Oil & Gas Job Listings
CALGARY, May 5 /CNW/ - Vermilion Energy Trust ("Vermilion") (TSX - VET.UN) is pleased to report unaudited interim operating and financial results for the period ended March 31, 2006.
First Quarter Highlights:
- Recorded Trust production of 26,241 boe/d compared to 26,639 boe/d in
the fourth quarter of 2005. Slightly lower production reflected
weather related downtime in Australia.
- Maintained stable distributions of $0.17 per month, a rate that has
remained constant since initial distribution in March 2003. Cash
distributions represented 39% of funds generated from operations
during the quarter.
- Provided a total return to unitholders of 11.2% in the first quarter,
comprised of 9.5% in capital appreciation and 1.7% in distributions.
- Drilled 32 coalbed methane ("CBM") wells in the first quarter of 2006.
Vermilion has successfully drilled approximately 125 wells since the
inception of this CBM program in July 2004.
- Announced an agreement to acquire an 89.8% interest in a French
subsidiary of ExxonMobil Corporation for $185 million (subject to
adjustment for working capital and assumed debt). The acquisition,
which is expected to close in the second quarter, will add
approximately 2,000 boe/d to Vermilion's 2006 average annual
production. Production volumes will increase in 2007 as Vermilion will
realize a full twelve-month stream of production next year. The
reserves acquired as part of the transaction will replace 150% of
Vermilion's 2006 production.
- Successfully drilled four new wells in the La Torche Field in France.
These wells will be completed and tied-in during the second quarter.
- Realized strong production results in The Netherlands as a result of
downhole and facility work. Prices for natural gas in The Netherlands
continue to climb, reflecting strong commodity prices in the second
half of 2006. Price realizations in the first quarter were 25% higher
than prices received in 2005.
- Reduced net debt by $21 million during the quarter to $223.4 million.
Vermilion's conservative approach to financial management will enable
the Trust to close the acquisition in France using existing credit
facilities.
Annual and Special Meeting Web-cast
As Vermilion's Annual and Special meeting is being held today, May 5, 2006 at 10:00 a.m. at the Metropolitan Centre in the Grand Lecture Theatre, there will not be a first quarter conference call, however, the Annual and Special meeting will be web-casted and the first quarter results will be discussed. Please visit www.vermilionenergy.com/irhome.html and click on the Annual and Special Meeting link to join in the web-cast.
HIGHLIGHTS
Three Months Ended
March 31, December 31,
2006 2005
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Financial ($000 CDN except unit and per unit
amounts)
Petroleum and natural gas revenues $ 147,286 $ 152,864
Funds from operations 82,652 87,865
Per unit, basic(1) 1.19 1.29
Capital expenditures 40,350 27,199
Net debt 223,415 244,889
Reclamation fund 43,127 42,198
Cash distributions per unit 0.51 0.51
Cash distributions total 32,269 31,837
Less DRIP 5,199 5,042
Cash distributions net 27,070 26,795
% of cash flow distributed gross 39% 36%
% of cash flow distributed net 33% 30%
Total net distributions and capex $ 67,420 $ 53,994
% cash flow 82% 61%
Trust units outstanding(1)
Basic 70,029,183 68,875,321
Diluted 73,673,665 73,148,621
Weighted average trust units outstanding(1)
Basic 69,491,270 68,122,539
Diluted 71,290,864 69,395,074
Unit trading
High $33.27 $30.42
Low $26.51 $19.67
Close $32.57 $29.74
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Operations
Production
Crude oil (bbls/d) 12,144 13,318
Natural gas liquids (bbls/d) 1,238 1,425
Natural gas (mcf/d) 77,148 71,376
Boe/d (6:1) 26,241 26,639
Average reference price
WTI (US per bbl) $63.47 $60.02
Brent (US per bbl) 61.75 56.90
AECO (CDN per mcf) 7.55 11.43
NIP 2004 Netherlands (Euro per GJ) 5.99 5.50
TAPIS Australia (US per bbl) 65.27 59.37
Average selling price
Crude oil and NGL's (CDN per bbl) 73.93 64.61
Natural gas (CDN per mcf) 8.39 10.11
Netbacks per boe (6:1)
Operations netback 42.65 38.64
Cash flow netback 35.00 35.86
Operating costs 8.62 8.02
General and administration $ 1.29 $ 1.28
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(1) Includes trust units issuable for outstanding exchangeable shares
based on the period end exchange ratio
(2) Distributions are paid on issued trust units at each record date and
are shown prior to the impact of the Trust's DRIP program
The above table includes non-GAAP measurements, which may not be
comparable to other companies. The 2005 results do not include Verenex Energy
Inc.
MANAGEMENT NEWS
Greg Hay, who served as Vermilion's general manager in the Netherlands,
and who successfully steered this new venture through the first two years of
operations is leaving Vermilion for personal reasons. We would like to thank
Greg for his contribution to Vermilion's entry into the Netherlands and for
his tireless effort in building Vermilion's reputation as a reliable operator
in that country.
We are pleased to announce that Peter Sider has agreed to join the
Vermilion team, and will be relocating to Harlingen as the new general manager
of Vermilion Oil & Gas Netherlands B.V. Peter brings 25 years of oil and gas
engineering and management experience, both domestic and international, and
has a strong background in production operations with a number of companies
including BP Amoco and Grad and Walker.
OUTLOOK
Merger activity in the Canadian energy trust sector appears to be
accelerating, as asset acquisition opportunities in Western Canada continue to
diminish. Vermilion's international exposure continues to reap strong benefits
for unitholders, as the Trust nears completion of the latest of a series of
accretive transactions. The recently announced transaction in France is
expected to close near the end of May and will add an estimated 3,500 boe/d of
production, increasing volumes in France by more than 50%. The acquired
reserves will replace approximately 150% of the Trust's forecast production in
2006, and more importantly, the properties offer substantial opportunity for
future production and reserve growth.
Vermilion's CBM drilling program in central Alberta continues on
schedule, though still not reflecting potential production volumes from these
wells. Capacity limitations of existing facilities have restricted the number
of wells tied-in to approximately one half of the wells drilled. Expansion of
gas processing facilities and the installation of a new pipeline should
considerably improve market access for this new gas production over the
balance of the year.
The Trust has procured a rig to drill a twelve-well infill program in
Drayton Valley, which is expected to commence late in the second quarter. This
program will target Rock Creek and Ellerslie gas zones which are the primary
producing zones in this area.
In France, Vermilion drilled three new wells in the La Torche Field in
the Paris Basin and cased a fourth in April 2006. These wells will be
completed and tied-in by the end of the second quarter. Ongoing workover
activities in the Paris and Aquitaine Basins, combined with these new wells
should hold base production levels near 6,000 boe/d in 2006. A project
appraisal document for the Aquitaine Maritime project, offshore France, will
be completed in May and will be distributed to a number of potential industry
participants. Vermilion would like to secure a drilling partner before the end
of the summer and plans to have the first well on this prospect drilled in
2007.
In the Netherlands, production has responded well to the installation of
siphon strings which has stabilized the performance of many of the wells
resulting in reduced downtime and operating costs. Vermilion has submitted
drilling proposals to regulatory authorities and hopes to receive approvals to
begin drilling by late 2006. Initial targets include two to three development
wells in existing tight-gas reservoirs, while future opportunities include
larger step-out prospects.
The Australian production volumes in the first quarter were negatively
impacted by the passing of several major cyclones, three of which necessitated
production to be shut-in and the platform to be evacuated as a cautionary
measure. These facilities, designed to withstand a category five storm,
weathered the storms extremely well and production levels were fully restored
with little incident after the passage of each storm. This year represented
the highest incident of storms in the region since the installation of the
platform in the mid-1990's and the facilities and employees performed
extremely well under these circumstances. Looking forward, reservoir
optimization studies indicate the potential for improved well performance
using modest intervention techniques, and Vermilion is planning the first well
workover in the third quarter. No workovers have been performed on the wells
in the Wandoo Field since they were initially completed in the mid 1990's.
Vermilion completed approximately 33% of the originally approved 2006
capital program during the first quarter, as we executed a significant portion
of our drilling operations in both France and Canada. As a result of the
significant inventory of exploitation opportunities within the Trust, combined
with a strong commodity price environment, the Trust has increased its capital
budget for 2006 by $20 million to $140 million.
The Trust was able to reduce debt by about $21 million from year-end
levels, which will provide the opportunity to finance the France acquisition
using existing lines of credit. Vermilion will continue to pursue investment
opportunities in its three core regions of activity that include Canada,
Western Europe and Australia.
At the end of the first quarter non-residents owned approximately 30% of
the issued and outstanding units of Vermilion (not including exchangeables)
and 28% if the exchangeable shares are included. This compares to 29% and 27%,
respectively, at the end of the fourth quarter of 2005. Pursuant to
Vermilion's Trust Indenture, non-resident unitholders may not own more than
50% of total outstanding trust units. The Canadian government recently relaxed
its view of non-resident ownership limitations, but Vermilion will adhere to
the limits designated by its Trust Indenture until further legislative
guidelines regarding non-resident ownership and taxation are firmly
established.
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
The following is management's discussion and analysis (MD&A) dated April
24, 2006 of Vermilion's operating and financial results for the quarter ended
March 31, 2006 compared with the corresponding period in the prior year. This
discussion should be read in conjunction with the attached unaudited interim
consolidated financial statements and the Trust's audited consolidated
financial statements for the years ended December 31, 2005 and 2004, together
with accompanying notes, as contained in the Trust's 2005 Annual Report.
NON-GAAP MEASURES
Included in this report are references to terms commonly used in the oil
and gas industry, such as cash flow, cash flow per unit and funds from
operations which represent cash flow from operating activities expressed
before changes in non-cash working capital and are used by the Trust to
analyze operating performance, leverage and liquidity. These terms do not have
standardized meanings prescribed by Generally Accepted Accounting Principles
("GAAP") and therefore may not be comparable with the calculations of similar
measures for other entities. Consequently, these are referred to as non-GAAP
measures. Cash flow, as discussed in this report, appears as a separate
caption on the Trust's cash flow statement as "funds from operations" and is
reconciled to net earnings.
(000's) 2006 2005
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Funds from operations $ 82,652 $ 57,427
Changes in non-cash operating working capital 22,116 (26,727)
Asset retirement costs incurred (361) (139)
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Cash from operations $ 104,407 $ 30,561
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FORWARD-LOOKING INFORMATION
This document contains forward-looking financial and operational
information as to the Trust's internal projections and expectations relating
to future events or performance. In some cases, forward-looking information
can be identified by terminology such as "may", "will", "should", "expects",
"projects", "anticipates" and similar expressions. These statements represent
management's expectations concerning future operating results or the economic
performance of the Trust and are subject to a number of risks and
uncertainties that could materially affect results. These risks include, but
are not limited to future commodity prices, exchange rates, interest rates,
geological risk, reserves risk, political risk, product demand and
transportation restrictions, which may cause actual performance and financial
results in future periods to differ materially from any projections of future
performance or results expressed by such forward-looking statements.
Accordingly, readers are cautioned that events or circumstances could cause
results to differ materially from those predicted. Certain natural gas volumes
have been converted on the basis of six thousand cubic feet of gas to one
barrel equivalent of oil. Barrels of oil equivalent (boe's) may be misleading,
particularly if used in isolation. A boe conversion ratio of six thousand
cubic feet to one barrel of oil is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead.
OPERATIONAL ACTIVITIES
In Canada, the Trust drilled 33 wells (27 net) in the first quarter,
resulting in one gas wells (0.5 net), and 32 standing wells (26.5 net). With
the exception of one gas well drilled in the Athabasca region, all of these
wells are part of Vermilion's shallow gas and CBM program in Central Alberta.
In addition to the Trust's drilling operations, Vermilion had five wells (1.8
net) drilled on its Canadian lands by third party operators through farm-out
arrangements in which Vermilion maintained an overriding royalty or small
working interest.
In France, Vermilion successfully drilled and cased three (3.0 net) wells
in the Paris Basin. A fourth well was drilling at the end of the quarter and
has since been cased. The wells will be completed and put on production by the
end of the second quarter of 2006. The successful workover and recompletion
program in France is continuing, with four wells recompleted or stimulated in
the first quarter. The technical team began a detailed review of the Esso Rep
properties, which should provide additional exploitation opportunities in the
coming months.
In the Netherlands, the Trust reactivated two shut-in gas wells,
installed one additional velocity string and performed stimulations on two
producing wells. The engineering team began a review of a potential facility
consolidation (Harlingen and Garjip) and submitted permit applications for
drilling infill wells at Harlingen.
In Australia, weather issues dominated activities during the first
quarter. Six cyclones occurred in the general area of the Wandoo platform,
three of which necessitated full evacuation of the facilities for cautionary
reasons.
Production
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Three Months Ended Three Months Ended
March 31, 2006 March 31, 2005
Oil & Natural Oil & Natural
NGLs Gas Total NGLs Gas Total
(bbls/d) (mmcf/d) (boe/d) % (bbls/d) (mmcf/d) (boe/d) %
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Vermilion Energy
Trust
Canada 4,159 40.56 10,919 42 5,494 38.90 11,978 53
France 5,580 1.45 5,822 22 5,342 1.30 5,559 24
Netherlands 13 35.14 5,870 22 17 31.25 5,225 23
Australia(1) 3,630 - 3,630 14 - - - -
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Total 13,382 77.15 26,241 100 10,853 71.45 22,762 100
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(1) Effective from April 1, 2005
First quarter production in Canada averaged 4,159 bbls/d of oil and NGL's
and 40.6 mmcf/d of natural gas compared to 4,522 bbls/d of oil and NGL's and
39.1 mmcf/d of natural gas in the fourth quarter of 2005. Total production
declined by only 1.1% despite the tie-in delays related to the CBM program.
Production in France averaged 5,822 boe/d in the first quarter as
compared to 6,096 boe/d in the fourth quarter of 2005. Completion of new wells
in the La Torche Field in the second quarter as well as a scheduled increase
in workovers should see volumes in France improve in the second quarter and
over the balance of the year.
Production in the Netherlands averaged 5,870 boe/d, up from 5,214 boe/d
in the fourth quarter of 2005. Improved performance from wells refitted with
siphon strings, the uphole recompletion of a shut-in gas well and the reduced
use of fuel gas for compression purposes all contributed to the higher
volumes. Second quarter production is anticipated to be reduced by
approximately 10% due to seasonally lower rates-of-take by Gasunie, the sale
gatherer and purchaser of gas in the Netherlands.
Australian production fell by 664 boe/d to 3,630 boe/d in the first
quarter from 4,294 in the fourth quarter of 2005. This reflects the shut-in
volumes resulting from an active cyclone season. Second quarter production
volumes in Australia are expected to average approximately 4,000 boe/d.
Overall, the Trust averaged 26,241 boe/d in the first quarter of 2006,
slightly below the 26,639 boe/d produced in the fourth quarter of 2005.
Production is expected to increase in June upon closing of the previously
announced acquisition in France, and should improve further as new wells are
put onstream and as new natural gas facilities in Central Alberta are
completed.
CAPITAL EXPENDITURES
Drilling and development capital spending for the first three months
totalled $36.1 million compared to $24.7 million spent in the first three
months of 2005. The acquisition of assets in Australia was completed in the
first quarter of 2005 for approximately $95 million.
($000's)
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Three Months Ended
March 31, March 31,
2006 2005
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Land $ 502 $ 417
Seismic 389 860
Drilling and completion 20,223 15,300
Production equipment and facilities 9,938 4,356
Recompletions 1,763 2,804
Other 3,325 961
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36,140 24,698
Acquisitions 4,210 94,967
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Total $ 40,350 $ 119,665
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FINANCIAL REVIEW
The Trust generated cash flow of $82.7 million ($1.19 per unit) in the
first quarter of 2006, compared to $87.9 million ($1.29 per unit) in the
fourth quarter of 2005 ($57.2 million, $0.85 per unit in first quarter 2005).
First quarter cash flows were slightly lower due to a drop in Canadian natural
gas prices and due to slightly lower production. After-tax cash flow netbacks
declined by $0.91 to $35.00 ($27.89 in first quarter 2005) as compared to
fourth quarter 2005 results, reflecting higher taxes accrued in the first
quarter. The Trust prefers to take a conservative approach to managing
potential tax liabilities, especially in light of the fact that forward curves
indicate potentially higher commodity prices over the balance of the year. The
Trust's distributions in the first quarter totalled $32.3 million or $0.51 per
unit for a payout ratio of 39%, which was slightly higher than the 36% (54% in
first quarter 2005) payout ratio reported in the fourth quarter of 2005.
Development capital expenditures in the quarter totalled $40.4 million. The
Trust's strong financial position at the end of the first quarter will allow
for the acquisition in France to be completed using Vermilion's existing
credit facilities. The Trust's net debt as of March 31 of $223.4 million
represents less than 0.7 times first quarter cash flow annualized. Vermilion
had funds set aside for reclamation purposes of $43.1 million at the end of
the first quarter, and is the industry leader in its approach to managing
future asset retirement obligations.
Benchmark Prices
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Three Months Ended
March 31, March 31,
2006 2005
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AECO ($CDN/mcf) $ 7.55 $ 6.89
WTI ($US/bbl) $ 63.47 $ 49.85
Foreign exchange rate (CDN/USD) $ 0.87 $ 0.82
NIP 2004 Netherlands (Euro per GJ) $ 5.99 $ 4.09
TAPIS Australia (US per bbl) $ 65.27 $ -
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REVENUE
Total revenues for the first quarter of 2006 were $147.3 million compared
to $108.7 million for the first quarter of 2005. Vermilion's combined crude
oil & NGL price was $73.93 per bbl for the first quarter of 2006, an increase
of 12% over the $65.97 per bbl reported for the first quarter of 2005. The
natural gas price realized in the first quarter of 2006 was $8.39 per mcf
compared to $6.99 per mcf realized a year ago, a 20% year-over-year increase.
In the following chart, "Derivative instruments" is the amortization of the
fair value loss of Vermilion's economic hedges in place as of January 1, 2004.
($000's except per BOE)
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Three Months Ended
March 31, March 31,
2006 2005
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Crude oil and NGL's $ 89,043 $ 64,640
Per boe $ 73.93 $ 65.97
Natural gas 58,243 45,248
Per mcf $ 8.39 $ 6.99
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Combined 147,286 109,888
Derivative instruments - (1,173)
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Petroleum and natural gas revenue $ 147,286 $ 108,715
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DERIVATIVE INSTRUMENTS
Vermilion continues to manage its risk exposure through prudent commodity
and currency economic hedging strategies. Vermilion has the following
financial collars and puts in place at March 31, 2006:
Risk Management: Oil Funded Cost bbls/d US$/bbl
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Collars - WTI
Q2 2006 US$1.50/bbl 250 $53.00 - $73.90
Q2 2006 US$0.25/bbl 250 $60.00 - $73.00
Q2 2006 US$0.25/bbl 250 $60.00 - $73.00
Q2 2006 Costless 250 $55.00 - $75.20
Q3 2006 Costless 250 $60.10 - $80.00
Q4 2006 Costless 250 $61.20 - $80.00
Q1 2007 Costless 250 $58.00 - $83.85
Puts
Q2 2006 US$0.25/bbl 500 $55.75
Mar-Dec US$1.00/bbl 1,000 $54.10
Apr-Sep US$0.75/bbl 250 $58.42
Q3 2006 US$0.75/bbl 500 $55.10
Collars - BRENT
2006 US$1.00/bbl 1,000 $53.00 - $67.70
Q3 2006 US$1.00/bbl 250 $52.00 - $68.50
Q3 2006 US$0.25/bbl 250 $58.00 - $72.10
Q3 2006 US$0.25/bbl 250 $58.00 - $72.20
Q4 2006 US$1.50/bbl 250 $53.00 - $69.80
Risk Management: Power MWH $CDN/MWH
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2006 2.0 $48.50
The impact of Vermilion's economic hedging program reduced cash netbacks
by $0.04 per boe on a combined basis for the three month period ended March
31, 2006 compared to a hedging cost of $3.98 per boe for the first three
months of 2005. Oil hedging resulted in a $0.2 million cost for the period
($0.16 per boe) compared to a $8.2 million cost, $8.40 per boe for the same
period in 2005. Gas hedging resulted in a $0.1 million cost for the period
($0.02 per boe) compared to no gain or loss for the same period in 2005. For
the period, the Trust recorded a net gain from its power hedges totalling $0.1
million or $0.06 per boe (compared to a gain of $0.03 million or $0.01 per boe
for the first quarter of 2005).
ROYALTIES
Total royalties, net of ARTC, increased to $10.02 per boe or 16% of sales
in the first quarter of 2006, compared with $7.01 per boe or 13% of sales in
the first quarter of 2005. The increase on a per boe basis is due to the
impact of higher commodity prices. The increase on a percentage basis is due
to the higher royalty rate in Australia as the Australia acquisition closed
March 31, 2005 and therefore did not impact first quarter results in 2005. In
France, royalties for the most part are calculated on a unit of production
basis and rates do not react to price changes, therefore as prices increase,
the royalties, as a percentage of sales, decline. In Australia, royalties are
reduced by capital reinvestment in the country. For the first quarter of 2006,
Vermilion's capital program in Australia was minimal resulting in the Trust
paying royalties at or near the maximum rate.
($000's except per BOE)
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Three Months Ended
March 31, March 31,
2006 2005
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Crude oil & NGL's $ 16,398 $ 8,875
Per boe $ 13.61 $ 9.06
Natural gas 7,270 5,564
Per mcf $ 1.05 $ 0.86
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Combined $ 23,668 $ 14,439
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Per boe $ 10.02 $ 7.01
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OPERATING COSTS
Operating costs increased to $8.62 per boe in 2006 from $7.52 per boe in
the first quarter of 2005. The increase in the dollar amount of operating
costs over 2005 was due to the acquisition of higher cost assets in Australia.
In Canada, the significant activity levels in the industry combined with
increased energy costs, have placed upward pressure on costs across the board.
When combined with plant turnarounds completed during the quarter, year over
year increases in costs per boe have been experienced. In France, operating
costs are down year over year due to a reclassification of certain expenses
beginning in the fourth quarter of 2005. In the Netherlands, operating costs
are up due primarily to plant maintenance in the quarter. Cost of operations
in Australia averaged $9.99 per boe of production in the quarter, consistent
with costs in 2005.
($000's except per BOE)
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Three Months Ended
March 31, March 31,
2006 2005
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Crude oil & NGL's $ 10,837 $ 7,278
Per boe $ 9.00 $ 7.43
Natural gas 9,516 8,205
Per mcf $ 1.37 $ 1.27
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Combined $ 20,353 $ 15,483
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Per boe $ 8.62 $ 7.52
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TRANSPORTATION
Transportation costs as presented in the statements of earnings are
defined by the point of legal transfer of the product. Transportation costs
are dependent upon where the product is sold, product split, location of
properties, and industry transportation rates that are driven by supply and
demand of available transport capacity. For Canadian gas production, legal
title transfers at the intersection of major pipelines (referred to as "the
Hub") whereas the majority of Vermilion's Canadian oil production is sold at
the wellhead. The majority of Vermilion's transportation costs are made up of
boat charges incurred in the Aquitaine Basin in France where oil production is
transported by tanker from the Ambès terminal in Bordeaux to Donges, France.
In Australia, oil is sold at the Wandoo B platform and in the Netherlands gas
is sold at the plant gate, resulting in no transportation costs relating to
Vermilion's production in these countries.
($000's except per BOE)
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Three Months Ended
March 31, March 31,
2006 2005
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Transportation $ 2,457 $ 2,951
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Per boe $ 1.04 $ 1.43
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GENERAL AND ADMINISTRATION EXPENSES
General and administration expenses for the first quarter of 2006
decreased to $1.29 per boe from $1.58 per boe in the first quarter of 2005.
Total costs are consistent with the first quarter 2005, however an increase in
production volumes have reduced the netback.
($000's except per BOE)
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Three Months Ended
March 31, March 31,
2006 2005
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General and administration $ 3,038 $ 3,249
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Per boe $ 1.29 $ 1.58
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UNIT COMPENSATION EXPENSE
A non-cash trust unit compensation expense of $2.06 per boe was recorded
in the first quarter of 2006 compared to $1.95 per boe in the first quarter of
2005. This non-cash amount relates to the value attributable to rights granted
to officers, directors and employees under the Trust Unit Rights Incentive
Plan and the Trust Unit Award Plan.
Unit compensation expense associated with rights and awards granted is
calculated using the fair value methodology and is deferred and recognized in
earnings over the vesting period of the plans with a corresponding increase or
decrease in contributed surplus. Consideration paid upon exercise of the
rights together with the amount previously recognized in contributed surplus
is recorded as an increase in unitholders' capital.
From inception of the unit rights incentive plan until January 1, 2005,
the Trust applied the intrinsic value methodology based on the initial
assessment that the number of uncertainties regarding the reduction in the
strike price of the rights precluded a reasonable estimate of the fair value
of the rights on the date of grant. In the fourth quarter of 2005 it was
determined that, in the circumstances, the fair value methodology could be
applied since inception of the plan. The Trust has therefore completed a fair
value estimate of the rights at the respective date of grant and has
retroactively restated its unit compensation expense back to the inception of
the plan in 2003.
($000's except per BOE)
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Three Months Ended
March 31, March 31,
2006 2005
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(Restated)
Unit compensation expense $ 4,861 $ 4,015
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Per boe $ 2.06 $ 1.95
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INTEREST EXPENSE
Interest expense increased to $0.99 per boe for the first quarter of 2006
from $0.47 per boe for the corresponding period in 2005 as a result of higher
average debt levels stemming from the purchase of the assets in Australia at
the end of the first quarter of 2005 and the Glacier acquisition in December
2005.
($000's except per BOE)
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Three Months Ended
March 31, March 31,
2006 2005
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Interest $ 2,345 $ 980
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Per boe $ 0.99 $ 0.47
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DEPLETION, DEPRECIATION AND ACCRETION EXPENSES
Depletion, depreciation and accretion expenses increased to $14.89 per
boe in the first quarter of 2006 from $12.77 per boe in the first quarter of
2005. The increase is due mainly to the increase of finding and development
costs in Canada and the increase in the asset retirement obligation resulting
primarily from the Australia acquisition.
($000's except per BOE)
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Three Months Ended
March 31, March 31,
2006 2005
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Depletion, depreciation and accretion $ 35,162 $ 26,286
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Per boe $ 14.89 $ 12.77
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TAXES
The Trust's current tax provision has increased to $5.66 per boe in the
first quarter of 2006 from $3.40 per boe in the first quarter of 2005 with the
increase due primarily to the increase in commodity prices year over year and
the resulting incremental tax liability in the Trust's foreign operations. The
tax liability in Australia was allocated to the purchase price for the period
from January 1 to March 31, 2005 in accordance with the allocation of revenues
and expenses related to the Australia assets for that same time period. The
recovery in future income taxes is a result of the taxable portion of
distribution payments made to unitholders. In the Trust's structure, payments
are made between the operating company and the Trust transferring both income
and future income tax liability to the unitholder. Therefore it is the opinion
of management that no cash income taxes in Canada are expected to be paid by
the operating company in the future, and as such, the future income tax
liability recorded on the balance sheet related to Canadian operations will be
recovered through earnings over time.
($000's except per BOE)
-------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
2006 2005
-------------------------------------------------------------------------
Current and capital tax $ 13,355 $ 7,001
-------------------------------------------------------------------------
Per boe $ 5.66 $ 3.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
FOREIGN EXCHANGE
A foreign exchange gain of $0.94 per boe was recorded for the first
quarter of 2006 with a gain of $0.50 per boe in the first quarter of 2005. The
gain is mostly unrealized and relates to the impact of the weakening Canadian
dollar compared to the Euro on the foreign working capital.
($000's except per BOE)
-------------------------------------------------------------------------
Three Months Ended
March 31, March 31,
2006 2005
-------------------------------------------------------------------------
Foreign exchange (gain) $ (2,214) $ (1,037)
-------------------------------------------------------------------------
Per boe $ (0.94) $ (0.50)
-------------------------------------------------------------------------
EARNINGS
Net earnings in the quarter increased to $40.9 million or $0.65 per unit
from $26.0 million or $0.43 per unit in 2005. The increase in earnings is due
mainly to the increased commodity prices realized in the period as well as the
reduced loss on derivatives due to the expiration of a number of oil economic
hedges at the end of 2005.
LIQUIDITY AND CAPITAL RESOURCES
Vermilion's debt (net of working capital) on March 31, 2006 was $223.4
million. Vermilion entered into an unsecured covenant based credit facility
with a syndicate of chartered banks in July 2005. This $410 million facility
is comprised of a one year revolving period with a one year term to follow
with a final settlement payment required at the end of the second year.
RECLAMATION FUND
Vermilion has established a reclamation fund for the ultimate payment of
environmental and site restoration costs on its asset base. The reclamation
fund is funded by Vermilion Resources Ltd. and/or its operating subsidiaries.
Contributions in the first quarter totaled approximately $0.9 million.
Contributions are currently made on a barrel of oil equivalent of production
basis in Canada, France, the Netherlands, and Australia and are occasionally
supplemented with lump sum contributions. Contribution levels to the
reclamation fund will be reviewed on a regular basis and will be adjusted when
necessary to ensure reclamation obligations associated with the Trust's assets
will be substantially funded when the costs are forecast to be incurred.
ASSET RETIREMENT OBLIGATION
At March 31, 2006, Vermilion had recorded an asset retirement obligation
of $71.9 million for future abandonment and reclamation of its properties
compared to $69.9 million for the same period in 2005. The increase is due to
foreign exchange fluctuations, incremental drilling and accretion expense.
DISTRIBUTIONS
Vermilion maintained monthly distributions at $0.17 per unit for the
quarter distributing a total of $32.3 million compared to $31.2 million for
the same period in 2005. Vermilion has maintained its distributions at $0.17
per month since its conversion to a trust, resulting in 38 continuous months
of distributions at this level. The Trust defines distributable income as
funds from operations. For the first quarter of 2006, the Trust has paid out
39% of its distributable income (54% in the first quarter of 2005).
UNITHOLDERS' EQUITY
During the quarter approximately 1.3 million units were issued on
conversion of exchangeable shares, unit rights exercised, issued pursuant to
the terms of the Trust's bonus plan and the Trust's unit rights incentive plan
and unitholders' participation in the distribution reinvestment plan.
Unitholders' capital increased during the quarter by $18.8 million as a result
of the issuance of those units and $6.6 million as a result of contributed
surplus transfer on exercise of unit rights. This increase in equity was
offset by cash distributions of $32.3 million in the first quarter.
NON-CONTROLLING INTEREST - EXCHANGEABLE SHARES
The Trust has recorded non-controlling interest attributed to the issued
and outstanding exchangeable shares.
Non-controlling interest on the consolidated balance sheet represents the
book value of exchangeable shares plus accumulated earnings attributable to
the outstanding exchangeable shares. The reduction in 2006 and 2005 net income
represents the net income attributable to the exchangeable shareholders for
2006 and 2005. As the exchangeable shares are converted to trust units,
Unitholders' capital is increased for the fair value of the trust units
issued. As the exchangeable shares are exchanged for trust units over time,
the non-controlling interest will decrease and eventually will be nil when all
exchangeable shares have been exchanged for trust units on or before January
22, 2013.
As at March 31, 2006 there were 4.5 million exchangeable shares
outstanding at exchange ratio of 1.40177 whereby 6.3 million trust units would
be issuable upon conversion. The exchangeable shares can be converted into
trust units or redeemed by the exchangeable shareholder for trust units at any
time. Vermilion may redeem all outstanding exchangeable shares on or before
January 22, 2013 and may redeem the exchangeable shares at any time if the
number of exchangeable shares outstanding falls below 500,000 shares.
Vermilion may issue cash or trust units upon redemption of exchangeable shares
and it is the intention to issue trust units upon redemption.
VERENEX ENERGY INC.
On December 15, 2005, the Trust's equity interest in Verenex Energy Inc.
("Verenex") was reduced to 49% from 53% and the Trust was no longer considered
to control Verenex. Effective December 15, 2005 the Trust discontinued
consolidating the financial results of Verenex and has since accounted for the
investment using the equity basis of accounting. Comparative figures have not
been restated.
PROPOSED TRANSACTION
On March 6, 2006 Vermilion announced that a wholly-owned subsidiary
entered into an arrangement with a French subsidiary of Exxon Mobil
Corporation, to purchase its 89.89% shareholding in Esso REP. The purchase
price for the proposed transaction is approximately C$185 million with an
effective date of July 1, 2005, subject to closing adjustments that account
for changes in working capital and assumed debt. Vermilion will begin
recording production from this transaction upon closing. Closing is subject to
the satisfaction of all conditions precedent and the receipt of all necessary
regulatory approvals and is anticipated to occur before the end of the second
quarter of 2006. It is anticipated the transaction will be funded out of
Vermilion's existing debt facility.
CRITICAL ACCOUNTING ESTIMATES
The Trust's financial and operating results contain estimates made by
management in the following areas:
i. Capital expenditures are based on estimates on projects in various
stages of completion;
ii. Revenues, royalties and operating costs are based on estimates for
which revenue had not yet been received and costs had not yet been
realized;
iii. Fair value of derivative instruments are based on estimates that
are subject to fluctuation of commodity prices and foreign exchange
rates;
iv. Depletion, depreciation and accretion are based on estimates of oil
and gas reserves that the Trust expects to recover in the future;
v. Asset retirement obligations are based on estimates of future costs
and the timing of expenditures; and
vi. The future recoverable value of capital assets and goodwill are
also based on estimates that the Trust expects to realize.
OFF BALANCE SHEET ARRANGEMENTS
The Trust has certain lease agreements that are entered into in the
normal course of operations. All leases are treated as operating leases
whereby the lease payments are included in operating expenses or G&A expenses
depending on the nature of the lease. No asset or liability value has been
assigned to these leases in the balance sheet as of March 31, 2006.
The Trust uses a variety of options including funded and costless collars
and puts to manage the risk associated with fluctuating commodity prices on
the sale of crude oil and natural gas. The Trust does not obtain collateral or
other security to support its collars as the majority of these instruments are
with the Trust's banking syndicate.
The Trust has not entered into any guarantee or off balance sheet
arrangements that would adversely impact the Trust's financial position or
results of operations.
DISCLOSURE CONTROLS AND PROCEDURES
Vermilion's officers have established and maintained disclosure controls
and procedures and evaluated the effectiveness of these controls in
conjunction with the Trust's filings.
NETBACKS (6:1) Three Months
Ended
March 31,
Three Months Ended March 31, 2006 2005
-------------------------------------------------------------------------
Natural (Restated)
Oil & NGLs Gas Total Total
$/bbl $/mcf $/boe $/boe
-------------------------------------------------------------------------
Trust Financial Information
Canada
Price $65.23 $8.71 $57.19 $50.91
Realized hedging loss 0.07 0.03 0.12 (3.85)
Royalties (net) (12.17) (1.98) (12.00) (10.92)
Transportation (0.07) (0.21) (0.80) (0.75)
Lifting costs (11.72) (1.15) (8.72) (6.71)
-------------------------------------------------------------------------
Operating netback $41.34 $5.40 $35.79 $28.68
-------------------------------------------------------------------------
France
Price $75.52 $7.65 $74.29 $72.93
Realized hedging loss (0.43) - (0.42) (8.08)
Royalties (net) (5.57) (0.25) (5.40) (5.34)
Transportation (3.33) - (3.19) (4.29)
Lifting costs (6.34) (2.91) (6.80) (8.20)
-------------------------------------------------------------------------
Operating netback $59.85 $4.49 $58.48 $47.02
-------------------------------------------------------------------------
Netherlands
Price $64.33 $8.05 $48.34 $38.60
Lifting costs - (1.57) (9.37) (8.83)
-------------------------------------------------------------------------
Operating netback $64.33 $6.48 $38.97 $29.77
-------------------------------------------------------------------------
Australia
Price $81.48 $ - $81.48 $ -
Royalties (net) (27.69) - (27.69) -
Transportation - - - -
Lifting costs (9.99) - (9.99) -
-------------------------------------------------------------------------
Operating netback $43.80 $ - $43.80 $ -
-------------------------------------------------------------------------
Total Trust
Price $73.93 $8.39 $62.37 $53.46
Realized hedging loss (0.16) 0.01 (0.04) (4.00)
Royalties (net) (13.61) (1.05) (10.02) (7.05)
Transportation (1.41) (0.11) (1.04) (1.44)
Lifting costs (9.00) (1.37) (8.62) (7.56)
-------------------------------------------------------------------------
Operating netback $49.75 $5.87 $42.65 $33.41
-------------------------------------------------------------------------
Verenex Energy Inc.
Price $ - $ - $ - $34.10
-------------------------------------------------------------------------
Operating netback $ - $ - $ - $34.10
-------------------------------------------------------------------------
Consolidated
Price $73.93 $8.39 $62.37 $53.36
Realized hedging loss (0.16) 0.01 (0.04) (3.98)
Royalties (net) (13.61) (1.05) (10.02) (7.01)
Transportation (1.41) (0.11) (1.04) (1.43)
Lifting costs (9.00) (1.37) (8.62) (7.52)
-------------------------------------------------------------------------
Operating netback $49.75 $5.87 $42.65 $33.42
-------------------------------------------------------------------------
General & administration (1.29) (1.58)
Interest (0.99) (0.47)
Foreign exchange 0.29 (0.08)
Current and capital taxes (5.66) (3.40)
-------------------------------------------------------------------------
Cash flow netback $35.00 $27.89
-------------------------------------------------------------------------
Depletion, depreciation and
accretion (14.89) (12.77)
Future income taxes 0.90 5.96
Foreign exchange 0.65 0.58
Non-controlling interest - 0.40
Non-controlling interest -
exchangeable shares (1.55) (0.90)
Equity in losses of affiliate 0.01 (0.01)
Unrealized loss on derivative
instruments (0.76) (6.58)
Fair value of stock compensation (2.06) (1.95)
-------------------------------------------------------------------------
Earnings netback $17.30 $12.62
-------------------------------------------------------------------------
The above table includes non-GAAP measurements which may not be
comparable to other companies, including "operating netback" and "cash
flow netback".
Consolidated Balance Sheets
($000's unaudited)
March 31, December 31,
2006 2005
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $ 90,015 $ 42,777
Accounts receivable 72,596 75,639
Crude oil inventory 7,451 10,279
Fair value of derivative instruments (Note 9) 603 1,166
Prepaid expenses and other 8,055 9,387
-------------------------------------------------------------------------
178,720 139,248
Long-term investment (Note 2) 19,126 19,096
Goodwill (Note 2) 19,840 19,840
Reclamation fund (Note 3) 43,127 42,198
Capital assets 903,160 891,357
-------------------------------------------------------------------------
$1,163,973 $1,111,739
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $ 98,312 $ 90,422
Distributions payable to unitholders 10,840 10,626
Income taxes payable 23,688 11,607
Fair value of derivative instruments (Note 9) 1,609 383
-------------------------------------------------------------------------
134,449 113,038
Long-term debt (Note 4) 267,686 271,099
Asset retirement obligation (Note 3) 71,941 70,214
Future income taxes 158,347 160,475
-------------------------------------------------------------------------
632,423 614,826
-------------------------------------------------------------------------
Non-Controlling Interest - Exchangeable Shares
(Note 6) 41,134 38,760
-------------------------------------------------------------------------
UNITHOLDERS' EQUITY
Unitholders' capital (Note 5) 300,228 274,813
Contributed surplus (Note 5) 12,805 14,566
Accumulated earnings 557,392 516,514
Accumulated cash distributions (380,009) (347,740)
-------------------------------------------------------------------------
490,416 458,153
-------------------------------------------------------------------------
$1,163,973 $1,111,739
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Earnings and Accumulated Earnings
($000's except unit and per unit amounts, unaudited)
Three Months Ended
March 31, March 31,
2006 2005
-------------------------------------------------------------------------
(Restated
Note 7)
Revenue:
Petroleum and natural gas revenue $ 147,286 $ 108,715
Royalties (net) 23,668 14,439
-------------------------------------------------------------------------
123,618 94,276
-------------------------------------------------------------------------
Expenses:
Production 20,353 15,483
Transportation 2,457 2,951
Unit compensation (Note 7) 4,861 4,015
Loss on derivative instruments (Note 9) 1,884 20,566
Interest on long-term debt 2,345 980
General and administration 3,038 3,249
Foreign exchange loss (gain) (2,214) (1,037)
Depletion, depreciation and accretion 35,162 26,286
-------------------------------------------------------------------------
67,886 72,493
-------------------------------------------------------------------------
Earnings before income taxes and other items 55,732 21,783
-------------------------------------------------------------------------
Income taxes (recovery):
Future (2,128) (12,272)
Current and capital 13,355 7,001
-------------------------------------------------------------------------
11,227 (5,271)
-------------------------------------------------------------------------
Other items:
Non-controlling interest - exchangeable shares
(Note 6) 3,657 1,867
Non-controlling interest (Note 2) - (829)
Equity in (gain) losses of affiliates (Note 2) (30) 26
-------------------------------------------------------------------------
3,627 1,064
-------------------------------------------------------------------------
Net earnings 40,878 25,990
-------------------------------------------------------------------------
Accumulated earnings, beginning of period 516,514 358,043
-------------------------------------------------------------------------
Accumulated earnings, end of period $ 557,392 $ 384,033
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per trust unit (Note 8):
Basic $ 0.65 $ 0.43
Diluted $ 0.62 $ 0.41
-------------------------------------------------------------------------
Weighted average trust units outstanding
(Note 8):
Basic 63,226,725 60,963,801
Diluted 71,290,864 67,453,932
-------------------------------------------------------------------------
Consolidated Statements of Cash Flows
($000's unaudited)
Three Months Ended
March 31, March 31,
2006 2005
-------------------------------------------------------------------------
(Restated
Note 7)
Cash and cash equivalents provided by (used in):
Operating
Net earnings $ 40,878 $ 25,990
Items not affecting cash:
Depletion, depreciation and accretion 35,162 26,286
Amortization of deferred charges for derivative
instruments (Note 9) - 1,173
Unrealized (gain) loss on derivative
instruments (Note 9) 1,789 12,369
Unit compensation 4,861 4,015
Equity in (gain) losses of affiliates (30) 26
Unrealized foreign exchange loss (gain) (1,537) (1,198)
Non-controlling interest - (829)
Non-controlling interest - exchangeable shares 3,657 1,867
Future income taxes (recovery) (2,128) (12,272)
-------------------------------------------------------------------------
Funds from operations 82,652 57,427
Asset retirement costs incurred (361) (139)
Changes in non-cash operating working capital 22,116 (26,727)
-------------------------------------------------------------------------
104,407 30,561
-------------------------------------------------------------------------
Investing
Drilling and development of petroleum and natural
gas properties (40,350) (24,698)
Acquisition of petroleum and natural gas property
(Note 2) - (90,318)
Contributions to reclamation fund (929) (3,044)
Changes in non-cash investing working capital 5,486 (3,223)
-------------------------------------------------------------------------
(35,793) (121,283)
-------------------------------------------------------------------------
Financing
Increase in long-term debt (3,412) 118,091
Cash received from shares issued by subsidiary - 153
Issue of trust units for cash, net of issue costs 7,123 4,387
Distribution reinvestment plan 5,199 2,670
Cash distributions (32,056) (31,059)
Changes in non-cash financing working capital 533 (408)
-------------------------------------------------------------------------
(22,613) 93,834
-------------------------------------------------------------------------
Foreign exchange gain (loss) on cash held in a
foreign currency 1,237 (1,303)
-------------------------------------------------------------------------
Net change in cash and cash equivalents 47,238 1,809
Cash and cash equivalents, beginning of period 42,777 65,031
-------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 90,015 $ 66,840
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash payments
Taxes $ 1,274 $ 5,956
Interest $ 2,823 $ 1,686
-------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
For the three months ended March 31, 2006 and 2005, unaudited
(000's except unit and per unit amounts)
1. BASIS OF PRESENTATION
The consolidated financial statements of Vermilion Energy Trust (the
"Trust" or "Vermilion") include the accounts of the Trust and its
subsidiaries and have been prepared by management in accordance with
Canadian Generally Accepted Accounting Principles on a consistent basis
with the audited consolidated financial statements for the year ended
December 31, 2005. The interim consolidated financial statements do not
include all disclosures required in annual consolidated financial
statements and should be read in conjunction with the consolidated
financial statements as at and for the year ended December 31, 2005
included in the Trust's 2005 Annual Report.
2. INVESTMENTS AND ACQUISITIONS
Verenex Energy Inc. ("Verenex")
-------------------------------
On December 15, 2005, the Trust's equity interest in Verenex Energy Inc.
("Verenex") was reduced to 49% from 53% and the Trust was no longer
considered to control Verenex. Effective December 15, 2005 the Trust
discontinued consolidating the financial results of Verenex and has since
accounted for the investment using the equity basis of accounting.
Comparative figures have not been restated.
Glacier Energy Limited ("Glacier")
----------------------------------
On December 7, 2005, the Trust acquired the outstanding shares of
Glacier, not already owned by the Trust and, as a result, is now
consolidated. Prior to December 7, 2005, the Trust accounted for its
investment in Glacier using the equity basis of accounting. Goodwill of
$19.8 million was recorded as part of the acquisition.
Australia Acquisition
---------------------
On March 31, 2005, the Trust acquired $95 million of producing properties
in Australia. Details are as follows:
Petroleum and natural gas assets and equipment $ 113,840
Asset retirement obligation (18,873)
-------------------------------------------------------------------------
94,967
Accounts payable and accrued liabilities (4,649)
-------------------------------------------------------------------------
Cash paid $ 90,318
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3. ASSET RETIREMENT OBLIGATION
The total future asset retirement obligation was estimated by management
based on the Trust's net ownership interest in all wells and facilities,
estimated costs to abandon and reclaim the wells and facilities and the
estimated timing of the costs to be incurred in future periods. The Trust
has estimated the net present value of its asset retirement obligations
to be $71.9 million as at March 31, 2006 (December 31, 2005 -
$70.2 million) based on a total future liability of $242.4 million
(December 31, 2005 - $236.7 million). These payments are expected to be
made over the next 49 years with most coming within the time frame of
25-30 years. The Trust used a credit adjusted risk free rate of 8% and an
inflation rate of 1.5% to calculate the present value of the asset
retirement obligation.
The following table reconciles the Trust's total asset retirement
obligation:
March 31, December 31,
2006 2005
-------------------------------------------------------------------------
Carrying amount, beginning of period $ 70,214 $ 51,688
Increase in liabilities in the period 101 19,656
Disposition of liabilities in the period (361) (948)
Change in estimate - 3,089
Accretion expense 1,327 4,935
Foreign exchange 660 (8,206)
-------------------------------------------------------------------------
Carrying amount, end of period $ 71,941 $ 70,214
-------------------------------------------------------------------------
The Trust has set aside funds for the future payment of its estimated
asset retirement obligations. During the period, the Trust contributed
$0.9 million to the reclamation fund, including earnings on the fund
balance.
4. LONG-TERM DEBT
As at March 31, 2006 the Trust had an unsecured covenant based credit
facility consisting of a revolving term loan in the amount of
$410 million. The revolving period under the term loan is expected to
expire in July 2006 and may be extended for an additional period of up to
364 days at the option of the lender. If the lenders convert the
revolving credit facility to a non-revolving credit facility, the amounts
outstanding under the facility become repayable 12 months after the end
of the revolving period. Various borrowing options are available under
the facility including prime rate based advances and bankers' acceptance
loans.
5. UNITHOLDERS' CAPITAL AND CONTRIBUTED SURPLUS
Number of Units Amount
-------------------------------------------------------------------------
Trust Units (Restated)
Unlimited number of trust units authorized
to be issued
Balance as at December 31, 2004 60,707,660 $244,015
Distribution reinvestment plan 674,766 15,850
Issued on conversion of exchangeable shares 73,692 1,623
Transfer from contributed surplus on unit right
exercise - 4,178
Trust units issued for bonus plan 40,246 827
Unit rights exercised 1,011,850 8,320
-------------------------------------------------------------------------
Balance as at December 31, 2005 62,508,214 $274,813
Distribution reinvestment plan 181,032 5,199
Issued on conversion of exchangeable shares 210,428 6,471
Transfer from contributed surplus on unit right
exercise - 6,622
Trust units issued for bonus plan 14,400 429
Unit rights exercised 850,564 6,694
-------------------------------------------------------------------------
Balance as at March 31, 2006 63,764,638 $300,228
-------------------------------------------------------------------------
March 31, March 31,
2006 2005
-------------------------------------------------------------------------
Contributed Surplus (Restated)
Opening balance $ 14,566 $ 9,136
Unit compensation expense 4,861 4,015
Transfer to unitholders' capital on unit option
exercise (6,622) (1,799)
-------------------------------------------------------------------------
Ending balance $ 12,805 $ 11,352
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. NON-CONTROLLING INTEREST - EXCHANGEABLE SHARES
Exchangeable shares are convertible into trust units based on the
exchange ratio which is adjusted monthly to reflect the distribution paid
on the trust units. Cash distributions are not paid on the exchangeable
shares.
The exchangeable shares are mandatorily converted into trust units upon
redemption by the exchangeable shareholder. The Company holds the option
to redeem all outstanding exchangeable shares for trust units or cash on
or before January 22, 2013 and it is the intention of the Trust that
trust units would be issued upon redemption of the exchangeable shares.
On or before January 22, 2013, there will be no remaining non-controlling
interest as all exchangeable shares will have been converted to trust
units by that time.
The non-controlling interest on the consolidated balance sheet consists
of the book value of the exchangeable shares upon issuance plus the
accumulated earnings attributable to the non-controlling interest. The
net earnings attributable to the non-controlling interest on the
consolidated statement of earnings represents the share of net earnings
attributable to the non-controlling interest based on the Trust units
issuable for exchangeable shares in proportion to total trust units
issued and issuable at each period end.
March 31, March 31,
2006 2005
-------------------------------------------------------------------------
Exchangeable Shares
Opening number of exchangeable shares 4,619,335 4,675,961
Exchanged for trust units (150,310) (12,372)
-------------------------------------------------------------------------
Ending balance 4,469,025 4,663,589
Ending exchange ratio 1.40177 1.29632
-------------------------------------------------------------------------
Trust units issuable upon conversion 6,264,545 6,045,504
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Following is a summary of the non-controlling interest:
March 31, December 31,
2006 2005
-------------------------------------------------------------------------
(Restated)
Non-controlling interest, beginning of period 38,760 $ 24,686
Reduction of book value for conversion to trust
units (1,283) (325)
Current period net earnings attributable to
non-controlling interest 3,657 14,399
-------------------------------------------------------------------------
Non-controlling interest, end of period 41,134 $ 38,760
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. UNIT COMPENSATION PLANS AND RESTATEMENT
Unit Rights Incentive Plan
The Trust has a unit rights incentive plan that allows the Trust to issue
rights to acquire trust units to directors, officers and employees. The
Trust is authorized to issue up to 6.0 million unit rights; however, the
number of trust units reserved for issuance upon exercise of the rights
shall not at any time exceed 10% of the aggregate number of issued and
outstanding trust units of the Trust. Unit right exercise prices are
equal to the market price for the trust units on the date the unit rights
are issued. If certain conditions are met, the exercise price per unit
may be calculated by deducting from the grant price the aggregate of all
distributions, on a per-unit basis, made by the Trust after the grant
date. Rights granted under the plan vest over a three-year period and
expire five years after the grant date. Future rights are expected to be
issued only in limited circumstances as the unit rights incentive plan
was replaced with a Trust Unit Award Plan in 2005. The existing rights
plan will be in place until all issued and outstanding rights are
exercised or cancelled.
Restatement of Unit Compensation Expense
From inception of the unit rights incentive plan until January 1, 2005,
the Trust applied the intrinsic value methodology based on the initial
assessment that the number of uncertainties regarding the reduction in
the strike price of the rights precluded a reasonable estimate of the
fair value of the rights on the date of grant.
Effective on January 1, 2005, the Trust prospectively applied the fair
value based method of accounting for the rights plan.
In the fourth quarter of 2005 however, it was determined that, in the
circumstances, the fair value methodology could be applied since
inception of the plan rather than the intrinsic value methodology. The
Trust has therefore computed a fair value estimate of the rights at the
respective dates of grant and has retroactively restated its unit
compensation expense back to the inception of the plan in 2003.
The Trust used the Black-Scholes option-pricing model to calculate the
estimated fair value of the outstanding rights. The following assumptions
were used to arrive at the estimate of fair value:
2004 2003
-------------------------------------------------------------------------
Expected volatility 22.33% 31.47%
Risk-free interest rate 4.0% 4.0%
Expected life of option (years) 5.0 5.0
Fair value per option $4.16-$5.52 $3.99-$5.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The dividend yield is offset by the reducing strike price feature of the
plan resulting in using a zero dividend yield in the option-pricing
model. The unamortized fair value of the rights will be recognized in
earnings over the remaining vesting period of the rights outstanding.
During the period, $0.7 million of the fair value has been recorded as
compensation expense (first quarter 2005 - $1.8 million). Any
consideration paid upon exercise together with the amount previously
recognized in contributed surplus is recorded as an increase to
unitholders' capital.
The following table summarizes information about the Trust's unit rights:
Weighted
Average
Number of Exercise
Unit Rights Price
-------------------------------------------------------------------------
Balance December 31, 2005 3,617,750 $ 14.47
Granted - -
Cancelled (80,000) 17.67
Exercised (710,850) 12.31
-------------------------------------------------------------------------
Balance March 31, 2006 2,826,900 $ 14.92
-------------------------------------------------------------------------
-------------------------------------------------------------------------
A summary of the plan as at March 31, 2006 is as follows:
Range of Number of Remaining Number of
Exercise Price Adjusted Rights Contractual Life Rights
At Grant Date Exercise Price Outstanding of Right (Years) Exercisable
-------------------------------------------------------------------------
$11.45 $6.98 1,550,550 1.8 1,550,550
$11.46-$15.00 $5.17-$8.71 129,050 1.9-2.8 71,033
$15.01-$19.56 $10.42-$14.97 1,147,300 2.8-3.9 383,833
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Trust Unit Award Incentive Plan
In 2005, the Board of Directors established a new Trust Unit Award
Incentive Plan (the "Award Plan") governing the issuance of restricted
units of the Trust to directors, officers, employees and consultants of
the Trust and its Affiliates. The Award Plan consists of units that will
be designated as either a Restricted Time Based Award ("RTBA's") for
which the number of awards is fixed or a Performance Based Award
("PBA's") for which the number of awards is variable.
Upon vesting, the grantee will be delivered units of the Trust, adjusted
for cumulative distributions of the Trust during the period that the
restricted units are outstanding. The number of units issued upon vesting
of the PBA's is dependent upon the future performance of the Trust
compared to its peers based on a performance factor that may range from
zero to two times the number of PBA's originally granted. The vesting
date for all restricted units shall be on the date that is the third
anniversary of the date of the Unit Award. Awards granted in which 2005
or 2006 is the grantee's first year of service, will vest over three
years.
The following table summarizes information about the Award Plan:
Number of Awards
-------------------------------------------------------------------------
Balance December 31, 2005 655,550
Granted 363,325
Vested (76,775)
Cancelled (41,300)
-------------------------------------------------------------------------
Balance March 31, 2006 900,800
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A compensation expense of $4.2 million has been recorded at March 31,
2006 (2005 - $0.2 million). The fair value of unexercised rights is
determined using the Binomial Lattice model and management's estimate of
the number of Restricted Units to be issued on maturity. The value is
deferred and recognized as an expense over the vesting period of the
Awards. The dividend yield is offset by the cumulative distributions
resulting in using a zero dividend yield in the model.
2006 2005
-------------------------------------------------------------------------
Expected volatility 18.0% 18.0%
Risk-free interest rate 3.5% 3.5%
Expected life of option (years) 3.0 3.0
Fair value per unit $21.00-$30.95 $15.57-$20.59
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8. PER UNIT AMOUNTS
Basic per unit calculations are based on the weighted average number of
trust units outstanding. Diluted calculations include an additional
1,799,594 trust units (444,627 additional units in 2005) for the dilutive
impact of unit rights outstanding pursuant to the unit rights incentive
and unit award plans and 6.3 million additional units for outstanding
exchangeables shares at the period end exchange ratio (2005 -
6.0 million).
The determination of diluted net earnings per unit was not affected by
unit rights that would have been anti-dilutive as the respective exercise
prices exceeded the average market price of the units. Net earnings
attributable to the non-controlling interest exchangeable shares were
added back to net earnings in calculating dilutive per unit amounts. The
unrecognized compensation cost is considered to be part of the assumed
proceeds to purchase trust units under the treasury stock method.
Net earnings per unit are as follows:
March 31, March 31,
2006 2005
-------------------------------------------------------------------------
(Restated)
Net earnings
Basic 0.65 $0.43
Diluted 0.62 $0.41
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Weighted-average number of units outstanding
Basic 63,226,725 60,963,801
Diluted 71,290,864 67,453,932
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9. DERIVATIVE INSTRUMENTS
Risk Management Activities
The nature of the Trust's operations result in exposure to fluctuations
in commodity prices, interest rates and foreign currency exchange rates.
The Trust monitors and, when appropriate, uses derivative financial
instruments to manage its exposure to these risks. The Trust is exposed
to credit-related losses in the event of non-performance by
counterparties to the financial instruments.
The Trust uses a variety of options including funded and costless collars
and puts to manage the risk associated with fluctuating commodity prices
on the sale of crude oil and natural gas. The Trust does not obtain
collateral or other security to support its collars as the majority of
these instruments are with the Trust's banking syndicate.
Risk Management: Oil Funded Cost bbls/d US$/bbl
-------------------------------------------------------------------------
Collars - WTI
Q2 2006 US$1.50/bbl 250 $53.00 - $73.90
Q2 2006 US$0.25/bbl 250 $60.00 - $73.00
Q2 2006 US$0.25/bbl 250 $60.00 - $73.00
Q2 2006 Costless 250 $55.00 - $75.20
Q3 2006 Costless 250 $60.10 - $80.00
Q4 2006 Costless 250 $61.20 - $80.00
Q1 2007 Costless 250 $58.00 - $83.85
Puts
Q2 2006 US$0.25/bbl 500 $55.75
Mar-Dec US$1.00/bbl 1,000 $54.10
Apr-Sep US$0.75/bbl 250 $58.42
Q3 2006 US$0.75/bbl 500 $55.10
Collars - BRENT
2006 US$1.00/bbl 1,000 $53.00 - $67.70
Q3 2006 US$1.00/bbl 250 $52.00 - $68.50
Q3 2006 US$0.25/bbl 250 $58.00 - $72.10
Q3 2006 US$0.25/bbl 250 $58.00 - $72.20
Q4 2006 US$1.50/bbl 250 $53.00 - $69.80
Risk Management: Power MWH $CDN/MWH
-------------------------------------------------------------------------
2006 2.0 $48.50
On January 1, 2004 the fair value of all outstanding derivative financial
instruments that are not recorded as accounting hedges were recorded on
the consolidated balance sheets with an offsetting amount to deferred
charges. The deferred charge was recognized into revenue over the life of
the associated contracts. Of the total deferred charge of $14,427
recorded at January 1, 2004, $9,709 was recognized as a charge to revenue
in the year ended December 31, 2004 and $4,718 was recognized in 2005.
Changes in fair value after January 1, 2004 are recorded on the
consolidated balance sheets with the associated unrealized gain or loss
recorded in net earnings. The estimated fair value of all derivative
financial instruments is based on quoted market prices or, in their
absence, third party market indications and forecasts. Unrealized gains
or losses and realized gains or losses are recorded as a separate element
of earnings.
The following table presents a reconciliation of the change in the
unrealized amounts from January 1, 2006 to March 31, 2006 and the related
total gain or loss during the year:
Total
Fair Value Gain (Loss)
-------------------------------------------------------------------------
Fair value of contracts, January 1, 2006 $ 783 $ -
Change in fair value of contracts outstanding at
January 1, 2006 (1,789) (1,789)
Contract settlements realized during the period - (95)
Fair value of contracts entered into during the
period - -
-------------------------------------------------------------------------
Fair value of contracts outstanding, end of
period $ (1,006) $ (1,884)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table presents a reconciliation of the change in the
unrealized amounts from January 1, 2005 to March 31, 2005:
Total
Fair Value Gain (Loss)
-------------------------------------------------------------------------
Fair value of contracts, January 1, 2005 $(21,610) $ -
Change in fair value of contracts outstanding at
January 1, 2005 (12,369) (12,369)
Contract settlements realized during the period - (8,197)
Fair value of contracts entered into during the
period - -
-------------------------------------------------------------------------
Fair value of contracts outstanding, end of
period $(33,979) $(20,566)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The fair value amounts are recorded on the consolidated balance sheets as
follows:
March 31, December 31,
2006 2005
-------------------------------------------------------------------------
Fair value of derivative instruments
Current asset $ 603 $ 1,166
Current liability (1,609) (383)
-------------------------------------------------------------------------
Total fair value of derivative instruments $ (1,006) $ 783
-------------------------------------------------------------------------
-------------------------------------------------------------------------
10. SEGMENTED INFORMATION
March 31, March 31,
2006 2005
-------------------------------------------------------------------------
Petroleum and natural gas revenues
Canada $ 56,200 $ 54,072
France 38,925 36,492
Netherlands 25,539 18,151
Australia(x) 26,622 -
-------------------------------------------------------------------------
$147,286 $108,715
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings (Restated)
Canada $ 2,157 $ 8,677
France 18,399 11,334
Netherlands 9,865 5,979
Australia(x) 10,457 -
-------------------------------------------------------------------------
$ 40,878 $ 25,990
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Funds from operations
Canada $ 30,464 $ 28,140
France 25,923 19,019
Netherlands 14,985 10,268
Australia(x) 11,280 -
-------------------------------------------------------------------------
$ 82,652 $ 57,427
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Capital expenditures
Canada $ 22,639 $ 9,453
France 16,526 12,791
Netherlands 495 2,454
Australia(x) 690 90,318
-------------------------------------------------------------------------
$ 40,350 $115,016
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x) Australia assets were acquired effective March 31, 2005
March 31, December 31,
2006 2005
-------------------------------------------------------------------------
Identifiable assets
Canada $ 592,780 $ 588,462
France 282,245 255,816
Netherlands 133,466 121,296
Australia 155,482 146,165
-------------------------------------------------------------------------
$1,163,973 $1,111,739
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11. SUBSEQUENT EVENTS
On March 6, 2006 Vermilion announced that a wholly-owned subsidiary
entered into an arrangement with a French subsidiary of Exxon Mobil
Corporation, to purchase its 89.89% shareholding in Esso REP. The
purchase price for the proposed transaction is approximately
C$185 million with an effective date of July 1, 2005, subject to closing
adjustments that account for changes in working capital and assumed debt.
Vermilion will begin recording production from this transaction upon
closing. Closing is subject to the satisfaction of all conditions
precedent and the receipt of all necessary regulatory approvals and is
anticipated to occur before the end of the second quarter of 2006. It is
anticipated the transaction will be funded out of Vermilion's existing
debt facility.
For further information
Curtis W. Hicks, C.A., Executive Vice President & Chief Financial Officer or Paul Beique, Director Investor Relations, 2800, 400 - 4th Avenue S.W., Calgary, Alberta, T2P 0J4, Phone: (403) 698-8827, Fax: (403) 264-6306, IR Toll Free: 1-866-895-8101, investor_relations@vermilionenergy.com, www.vermilionenergy.com
Source: Vermilion Energy Trust
