Advantage Announces 1st Quarter Results 2009
(TSX: AVN.UN, NYSE: AAV)
Financial and Operating Highlights
Three months Three months
ended ended
March 31, March 31,
2009 2008
-------------------------------------------------------------------------
Financial ($000, except as otherwise
indicated)
Revenue before royalties(1) $ 122,950 $ 188,505
per Trust Unit(2) $ 0.86 $ 1.37
per boe $ 44.64 $ 62.52
Funds from operations $ 55,591 $ 94,618
per Trust Unit(3) $ 0.38 $ 0.68
per boe $ 20.19 $ 31.37
Distributions declared $ 17,266 $ 50,021
per Trust Unit(3) $ 0.12 $ 0.36
Expenditures on property and equipment $ 52,643 $ 66,903
Working capital deficit(4) $ 128,455 $ 35,375
Bank indebtedness $ 615,438 $ 563,500
Convertible debentures (face value) $ 214,328 $ 224,587
Trust Units outstanding at end of period (000) 145,203 139,273
Basic weighted average Trust Units (000) 143,691 137,599
Operating
Daily Production
Natural gas (mcf/d) 117,968 125,113
Crude oil and NGLs (bbls/d) 10,942 12,281
Total boe/d at 6:1 30,603 33,133
Average prices (including hedging)
Natural gas ($/mcf) $ 6.52 $ 8.23
Crude oil and NGLs ($/bbl) $ 54.54 $ 84.83
(1) includes realized derivative gains and losses
(2) based on basic weighted average Trust Units outstanding
(3) based on Trust Units outstanding at each distribution record date
(4) working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,
distributions payable, and the current portion of capital lease
obligations and convertible debentures
MESSAGE TO UNITHOLDERS
Montney Development Program at Glacier on-track
- For the three month period ended March 31, 2009, the Fund's capital
program amounted to $51.9 million net and included the drilling of
9.6 net (11 gross) wells at a 100% success rate. Total capital
spending in the quarter included $40.6 million at Glacier,
$5.0 million at Martin Creek, and $0.7 million at Nevis.
- Glacier capital investment included drilling 3 net (3 gross)
horizontal wells and 2 net (2 gross) vertical wells during the
quarter. Two new Montney horizontal wells were brought on-stream at
combined rates of 8 to 10 mmcf/d at the end of January 2009.
Facilities work involving the expansion of compression facilities and
our pipeline gathering system was completed at the end of the quarter
and has taken our overall facility capacity to approximately
25 mmcf/d after commissioning the expansion in the second quarter of
2009. The remaining Montney wells drilled in 2008 and the first
quarter of 2009 will provide sufficient production deliverability to
keep the facilities near capacity for the remainder of the year. New
wells brought on-stream after March 31, 2009 will qualify for the
Alberta royalty incentive program which results in a 5% royalty rate
for one year or 0.5 bcf of gas production. The development program at
Glacier is on-track and design work is underway to increase
production to 50 mmcf/d in 2010.
- At Martin Creek, 3.6 net (4 gross) wells were successfully drilled
and have been brought on-stream before the end of the quarter to help
offset declines during the remainder of the year. Production is
currently at facility capacity.
- At Nevis, activity focused on increasing battery capacity and
preparatory work for new Wabamun light oil and Horseshoe Canyon coal
bed methane wells. This program may be drilled during the remainder
of 2009.
Strong Hedging Program and Operating Cost Reductions Mitigates Lower
Commodity Prices
- Our hedging program contributed a gain of $23.3 million to funds from
operations which helped to partially mitigate a significant reduction
in commodity prices.
- Operating costs for the three months ended March 31, 2009 was
$13.08 per boe, a decrease of 11% (16% on an absolute cost basis)
from the fourth quarter of 2008 and a decrease of 2% (11% on an
absolute cost basis) when compared to the same period in 2008. An
aggressive optimization program through 2008 is beginning to
demonstrate positive benefits and we will continue to seek
opportunities to further improve our operating cost structure. We
also anticipate that service and supply costs may decrease further
during the remainder of 2009 due to the reduced activity in the oil
and gas industry.
- Significantly lower average natural gas and crude oil prices resulted
in a 41% decrease in funds from operations to $55.6 million for the
first quarter of 2009 as compared to $94.6 million for the same
period of 2008. Funds from operations on a per unit basis decreased
44% to $0.38 per Trust Unit compared to $0.68 per Trust Unit for the
three months ended March 31, 2008.
- Average daily production for the three months ended March 31, 2009
decreased 3% to 30,603 boe/d compared to the fourth quarter of 2008.
This decline was due to 1,100 boe/d (73% natural gas) being curtailed
since August 2008 at our Lookout Butte property as a result of an
ongoing third party facility outage. Cold weather related production
issues also impacted production during the month of January 2009.
Production decreased 8% when compared to the same period of 2008.
- Natural gas production for the three months ended March 31, 2009
decreased 6% to 118.0 mmcf/d, compared to 125.1 mmcf/d for the same
period of 2008. Crude oil and natural gas liquids production
decreased 11% to 10,942 bbls/d compared to 12,281 bbls/d for the
three months ended March 31, 2008.
- The Fund declared distributions totaling $0.12 per Trust Unit or
$17.3 million during the three months ended March 31, 2009. On
March 18, 2009, the Fund announced it would discontinue cash
distributions.
Strong Hedging Program
- Advantage's hedging program includes 56% of our net natural gas
production hedged for 2009 at an average price of $8.09 per mcf and
48% hedged for 2010 at an average price of $7.46 per mcf. Crude oil
hedges include 46% of our net crude oil production hedged at an
average floor price of $69.38 Cdn per bbl and 26% hedged for 2010 at
an average price of $67.83 Cdn per bbl. Details on our hedging
program are available on our website.
- For the remaining three quarters of 2009, Advantage has 54% of our
net natural gas hedged at $8.17/mcf.
Approximate
Production Hedged, Average Average
Commodity Net of Royalties Floor Price Ceiling Price
-------------------------------------------------------------------------
Natural gas - AECO
April to June 2009 53% Cdn$8.17/mcf Cdn$8.17/mcf
July to September 2009 54% Cdn$8.17/mcf Cdn$8.17/mcf
October to December 2009 56% Cdn$8.17/mcf Cdn$8.17/mcf
-----------------------------------------------------------------------
Total 2009 56% Cdn$8.09/mcf Cdn$8.09/mcf
-----------------------------------------------------------------------
January to March 2010 62% Cdn$7.64/mcf Cdn$7.64/mcf
April to June 2010 53% Cdn$7.53/mcf Cdn$7.53/mcf
July to September 2010 38% Cdn$7.27/mcf Cdn$7.27/mcf
October to December 2010 38% Cdn$7.27/mcf Cdn$7.27/mcf
-----------------------------------------------------------------------
Total 2010 48% Cdn$7.46/mcf Cdn$7.46/mcf
-----------------------------------------------------------------------
January to March 2011 6% Cdn$7.25/mcf Cdn$7.25/mcf
-----------------------------------------------------------------------
Crude Oil - WTI
April to June 2009 48% Cdn$62.40/bbl Cdn$69.40/bbl
July to September 2009 48% Cdn$62.40/bbl Cdn$69.40/bbl
October to December 2009 50% Cdn$62.40/bbl Cdn$69.40/bbl
-----------------------------------------------------------------------
Total 2009 46% Cdn$69.38/bbl Cdn$74.92/bbl
-----------------------------------------------------------------------
January to March 2010 26% Cdn$62.80/bbl Cdn$62.80/bbl
April to June 2010 26% Cdn$69.50/bbl Cdn$69.50/bbl
July to September 2010 26% Cdn$69.50/bbl Cdn$69.50/bbl
October to December 2010 26% Cdn$69.50/bbl Cdn$69.50/bbl
-----------------------------------------------------------------------
Total 2010 26% Cdn$67.83/bbl Cdn$67.83/bbl
-----------------------------------------------------------------------
-----------------------------------------------------------------------
January to March 2011 9% Cdn$69.50/bbl Cdn$69.50/bbl
-----------------------------------------------------------------------
Looking Forward
- On March 18, 2009, Advantage announced that our Board of Directors
had approved conversion to a growth oriented corporation and a
strategic asset disposition program to increase financial
flexibility.
- The corporate conversion will be subject to two-thirds Unitholder
approval as well as customary court and regulatory approvals,
anticipated to be completed on or about June 29, 2009. The conversion
will enable Advantage to pursue a business plan that is focused on
the development and growth of the Montney natural gas resource play
at Glacier.
- The Fund has retained advisors to assist with the disposition of
properties producing up to 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's financial
flexibility. Advantage may also draw down its credit facilities in
the future to redeem certain of the Fund's convertible debentures.
Proposals are anticipated by mid May 2009 and the selected assets
will be available in four distinct packages varying in size from
approximately 1,600 to 5,400 boe/d of production.
- As another step to increase Advantage's financial flexibility and to
focus on development and growth at Glacier, we discontinued payment
of cash distributions with the final cash distribution paid on
March 16, 2009 to unitholders of record as of February 27, 2009.
Going forward, Advantage does not anticipate paying distributions or
dividends and will instead, direct cash flow to capital expenditures
and debt repayment.
- We will provide updated guidance subsequent to the results of our
asset disposition program and our corporate conversion.
MANAGEMENT'S DISCUSSION & ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”), dated as of
Non-GAAP Measures
The Fund discloses several financial measures in the MD&A that do not have any standardized meaning prescribed under GAAP. These financial measures include funds from operations, funds from operations per Trust Unit and cash netbacks. Management believes that these financial measures are useful supplemental information to analyze operating performance, leverage and provide an indication of the results generated by the Fund’s principal business activities prior to the consideration of how those activities are financed or how the results are taxed. Investors should be cautioned that these measures should not be construed as an alternative to net income, cash provided by operating activities or other measures of financial performance as determined in accordance with GAAP. Advantage’s method of calculating these measures may differ from other companies, and accordingly, they may not be comparable to similar measures used by other companies.
Funds from operations, as presented, is based on cash provided by operating activities before expenditures on asset retirement and changes in non-cash working capital. Funds from operations per Trust Unit is based on the number of Trust Units outstanding at each distribution record date. Cash netbacks are dependent on the determination of funds from operations and include the primary cash revenues and expenses on a per boe basis that comprise funds from operations. Funds from operations reconciled to cash provided by operating activities is as follows:
Three months ended
March 31
($000) 2009 2008 % change
-------------------------------------------------------------------------
Cash provided by operating activities $ 41,879 $ 81,593 (49)%
Expenditures on asset retirement 2,577 4,965 (48)%
Changes in non-cash working capital 11,135 8,060 38%
-------------------------------------------------------------------------
Funds from operations $ 55,591 $ 94,618 (41)%
-------------------------------------------------------------------------
Forward-Looking Information
This MD&A contains certain forward-looking statements, which are based on our current internal expectations, estimates, projections, assumptions and beliefs. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe”, “would” and similar or related expressions. These statements are not guarantees of future performance.
In particular, forward-looking statements included in this MD&A include, but are not limited to, statements with respect to average production and projected exit rates; areas of operations; spending and capital budgets; availability of funds for our capital program; the size of, and future net revenues from, reserves; the focus of capital expenditures; expectations regarding the ability to raise capital and to continually add to reserves through acquisitions and development; projections of market prices and costs; the performance characteristics of our properties; our future operating and financial results; capital expenditure programs; supply and demand for oil and natural gas; average royalty rates; and amount of general and administrative expenses. In addition, statements relating to “reserves” or “resources” are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the future.
These forward-looking statements involve substantial known and unknown risks and uncertainties, many of which are beyond our control, including the effect of acquisitions; changes in general economic, market and business conditions; changes or fluctuations in production levels; unexpected drilling results, changes in commodity prices, currency exchange rates, capital expenditures, reserves or reserves estimates and debt service requirements; changes to legislation and regulations and how they are interpreted and enforced, changes to investment eligibility or investment criteria; our ability to comply with current and future environmental or other laws; our success at acquisition, exploitation and development of reserves; actions by governmental or regulatory authorities including increasing taxes, changes in investment or other regulations; the occurrence of unexpected events involved in the exploration for, and the operation and development of, oil and gas properties; competition from other producers; the lack of availability of qualified personnel or management; changes in tax laws, royalty regimes and incentive programs relating to the oil and gas industry and income trusts; hazards such as fire, explosion, blowouts, cratering, and spills, each of which could result in substantial damage to wells, production facilities, other property and the environment or in personal injury; stock market volatility; and ability to access sufficient capital from internal and external sources. Many of these risks and uncertainties are described in Advantage’s Annual Information Form which is available at www.sedar.com and www.advantageincome.com. Readers are also referred to risk factors described in other documents Advantage files with Canadian securities authorities.
With respect to forward-looking statements contained in this MD&A, Advantage has made assumptions regarding: current commodity prices and royalty regimes; availability of skilled labour; timing and amount of capital expenditures; future exchange rates; the price of oil and natural gas; the impact of increasing competition; conditions in general economic and financial markets; availability of drilling and related equipment; effects of regulation by governmental agencies; royalty rates and future operating costs.
Management has included the above summary of assumptions and risks related to forward-looking information provided in this MD&A in order to provide Unitholders with a more complete perspective on Advantage’s future operations and such information may not be appropriate for other purposes. Advantage’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Advantage will derive there from. Readers are cautioned that the foregoing lists of factors are not exhaustive. These forward-looking statements are made as of the date of this MD&A and Advantage disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.
Corporate Conversion and Asset Disposition
On
The corporate conversion will be subject to approval by at least two-thirds of the Fund’s Unitholders as well as customary court and regulatory approvals, anticipated to be completed on or about
The Fund has retained advisors to assist with the disposition of properties producing up to 11,900 boe/d of light oil and natural gas properties located in
As another step to increase Advantage’s financial flexibility and to focus on development and growth at Glacier, Advantage has discontinued payment of cash distributions. Going forward, we do not anticipate paying dividends in the immediate future and will instead direct cash flow to capital expenditures and debt repayment.
Given these business developments, historical operating and financial performance may not be indicative of future performance depending on the magnitude of the asset disposition process and pending approval of the corporate conversion.
Overview
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Cash provided by operating
activities ($000) $ 41,879 $ 81,593 (49)%
Funds from operations ($000) $ 55,591 $ 94,618 (41)%
per Trust Unit(1) $ 0.38 $ 0.68 (44)%
(1) Based on Trust Units outstanding at each distribution record date.
Cash provided by operating activities, funds from operations and funds from operations per Trust Unit have decreased significantly for the three months ended
The primary factor that causes significant variability of Advantage’s cash provided by operating activities, funds from operations, and net income is commodity prices. Refer to the section “Commodity Prices and Marketing” for a more detailed discussion of commodity prices and our price risk management.
Distributions
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Distributions declared ($000) $ 17,266 $ 50,021 (65)%
per Trust Unit(1) $ 0.12 $ 0.36 (67)%
(1) Based on Trust Units outstanding at each distribution record date.
Distributions for the three months ended
Revenue
Three months ended
March 31
($000) 2009 2008 % change
-------------------------------------------------------------------------
Natural gas excluding hedging $ 56,860 $ 89,994 (37)%
Realized hedging gains 12,386 3,710 234%
-------------------------------------------------------------------------
Natural gas including hedging $ 69,246 $ 93,704 (26)%
-------------------------------------------------------------------------
Crude oil and NGLs excluding hedging $ 42,744 $ 96,104 (56)%
Realized hedging gains (losses) 10,960 (1,303) (941)%
-------------------------------------------------------------------------
Crude oil and NGLs including hedging $ 53,704 $ 94,801 (43)%
-------------------------------------------------------------------------
Total revenue $ 122,950 $ 188,505 (35)%
-------------------------------------------------------------------------
Natural gas, crude oil and NGLs revenues, excluding hedging, decreased significantly for the three months ended
Production
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Natural gas (mcf/d) 117,968 125,113 (6)%
Crude oil (bbls/d) 8,677 9,851 (12)%
NGLs (bbls/d) 2,265 2,430 (7)%
-------------------------------------------------------------------------
Total (boe/d) 30,603 33,133 (8)%
-------------------------------------------------------------------------
Natural gas (%) 65% 63%
Crude oil (%) 28% 30%
NGLs (%) 7% 7%
The Fund’s total daily production averaged 30,603 boe/d for the three months ended
On
Commodity Prices and Marketing
Natural Gas
Three months ended
March 31
($/mcf) 2009 2008 % change
-------------------------------------------------------------------------
Realized natural gas prices
Excluding hedging $ 5.36 $ 7.90 (32)%
Including hedging $ 6.52 $ 8.23 (21)%
AECO monthly index $ 5.64 $ 7.13 (21)%
Realized natural gas prices, excluding hedging, were significantly lower for the three months ended
Crude Oil and NGLs
Three months ended
March 31
($/bbl) 2009 2008 % change
-------------------------------------------------------------------------
Realized crude oil prices
Excluding hedging $ 44.94 $ 88.15 (49)%
Including hedging $ 58.97 $ 86.69 (32)%
Realized NGLs prices
Excluding hedging $ 37.54 $ 77.25 (51)%
Realized crude oil and NGL prices
Excluding hedging $ 43.41 $ 85.99 (50)%
Including hedging $ 54.54 $ 84.83 (36)%
WTI ($US/bbl) $ 43.21 $ 97.96 (56)%
$US/$Canadian exchange rate $ 0.80 $ 1.00 (20)%
Realized crude oil and NGLs prices, excluding hedging, decreased 50% for the three months ended
Commodity Price Risk
The Fund’s operational results and financial condition will be dependent on the prices received for oil and natural gas production. Oil and natural gas prices have fluctuated widely during recent years and are determined by economic and, in the case of oil prices, political factors. Supply and demand factors, including weather and general economic conditions as well as conditions in other oil and natural gas regions, impact prices. Any movement in oil and natural gas prices could have an effect on the Fund’s financial condition and performance. As current and future practice, Advantage has established a financial hedging strategy and may manage the risk associated with changes in commodity prices by entering into derivatives. Although these commodity price risk management activities could expose Advantage to losses or gains, entering derivative contracts helps us to stabilize cash flows and ensures that our capital expenditure program is substantially funded by such cash flows. To the extent that Advantage engages in risk management activities related to commodity prices, it will be subject to credit risk associated with counterparties with which it contracts. Credit risk is mitigated by entering into contracts with only stable, creditworthy parties and through frequent reviews of exposures to individual entities.
We have been active in entering new financial contracts to protect future cash flows and currently the Fund has fixed commodity prices on anticipated production as follows:
Approximate
Production Hedged, Average Average
Commodity Net of Royalties(1) Floor Price Ceiling Price
-------------------------------------------------------------------------
Natural gas - AECO
April to June 2009 53% Cdn$8.17/mcf Cdn$8.17/mcf
July to September 2009 54% Cdn$8.17/mcf Cdn$8.17/mcf
October to December 2009 56% Cdn$8.17/mcf Cdn$8.17/mcf
-----------------------------------------------------------------------
Total 2009 56% Cdn$8.09/mcf Cdn$8.09/mcf
-----------------------------------------------------------------------
January to March 2010 62% Cdn$7.64/mcf Cdn$7.64/mcf
April to June 2010 53% Cdn$7.53/mcf Cdn$7.53/mcf
July to September 2010 38% Cdn$7.27/mcf Cdn$7.27/mcf
October to December 2010 38% Cdn$7.27/mcf Cdn$7.27/mcf
-----------------------------------------------------------------------
Total 2010 48% Cdn$7.46/mcf Cdn$7.46/mcf
-----------------------------------------------------------------------
January to March 2011 6% Cdn$7.25/mcf Cdn$7.25/mcf
-----------------------------------------------------------------------
Crude Oil - WTI
April to June 2009 48% Cdn$62.40/bbl Cdn$69.40/bbl
July to September 2009 48% Cdn$62.40/bbl Cdn$69.40/bbl
October to December 2009 50% Cdn$62.40/bbl Cdn$69.40/bbl
-----------------------------------------------------------------------
Total 2009 46% Cdn$69.38/bbl Cdn$74.92/bbl
-----------------------------------------------------------------------
January to March 2010 26% Cdn$62.80/bbl Cdn$62.80/bbl
April to June 2010 26% Cdn$69.50/bbl Cdn$69.50/bbl
July to September 2010 26% Cdn$69.50/bbl Cdn$69.50/bbl
October to December 2010 26% Cdn$69.50/bbl Cdn$69.50/bbl
-----------------------------------------------------------------------
Total 2010 26% Cdn$67.83/bbl Cdn$67.83/bbl
-----------------------------------------------------------------------
January to March 2011 9% Cdn$69.50/bbl Cdn$69.50/bbl
-----------------------------------------------------------------------
(1) Approximate production hedged is based on our assumed average
production by quarter net of royalty payments; however, this will be
impacted by the magnitude of our asset disposition program.
For the three month period ended
Royalties
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Royalties ($000) $ 16,080 $ 33,881 (53)%
per boe $ 5.84 $ 11.24 (48)%
As a percentage of revenue,
excluding hedging 16.1% 18.2% (2.1)%
Advantage pays royalties to the owners of mineral rights from which we have leases. The Fund currently has mineral leases with provincial governments, individuals and other companies. Royalties have decreased in total for the three months ended
Operating Costs
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Operating costs ($000) $ 36,031 $ 40,272 (11)%
per boe $ 13.08 $ 13.36 (2)%
Total operating costs decreased 11% for the three months ended
General and Administrative
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
General and administrative expense
($000) $ 7,380 $ 7,232 2%
per boe $ 2.68 $ 2.40 12%
Employees at March 31 165 163 1%
General and administrative (“G&A”) expense for the three months ended
Management Internalization
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Management internalization ($000) $ 964 $ 2,491 (61)%
per boe $ 0.35 $ 0.83 (58)%
In 2006, the Fund and Advantage Investment Management Ltd. (the “Manager”) reached an agreement to internalize the pre-existing management contract arrangement. As part of the agreement, Advantage agreed to purchase all of the outstanding shares of the Manager pursuant to the terms of the Arrangement, thereby eliminating the management fee and performance incentive effective
Interest on Bank Indebtedness
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Interest expense ($000) $ 4,916 $ 7,766 (37)%
per boe $ 1.78 $ 2.58 (31)%
Average effective interest rate 3.3% 5.6% (2.3)%
Bank indebtedness at March 31 ($000) $ 615,438 $ 563,500 9%
Total interest expense decreased 37% and 31% per boe for the three months ended
Interest and Accretion on Convertible Debentures
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Interest on convertible debentures
($000) $ 3,969 $ 4,187 (5)%
per boe $ 1.44 $ 1.39 4%
Accretion on convertible
debentures ($000) $ 682 $ 720 (5)%
per boe $ 0.25 $ 0.24 4%
Convertible debentures maturity
value at March 31 ($000) $ 214,328 $ 224,587 (5)%
Interest and accretion on convertible debentures for the three months ended
Depletion, Depreciation and Accretion
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Depletion, depreciation and
accretion ($000) $ 69,922 $ 76,880 (9)%
per boe $ 25.39 $ 25.50 -
Depletion and depreciation of fixed assets is provided on the “unit-of-production” method based on total proved reserves. Accretion represents the increase in the asset retirement obligation liability each reporting period due to the passage of time. The depletion, depreciation and accretion (“DD&A”) provision has decreased 9% for the three months ended
Taxes
Current taxes paid or payable for the quarter ended
Under the Fund’s current structure, payments are made between the operating company and the Fund transferring income tax obligations to Unitholders and as a result no cash income taxes would be paid by the operating company or the Fund prior to 2011. However, the Specified Investment Flow-Through Entity (“SIFT”) tax legislation was enacted on
On
Under Canadian GAAP, the future income tax impact of the planned corporate conversion, which is anticipated to be completed on or about
For the three months ended
Net Income (Loss)
Three months ended
March 31
2009 2008 % change
-------------------------------------------------------------------------
Net income (loss) ($000) $ 18,890 $ (24,122) (178)%
per Trust Unit - Basic $ 0.13 $ (0.18) (172)%
- Diluted $ 0.13 $ (0.18) (172)%
Net income for the three months ended
Cash Netbacks
Three months ended Three months ended
March 31, 2009 March 31, 2008
$000 per boe $000 per boe
-------------------------------------------------------------------------
Revenue $ 99,604 $ 36.16 $ 186,098 $ 61.72
Realized gain on
derivatives 23,346 8.48 2,407 0.80
Royalties (16,080) (5.84) (33,881) (11.24)
Operating costs (36,031) (13.08) (40,272) (13.36)
-------------------------------------------------------------------------
Operating $ 70,839 $ 25.72 $ 114,352 $ 37.92
General and
administrative(1) (6,083) (2.21) (7,093) (2.35)
Interest (4,916) (1.78) (7,766) (2.58)
Interest on convertible
debentures(2) (3,969) (1.44) (4,187) (1.39)
Income and capital taxes (280) (0.10) (688) (0.23)
-------------------------------------------------------------------------
Funds from operations
and cash netbacks $ 55,591 $ 20.19 $ 94,618 $ 31.37
-------------------------------------------------------------------------
(1) General and administrative expense excludes non-cash unit-based
compensation expense.
(2) Interest on convertible debentures excludes non-cash accretion
expense.
Funds from operations and cash netbacks decreased in total and per boe for the quarter ended
Contractual Obligations and Commitments
The Fund has contractual obligations in the normal course of operations including purchases of assets and services, operating agreements, transportation commitments, sales contracts and convertible debentures. These obligations are of a recurring and consistent nature and impact cash flow in an ongoing manner. The following table is a summary of the Fund’s remaining contractual obligations and commitments. Advantage has no guarantees or off-balance sheet arrangements other than as disclosed.
Payments due by period
($ millions) Total 2009 2010 2011 2012
-------------------------------------------------------------------------
Building leases $ 9.4 $ 2.9 $ 3.9 $ 1.5 $ 1.1
Capital leases 5.7 1.6 2.2 1.9 -
Pipeline/transportation 4.8 2.3 2.0 0.5 -
Convertible debentures(1) 214.3 82.1 69.9 62.3 -
-------------------------------------------------------------------------
Total contractual
obligations $ 234.2 $ 88.9 $ 78.0 $ 66.2 $ 1.1
-------------------------------------------------------------------------
(1) As at March 31, 2009, Advantage had $214.3 million convertible
debentures outstanding (excluding interest payable during the various
debenture terms). Each series of convertible debentures are
convertible to Trust Units based on an established conversion price.
All remaining obligations related to convertible debentures can be
settled through the payment of cash or issuance of Trust Units at
Advantage's option.
(2) Bank indebtedness of $615.4 million has been excluded from the
contractual obligations table as the credit facilities constitute a
revolving facility for a 364 day term which is extendible annually
for a further 364 day revolving period at the option of the
syndicate. If not extended, the revolving credit facility is
converted to a two year term facility with the first payment due one
year and one day after commencement of the term.
Liquidity and Capital Resources
The following table is a summary of the Fund's capitalization structure.
($000, except as otherwise indicated) March 31, 2009
-------------------------------------------------------------------------
Bank indebtedness (long-term) $ 615,438
Working capital deficit(1) 128,455
-------------------------------------------------------------------------
Net debt $ 743,893
-------------------------------------------------------------------------
Trust Units outstanding (000) 145,203
Trust Units closing market price ($/Trust Unit) $ 3.07
-------------------------------------------------------------------------
Market value $ 445,773
-------------------------------------------------------------------------
Convertible debentures maturity value (long-term) $ 132,221
Capital lease obligations (long term) 3,612
-------------------------------------------------------------------------
Total capitalization $ 1,325,499
-------------------------------------------------------------------------
(1) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities, and
the current portion of capital lease obligations and convertible
debentures.
Advantage monitors its capital structure and makes adjustments according to market conditions in an effort to meet its objectives given the current outlook of the business and industry in general. The capital structure of the Fund is composed of working capital (excluding derivative assets and liabilities), bank indebtedness, convertible debentures, capital lease obligations and Unitholders’ equity. Advantage may manage its capital structure by issuing new Trust Units, obtaining additional financing either through bank indebtedness or convertible debenture issuances, refinancing current debt, issuing other financial or equity-based instruments, adjusting or discontinuing the amount of monthly distributions, suspending or renewing its distribution reinvestment plan, adjusting capital spending, or disposing of assets. The capital structure is reviewed by Management and the Board of Directors on an ongoing basis.
The ongoing global recession has significantly impacted the ability to raise capital although there have been recent signs of improvements. Despite this situation, the Fund continues to generate funds from operations sufficient to fund our operations and a reduced capital program. Management of the Fund’s capital structure is facilitated through its financial and operational forecasting processes. The forecast of the Fund’s future cash flows is based on estimates of production, commodity prices, forecast capital and operating expenditures, and other investing and financing activities. The forecast is regularly updated based on new commodity prices and other changes, which the Fund views as critical in the current environment. Selected forecast information is frequently provided to the Board of Directors. This continual financial assessment process further enables the Fund to mitigate risks. The Fund continues to satisfy all liabilities and commitments as they come due. We have an established
The current economic situation has also placed additional pressure on commodity prices. Crude oil has dropped from a historic high in 2008 to approximately
In summary, we have implemented a strategy to maximize self sufficiency such that funds from operations will satisfy our capital program, reduce debt, and meet other expenditure requirements. We do not anticipate any problems satisfying obligations as they become due. A successful hedging program was also executed to help protect our funds from operations. As a result, we feel that Advantage has implemented adequate strategies to protect our business as much as possible in this environment. However, as with all companies, we are still exposed to risks as a result of the current economic situation and the potential duration. We continue to closely monitor the possible impact on our business and strategy, and will make adjustments as necessary with prudent management.
Unitholders’ Equity and Convertible Debentures
Advantage has utilized a combination of Trust Units, convertible debentures and bank debt to finance acquisitions and development activities.
As at
At
Bank Indebtedness, Credit Facility and Other Obligations
At
Advantage had a working capital deficiency of
Capital Expenditures
Three months ended
March 31
($000) 2009 2008
-------------------------------------------------------------------------
Land and seismic $ 1,667 $ 4,170
Drilling, completions and workovers 37,612 36,744
Well equipping and facilities 13,297 25,598
Other 67 391
-------------------------------------------------------------------------
$ 52,643 $ 66,903
Property dispositions (759) (91)
-------------------------------------------------------------------------
Total capital expenditures $ 51,884 $ 66,812
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Advantage’s exploitation and development program focuses on areas where past activity has yielded long-life reserves with high cash netbacks. We are very well positioned to selectively exploit the highest value-generating drilling opportunities given the size, strength and diversity of our asset base as evidenced by our success at Glacier,
For the three month period ended
Sources and Uses of Funds
The following table summarizes the various funding requirements during the three months ended
Three months ended
March 31
($000) 2009 2008
-------------------------------------------------------------------------
Sources of funds
Funds from operations $ 55,591 $ 94,618
Increase in bank indebtedness 27,291 16,074
Property dispositions 759 91
Decrease in working capital - 2,035
Units issued, net of costs - (42)
-------------------------------------------------------------------------
$ 83,641 $ 112,776
-------------------------------------------------------------------------
Uses of funds
Expenditures on property and equipment $ 52,643 $ 66,903
Distributions to Unitholders 23,481 40,302
Increase in working capital 4,620 -
Expenditures on asset retirement 2,577 4,965
Reduction of capital lease obligations 320 606
-------------------------------------------------------------------------
$ 83,641 $ 112,776
-------------------------------------------------------------------------
The Fund generated lower funds from operations during the three months ended
Quarterly Performance
2009 2008
($000, except as
otherwise indicated) Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Daily production
Natural gas (mcf/d) 117,968 120,694 122,627 123,104
Crude oil and NGLs
(bbls/d) 10,942 11,413 11,980 11,498
Total (boe/d) 30,603 31,529 32,418 32,015
Average prices
Natural gas ($/mcf)
Excluding hedging $ 5.36 $ 7.15 $ 8.65 $ 10.33
Including hedging $ 6.52 $ 7.61 $ 7.55 $ 9.18
AECO monthly index $ 5.64 $ 6.79 $ 9.27 $ 9.35
Crude oil and NGLs
($/bbl)
Excluding hedging $ 43.41 $ 53.65 $ 107.96 $ 110.15
Including hedging $ 54.54 $ 61.67 $ 100.02 $ 101.34
WTI ($US/bbl) $ 43.21 $ 58.75 $ 118.13 $ 124.00
Total revenues
(before royalties) $ 122,950 $ 149,205 $ 195,384 $ 208,868
Net income (loss) $ 18,890 $ (95,477) $ 113,391 $ (14,369)
per Trust Unit
- basic $ 0.13 $ (0.67) $ 0.81 $ (0.10)
- diluted $ 0.13 $ (0.67) $ 0.79 $ (0.10)
Funds from operations $ 55,591 $ 69,370 $ 93,345 $ 103,754
Distributions declared $ 17,266 $ 45,514 $ 50,743 $ 50,364
2008 2007
($000, except as
otherwise indicated) Q1 Q4 Q3 Q2
-------------------------------------------------------------------------
Daily production
Natural gas (mcf/d) 125,113 128,556 115,991 108,978
Crude oil and NGLs
(bbls/d) 12,281 12,895 10,014 8,952
Total (boe/d) 33,133 34,321 29,346 27,115
Average prices
Natural gas ($/mcf)
Excluding hedging $ 7.90 $ 6.23 $ 5.62 $ 7.54
Including hedging $ 8.23 $ 6.97 $ 6.35 $ 7.52
AECO monthly index $ 7.13 $ 6.00 $ 5.62 $ 7.37
Crude oil and NGLs
($/bbl)
Excluding hedging $ 85.99 $ 73.40 $ 69.03 $ 61.84
Including hedging $ 84.83 $ 70.40 $ 68.51 $ 61.93
WTI ($US/bbl) $ 97.96 $ 90.63 $ 75.33 $ 65.02
Total revenues
(before royalties) $ 188,505 $ 165,951 $ 130,830 $ 125,075
Net income (loss) $ (24,122) $ 13,795 $ (26,202) $ 4,531
per Trust Unit
- basic $ (0.18) $ 0.10 $ (0.22) $ 0.04
- diluted $ (0.18) $ 0.10 $ (0.22) $ 0.04
Funds from operations $ 94,618 $ 80,519 $ 62,345 $ 62,634
Distributions declared $ 50,021 $ 57,875 $ 55,017 $ 52,096
The table above highlights the Fund’s performance for the first quarter of 2009 and also for the preceding seven quarters. Production during the 2006/2007 winter was steady until we experienced a decrease in the second quarter of 2007 due to several facility turnarounds at that time. The Sound acquisition closed on
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires Management to make certain judgments and estimates. Changes in these judgments and estimates could have a material impact on the Fund’s financial results and financial condition.
Management relies on the estimate of reserves as prepared by the Fund’s independent qualified reserves evaluator. The process of estimating reserves is critical to several accounting estimates. The process of estimating reserves is complex and requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing development and production activities becomes available and as economic conditions impact crude oil and natural gas prices, operating costs, royalty burden changes, and future development costs. Reserve estimates impact net income through depletion and depreciation of fixed assets, the provision for asset retirement costs and related accretion expense, and impairment calculations for fixed assets and goodwill. The reserve estimates are also used to assess the borrowing base for the Fund’s credit facilities. Revision or changes in the reserve estimates can have either a positive or a negative impact on net income and the borrowing base of the Fund.
Management’s process of determining the provision for future income taxes, the provision for asset retirement obligation costs and related accretion expense, and the fair values assigned to any acquired company’s assets and liabilities in a business combination is based on estimates. These estimates are significant and can include reserves, future production rates, future crude oil and natural gas prices, future costs, future interest rates, future tax rates and other relevant assumptions. Revisions or changes in any of these estimates can have either a positive or a negative impact on asset and liability values and net income.
In accordance with GAAP, derivative assets and liabilities are recorded at their fair values at the reporting date, with unrealized gains and losses recognized directly into net income and comprehensive income in the same period. The fair value of derivatives outstanding is an estimate based on pricing models, estimates, assumptions and market data available at that time. As such, the recognized amounts are not cash and the actual gains or losses realized on eventual cash settlement can vary materially due to subsequent fluctuations in commodity prices as compared to the valuation assumptions.
International Financial Reporting Standards (“IFRS”)
In
The most significant change identified will be accounting for property, plant and equipment. The Fund, like many Canadian oil and gas reporting issuers, applies the “full cost” concept in accounting for its oil and gas assets. Under full cost, capital expenditures are maintained in a single cost centre for each country, and the cost centre is subject to a single depletion calculation and impairment test. IFRS will require the Fund to make a much more detailed assessment of its oil and gas property, plant and equipment. For depletion and depreciation, the Fund must identify asset components, and determine an appropriate depreciation or depletion method for each component. With regard to impairment test calculations, we must identify “Cash Generating Units”, which are defined as the smallest group of assets that produce independent cash flows. An impairment test must be performed individually for all cash generating units. The recognition of impairments in a prior year can be reversed subsequently depending on such calculations. It is also important to note that the International Accounting Standards Board (“IASB”) is currently undertaking an extractive industries project, to develop accounting standards specifically for businesses like that of the Fund. However, the project will not be complete prior to IFRS adoption in
Disclosure Controls and Internal Controls over Financial Reporting
Disclosure controls and procedures have been designed to provide reasonable assurance that information required to be disclosed by the Fund is recorded, processed, summarized and reported within the time periods specified under the Canadian securities law. Advantage’s Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation, that the disclosure controls and procedures as of the end of
Advantage’s Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining internal controls over financial reporting (“ICFR”). They have, as at the quarter ended
Advantage’s Chief Executive Officer and Chief Financial Officer are required to disclose any change in the internal controls over financial reporting that occurred during our most recent interim period that has materially affected, or is reasonably likely to affect, the Fund’s internal controls over financial reporting. No material changes in the internal controls were identified during the period ended
It should be noted that a control system, including Advantage’s disclosure and internal controls and procedures, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met and it should be not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.
Outlook
On
Industry supply, servicing and maintenance costs increased through much of 2008 driven primarily from higher crude oil and natural gas prices. Also, there were significant increases from electrical power costs, processing fees, steel and chemicals. We initiated an aggressive optimization program in 2008 and are beginning to see benefits in terms of cost reductions and efficiencies. We expect to see some further easing of operating costs as the lower commodity price environment is expected to remain for a sustained period.
Advantage’s funds from operations in 2009 will continue to be impacted by the volatility of crude oil and natural gas prices and the $US/$Canadian exchange rate. Additional hedging has been completed for 2009 and 2010 to stabilize cash flows and ensure that the Fund’s capital program is fully funded. Approximately 56% of our natural gas production, net of royalties, is now hedged for the 2009 calendar year at an average fixed price of
We will provide updated guidance subsequent to the results of our asset disposition program and our corporate conversion.
Looking forward, Advantage’s high quality assets combined with a significant unconventional and conventional inventory, strong hedging program and excellent tax pools positions us well to create value growth for our Unitholders.
Additional Information
Additional information relating to Advantage can be found on SEDAR at www.sedar.com and the Fund’s website at www.advantageincome.com. Such other information includes the annual information form, the annual information circular – proxy statement, press releases, material contracts and agreements, and other financial reports. The annual information form will be of particular interest for current and potential Unitholders as it discusses a variety of subject matter including the nature of the business, structure of the Fund, description of our operations, general and recent business developments, risk factors, reserves data and other oil and gas information.
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
March 31, December 31,
(thousands of dollars) 2009 2008
-------------------------------------------------------------------------
(unaudited)
Assets
Current assets
Accounts receivable $ 68,149 $ 84,689
Prepaid expenses and deposits 10,734 11,571
Derivative asset (note 10) 66,230 41,472
-------------------------------------------------------------------------
145,113 137,732
Derivative asset (note 10) 10,835 1,148
Fixed assets (note 3) 2,149,751 2,163,866
-------------------------------------------------------------------------
$ 2,305,699 $ 2,302,746
-------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 124,049 $ 146,046
Distributions payable to Unitholders - 11,426
Current portion of capital lease
obligations (note 4) 1,721 1,747
Current portion of convertible
debentures (note 5) 81,568 86,125
Derivative liability (note 10) 5,366 611
Future income taxes 17,750 11,939
-------------------------------------------------------------------------
230,454 257,894
Derivative liability (note 10) 6,332 1,039
Capital lease obligations (note 4) 3,612 3,906
Bank indebtedness (note 6) 612,008 584,717
Convertible debentures (note 5) 129,221 128,849
Asset retirement obligations (note 7) 75,198 73,852
Future income taxes 26,398 43,976
-------------------------------------------------------------------------
1,083,223 1,094,233
-------------------------------------------------------------------------
Unitholders' Equity
Unitholders' capital (note 8) 2,087,858 2,075,877
Convertible debentures equity component
(note 5) 9,155 9,403
Contributed surplus (note 8) 893 287
Accumulated deficit (note 9) (875,430) (877,054)
-------------------------------------------------------------------------
1,222,476 1,208,513
-------------------------------------------------------------------------
$ 2,305,699 $ 2,302,746
-------------------------------------------------------------------------
Commitments (note 12)
See accompanying Notes to Consolidated Financial Statements
Consolidated Statements of Income (Loss), Comprehensive Income (Loss)
and Accumulated Deficit
Three months Three months
ended ended
(thousands of dollars, except for March 31, March 31,
per Trust Unit amounts) (unaudited) 2009 2008
-------------------------------------------------------------------------
Revenue
Petroleum and natural gas $ 99,604 $ 186,098
Realized gain on derivatives (note 10) 23,346 2,407
Unrealized gain (loss) on derivatives
(note 10) 24,397 (61,186)
Royalties (16,080) (33,881)
-------------------------------------------------------------------------
131,267 93,438
-------------------------------------------------------------------------
Expenses
Operating 36,031 40,272
General and administrative 7,380 7,232
Management internalization (note 8) 964 2,491
Interest 4,916 7,766
Interest and accretion on convertible
debentures 4,651 4,907
Depletion, depreciation and accretion 69,922 76,880
-------------------------------------------------------------------------
123,864 139,548
-------------------------------------------------------------------------
Income (loss) before taxes 7,403 (46,110)
Future income tax reduction (11,767) (22,676)
Income and capital taxes 280 688
-------------------------------------------------------------------------
(11,487) (21,988)
-------------------------------------------------------------------------
Net income (loss) and comprehensive
income (loss) 18,890 (24,122)
Accumulated deficit, beginning of period (877,054) (659,835)
Distributions declared (17,266) (50,021)
-------------------------------------------------------------------------
Accumulated deficit, end of period $ (875,430) $ (733,978)
-------------------------------------------------------------------------
Net income (loss) per Trust Unit (note 8)
Basic and diluted $ 0.13 $ (0.18)
-------------------------------------------------------------------------
see accompanying Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
Three months Three months
ended ended
March 31, March 31,
(thousands of dollars) (unaudited) 2009 2008
-------------------------------------------------------------------------
Operating Activities
Net income (loss) $ 18,890 $ (24,122)
Add (deduct) items not requiring cash:
Unrealized loss (gain) on derivatives (24,397) 61,186
Unit-based compensation 1,297 139
Management internalization 964 2,491
Accretion on convertible debentures 682 720
Depletion, depreciation and accretion 69,922 76,880
Future income tax reduction (11,767) (22,676)
Expenditures on asset retirement (2,577) (4,965)
Changes in non-cash working capital (11,135) (8,060)
-------------------------------------------------------------------------
Cash provided by operating activities 41,879 81,593
-------------------------------------------------------------------------
Financing Activities
Units issued, net of costs - (42)
Increase in bank indebtedness 27,291 16,074
Reduction of capital lease obligations (320) (606)
Distributions to Unitholders (23,481) (40,302)
-------------------------------------------------------------------------
Cash provided by (used in) financing
activities 3,490 (24,876)
-------------------------------------------------------------------------
Investing Activities
Expenditures on property and equipment (52,643) (66,903)
Property dispositions 759 91
Changes in non-cash working capital 6,515 10,095
-------------------------------------------------------------------------
Cash used in investing activities (45,369) (56,717)
-------------------------------------------------------------------------
Net change in cash - -
Cash, beginning of period - -
-------------------------------------------------------------------------
Cash, end of period $ - $ -
-------------------------------------------------------------------------
Supplementary Cash Flow Information
Interest paid $ 8,247 $ 8,566
Taxes paid $ 375 $ 154
see accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2009 (unaudited)
All tabular amounts in thousands except as otherwise indicated.
The interim consolidated financial statements of Advantage Energy Income
Fund ("Advantage" or the "Fund") have been prepared by management in
accordance with Canadian generally accepted accounting principles
("GAAP") using the same accounting policies as those set out in note 2 to
the consolidated financial statements for the year ended December 31,
2008, except as described below. The interim consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements of Advantage for the year ended December 31, 2008 as
set out in Advantage's Annual Report.
1. Business and Structure of the Fund
Advantage was formed on May 23, 2001 as a result of a plan of
arrangement. For Canadian tax purposes, Advantage is an open-ended
unincorporated mutual fund trust created under the laws of the
Province of Alberta pursuant to a Trust Indenture originally dated
April 17, 2001, and as occasionally amended, between Advantage Oil &
Gas Ltd. ("AOG") and Computershare Trust Company of Canada, as
trustee. The Fund commenced operations on May 24, 2001. The
beneficiaries of the Fund are the holders of the Trust Units (the
"Unitholders").
The principal undertaking of the Fund is to indirectly acquire and
hold interests in petroleum and natural gas properties and assets
related thereto. The business of the Fund is carried on by its
wholly-owned subsidiary, AOG. The Fund's primary assets are currently
the common shares of AOG, a royalty in the producing properties of
AOG (the "AOG Royalty") and notes of AOG (the "AOG Notes"). The
Fund's strategy, through AOG, is to minimize exposure to exploration
risk while focusing on growth through acquisitions and development of
producing crude oil and natural gas properties.
The original purpose of the Fund was to distribute available cash
flow to Unitholders on a monthly basis in accordance with the terms
of the Trust Indenture. The Fund's available cash flow includes
principal repayments and interest income earned from the AOG Notes,
royalty income earned from the AOG Royalty, and any dividends
declared on the common shares of AOG less any expenses of the Fund
including interest on convertible debentures. Cash received on the
AOG Notes, AOG Royalty and common shares of AOG result in the
effective transfer of the economic interest in the properties of AOG
to the Fund. However, while the royalty is a contractual interest in
the properties owned by AOG, it does not confer ownership in the
underlying resource properties. Any distributions from the Fund to
Unitholders are entirely discretionary and are determined by
Management and the Board of Directors. We closely monitor our
distribution policy considering forecasted cash flows, optimal debt
levels, capital spending activity, taxability to Unitholders, working
capital requirements, and other potential cash expenditures.
Distributions are based on the cash available after retaining a
portion to meet such spending requirements. The level of
distributions are primarily determined by cash flows received from
the production of oil and natural gas from existing Canadian resource
properties and are highly dependent upon our success in exploiting
the current reserve base and acquiring additional reserves.
Furthermore, monthly distributions we pay to Unitholders are highly
dependent upon the prices received for such oil and natural gas
production.
On March 18, 2009, Advantage announced the Board of Directors had
approved conversion to a growth oriented corporation and a strategic
asset disposition program combined with suspension of the monthly
distribution to increase financial flexibility. The corporate
conversion will be subject to approval by at least two-thirds of the
Fund's Unitholders as well as customary court and regulatory
approvals, anticipated to be completed on or about June 29, 2009. The
conversion will enable Advantage to pursue a business plan that is
focused on the development and growth of the Montney natural gas
resource play at Glacier, Alberta. The Fund has engaged an advisory
firm to assist in the disposal of light oil and natural gas
properties located in Northeast British Columbia, West Central
Alberta and Northern Alberta with proposals anticipated by mid May
2009. Going forward, Advantage does not anticipate paying dividends
in the immediate future and will instead direct cash flow to capital
expenditures and debt repayment.
2. Changes in Accounting Policies
(a) Goodwill and intangible assets
In February 2008, the Canadian Institute of Chartered Accountants
("CICA") issued Section 3064, Goodwill and Intangible Assets,
replacing Section 3062, Goodwill and Other Intangible Assets and
Section 3450, Research and Development Costs. The new Section became
effective January 1, 2009. Management has implemented the new Section
and there was no impact for the financial statements of the Fund.
(b) Recent accounting pronouncements issued but not implemented
(i) International Financial Reporting Standards ("IFRS")
In February 2008, the CICA Accounting Standards Board confirmed
that IFRS will replace Canadian GAAP effective January 1, 2011
for publicly accountable enterprises. Management is currently
evaluating the effects of all current and pending pronouncements
of the International Accounting Standards Board on the financial
statements of the Fund, and has developed a plan for
implementation.
(c) Comparative figures
Certain comparative figures have been reclassified to conform to the
current period presentation.
3. Fixed Assets
Accumulated
Depletion and Net Book
March 31, 2009 Cost Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas
properties $ 3,354,098 $ 1,208,966 $ 2,145,132
Furniture and equipment 11,638 7,019 4,619
---------------------------------------------------------------------
$ 3,365,736 $ 1,215,985 $ 2,149,751
---------------------------------------------------------------------
Accumulated
Depletion and Net Book
December 31, 2008 Cost Depreciation Value
---------------------------------------------------------------------
Petroleum and natural gas
properties $ 3,299,657 $ 1,140,710 $ 2,158,947
Furniture and equipment 11,572 6,653 4,919
---------------------------------------------------------------------
$ 3,311,229 $ 1,147,363 $ 2,163,866
---------------------------------------------------------------------
4. Capital Lease Obligations
The Fund has capital leases on a variety of fixed assets. Future
minimum lease payments at March 31, 2009 consist of the following:
2009 $ 1,640
2010 2,200
2011 1,925
-----------------------------------------
5,765
Less amounts representing
interest (432)
-----------------------------------------
5,333
Current portion (1,721)
-----------------------------------------
$ 3,612
-----------------------------------------
5. Convertible Debentures
The balance of debentures outstanding at March 31, 2009 and changes
in the liability and equity components during the three months ended
March 31, 2009 are as follows:
8.25% 8.75% 7.50%
---------------------------------------------------------
Trading symbol AVN.DBB AVN.DBF AVN.DBC
Debentures outstanding $ - $ 29,839 $ 52,268
---------------------------------------------------------
Liability component:
Balance at
December 31, 2008 $ 4,859 $ 29,687 $ 51,579
Accretion of discount 8 75 227
Matured (4,867) - -
---------------------------------------------------------
Balance at
March 31, 2009 $ - $ 29,762 $ 51,806
---------------------------------------------------------
Equity component:
Balance at
December 31, 2008 $ 248 $ 852 $ 2,248
Expired (248) - -
---------------------------------------------------------
Balance at
March 31, 2009 $ - $ 852 $ 2,248
---------------------------------------------------------
6.50% 7.75% 8.00% Total
---------------------------------------------------------------------
Trading symbol AVN.DBE AVN.DBD AVN.DBG
Debentures outstanding $ 69,927 $ 46,766 $ 15,528 $ 214,328
---------------------------------------------------------------------
Liability component:
Balance at
December 31, 2008 $ 68,807 $ 44,964 $ 15,078 $ 214,974
Accretion of discount 184 150 38 682
Matured - - - (4,867)
---------------------------------------------------------------------
Balance at
March 31, 2009 $ 68,991 $ 45,114 $ 15,116 $ 210,789
---------------------------------------------------------------------
Equity component:
Balance at
December 31, 2008 $ 2,971 $ 2,286 $ 798 $ 9,403
Expired - - - (248)
---------------------------------------------------------------------
Balance at
March 31, 2009 $ 2,971 $ 2,286 $ 798 $ 9,155
---------------------------------------------------------------------
During the three months ended March 31, 2009, there were no
convertible debenture conversions (March 31, 2008 - $25,000 converted
resulting in the issuance of 1,001 Trust Units).
The principal amount of 8.25% convertible debentures matured on
February 1, 2009 and the Fund settled the obligation by issuing
946,887 Trust Units.
6. Bank Indebtedness
March 31, December 31,
2009 2008
---------------------------------------------------------------------
Revolving credit facility $ 615,438 $ 587,404
Discount on Bankers Acceptances (3,430) (2,687)
---------------------------------------------------------------------
Balance, end of period $ 612,008 $ 584,717
---------------------------------------------------------------------
Advantage has a credit facility agreement with a syndicate of
financial institutions which provides for a $690 million extendible
revolving loan facility and a $20 million operating loan facility.
The loan's interest rate is based on either prime, US base rate,
LIBOR or bankers' acceptance rates, at the Fund's option, subject to
certain basis point or stamping fee adjustments ranging from 0.00% to
1.50% depending on the Fund's debt to cash flow ratio. The credit
facilities are collateralized by a $1 billion floating charge demand
debenture, a general security agreement and a subordination agreement
from the Fund covering all assets and cash flows. The credit
facilities are subject to review on an annual basis with the next
renewal due in June 2009. Various borrowing options are available
under the credit facilities, including prime rate-based advances, US
base rate advances, US dollar LIBOR advances and bankers' acceptances
loans. The credit facilities constitute a revolving facility for a
364 day term which is extendible annually for a further 364 day
revolving period at the option of the syndicate. If not extended, the
revolving credit facility is converted to a two year term facility
with the principal payable at the end of such two year term. The
credit facilities contain standard commercial covenants for
facilities of this nature. The only financial covenant is a
requirement for AOG to maintain a minimum cash flow to interest
expense ratio of 3.5:1, determined on a rolling four quarter basis.
The credit facilities also prohibit the Fund from entering into any
derivative contract where the term of such contract exceeds two years
or the aggregate of such contracts hedge greater than 60% of the
Fund's estimated oil and gas production. Breach of any covenant will
result in an event of default in which case AOG has 20 days to remedy
such default. If the default is not remedied or waived, and if
required by the majority of lenders, the administrative agent of the
lenders has the option to declare all obligations of AOG under the
credit facilities to be immediately due and payable without further
demand, presentation, protest, or notice of any kind. Distributions
by AOG to the Fund (and effectively by the Fund to Unitholders) are
subordinated to the repayment of any amounts owing under the credit
facilities. Distributions to Unitholders are not permitted if the
Fund is in default of such credit facilities or if the amount of the
Fund's outstanding indebtedness under such facilities exceeds the
then existing current borrowing base. Interest payments under the
debentures are also subordinated to indebtedness under the credit
facilities and payments under the debentures are similarly
restricted. For the three months ended March 31, 2009, the effective
interest rate on the outstanding amounts under the facility was
approximately 3.3% (March 31, 2008 - 5.6%).
7. Asset Retirement Obligations
A reconciliation of the asset retirement obligations is provided
below:
Three months
ended Year ended
March 31, December 31,
2009 2008
---------------------------------------------------------------------
Balance, beginning of period $ 73,852 $ 60,835
Accretion expense 1,300 4,186
Liabilities incurred 340 1,526
Change in estimates 2,283 16,564
Liabilities settled (2,577) (9,259)
---------------------------------------------------------------------
Balance, end of period $ 75,198 $ 73,852
---------------------------------------------------------------------
8. Unitholders' Equity
(a) Unitholders' capital
(i) Authorized
Unlimited number of voting Trust Units
(ii) Issued
Number of Units Amount
---------------------------------------------------------------------
Balance at December 31, 2008 142,824,854 $ 2,077,760
Distribution reinvestment plan 1,263,158 5,211
Issued on maturity of debentures 946,887 4,867
Issued pursuant to Restricted
Trust Unit Plan 171,093 939
Management internalization forfeitures (3,155) (65)
---------------------------------------------------------------------
145,202,837 $ 2,088,712
---------------------------------------------------------------------
Management internalization escrowed
Trust Units (854)
---------------------------------------------------------------------
Balance at March 31, 2009 $ 2,087,858
---------------------------------------------------------------------
On June 23, 2006, Advantage internalized the external management
contract structure and eliminated all related fees for total original
consideration of 1,933,208 Advantage Trust Units initially valued at
$39.1 million and subject to escrow provisions over a 3-year period,
vesting one-third each year beginning June 23, 2007. For the three
months ended March 31, 2009, a total of 3,155 Trust Units issued for
the management internalization were forfeited (March 31, 2008 - 4,193
Trust Units) and $1.0 million has been recognized as management
internalization expense (March 31, 2008 - $2.5 million). As at
March 31, 2009, 529,854 Trust Units remain held in escrow
(December 31, 2008 - 564,612 Trust Units).
During the three months ended March 31, 2009, 1,263,158 Trust Units
(March 31, 2008 - 1,006,673 Trust Units) were issued under the
Premium Distribution(TM), Distribution Reinvestment and Optional
Trust Unit Purchase Plan, generating $5.2 million (March 31, 2008 -
$9.6 million) reinvested in the Fund.
The principal amount of 8.25% convertible debentures matured on
February 1, 2009 and the Fund settled the obligation by issuing
946,887 Trust Units.
(b) Contributed surplus
Three months
ended Year ended
March 31, December 31,
2009 2008
---------------------------------------------------------------------
Balance, beginning of period $ 287 $ 2,005
Unit-based compensation 358 (1,256)
Expiration of convertible debentures
equity component 248 229
Exercise of Trust Unit Rights - (691)
---------------------------------------------------------------------
Balance, end of period $ 893 $ 287
---------------------------------------------------------------------
(c) Unit-based compensation
Advantage's current employee compensation includes a Restricted Trust
Unit Plan, as approved by the Unitholders on June 23, 2006. The
purpose of the long-term compensation plan is to retain and attract
employees, to reward and encourage performance, and to focus
employees on operating and financial performance that results in
lasting Unitholder return.
Although Advantage experienced a negative return for the 2008 year,
the approved peer group also experienced likewise negative returns.
As a result, Advantage's 2008 annual return was within the top
two-thirds of the approved peer group and the Board of Directors
granted Restricted Trust Units ("RTUs") at their discretion. The RTUs
were deemed to be granted at January 15, 2009 and was valued at
$3.8 million to be issued in Trust Units at $5.49 per Trust Unit.
Unit-based compensation expense of $1.3 million has been included in
general and administration expense for the period ended March 31,
2009 and 171,093 Trust Units were issued to employees in January 2009
for the first one-third of the grant that vested. The remaining
two-thirds of the RTUs granted will vest over the subsequent two
yearly anniversary dates with corresponding compensation expense
recognized over the service period. Since implementing the Plan in
2006, the grant thresholds have not been previously met, and there
have been no RTU grants made during prior years and no related
compensation expense has been recognized.
(d) Net income (loss) per Trust Unit
The calculation of basic and diluted net income (loss) per Trust Unit
are derived from both income (loss) available to Unitholders and
weighted average Trust Units outstanding calculated as follows:
Three months Three months
ended ended
March 31, March 31,
2009 2008
---------------------------------------------------------------------
Income (loss) available to Unitholders
Basic and diluted $ 18,890 $ (24,122)
---------------------------------------------------------------------
Weighted average Trust Units outstanding
Basic 143,691,270 137,599,070
Management Internalization 302,058 -
---------------------------------------------------------------------
Diluted 143,993,328 137,599,070
---------------------------------------------------------------------
The calculation of diluted net income per Trust Unit excludes all
series of convertible debentures for the three months ended March 31,
2009 and 2008 as the impact would be anti-dilutive. Total weighted
average Trust Units issuable in exchange for the convertible
debentures and excluded from the diluted net income per Trust Unit
calculation for the three months ended March 31, 2009 were 9,335,706
(March 31, 2008 - 9,846,967). As at March 31, 2009, the total
convertible debentures outstanding were immediately convertible to
9,234,106 Trust Units (March 31, 2008 - 9,846,252).
Escrowed RTUs granted in January 2009 have been excluded from the
calculation of diluted net income per Trust Unit for the three months
ended March 31, 2009, as the impact would have been anti-dilutive.
Total weighted average Trust Units issuable in exchange for the RTUs
and excluded from the diluted net income per Trust Unit calculation
for the three months ended March 31, 2009 was 542,807.
Management Internalization escrowed Trust Units have been excluded
from the calculation of diluted net income per Trust Unit for the
three months ended March 31, 2008, as the impact would have been
anti-dilutive. Total weighted average Trust Units issuable in
exchange for the Management Internalization escrowed Trust Units and
excluded from the diluted net income per Trust Unit calculation for
the three months ended March 31, 2008 was 559,073.
9. Accumulated Deficit
Accumulated deficit consists of accumulated income and accumulated
distributions for the Fund since inception as follows:
March 31, December 31,
2009 2008
---------------------------------------------------------------------
Accumulated Income $ 218,301 $ 199,411
Accumulated Distributions (1,093,731) (1,076,465)
---------------------------------------------------------------------
Accumulated Deficit $ (875,430) $ (877,054)
---------------------------------------------------------------------
For the three months ended March 31, 2009 the Fund declared
$17.3 million in distributions representing $0.12 per Trust Unit
(March 31, 2008 - $50.0 million in distributions representing $0.36
per Trust Unit).
10. Financial Instruments
Financial instruments of the Fund include accounts receivable,
deposits, accounts payable and accrued liabilities, distributions
payable to Unitholders, bank indebtedness, convertible debentures and
derivative assets and liabilities.
Accounts receivable and deposits are classified as loans and
receivables and measured at amortized cost. Accounts payable and
accrued liabilities, distributions payable to Unitholders and bank
indebtedness are all classified as other liabilities and similarly
measured at amortized cost. As at March 31, 2009, there were no
significant differences between the carrying amounts reported on the
balance sheet and the estimated fair values of these financial
instruments due to the short terms to maturity and the floating
interest rate on the bank indebtedness.
The Fund has convertible debenture obligations outstanding, of which
the liability component has been classified as other liabilities and
measured at amortized cost. The convertible debentures have different
fixed terms and interest rates (note 5) resulting in fair values that
will vary over time as market conditions change. As at March 31,
2009, the estimated fair value of the total outstanding convertible
debenture obligation was $180.1 million (December 31, 2008 -
$191.2 million). The fair value of convertible debentures was
determined based on the public trading activity of such debentures.
Advantage has an established strategy to manage the risk associated
with changes in commodity prices by entering into derivatives, which
are recorded at fair value as derivative assets and liabilities with
gains and losses recognized through earnings. As the fair value of
the contracts varies with commodity prices, they give rise to
financial assets and liabilities. The fair values of the derivatives
are determined through valuation models completed internally and by
third parties. Various assumptions based on current market
information were used in these valuations, including settled forward
commodity prices, interest rates, foreign exchange rates, volatility
and other relevant factors. The actual gains and losses realized on
eventual cash settlement can vary materially due to subsequent
fluctuations in commodity prices as compared to the valuation
assumptions.
Credit Risk
Accounts receivable, deposits, and derivative assets are subject to
credit risk exposure and the carrying values reflect Management's
assessment of the associated maximum exposure to such credit risk.
Advantage mitigates such credit risk by closely monitoring
significant counterparties and dealing with a broad selection of
partners that diversify risk within the sector. The Fund's deposits
are primarily due from the Alberta Provincial government and are
viewed by Management as having minimal associated credit risk. To the
extent that Advantage enters derivatives to manage commodity price
risk, it may be subject to credit risk associated with counterparties
with which it contracts. Credit risk is mitigated by entering into
contracts with only stable, creditworthy parties and through frequent
reviews of exposures to individual entities. In addition, the Fund
only enters into derivative contracts with major national banks and
international energy firms to further mitigate associated credit
risk.
Substantially all of the Fund's accounts receivable are due from
customers and joint operation partners concentrated in the Canadian
oil and gas industry. As such, accounts receivable are subject to
normal industry credit risks. As at March 31, 2009, $11.5 million or
17% of accounts receivable are outstanding for 90 days or more
(December 31, 2008 - $14.2 million or 17% of accounts receivable).
The Fund believes that the entire balance is collectible, and in some
instances we have the ability to mitigate risk through withholding
production or offsetting payables with the same parties. Accordingly,
management has not provided for an allowance for doubtful accounts at
March 31, 2009.
Liquidity Risk
The Fund is subject to liquidity risk attributed from accounts
payable and accrued liabilities, distributions payable to
Unitholders, bank indebtedness, convertible debentures, and
derivative liabilities. Accounts payable and accrued liabilities,
distributions payable to Unitholders and derivative liabilities are
primarily due within one year of the balance sheet date and Advantage
does not anticipate any problems in satisfying the obligations due to
the strength of cash provided by operating activities and the
existing credit facility. The Fund's bank indebtedness is subject to
a $710 million credit facility agreement. Although the credit
facility is a source of liquidity risk, the facility also mitigates
liquidity risk by enabling Advantage to manage interim cash flow
fluctuations. The credit facility constitutes a revolving facility
for a 364 day term which is extendible annually for a further 364 day
revolving period at the option of the syndicate. If not extended, the
revolving credit facility is converted to a two year term facility
with the principal payable at the end of such two year term. The
terms of the credit facility are such that it provides Advantage
adequate flexibility to evaluate and assess liquidity issues if and
when they arise. Additionally, the Fund regularly monitors liquidity
related to obligations by evaluating forecasted cash flows, optimal
debt levels, capital spending activity, working capital requirements,
and other potential cash expenditures. This continual financial
assessment process further enables the Fund to mitigate liquidity
risk.
Advantage has several series of convertible debentures outstanding
that mature from 2009 to 2011 (note 5). Interest payments are made
semi-annually with excess cash provided by operating activities. As
the debentures become due, the Fund can satisfy the obligations in
cash or issue Trust Units at a price determined in the applicable
debenture agreements. This settlement alternative allows the Fund to
adequately manage liquidity, plan available cash resources and
implement an optimal capital structure.
To the extent that Advantage enters derivatives to manage commodity
price risk, it may be subject to liquidity risk as derivative
liabilities become due. While the Fund has elected not to follow
hedge accounting, derivative instruments are not entered for
speculative purposes and Management closely monitors existing
commodity risk exposures. As such, liquidity risk is mitigated since
any losses actually realized are subsidized by increased cash flows
realized from the higher commodity price environment.
The timing of cash outflows relating to financial liabilities are as
follows:
Less than One to Four to
one year three years five years Thereafter
---------------------------------------------------------------------
Accounts payable and
accrued liabilities $ 124,049 $ - $ - $ -
Derivative liabilities 5,366 6,332 - -
Bank indebtedness
- principal - 615,438 - -
- interest 11,759 23,518 - -
Convertible debentures
- principal 82,107 132,221 - -
- interest 14,637 12,005 - -
---------------------------------------------------------------------
$ 237,918 $ 789,514 $ - $ -
---------------------------------------------------------------------
The Fund's bank indebtedness does not have specific maturity dates.
It is governed by a credit facility agreement with a syndicate of
financial institutions (note 6). Under the terms of the agreement,
the facility is reviewed annually, with the next review scheduled in
June 2009. The facility is revolving, and is extendible at each
annual review for a further 364 day period at the option of the
syndicate. If not extended, the credit facility is converted at that
time into a two year term facility, with the principal payable at the
end of such two year term. Management fully expects that the facility
will be extended at each annual review.
Interest Rate Risk
The Fund is exposed to interest rate risk to the extent that bank
indebtedness is at a floating rate of interest and the Fund's maximum
exposure to interest rate risk is based on the effective interest
rate and the current carrying value of the bank indebtedness. The
Fund monitors the interest rate markets to ensure that appropriate
steps can be taken if interest rate volatility compromises the Fund's
cash flows. A 1% increase in interest rates for the three months
ended March 31, 2009 could have decreased net income by approximately
$1.0 million for that period.
Price and Currency Risk
Advantage's derivative assets and liabilities are subject to both
price and currency risks as their fair values are based on
assumptions including forward commodity prices and foreign exchange
rates. The Fund enters derivative financial instruments to manage
commodity price risk exposure relative to actual commodity production
and does not utilize derivative instruments for speculative purposes.
Changes in the price assumptions can have a significant effect on the
fair value of the derivative assets and liabilities and thereby
impact net income. It is estimated that a 10% change in the forward
natural gas prices used to calculate the fair value of the natural
gas derivatives at March 31, 2009 could impact net income by
approximately $12.3 million for the three months ended March 31,
2009. As well, a change of 10% in the forward crude oil prices used
to calculate the fair value of the crude oil derivatives at March 31,
2009 could impact net income by $8.7 million for the three months
ended March 31, 2009. A change of 10% in the forward power prices
used to calculate the fair value of the power derivatives at
March 31, 2009 could impact net income by $0.1 million for the three
months ended March 31, 2009. A similar change in the currency rate
assumption underlying the derivatives fair value does not have a
material impact on net income.
As at March 31, 2009 the Fund had the following derivatives in place:
Description of
Derivative Term Volume Average Price
-------------------------------------------------------------------------
Natural gas - AECO
Fixed price April 2009 to 9,478 mcf/d Cdn $8.66/mcf
December 2009
Fixed price April 2009 to 9,478 mcf/d Cdn $8.67/mcf
December 2009
Fixed price April 2009 to 9,478 mcf/d Cdn $8.94/mcf
December 2009
Fixed price April 2009 to 14,217 mcf/d Cdn $7.59/mcf
March 2010
Fixed price April 2009 to 14,217 mcf/d Cdn $7.56/mcf
March 2010
Fixed price January 2010 to 14,217 mcf/d Cdn $8.23/mcf
June 2010
Fixed price January 2010 to 18,956 mcf/d Cdn $7.29/mcf
December 2010
Fixed price April 2010 to 18,956 mcf/d Cdn $7.25/mcf
January 2011
Crude oil - WTI
Collar April 2009 to 2,000 bbl/d Bought put Cdn $62.00/bbl
December 2009 Sold call Cdn $76.00/bbl
Fixed price April 2009 to 2,000 bbls/d Cdn $62.80/bbl
March 2010
Fixed price April 2010 to 2,000 bbls/d Cdn $69.50/bbl
January 2011
Electricity - Alberta Pool Price
Fixed price April 2009 to 2.0 MW Cdn $63.33/MWh
June 2009
Fixed price March 2009 to 2.0 MW Cdn $75.43/MWh
December 2009
As at March 31, 2009, the fair value of the derivatives outstanding
resulted in an asset of approximately $77,065,000 (December 31,
2008 - $42,620,000) and a liability of approximately $11,698,000
(December 31, 2008 - $1,650,000). For the three months ended
March 31, 2009, $24,397,000 was recognized in income as an unrealized
derivative gain (March 31, 2008 - $61,186,000 unrealized derivative
loss) and $23,346,000 was recognized in income as a realized
derivative gain (March 31, 2008 - $2,407,000 realized derivative
gain).
11. Capital Management
The Fund manages its capital with the following objectives:
- To ensure sufficient financial flexibility to achieve the ongoing
business objectives including replacement of production, funding
of future growth opportunities, and pursuit of accretive
acquisitions; and
- To maximize Unitholder return through enhancing the Trust Unit
value.
Advantage monitors its capital structure and makes adjustments
according to market conditions in an effort to meet its objectives
given the current outlook of the business and industry in general.
The capital structure of the Fund is composed of working capital
(excluding derivative assets and liabilities), bank indebtedness,
convertible debentures, capital lease obligations and Unitholders'
equity. Advantage may manage its capital structure by issuing new
Trust Units, obtaining additional financing either through bank
indebtedness or convertible debenture issuances, refinancing current
debt, issuing other financial or equity-based instruments, adjusting
or discontinuing the amount of monthly distributions, suspending or
renewing its distribution reinvestment plan, adjusting capital
spending, or disposing of assets. The capital structure is reviewed
by Management and the Board of Directors on an ongoing basis.
Advantage's capital structure as at March 31, 2009 is as follows:
March 31, 2009
---------------------------------------------------------------------
Bank indebtedness (long-term) $ 615,438
Working capital deficit(1) 128,455
---------------------------------------------------------------------
Net debt 743,893
Trust Units outstanding market value 445,773
Convertible debentures maturity value (long-term) 132,221
Capital lease obligations (long-term) 3,612
---------------------------------------------------------------------
Total capitalization $ 1,325,499
---------------------------------------------------------------------
(1) Working capital deficit includes accounts receivable, prepaid
expenses and deposits, accounts payable and accrued liabilities,
and the current portion of capital lease obligations and
convertible debentures.
The Fund's bank indebtedness is governed by a $710 million credit
facility agreement (note 6) that contains standard commercial
covenants for facilities of this nature. The only financial covenant
is a requirement for AOG to maintain a minimum cash flow to interest
expense ratio of 3.5:1, determined on a rolling four quarter basis.
The Fund is in compliance with all credit facility covenants. As
well, the borrowing base for the Fund's credit facilities is
determined through utilizing Advantage's regular reserve estimates.
The banking syndicate thoroughly evaluates the reserve estimates
based upon their own commodity price expectations to determine the
amount of the borrowing base. Revision or changes in the reserve
estimates and commodity prices can have either a positive or a
negative impact on the borrowing base of the Fund. On March 18, 2009,
we announced our intention to dispose of certain assets with the net
proceeds from these sales and other oil and natural gas property
sales initially utilized to reduce outstanding bank debt and improve
Advantage's financial flexibility. The amount of the borrowing base
will be impacted by the magnitude of the dispositions and the
resulting effect on reserves. Advantage's issuance of convertible
debentures is limited by its Trust Indenture which currently
restricts the issuance of additional convertible debentures to 25% of
market capitalization subsequent to issuance. Advantage's Trust
Indenture also provides for the issuance of an unlimited number of
Trust Units. However, through tax legislation, an income trust is
restricted to doubling its market capitalization as it stands on
October 31, 2006 by growing a maximum of 40% in 2007 and 20% for the
years 2008 to 2010. In addition, an income trust may replace debt
that was outstanding as of October 31, 2006 with new equity or issue
new, non-convertible debt without affecting the normal growth
percentage. As a result of the "normal growth" guidelines, the Fund
is permitted to issue approximately $2.3 billion of new equity from
April 1, 2009 to January 1, 2011, which we believe is adequate for
any growth we expect to incur. If an income trust exceeds the
established limits on the issuance of new trust units and convertible
debt that constitute normal growth, the income trust will be
immediately subject to the Specified Investment Flow-Through Entity
tax legislation whereby the taxable portion of any distributions paid
will be subject to tax at the trust level.
Management of the Fund's capital structure is facilitated through its
financial and operational forecasting processes. The forecast of the
Fund's future cash flows is based on estimates of production,
commodity prices, forecast capital and operating expenditures, and
other investing and financing activities. The forecast is regularly
updated based on new commodity prices and other changes, which the
Fund views as critical in the current environment. Selected forecast
information is frequently provided to the Board of Directors.
The Fund's capital management objectives, policies and processes have
remained unchanged during the three month period ended March 31,
2009.
12. Commitments
Advantage has several lease commitments relating to office buildings.
The estimated remaining annual minimum operating lease rental
payments for buildings are as follows:
2009 $ 2,896
2010 3,878
2011 1,471
2012 1,072
---------------------------------------------------------------------
$ 9,317
---------------------------------------------------------------------
Advisory
The information in this release contains certain forward-looking statements. These statements relate to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe”, “would” and similar expressions. These statements involve substantial known and unknown risks and uncertainties, certain of which are beyond Advantage’s control, including: the impact of general economic conditions; industry conditions; changes in laws and regulations including the adoption of new environmental laws and regulations and changes in how they are interpreted and enforced; fluctuations in commodity prices and foreign exchange and interest rates; stock market volatility and market valuations; volatility in market prices for oil and natural gas; liabilities inherent in oil and natural gas operations; uncertainties associated with estimating oil and natural gas reserves; competition for, among other things, capital, acquisitions, of reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions; changes in income tax laws or changes in tax laws and incentive programs relating to the oil and gas industry and income trusts; geological, technical, drilling and processing problems and other difficulties in producing petroleum reserves; and obtaining required approvals of regulatory authorities. Advantage’s actual results, performance or achievement could differ materially from those expressed in, or implied by, such forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur or, if any of them do, what benefits that Advantage will derive from them. Except as required by law, Advantage undertakes no obligation to publicly update or revise any forward-looking statements.
SOURCE Advantage Energy Income Fund
