Advantage Energy Income Fund is pleased to announce its unaudited operating and financial results for the second quarter ended June 30, 2008.
MESSAGE TO UNITHOLDERS
Record Second Quarter Funds from Operations and Payout Ratio:
- Strong natural gas and crude oil pricing combined with solid operational results generated a record level of funds from operations during the second quarter of 2008 resulting in a payout ratio of 49%. This is the lowest payout ratio in the history of Advantage and reinforces our strategy to finance our highly efficient capital program from operating cash flow.
- Funds from operations for the second quarter of 2008 increased 66% to $103.8 million and 37% to $0.74 per Trust Unit compared to $62.6 million or $0.54 per Trust Unit for the same period of 2007.
- The Fund declared three distributions during the quarter totaling $0.36 per Trust Unit. Since inception, the Fund has distributed $980.2 million or $16.98 per Trust Unit.
- Production volumes in the second quarter of 2008 increased 18% to 32,015 boe/d compared to 27,115 boe/d in the second quarter of 2007. Second quarter 2008 production volumes were negatively impacted by a significant number of third party turnaround maintenance outages which amounted to approximately 1,400 boe/d for the quarter.
- Natural gas production for the second quarter of 2008 increased 13% to 123.1 mmcf/d, compared to 109.0 mmcf/d reported in the second quarter of 2007. Crude oil and natural gas liquids production increased 28% to average 11,498 bbls/d compared to 8,952 bbls/d in the second quarter of 2007.
Drilling Underway at our Glacier Montney Natural Gas Resource Play Following increased Capital Budget
- On June 27, 2008, Advantage's Board of Directors approved an increase of $55 million to the 2008 capital budget, which has resulted in an annual budget total of $200 million.
- Approximately $39 million will be spent on the next phase of development at Glacier that includes drilling an additional 5 gross horizontal wells, 5 gross vertical delineation wells, and initial infrastructure activities. During the first quarter of 2008, the Fund drilled 5 vertical delineation wells at Glacier which helped confirm geological formations, reservoir productivity and pool continuity.
- Drilling has commenced with three drilling rigs on the property and initial commitments toward facilities expansion plans have been made. We anticipate longer term development plans to be further defined by year-end based on the timing of well information.
- Advantage's extensive 83 section land block, which may support in excess of 150 horizontal wells, is located directly adjacent and on- trend to EnCana's Swan Lake and Murphy's Tupper project developments which are continuing to exhibit successful results.
Strong Results Continue with our Conventional Assets
- Capital spending for the quarter was $21.6 million net which included $9.4 million on drilling and completion activities. During the second quarter, 4 gross (3 net) wells were drilled at 100% success rate with the balance of capital activity directed at well completions carried over from the first quarter, facilities expansions and maintenance capital. Year to date drilling activity has resulted in 57 gross (41 net) wells at a 98% success rate.
- At Nevis in Central Alberta, horizontal light oil wells are exceeding initial budgeted productivities and additional oil facilities expansion work is required. Further to our phase 1 Horseshoe Canyon coal bed methane program, which included 22 wells in the first quarter, an additional 15 well phase 2 program has commenced on the lands acquired in connection with the acquisition of Sound Energy Trust. The wells have excellent initial productivities ranging from 125 to 250 mcf/d. Several years of future light oil and natural gas drilling opportunities are available at our Nevis property.
- At Martin Creek in Northwest British Columbia, new well production information from our highly successful first quarter drilling program is confirming the significant upside potential that exists in this property.
- At Willesden Green in Central Alberta, follow-up drilling locations are being pursued on a light oil discovery that was made in the first quarter of 2008.
- With continued drilling success and a highly attractive suite of assets, Advantage has over 5 years of conventional drilling inventory and is well positioned to additionally capitalize on the significant natural gas resource play in the Montney formation at our Glacier and Stoddart properties.
Improved Commodity Prices & Hedging Update
- With improved natural gas and crude oil pricing realized through the first six months of 2008 and including our commodity risk management positions for this year, we anticipate generating cash flow in excess of our $200 million revised capital budget and current distribution requirements. Surplus cash flow provides security to our current distribution level, flexibility to fund our highly efficient capital program, and the ability to capitalize on acquisition opportunities or reduce debt.
- Advantage maintains a hedging program to reduce cash flow volatility and to ensure that our capital program can be funded out of cash flow. Additional natural gas pricing hedges have been secured for April to December of 2009 for approximately 23% of our gross production at an average AECO price of $8.76 Canadian per mcf or equivalent to approximately NYMEX $9.64 US per mmbtu. Details on our hedging program are available in our MD&A for the quarter and on our website.
Looking Forward
- Our 2008 annual guidance includes capital expenditures of $200 million and production of 32,000 to 34,000 boe/d with a 63% weighting to natural gas. Royalty rates are estimated to range between 18% to 20%. Operating costs are now forecasted to be $13.40 to $13.90/boe due to cost escalations resulting from increased third party processing fees especially at our Lookout Butte property. The higher commodity price environment has also increased electrical power costs and the cost of supplies derived from crude oil and natural gas as feedstocks.
- Production at our Lookout Butte property in Southern Alberta will be impacted during the third quarter by an extended third party facility outage at Shell's Waterton gas plant where a significant modification project is underway. Estimates provided by Shell indicate a potential outage of approximately 55 to 75 days that begins August 13, 2008.
- Advantage's current intention is to continue to be a cash distributing entity after 2010. We will continue to closely monitor industry dynamics and are considering a number of alternative structures. Advantage's significant tax pools of $1.7 billion affords us flexibility to evaluate many options in this regard.
MANAGEMENT'S DISCUSSION & ANALYSIS
The following Management's Discussion and Analysis ("MD&A"), dated as of August 14, 2008, provides a detailed explanation of the financial and operating results of Advantage Energy Income Fund ("Advantage", the "Fund", "us", "we" or "our") for the three and six months ended June 30, 2008 and should be read in conjunction with the consolidated financial statements contained within this interim report and the audited financial statements and MD&A for the year ended December 31, 2007. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and all references are to Canadian dollars unless otherwise indicated. All per barrel of oil equivalent ("boe") amounts are stated at a conversion rate of six thousand cubic feet of natural gas being equal to one barrel of oil or liquids. -- www.cnxmarketlink.com
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