Advantage Energy Posts CAD18.9 Million Net Income In Q1 2009

Overview:

Cash provided by operating activities, funds from operations and funds from operations per trust unit have decreased significantly for the three months ended March 31, 2009 as compared to the same period of 2008 due to considerably lower revenue. Lower revenue was primarily caused by severely depressed commodity prices and a slight decrease in production.

The first quarter of 2009 has seen a worsening of the global recession, which has resulted in drastic reductions in commodity prices from lower demand and perceived excess supply. This challenging environment has continued into the second quarter of 2009.

Distributions

31Distributions for the three months ended March 31, 2009 are lower in total and per trust unit compared to the same period of 2008 as a result of decreases in the distribution declared per trust unit. For the majority of 2008, including the three months ended March 31, 2008, Advantage Energy paid a monthly distribution of CAD0.12 per trust unit and reduced the distribution to CAD0.08 per trust unit effective for the December 2008 distribution paid in January 2009. The company further reduced the monthly distribution to CAD0.04 per trust unit for the February 2009 distribution paid in March 2009.

As commodity prices weakened throughout these periods, Advantage Energy reduced distributions to more appropriately reflect the current price environment. On March 18, 2009, the company has announced the discontinuance of future distributions, consistent with the company’s strategy to reduce debt and convert to a growth oriented corporation that will focus capital on Advantage Energy’s Montney natural gas resource play at Glacier, Alberta. Going forward, the company does not anticipate paying dividends in the immediate future.

Revenue

Natural gas, crude oil and NGLs revenues, excluding hedging, decreased significantly for the three months ended March 31, 2009, as compared to 2008. This is primarily the result of lower commodity prices from the ongoing global recession that has reduced demand and increased perceived supply. Realized natural gas prices, excluding hedging, decreased by 32% while realized crude oil and NGL prices, excluding hedging, decreased a substantial 50%.

As a result of the company’s commodity price risk management program, Advantage Energy recognized natural gas and crude oil hedging gains of CAD23.3 million for the three months ended March 31, 2009. Advantage Energy enters derivative contracts whereby realized hedging gains and losses partially offset commodity price fluctuations, which can positively or negatively impact revenues.

Production

Advantage Energy’s total daily production averaged 30,603 boed/d for the three months ended March 31, 2009, a decrease of 8%, from the same period of 2008. Total daily production for the quarter was 3% lower compared to the fourth quarter of 2008, mainly due to natural declines and a slow recovery from cold weather conditions that caused brief production outages in late December.

Production of 1,100 boe/d at Advantage Energy’s Lookout Butte property in Southern Alberta remained shut-in during the first quarter by an extended third party facility outage that began in August 2008 at the Waterton gas plant where a significant modification project is underway.

Original estimates provided by the third party indicated a potential outage of about 55 to 75 days. However, current information now indicates that the gas plant may be down until June 1, 2009. Additionally, Advantage Energy has drilled a number of wells during the current quarter but delayed production until after March 31, 2009 such that it could benefit from the new 5% Alberta royalty rate available on such wells for the next twelve month period.

On March 18, 2009, Advantage Energy announced the intention to dispose of properties producing upto 11,900 boe/d of light oil and natural gas properties located in Northeast British Columbia, West Central Alberta and Northern Alberta. The net proceeds from these sales or other oil and natural gas property sales will initially be used to reduce outstanding bank debt to improve Advantage Energy’s financial flexibility.

Proposals are anticipated by mid May 2009 and the selected assets will be available in four distinct packages varying in size from about 1,600 to 5,400 boe/d of production. Assuming asset sales of about 10,000 to 11,900 boe/d of production are completed, Advantage Energy expects production of about 20,000 to 22,000 boe/d from a focused asset base (60% natural gas, 40% oil and natural gas liquids).

Natural Gas

Realized natural gas prices, excluding hedging, were significantly lower for the three months ended March 31, 2009 than the same period of 2008 and decreased 25% from the fourth quarter of 2008. The 2007/2008 winter season in North America caused inventory levels, which had been high prior to winter, to decline to about the five-year average resulting in stronger prices during early 2008.

However, the second half of 2008 and the first quarter of 2009 experienced significant softening of natural gas prices from higher US domestic natural gas production, mild weather conditions and forecasts, and the ongoing global recession that has impacted demand. These factors have resulted in much higher inventory levels that continue to place considerable downward pressure on natural gas prices.

Unfortunately, these conditions have also continued beyond the first quarter of 2009 with AECO gas presently trading at about CAD4.25/GJ. Although the company continues to believe in the longer-term pricing fundamentals for natural gas, it is concerned about the current pricing and economic environment that has the potential to extend for a considerable period of time.

The global recession could delay the recovery of natural gas pricing longer than anticipated. While the current pricing situation is quite weak, some of the factors that the company believes that it will support stronger future natural gas prices include: (i) significantly less natural gas drilling in Canada and the US projected for 2009, which will reduce productivity to offset declines, (ii) the increasing focus on resource style natural gas wells, which have high initial declines, and which are becoming a larger proportion of the total natural gas supply based in Canada and the US, and (iii) the potential demand for natural gas for the Canadian oil sands projects.

Crude Oil and NGLs

Realized crude oil and NGLs prices, excluding hedging, decreased 50% for the three months ended March 31, 2009, as compared to the same period of 2008 and decreased 19% from the fourth quarter of 2008. Advantage Energy’s realized crude oil price may not change to the same extent as WTI, due to changes in the CADUS/CADCanadian exchange rate, and changes in Canadian crude oil differentials relative to WTI.

The price of WTI fluctuates based on worldwide supply and demand fundamentals. There has been significant price volatility experienced over the last several years whereby WTI reached historic high levels in the first half of 2008, followed by a record decline in the latter half of the year, the result of demand destruction brought on by the current global recession.

There has been a modest recovery subsequent to the first quarter of 2009, and WTI is currently trading at about $58/bbl. The impact from this decrease in WTI will be somewhat mitigated for Advantage Energy due to the strengthening US dollar relative to the Canadian dollar. As with natural gas, it seems evident that the global recession will likely prolong depressed crude oil prices through the coming year.