Operations – Bonavista Energy’s exploitation and development program for the three months ended March 31, 2009 led to the drilling of 36 wells in Bonavista Energy’s four core regions with an overall success rate of 97%. This program resulted in 22 natural gas wells and 13 oil wells. Bonavista Energy continues to pursue deeper and higher impact drilling opportunities focusing on unconventional development through horizontal drilling and multi-stage fracture stimulation technology particularly in the Lower Mannville sands in Bonavista Energy’s Central region in Alberta and in the Bakken play in the company’s Southeast Saskatchewan area, where it has experienced excellent success and attractive finding and development costs over the past few years.
These activities have also continued to enhance the predictability in the company’s overall production base in addition to lengthening Bonavista Energy’s reserve life index. In addition to the exploitation and development program, Bonavista Energy executed three complementary acquisitions in its core regions during the first quarter of 2009.
Production – For the three months ended March 31, 2009, production decreased 6% to 51,347 boe per day when compared to 54,397 boe per day for the same period a year ago. Specifically, average natural gas production decreased 3% to 172 mmcf per day in the first quarter of 2009 from 178 mmcf per day for the same period a year ago, while total oil and liquids production decreased 8% to 22,757 bbls per day in the first quarter of 2009 (comprised of 17,221 bbls per day of light and medium oil and 5,536 bbls per day of heavy oil) from 24,694 bbls per day (comprised of 17,740 bbls per day of light and medium oil and 6,954 bbls per day of heavy oil) for the same period in 2008. The decline in production quarter over quarter was due in part to lower spending levels, 600 bbls per day of heavy oil production shut in due to weak heavy oil prices and unusually cold weather in January 2009.
Bonavista Energy also delayed the tie-in of about 800 boe per day of production relating to two material natural gas wells in order to take full advantage of the reduced royalty program announced in early March 2009. Bonavista Energy’s balanced commodity investment approach minimizes Bonavista Energy’s dependence on any one product and helped the company report consistent results in the quarter. The company anticipates production volumes in 2009 to average between 51,500 and 52,500 boe per day. Bonavista Energy’s current production is about 52,250 boe per day consisting of 55% natural gas, 34% light and medium oil and 11% heavy oil.
For the three months ended March 31, 2009, natural gas prices decreased 19% to CAD6.37 per mcf, when compared to CAD7.89 per mcf realized in the same period in 2008. The average oil and liquids price also decreased 25% to CAD51.35 per bbl (comprised of CAD54.42 per bbl for light and medium oil and CAD41.78 per bbl for heavy oil) for the first quarter of 2009 from CAD68.63 per bbl (comprised of CAD69.91 per bbl for light and medium oil and CAD65.36 per bbl for heavy oil) for the same period in 2008.
Commodity price risk management – As part of Bonavista Energy’s financial management strategy, Bonavista Energy has adopted a disciplined commodity price risk management program. The purpose of this program is to stabilize funds from operations against volatile commodity prices and protect acquisition economics. Bonavista Energy’s board of directors has approved a commodity price risk management limit of 60% of forecast production, net of royalties, primarily using costless collars. The company’s strategy of primarily using costless collars limits Bonavista Energy’s exposure to downturns in commodity prices, while allowing for participation in commodity price increases.
For the three months ended March 31, 2009, Bonavista Energy’s risk management program on financial instruments resulted in a net gain of CAD6.9 million, consisting of a realized gain of CAD24.3 million and an unrealized loss of CAD17.4 million. The realized gain of CAD24.3 million consisted of a CAD4.8 million gain on natural gas commodity derivative contracts and a CAD19.5 million gain on crude oil commodity derivative contracts. For the same period in 2008, Bonavista Energy’s risk management program on financial instruments resulted in a net loss of CAD33.7 million, consisting of a realized loss of CAD14.3 million and an unrealized loss of CAD19.4 million. The realized loss of CAD14.3 million consisted of a CAD338,000 gain on natural gas commodity derivative contracts and a CAD14.6 million loss on crude oil commodity derivative contracts.
Royalties – For the three months ended March 31, 2009, royalties decreased 43% to CAD32.9 million from CAD57.5 million for the same period a year ago, largely attributed to a decrease in commodity prices. In addition, royalties as percentage of revenues (including realized gains and losses on financial instruments) for the first quarter of 2009 decreased to 16.2% compared to 20.4% in 2008 for similar reasons discussed above and the impact of realized gains on financial instruments in the first quarter of 2009 compared to realized losses on financial instruments in the comparable period of 2008.
For the three months ended March 31, 2009, royalties by product as percentage of revenues (including realized gains and losses on financial instruments) were 17.7% for natural gas, 15.2% for light and medium oil and 13.2% for heavy oil. For the three months ended March 31, 2008, royalties by product as percentage of revenues (including realized gains and losses on financial instruments) were 20.9% for natural gas, 20.1% for light and medium oil and 19.4% for heavy oil.
On October 25, 2007, the Alberta government announced the New Royalty Framework (NRF) which was subsequently revised on April 10, 2008 to provide further clarification on the NRF as well as to introduce two new royalty programs related to the development of deep oil and natural gas reserves. The NRF was legislated in November 2008 and took effect on January 1, 2009. Subsequent to legislation of the NRF, the Government of Alberta introduced the Transitional Royalty Plan (TRP) in response to the decrease in development activity in Alberta resulting from declining commodity prices and the global economic downturn. The TRP offers reduced royalty rates for new wells drilled on or after November 19, 2008 that meet certain depth requirements. An election must be filed on an individual well basis in order to qualify for the TRP.
The TRP is in place for a maximum of five years to December 31, 2013. All wells drilled between 2009 and 2013 that adopt the transitional rates will be required to shift to the NRF on January 1, 2014. On March 3, 2009, the Alberta government announced a further royalty incentive program consisting of a three-point incentive program to stimulate new and continued economic activity in Alberta which includes a drilling royalty credit for new conventional oil and natural gas wells and a new royalty incentive program. The net effect of these programs will add about CAD7 million to CAD9 million of funds from operations and credits in 2009.
Capital expenditure – With the current economic and industry conditions, in March 2009 Bonavista Energy reduced its capital spending projections for 2009 to between CAD225 and CAD250 million. This level of spending will result in the drilling of about 110 to 120 wells, and result in production averaging between 51,500 and 52,500 boe per day in 2009. Although this revised level of capital spending is down over 50% from 2008 and with our distribution reduction of 47%, the company believes this to be prudent given the uncertainty surrounding the prevailing economy.
