 34,256 $ 35,539 $ 102,749 $ 101,991
Per boe $ 12.24 $ 12.10 $ 11.81 $ 11.31
TRANSPORTATION
Transportation costs are a function of the point of legal transfer of the product and are dependent upon where the product is sold, product split, location of properties as well as industry transportation rates that are driven by supply and demand of available transport capacity. For Canadian gas production, legal title transfers at the intersection of major pipelines (referred to as "the Hub") whereas the majority of Vermilion's Canadian oil production is sold at the wellhead. In France, the majority of Vermilion's transportation costs are comprised of shipping charges incurred in the Aquitaine Basin where oil production is transported by tanker from the Ambes terminal in Bordeaux to the refinery. In Australia, oil is sold at the Wandoo B Platform and in the Netherlands, gas is sold at the plant gate, resulting in no transportation costs relating to Vermilion's production in these countries.
Transportation costs in France decreased in 2009 on a year to date basis as in March 2008, Vermilion resumed transporting crude to the Ambes terminal via pipeline and trucking operations ceased. In addition, resumption of terminal operations occurred during the second quarter of 2009 as two storage tanks were placed back into service further reducing transportation costs on a quarterly and on a year to date basis. Long term plans for the terminal include an expanded level of operations utilizing four storage tanks.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe)
Transportation $ 3,734 $ 4,980 $ 12,517 $ 17,380
Per boe $ 1.33 $ 1.70 $ 1.44 $ 1.93
GENERAL AND ADMINISTRATION EXPENSES
General and administration expense per boe for the three and nine month periods ended September 30, 2009 was $2.93 and $2.58, respectively (three and nine month periods ended September 30, 2008, $2.57 and $2.18, respectively). The increase per boe from 2008 is associated with a decrease in third party overhead recoveries and lower levels of project specific costs charged to capital assets.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe)
General and $ 8,211 $ 7,541 $ 22,464 $ 19,627
administration
Per boe $ 2.93 $ 2.57 $ 2.58 $ 2.18
UNIT BASED COMPENSATION EXPENSE
Non-cash unit based compensation expense for the three and nine month periods ended September 30, 2009 was $4.7 million and $13.7 million, respectively (three and nine month periods ended September 30, 2008, $4.5 million and $13.7 million, respectively). This expense relates to the value attributable to long-term incentives granted to officers, employees and directors under the Trust Unit Award Incentive Plan and the Trust's bonus plan.
Total unit based compensation expense has remained relatively consistent on a year over year basis.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe)
Unit based $ 4,706 $ 4,454 $ 13,676 $ 13,704
compensation
Per boe $ 1.68 $ 1.52 $ 1.57 $ 1.52
INTEREST EXPENSE
Interest expense for the three and nine month periods ended September 30, 2009 was $6.4 million and $9.4 million, respectively (three and nine month periods ended September 30, 2008, $2.7 million and $13.9 million, respectively). Interest expense for the year to date period in 2009 has decreased from the same period in 2008 as a result of lower average debt levels. Interest expense for the third quarter of 2009 has increased compared to the third quarter of 2008 due to higher interest rates and increased debt levels related to the Corrib acquisition that closed in late July 2009. Interest expense for the quarter and year to date periods in 2009 includes a $2.2 million non-cash charge relating to the unwinding of the discount on the Corrib acquisition obligation. See "Liquidity and Capital Resources" for additional information.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe)
Interest $ 6,361 $ 2,674 $ 9,398 $ 13,948
Per boe $ 1.47 $ 0.91 $ 0.82 $ 1.55
DEPLETION, DEPRECIATION AND ACCRETION EXPENSES
Depletion, depreciation and accretion expenses per boe for the three and nine month periods ended September 30, 2009 were $22.73 and $22.06, respectively (three and nine month periods ended September 30, 2008, $21.69 and $21.22, respectively). Depletion, depreciation and accretion rates for the quarter and year to date periods in 2009 have increased marginally from the rates per boe for the same periods in 2008 due primarily to higher finding, development and acquisition costs incurred by the Trust.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe)
Depletion,
depreciation and $ 63,602 $ 63,697 $ 191,856 $ 191,334
accretion
Per boe $ 22.73 $ 21.69 $ 22.06 $ 21.22
TAXES
Vermilion is subject to current taxes in France, the Netherlands and Australia. Current taxes for the nine months ended September 30, 2009 decreased to $25.7 million compared to $82.4 million in the prior year. This decrease is attributable to the decline in year over year revenues associated with significantly lower average commodity prices in 2009 versus 2008.
On June 22, 2007 Federal legislation to tax certain types of income in publicly traded income and royalty trusts ("SIFT Rules") received royal assent. The main purpose of the SIFT Rules was to introduce a tax structure for trusts similar to that for corporations and the rules are expected to take effect at the beginning of 2011. The SIFT Rules also introduced normal growth guidelines that limit the amount of equity that can be issued by trusts until 2011. Currently, Vermilion does not anticipate the normal growth guidelines will impede its ability to execute its business strategy.
On June 18, 2008 Federal legislation was enacted to replace the 13% provincial tax component for the tax applicable to SIFT trusts with the "provincial SIFT tax rate". As substantially all of Vermilion's Canadian operations are in Alberta, we expect the provincial SIFT tax rate to be 10%. The related income tax regulations for calculating the provincial SIFT tax rate were enacted on March 12, 2009.
On November 28, 2008 the Minister of Finance introduced legislation to permit trusts to convert into corporations without any undue tax consequences to either the trust or its unitholders. The legislation was enacted on March 12, 2009. Vermilion has evaluated the impact of the SIFT Rules on the current Trust structure in addition to analyzing other alternative structures to determine the impact to its business model and unitholders. It is management's current intention that Vermilion will convert to a corporation by the end of September 2010. The timing of the intended conversion to a corporation will be influenced by a number of factors including strategic business opportunities. Management will continue to monitor any future changes to tax legislation and determine the impact to the trust structure accordingly.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe)
Current taxes $ 6,456 $ 19,874 $ 25,745 $ 82,442
Per boe $ 2.31 $ 6.77 $ 2.96 $ 9.14
FOREIGN EXCHANGE
During the nine months ended September 30, 2009, a combined realized and unrealized foreign exchange gain of $26.5 million was recorded compared to a loss of $6.0 million in 2008. The combined gain through September 30, 2009 is comprised of a realized loss of $6.3 million associated with cash repatriations and an unrealized, non-cash gain of $32.8 million. The year to date unrealized gain is largely related to the translation to Canadian dollars of foreign currency denominated future income taxes and asset retirement obligations. Since December 31, 2008, the Canadian dollar has strengthened against the Euro resulting in this unrealized gain.
Three Months Ended Nine Months Ended
($000's except per Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
boe)
Foreign exchange $ (14,227) $ (19,204) $ (26,508) $ 6,045
(gain) loss
Per boe $ (5.09) $ (6.54) $ (3.05) $ 0.67
EARNINGS
Net earnings for the three and nine month periods ended September 30, 2009 were $17.8 million or $0.25 per unit and $62.6 million or $0.88 per unit, respectively (three and nine month periods ended September 30, 2008, $86.9 million or $1.24 per unit and $215.4 million or $3.11 per unit, respectively). The decrease in earnings for 2009 versus 2008 is due to lower average commodity price levels in 2009 as compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Vermilion's net debt as at September 30, 2009 was $440.0 million compared to $207.8 million as at December 31, 2008.
As at September 30, 2009, the Trust had credit facilities allowing for maximum borrowings of $675 million comprised of a syndicated revolving facility and an acquisition facility. The revolving period under the revolving credit facility is expected to expire in June 2010 and may be extended for an additional period of up to 364 days at the option of the lenders. If the lenders convert the revolving credit facility to a non-revolving credit facility, the amounts outstanding under the facility become repayable 24 months after the end of the revolving period. The acquisition facility is a non-revolving, non-extendible facility permitting maximum borrowings of $100 million and is expected to mature in June 2010. Various borrowing options are available under the facilities including prime rate based advances and bankers' acceptance loans.
The credit facilities are secured by various fixed and floating charges against subsidiaries of the Trust. Under the terms of the credit facility, the Trust must maintain a ratio of total borrowings under the facility to consolidated earnings before interest, income taxes, depreciation, accretion and other certain non-cash items of not greater than 3.0. Borrowings under the acquisition facility are subject to certain conditions including unanimous approval of all banks in the syndicate.
On July 30, 2009 the Trust completed its previously announced acquisition of an 18.5% non-operated interest in the Corrib gas field located off the northwest coast of Ireland. The cash consideration paid was $136.8 million including a US $10 million deposit paid to the vendor during the second quarter of 2009. Pursuant to the terms of the acquisition agreement the Trust will make an additional future payment to the vendor, the amount of which will be between US $135 million and US $300 million depending on the date when first commercial gas is achieved. Management currently expects that first commercial gas will be achieved by the end of 2011.
To reflect the future payment due to the vendor, the Trust has recognized a non-current liability which was determined by calculating the expected value of the payment based on management's best estimates associated with the timing of first commercial gas and discounting the resulting amount. The discount rate used to present value this obligation was 8% which is the Trust's best estimate of the interest rate that would result from an arm's length borrowing transaction associated with the purchase of these assets. During the three and nine month periods ended September 30, 2009 interest expense of $2.2 million was recorded in the Trust's consolidated statement of earnings associated with the unwinding of the discount on this obligation. The cost of this acquisition, which is not a business combination for accounting purposes, was allocated as follows:
Capital assets $ 304,564 Future income tax assets 67,299 Asset retirement obligation (9,788) Working capital (57,507) Total consideration $ 304,568
Comprised of: Cash $ 136,832 Present value of estimated future payment due to vendor 167,736 Total consideration $ 304,568
Verenex Energy Inc. ("Verenex"), in which Vermilion holds 18,760,540 common shares representing a 42% equity ownership position (38% on a fully diluted basis), has entered into a definitive arrangement agreement (the "Agreement") with the Libyan Investment Authority (the "LIA") pursuant to which the LIA, through a subsidiary, has agreed to acquire all of the Verenex shares issued and outstanding upon completion of the transaction at a price per share in cash equal to $7.09 plus any positive net working capital at the time of completion of the transaction. The transaction will be completed by way of plan of arrangement (the "Arrangement"), to be submitted to the holders of Verenex securities (Verenex shares, options and performance warrants) for approval at a meeting scheduled for December 11, 2009.
On October 30, 2009, the Trust closed the sale of 7,282,000 trust units at $30.90 per trust unit which resulted in net proceeds of $213.8 million after deducting the underwriters' fee. In addition, the underwriters have been granted an over-allotment option to purchase up to an additional 809,000 trust units at the issue price at any time from the closing date until 30 days following the closing date which would result in additional net proceeds of up to $23.8 million.
RECLAMATION FUND
Vermilion has established a reclamation fund for the ultimate payment of environmental and site restoration costs on its asset base. The reclamation fund is funded by Vermilion Resources Ltd. and its operating subsidiaries. Contribution levels to the reclamation fund are reviewed on a regular basis and are adjusted when necessary to ensure that reclamation obligations associated with th
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