Bonavista Energy Trust
TSX : BNP.UN

Bonavista Energy Trust

November 08, 2007 17:45 ET

Bonavista Energy Trust Announces Third Quarter Results

CALGARY, ALBERTA--(Marketwire - Nov. 8, 2007) - Bonavista Energy Trust (TSX:BNP.UN) is pleased to report to unitholders its interim consolidated financial and operating results for the three and nine months ended September 30, 2007.



----------------------------------------------------------------------------
Highlights
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Nine Months
ended September 30, ended September 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial
($ thousands, except per unit)
Production revenues 219,885 227,270 668,985 689,595
Funds from operations (1) 120,382 123,477 375,005 375,133
Per unit (1) (2) 1.14 1.20 3.57 3.69
Distributions declared 76,972 83,650 230,265 247,720
Per unit 0.90 0.99 2.70 2.97
Net income 58,990 70,800 154,556 233,635
Per unit (2) 0.56 0.69 1.47 2.30
Percentage of funds from
Operations (1) distributed 64% 68% 61% 66%
----------------------------------------------------------------------------
Total assets 2,188,154 2,038,684
Long-term debt, including working
capital deficiency 690,093 502,529
Unitholders' equity 1,072,264 1,135,155
Capital expenditures:
Exploitation and development 50,889 65,995 209,220 221,819
Acquisitions, net 98,311 4,519 99,121 36,135
Weighted average outstanding
equivalent trust
units: (thousands) (2)
Basic 105,983 102,764 105,132 101,692
Diluted 108,405 105,966 107,729 105,382
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating
(boe conversion - 6:1 basis)
Production:
Natural gas (mmcf/day) 171 176 171 178
Oil and liquids (bbls/day) 24,938 23,096 23,784 22,716
Total oil equivalent (boe/day) 53,382 52,494 52,328 52,420
Product prices: (3)
Natural gas ($/mcf) 5.86 6.65 7.02 7.36
Oil and liquids ($/bbl) 56.36 54.27 53.12 51.81
Operating expenses ($/boe) 8.51 7.96 8.44 7.84
General and administrative
expenses ($/boe) 0.71 0.56 0.68 0.54
Cash costs ($/boe) (4) 11.15 10.06 10.82 9.73
Operating netback ($/boe) (5) 27.16 27.67 28.63 28.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTES:

(1) Management uses funds from operations to analyze operating performance,
distribution coverage and leverage. Funds from operations as presented
do not have any standardized meaning prescribed by Canadian GAAP and
therefore it may not be comparable with the calculations of similar
measures for other entities. Funds from operations as presented is not
intended to represent operating cash flow or operating profits for the
period nor should it be viewed as an alternative to cash flow from
operating activities, net income or other measures of financial
performance calculated in accordance with Canadian GAAP. All references
to funds from operations throughout this report are based on cash flow
from operating activities before changes in non-cash working capital
and asset retirement expenditures. Funds from operations per unit is
calculated based on the weighted average number of units outstanding
consistent with the calculation of net income per unit.

(2) Basic per unit calculations include exchangeable shares which are
convertible into trust units on certain terms and conditions.

(3) Product prices include realized gains or losses on financial
instruments.

(4) Cash costs equal the total of operating, general and administrative,
and financing expenses.

(5) Operating netback equals production revenues including realized gains
or losses on financial instruments, less royalties, transportation
and operating expenses, calculated on a boe basis.

----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months ended
------------------------------------------------------
Trust Unit September 30, June 30, March 31, December 31,
Trading Statistics 2007 2007 2007 2006
----------------------------------------------------------------------------
($ per unit, except
volume)
High 31.38 33.54 31.89 35.50
Low 27.25 29.12 25.90 24.52
Close 29.02 30.60 30.85 28.15
Average Daily Volume 177,752 216,676 230,630 472,156
----------------------------------------------------------------------------
----------------------------------------------------------------------------


MESSAGE TO UNITHOLDERS

Bonavista Energy Trust ("Bonavista" or the "Trust") is pleased to report to its unitholders (the "Unitholders") its consolidated financial and operating results for the three and nine months ended September 30, 2007. The results for the third quarter of 2007 represents seventeen consecutive quarters of profitability for Bonavista since commencing operations as an energy trust in July 2003. The continued successful execution of Bonavista's proven strategies in the third quarter of 2007 are a testament to the validity and effectiveness of an operationally and technically focused energy trust. The third quarter results for 2007 are also highlighted by an active and successful drilling and acquisition program which have led to attractive finding and development costs despite the higher cost trend in overall industry costs. This environment creates the opportunity for Bonavista to continue to differentiate itself by posting solid financial results in an ever-changing economic landscape.

Other significant year-to-date accomplishments for Bonavista include:

- Produced 53,382 boe per day during the third quarter of 2007, a 2% increase when compared to the 52,494 boe per day reported in the third quarter of 2006 and a 4% increase when compared to the 51,533 boe per day in the second quarter of 2007;

- Maintained an active capital program during the third quarter of 2007, having invested $149.2 million, spending $50.9 million in exploitation and development activities, drilling 51 wells with an overall 92% success rate with the remaining $98.3 million spent on four property acquisitions within our existing core regions. The third quarter of 2007 marks an important turning point whereby property acquisitions are being consummated at attractive valuations and Bonavista will continue to participate in these opportunities;

- Continued to actively participate at Crown land sales, investing $4.3 million in land activity during the third quarter, further enhancing our undeveloped land position and future drilling prospect inventory to more than two years. Furthermore, over the last 10 months Bonavista invested $18.0 million to acquire 49 sections of undeveloped land through crown and freehold purchases in the light oil Bakken trend in the greater Viewfield area in Southeast Saskatchewan. These lands add significantly to Bonavista's existing prospect inventory with drilling expected to commence in December 2007;

- Generated funds from operations of $120.4 million ($1.14 per unit) in the third quarter of 2007 and recorded strong profitability with net income of $59.0 million ($0.56 per unit). This results in an attractive average return on equity of 22% and a strong net income to funds from operations ratio of 49%; and

- Within the energy trust industry, delivered top decile total returns to our Unitholders in 2007 and currently have a cash on cash yield of 11.3%. In addition, Bonavista has delivered cumulative distributions of $1.1 billion or $14.51 per trust unit since inception of our Trust in July 2003.

On October 25, 2007, the Government of Alberta announced its proposal for a new royalty framework in Alberta. The proposed changes to the Alberta crown royalty framework are effective on January 1, 2009 if they are enacted. Bonavista has conducted a preliminary review based on the proposed legislation and have concluded that using Bonavista's January 1, 2007 reserve report the impact of these changes on our existing operations are not material on both a cash flow and a net asset value basis.

Bonavista will continue to analyze the information that becomes available with respect to the new crown royalty framework, however based upon initial documentation, royalty rates will increase substantially on medium depth natural gas and high productivity natural gas and light oil production in Alberta and as a result the economics of these opportunities have been negatively impacted. This will result in a reallocation of capital to other jurisdictions or more favorable economic opportunities. Bonavista has a strong history of ensuring that it allocates capital to those projects delivering the highest rate of return and will continue to do so under this new royalty regime.

Strengths of Bonavista Energy Trust

Since restructuring into an energy trust in July 2003, Bonavista has maintained a high level of investment activity on its asset base, growing production by over 50% since that time. This activity stems from the operational and technical focus of our Trust and the ability to uncover value from our assets within the Western Canadian Sedimentary Basin. Our experienced technical teams have a solid understanding of our asset base and possess the necessary discipline and commitment to deliver profitable results to our Unitholders for the long-term. We actively participate in undeveloped land acquisitions through Crown land sales, property purchases or farm-in opportunities, which have all continued to add to our already extensive low-risk drilling inventory. This has led to low cost reserve additions, lengthening of our reserve life index, and a growing production base. Our production base is balanced 53% in favour of natural gas and 47% towards oil and liquids and is geographically focused within select medium depth, multi-zone regions in Alberta, Saskatchewan and British Columbia. This base has one of the lowest operating cost structures in the oil and natural gas sector. In addition, these high working interest assets are predominantly operated by Bonavista, ensuring that operating and capital cost efficiencies are maintained and that Bonavista controls the pace of its operations. All of these attributes, combined, result in attractive operating netbacks for Bonavista.

Our team brings a successful track record of executing low to medium risk development programs, including both asset and corporate acquisitions, along with sound financial management. Unitholders benefit from a fully internalized, industry leading cost structure, which results in one of the lowest per unit overhead costs in the energy trust industry. The management team, along with a strong Board of Directors, possesses extensive experience in oil and natural gas operations, corporate governance and financial management. Directors, management and employees also own approximately 18% of the Trust, resulting in an alignment of interests with all Unitholders.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's discussion and analysis ("MD&A") of the financial condition and results of operations should be read in conjunction with Bonavista Energy Trust's ("Bonavista" or the "Trust") consolidated interim financial statements for the three and nine months ended September 30, 2007 and the audited consolidated financial statements and MD&A for the year ended December 31, 2006. The following MD&A of the financial condition and results of operations was prepared at, and is dated November 8, 2007. Our audited consolidated financial statements, Annual Report, and other disclosure documents for 2006 are available through our filings on SEDAR at www.sedar.com or can be obtained from Bonavista's website at www.bonavistaenergy.com.

Basis of Presentation - The financial data presented below has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and the measurement currency is the Canadian dollar. For the purpose of calculating unit costs, natural gas is converted to a barrel of oil equivalent ("boe") using six thousand cubic feet of natural gas equal to one barrel of oil unless otherwise stated.

Forward-Looking Statements - Certain information set forth in this document, including management's assessment of Bonavista's future plans and operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond Bonavista's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, changes in environmental, tax and royalty legislation, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Bonavista's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements or if any of them do so, what benefits that Bonavista will derive therefrom. Bonavista disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Investors are also cautioned that cash-on-cash yield represents a blend of return of investor's initial investment and a return on investors initial investment and is not comparable to traditional yield on debt instruments where investors are entitled to full return of the principal amount of debt on maturity in addition to a return on investment through interest payments.

Non-GAAP Measurements - Within Management's discussion and analysis, references are made to terms commonly used in the oil and natural gas industry. Management uses "funds from operations" and the "ratio of debt to funds from operations" to analyze operating performance and leverage. Funds from operations as presented does not have any standardized meaning prescribed by Canadian GAAP and therefore it may not be comparable with the calculation of similar measures for other entities. Funds from operations as presented is not intended to represent operating cash flow or operating profits for the period nor should it be viewed as an alternative to cash flow from operating activities, net income or other measures of financial performance calculated in accordance with Canadian GAAP. All references to funds from operations throughout this report are based on cash flow from operating activities before changes in non-cash working capital and abandonment expenditures. Funds from operations per unit is calculated based on the weighted average number of trust units outstanding consistent with the calculation of net income per unit. Operating netbacks equal production revenue and realized gains or losses on financial instruments, less royalties, transportation and operating expenses calculated on a boe basis. Total boe is calculated by multiplying the daily production by the number of days in the period. Management uses these terms to analyze operating performance and leverage.

Operations - Bonavista's exploitation and development program for the nine months ended September 30, 2007 led to the drilling of 185 wells in our four core regions with an overall success rate of 95%. This program resulted in 97 natural gas wells, 78 oil wells and 10 dry holes. In recent years, Bonavista has been emphasizing deeper, higher impact drilling opportunities within the Northeast British Columbia and South Central Alberta core regions where we have experienced excellent success and attractive finding and development costs over this period. These activities have also lengthened our reserve life index and the predictability in our overall production base. We also drilled 12 heavy oil targets in the Lloydminster area in the third quarter resulting in 100% success and stable heavy oil production of 8,000 bbls per day. In addition to the exploitation and development programs, Bonavista executed eight complementary acquisitions in its core regions during the first nine months of 2007.

Production - Overall production for the third quarter of 2007 increased slightly to 53,382 boe per day when compared to 52,494 boe per day for the same period a year ago. As expected, average natural gas production decreased 3% to 171 mmcf per day in the third quarter of 2007 from 176 mmcf per day for the same period a year ago. In the third quarter of 2007 total oil and liquids production increased 8% to 24,938 bbls per day (comprised of 16,967 bbls per day of light and medium oil and 7,971 bbls per day of heavy oil) from 23,096 bbls per day (comprised of 16,072 bbls per day of light and medium oil and 7,024 bbls per day of heavy oil) for the same period in 2006. Our current production is approximately 53,000 boe per day consisting of 53% natural gas, 32% light and medium oil and 15% heavy oil. Total production for the nine months ended September 30, 2007 decreased slightly to 52,328 boe per day when compared to 52,420 boe per day for the same period a year ago. More specifically, average natural gas production decreased 4% to 171 mmcf per day in the first nine months of 2007 from 178 mmcf per day in the first nine months of 2006 while total oil and liquids production increased 5% to 23,784 bbls per day in the first nine months of 2007 (comprised of 16,372 bbls per day of light and medium oil and 7,412 bbls per day of heavy oil) from 22,716 bbls per day (comprised of 15,822 bbls per day of light and medium oil and 6,894 bbls per day of heavy oil) in the first nine months of 2006. Bonavista's diversified commodity investment approach minimizes our dependence on any one product.

Revenues - Revenues, excluding gains and losses on financial instruments, for the third quarter of 2007 decreased by 3% to $219.9 million from $227.3 million in the third quarter of 2006. This decrease is attributable to a 5% decrease in realized commodity prices, offset by a 2% increase in average production volumes. In the third quarter of 2007, our natural gas price including realized gains on financial instruments averaged $5.86 per mcf, a decrease of 12% from $6.65 per mcf for the same period in 2006. The average oil and liquids price increased 4% to $56.36 per bbl (comprised of $60.27 per bbl for light and medium oil and $48.03 per bbl for heavy oil) in the third quarter of 2007 from $54.27 per bbl (comprised of $56.61 per bbl for light and medium oil and $48.92 per bbl for heavy oil) for the same period in 2006. Revenues, excluding gains and losses on financial instruments, for the nine months ended September 30, 2007 decreased by 3% to $669.0 million when compared to $689.6 million for the same period a year ago due to slightly lower average commodity prices. For the nine month period ended September 30, 2007, natural gas prices averaged $7.02 per mcf, down 5% from $7.36 per mcf for the same period in 2006. The average oil and liquids price increased 3% to $53.12 per bbl (comprised of $57.32 per bbl for light and medium oil and $43.83 per bbl for heavy oil) for the nine month period ended September 30, 2007 from $51.81 per bbl (comprised of $55.55 per bbl for light and medium oil and $43.25 per bbl for heavy oil) for the same period in 2006.

Commodity price risk management - As part of our financial management strategy, Bonavista has adopted a disciplined commodity price risk management program. The purpose of this program is to stabilize funds from operations against unpredictable commodity prices and protect acquisition economics. Bonavista's Board of Directors have approved a commodity price risk management limit of 60% of forecast production, net of royalties, primarily using costless collars. Our strategy of using costless collars limits Bonavista's exposure to downturns in commodity prices, while allowing for participation in commodity price increases.

Prior to January 1, 2007, Bonavista accounted for all of our financial contracts as hedges and included realized gains or losses in revenues. On January 1, 2007, with the adoption of new accounting standards for financial instruments and hedging, Bonavista discontinued hedge accounting treatment for our financial commodity derivative contracts. Accordingly, realized and unrealized gains on these financial instruments are recognized in the current period. See note 1 of the consolidated financial statements for the three and nine months ended September 30, 2007.

In the third quarter of 2007, our risk management program on financial instruments resulted in a net loss of $2.9 million consisting of a realized gain of $1.4 million and an unrealized loss of $4.3 million. In the same period in 2006, Bonavista realized a net loss of $4.1 million. The realized gain of $1.4 million for the third quarter of 2007 consisted of a $2.8 million gain on natural gas commodity derivative contracts and a $1.4 million loss on crude oil commodity derivative contracts. The realized net loss of $4.1 million in the same period of 2006 consisted of a $2.7 million gain on natural gas commodity derivative contracts and a $6.8 million loss on crude oil commodity derivative contracts. For the nine months ended September 30, 2007 our risk management program on financial instruments resulted in a net loss of $9.2 million, consisting of a realized gain of $4.3 million and an unrealized loss of $13.5 million. The realized gain of $4.3 million consisted of a $3.5 million gain on natural gas commodity derivative contracts and a $800,000 gain on crude oil commodity derivative contracts. In the same period in 2006, Bonavista realized a net loss of $10.2 million which consisted of a $5.8 million gain on natural gas commodity derivatives contacts and a $16.0 million loss on crude oil derivative contracts. A summary of commodity price risk management contracts in place as at September 30, 2007 is included in note 8 of the consolidated financial statements for the three and nine months ended September 30, 2007.

Royalties - For the three months ended September 30, 2007, royalties decreased 13% to $35.5 million from $40.9 million for the same period a year ago, primarily due to lower natural gas prices, realized gains on financial instruments and favourable crown royalty adjustments relating to prior periods. In addition, royalties as a percentage of revenues including realized gains and losses on financial instruments for the third quarter decreased to 16.1% from 18.3% in 2006 primarily due to similar reasons. For the three months ended September 30, 2007, royalties by product, as a percentage of revenues including realized gains and losses on financial instruments were 15.4% for natural gas, 16.6% for light and medium oil and 16.1% for heavy oil. In the third quarter of 2006 royalties by product as a percentage of revenue were 19.0% for natural gas, 18.4% for light and medium oil and 16.1% for heavy oil. For the nine months ended September 30, 2007, royalties decreased 17% to $112.8 million from $135.9 million for the same period a year ago, for similar reasons discussed above. In addition, royalties as a percentage of revenue including realized gains and losses on financial instruments for the nine month period also decreased from 20.0% in 2006 to 16.7% in 2007, for the same reasons as discussed above. For the nine months ended September 30, 2007, royalties by product as a percentage of revenues including realized gains and losses on financial instruments were 17.4% for natural gas, 16.5% for light and medium oil and 15.1% for heavy oil. For the nine months ended September 30, 2006, royalties by product as a percentage of revenues including realized gains and loss on financial instruments were 21.9% for natural gas, 19.0% for light and medium oil and 14.7% for heavy oil.

Operating expenses - Operating expenses for the third quarter of 2007 increased 9% to $41.8 million compared to $38.4 million for the same period a year ago. However, over the past few months, operating costs have shown signs of stabilizing with some components starting to decrease. Average per unit operating costs for the three months ended September 30, 2007 increased to $8.51 per boe which is up 7% from $7.96 per boe in the comparable period of 2006. In the third quarter of 2007, per unit operating expenses by product were $1.17 per mcf for natural gas, $9.19 per bbl for light and medium oil and $12.39 per bbl for heavy oil compared to $1.12 per mcf for natural gas, $8.79 per bbl for light and medium oil and $11.02 per bbl for heavy oil for the third quarter of 2006. For the nine months ended September 30, 2007 operating costs increased to $120.5 million compared to $112.1 million for the same period a year ago, due to higher per unit costs. For the nine months ended September 30, 2007, operating costs increased to $8.44 per boe from $7.84 per boe in the comparable period of 2006. Operating costs by product for the first nine months of 2007 were $1.18 per mcf for natural gas, $9.11 per bbl for light and medium oil and $12.23 per bbl for heavy oil. For the nine months ended September 30, 2006 operating costs were $1.12 per mcf for natural gas, $8.68 per bbl for light and medium oil and $10.68 per bbl for heavy oil. Notwithstanding recent increases, Bonavista continues to place significant emphasis on the control of operating costs and is continuing to pursue cost reduction initiatives.

Transportation expenses - Transportation expenses for the three months ended September 30, 2007 increased to $10.6 million ($2.16 per boe) compared to $10.2 million ($2.11 per boe) in 2006. The increase in transportation expenses was primarily due to slightly higher cost pressures and increasing oil and liquids production volumes in the third quarter of 2007 versus the same period in 2006. Similarly, transportation costs for the nine months ended September 30, 2007 increased to $31.0 million ($2.17 per boe) compared to $29.2 million ($2.04 per boe) for the same period a year ago. Transportation expenses by product for the third quarter of 2007 were $0.44 per mcf for natural gas, $0.87 per bbl for light and medium oil and $3.14 per bbl for heavy oil compared to $0.44 per mcf for natural gas, $0.85 per bbl for light and medium oil and $2.84 per bbl for heavy oil for the third quarter of 2006. For the first nine months of 2007, transportation expenses by product were $0.44 per mcf for natural gas, $0.94 per bbl for light and medium oil and $3.17 per bbl for heavy oil compared to $0.42 per mcf for natural gas, $0.86 per bbl for light and medium oil and $2.78 per bbl for heavy oil for the same period a year ago.

General and administrative expenses - General and administrative expenses, after overhead recoveries, for the three months ended September 30, 2007 increased 28% to $3.5 million from $2.7 million in the same period in 2006 and increased 26% to $9.7 million for the nine months ended September 30, 2007 from $7.7 million in the same period in 2006. On a per boe basis, general and administrative expenses increased 27% for the three months ended September 30, 2007 to $0.71 per boe from $0.56 per boe in the same period in 2006 and increased 26% for the nine months ended September 30, 2007 to $0.68 per boe from $0.54 per boe in the same period in 2006. This increase is largely due to the higher staffing levels required to manage our operations and increasing operating cost pressures, currently experienced throughout the industry. In addition, through a services agreement with NuVista Energy Ltd., Bonavista provides certain administrative activities. The fee charged under this agreement was $22,000 rendered for the three months ended September 30, 2007 as compared to $590,000 in the same period in 2006 and $32,000 for the nine months ended September 30, 2007 as compared to $1.6 million. In connection with its Trust Unit Incentive Rights Plan, Bonavista also recorded a unit-based compensation charge of $1.7 million and $4.5 million for the three and nine months ended September 30, 2007 respectively, compared to $1.8 million and $4.2 million for the same periods in 2006.

Financing expenses - Financing expenses, which include interest expense on long-term debt and convertible debentures, increased to $9.5 million for the three months ended September 30, 2007, from $7.3 million for the same period in 2006 and on a boe basis increased to $1.94 per boe for the three months ended September 30, 2007 from $1.52 per boe in the same period in 2006. For the nine months ended September 30, 2007, financing expenses increased to $24.3 million from $19.3 million for the same period in 2006 and on a boe basis increased to $1.70 per boe for the nine months ended September 30, 2007 from $1.35 per boe in the same period in 2006. These increases are due to higher interest rates and increased debt levels used to fund Bonavista's growth. Amortization and accretion expenses related to the Trust's convertible debentures for the three months ended September 30, 2007 decreased to $193,000 from $202,000 for the same period in 2006. For the nine months ended September 30, 2007 amortization and accretion expenses decreased to $585,000 from $663,000 for the same period in 2006. This decrease is largely attributable to the conversion of debentures into Trust Units since September 30, 2006. The amortization component reflects the charge to net income of the debenture issue costs over the term of the debenture. The fair value of the conversion option of the debentures is classified as equity. Over the term of the debentures, the carrying value will accrete to the principal balance at maturity, with the charge to accretion expense on convertible debentures. During the third quarter of 2007, Bonavista paid cash interest of $9.0 million compared to $6.6 million in 2006. For the nine months ended September 30, 2007 Bonavista paid cash interest of $24.1 million compared to $18.9 million for the same period in 2006.

Depreciation, depletion and accretion expenses - Depreciation, depletion and accretion expenses increased 10% to $59.9 million for the three months ended September 30, 2007 from $54.3 million in the same period of 2006. For the nine months ended September 30, 2007 depreciation, depletion and accretion expenses also increased by 8% to $171.5 million from $158.5 million in the same period of 2006. Both increases were due to higher costs of finding and developing reserves and a larger asset base in 2007. For the three months ended September 30, 2007 the average cost increased to $12.19 per boe from $11.24 per boe for the same period in 2006 and for the nine months ended September 30, 2007 the average cost increased to $12.00 per boe from $11.08 per boe for the same period a year ago. These increases are due to the higher costs of adding new reserves, a trend being experienced throughout the industry.

Income and other taxes - For the three months ended September 30, 2007, the provision for income and other taxes was a reduction of $4.8 million compared to a reduction of $3.6 million for the same period of 2006. For the nine months ended September 30, 2007, the provision for income and other taxes was $30.3 million compared to a reduction of $21.8 million for the same period in 2006. The income tax provision for the nine months ended September 30, 2007 includes a $41.0 million future income tax charge resulting from recent changes to income tax legislation substantively enacted in the second quarter of 2007 that modify the taxation of certain flow through entities, including mutual fund trusts and their unitholders. The provision arose as the book basis of the assets and liabilities held in the Trust and a subsidiary trust exceeded their tax basis. Previously, future income taxes were recorded only on the temporary differences in the corporate subsidiaries of the Trust. In addition, the provision for the nine months ended September 30, 2007 includes a reduction of $3.7 million related to tax rate reductions enacted during the second quarter of 2007. Bonavista made no cash payments relating to installments for either of the three and nine month periods ended September 30, 2007, compared to nil and $785,000, respectively, for the same periods a year ago.

Funds from operations, net income and comprehensive income - For the three months ended September 30, 2007, Bonavista experienced a 3% decrease in funds from operations to $120.4 million ($1.14 per unit, basic) from $123.5 million ($1.20 per unit, basic) for the same period in 2006. For the nine month period ended September 30, 2007, Bonavista experienced a slight decrease in funds from operations to $375.0 million ($3.57 per unit, basic) from $375.1 million ($3.69 per unit, basic) for the same period in 2006. Funds from operations decreased slightly for the three and nine months ended September 30, 2007 primarily due to lower realized natural gas prices. Net income for the three months ended September 30, 2007, decreased 17% to $59.0 million ($0.56 per unit, basic) from $70.8 million ($0.69 per unit, basic) for the same period of 2006. The decrease is largely due to higher depletion and depreciation expenses and the recognition of unrealized losses on financial instruments. For the nine months ended September 30, 2007, net income decreased 34% to $154.6 million ($1.47 per unit, basic) from $233.6 million ($2.30 per unit, basic) for the same period in 2006. The decrease in net income, prior to the tax provision to reflect the enactment of the taxation changes, for the nine months ended September 30, 2007, was largely due to a recovery relating to the reduction in future federal and provincial income tax rates enacted during the third quarter of 2006 and the recognition of unrealized losses on financial instruments. Other comprehensive income for the quarter included a charge of $781,000, (2006 - nil) relating to the amortization of the amount recognized in accumulated other comprehensive income on January 1, 2007 for the fair value of financial instruments on adoption of the new accounting standards for financial instruments. This resulted in total comprehensive income in the quarter of $58.2 million (2006 - $70.8 million). Other comprehensive income for the nine months ended September 30, 2007 included a charge of $3.5 million, (2006 - nil) relating to the amortization of the amount recognized in accumulated other comprehensive income on January 1, 2007 for the fair value of financial instruments on adoption of the new accounting standards for financial instruments. This resulted in total comprehensive income for the nine months ended September 30, 2007 of $151.1 million (2006 - $233.6 million).

Capital expenditures - Capital expenditures for the three months ended September 30, 2007 were $149.2 million, which consisted of $50.9 million of exploitation and development spending and $98.3 million of net property acquisitions. For the same period in 2006, capital expenditures were $70.5 million consisting of $66.0 million of exploitation and development spending and $4.5 million of net property acquisitions. Capital expenditures for the nine month period ended September 30, 2007 were $308.3 million, consisting of $209.2 million on exploitation and development spending and $99.1 million on net acquisitions. For the same period in 2006 capital expenditures were $258.0 million, consisting of $221.8 million of exploitation and development spending and $36.2 million of net acquisitions. With the industry currently experiencing cost reductions in many of its services due to lower industry activity levels, Bonavista too is benefiting with its active drilling program which is generating production addition costs at an attractive level of approximately $32,000 per boe per day. Entering the fourth quarter of 2007, we continue to generate favourable economic returns from our capital expenditure program as a direct result of the recent decrease in service costs.

Liquidity and capital resources - As at September 30, 2007, long-term debt including working capital deficiency, was $690.1 million with an attractive debt to 2007 annualized third quarter funds from operations ratio of 1.4:1 (1.5:1 including convertible debentures). With our bank credit facility recently increased to $1.0 billion in August 2007, Bonavista has $309.9 million of unused bank borrowing capability, leaving significant flexibility to finance future expansions in our capital programs or acquisition opportunities as they arise.

In 2007, Bonavista plans to invest approximately $355 million to expand its core regions, which will be financed through a combination of funds from operations and bank debt. The Trust is committed to the fundamental principle of maintaining financial flexibility and the prudent use of debt. As such, the 2007 capital expenditure program is based on using a conservative amount of debt in our financing structure.

Unitholders' equity - As at September 30, 2007, Bonavista had 106.0 million equivalent trust units outstanding. This includes 12.3 million exchangeable shares, which are exchangeable into 20.5 million trust units. The exchange ratio in effect at September 30, 2007 for exchangeable shares was 1.66859:1. As at November 8, 2007, Bonavista had 106.3 million equivalent trust units outstanding. This includes 12.2 million exchangeable shares, which are exchangeable into 20.6 million trust units. The exchange ratio in effect at November 8, 2007 for exchangeable shares was 1.68579:1. In addition, Bonavista has 3.8 million trust unit incentive rights outstanding at November 8, 2007, with an average exercise price of $24.83 per trust unit.

As at September 30, 2007, Unitholders' equity included $1.1 million for the ascribed value of the conversion feature of the convertible debentures. This amount was determined at the time the debentures were issued and was subsequently reduced by the amounts attributed to debentures that have been converted into trust units. Of the 100,000, 7.5% convertible debentures issued on January 29, 2004, there have been 91,609 of these debentures converted into trust units, leaving 8,391 debentures with a principal amount of $8.4 million outstanding as at September 30, 2007. On December 31, 2004, the Trust issued 135,000, 6.75% convertible debentures in conjunction with a property acquisition in British Columbia. The original issue of these debentures had a principal amount of $135.0 million, and from the date of issuance to September 30, 2007 there have been 91,698 of these debentures converted into trust units, leaving 43,302 debentures outstanding with a principal amount of $43.3 million.

Distributions - Bonavista's distribution policy is constantly monitored and is dependent upon its forecasted operations, funds from operations, debt levels and capital expenditures. One of the paramount objectives of the Trust is to be a sustainable entity, which is defined as maintaining both production and reserves over an extended period of time. This is accomplished by retaining sufficient cash flow to replace the reserves that have been produced. With these considerations, in the third quarter of 2007 the Trust declared distributions of $77.0 million compared to $83.7 million in the same period in 2006. For the nine months ended September 30, 2007 the Trust declared distributions of $230.3 million compared to $247.7 million in the same period in 2006.

The following table illustrates the relationship between cash flow provided from operating activities and distributions declared, as well as net income and distributions declared. Net income includes significant non-cash charges that do not impact cash flow. For the three and nine months ended September 30, 2007, the non-cash charges amounted to $69.7 million and $223.0 million respectively. Net income also includes fluctuations in future income taxes due to changes in tax rates and tax rules. In addition, other non-cash charges, such as depreciation, depletion and accretion, and unrealized gains and losses on financial instruments, do not represent the actual cost of maintaining our productive capacity given the natural declines associated with oil and gas assets. In these instances, where distributions exceed net income, a portion of the cash distribution paid to Unitholders may be considered an economic return of Unitholders' capital.



----------------------------------------------------------------------------
Three Months Nine Months
Distribution ended ended Year Ended Year Ended
Analysis September 30, September 30, December 31, December 31,
($ thousands) 2007 2007 2006 2005
----------------------------------------------------------------------------
Cash flow provided
from operating
activities 128,685 377,562 475,050 503,487
Net income 58,990 154,556 301,270 302,942
Distributions
declared 76,972 230,265 324,016 270,827
Excess of cash
flow provided
from operating
activities over
distributions
declared 51,713 147,297 151,034 232,660
Excess (shortfall)
of net income
over
distributions
declared (17,982) (75,709) (22,746) 32,115
----------------------------------------------------------------------------


Bonavista announces its distribution policy on a quarterly basis. Distributions are determined by the Board of Directors and are dependent upon the commodity price environment, production levels, and the amount of capital expenditures to be financed from funds from operations. Bonavista's current monthly distribution rate is $0.30 per trust unit. This monthly distribution is comprised of the base distribution of $0.28 per trust unit plus a supplementary distribution of $0.02 per unit, due to the average realized commodity prices in excess of budget prices. The base distribution rate assumes realized commodity prices of CDN $8.00 per gj at AECO for natural gas and CDN $58.00 per barrel at Edmonton for light crude (this equates to approximately US $8.80 per mmbtu for NYMEX natural gas and US $55.00 per barrel for WTI crude oil). The combined base and supplementary distribution incorporates the withholding of sufficient cash flow to fund capital expenditures required to maintain or modestly grow the current production base and provide sustainable distributions in the long-term. Our long-term objective is to distribute between 50% and 60% of our cash flow. Our current distribution rate of $0.30 per trust unit per month places us in this range for 2007, based on the current market of commodity price futures.

Quarterly financial information - The following table highlights Bonavista's performance for the eight quarterly periods ending on December 31, 2005 to September 30, 2007:



----------------------------------------------------------------------------
2007
----------------------------------------------------
September 30 June 30 March 31 December 31
-------------- --------- ---------- -------------
($ thousands, except
per unit amounts)
Production revenues 219,885 223,878 225,222 220,484
Net income 58,990 33,936 61,630 67,635
Net income per unit:
Basic 0.56 0.32 0.59 0.65
Diluted 0.55 0.32 0.59 0.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------


2006 2005
----------------------------------------------------
September 30 June 30 March 31 December 31
-------------- --------- ---------- -------------
($ thousands, except
per unit amounts)
Production revenues 227,270 229,492 232,833 293,563
Net income 70,800 87,425 75,410 103,759
Net income per unit:
Basic 0.69 0.86 0.75 1.05
Diluted 0.68 0.84 0.74 1.01
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Over the past eight quarters, production revenue excluding gains and losses on financial instruments peaked in the fourth quarter of 2005 reflecting the impact of increased production levels and the trend of increasing oil and natural gas commodity prices. For quarterly periods ending in 2007 and 2006, production revenue and net income were lower than the last quarter of 2005, primarily due to the decrease in the price of natural gas and higher costs of doing business. Over the eight quarters, production revenues have decreased 25% and net income has decreased 43%. The decrease in net income in the second quarter of 2007 is attributable to the non-cash future income tax charge to net income of $41.0 million to reflect recent changes to income tax legislation, substantially enacted in the second quarter of 2007.

Disclosure and Internal Controls - Disclosure controls and procedures have been designed to ensure that information required to be disclosed by Bonavista is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosures. The Chief Executive Officer and Chief Financial Officer have concluded, as of the end of the period covered by the interim filings, that Bonavista's disclosure controls and procedures are effectively designed to provide reasonable assurance that material information related to the issuer is made known to them by others within the Trust. It should be noted that while the Trust's Chief Executive Officer and Chief Financial Officer believe that the disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objective of the control system is met.

Update on Regulatory and Financial Reporting Matters - Effective January 1, 2007, Bonavista adopted Canadian Institute of Chartered Accountants ("CICA") section 3855, "Financial Instrument Recognition and Measurement" section 3865, "Hedges" section 1530, "Comprehensive Income", and section 3861, "Financial Instruments - Disclosure and Presentation". These standards have been adopted prospectively. See note 1 to the consolidated financial statements.

Update on Government of Alberta Royalty Review - On October 25, 2007, the Government of Alberta released its much anticipated New Royalty Framework ("NRF"). The NRF was the government's response to a report issued September 18, 2007 by the Alberta Royalty Review Panel, which was commissioned by the Government of Alberta to perform a review of the province's royalty system to, in their words, ensure that the people of Alberta were receiving their "Fair Share" for the resources being extracted by the oil and gas industry. The full NRF is available at www.energy.gov.ab.ca. The Trust has reviewed the modifications proposed by the Government of Alberta to its royalty program which take effect January 1, 2009 and have concluded that the impact of these changes on our existing operations are not material on both a cash flow and a net asset value basis.

Environmental Matters - On April 26, 2007, the Federal Government released its Action Plan to Reduce Greenhouse Gases and Air Pollution (the "Action Plan") also known as ecoACTION which includes the Regulatory Framework for Air Emissions. This Action Plan covers not only large industry, but regulates the fuel efficiency of vehicles and the strengthening of energy standards for a number of energy-using products. Regarding large industry and industry related projects, the Government's Action Plan intends to achieve the following: (i) an absolute reduction of 150 megatonnes in greenhouse gas emissions by 2020 by imposing mandatory targets; and (ii) air pollution from industry is to be cut in half by 2015 by setting certain targets. New facilities using cleaner fuels and technologies will have a grace period of three years. In order to facilitate the companies' compliance with the Action Plan's requirements, while at the same time allowing them to be cost-effective, innovative and adopt cleaner technologies, certain options are provided. These are: (i) in-house reductions; (ii) contributions to technology funds; (iii) trading of emissions with below-target emission companies; (iv) offsets; and (v) access to Kyoto's Clean Development Mechanism.

On March 8, 2007, the Alberta Government introduced Bill 3, the Climate Change and Emissions Management Amendment Act, which intends to reduce greenhouse gas emission intensity from large industries. Bill 3 states that facilities emitting more than 100,000 tonnes of greenhouse gases a year must reduce their emission intensity by 12% starting July 1, 2007; if such reduction is not initially possible the companies owning the large emitting facilities will be required to pay $15 per tonne for every tonne above the 12% target. These payments will be deposited into an Alberta-based technology fund that will be used to develop infrastructure to reduce emissions or to support research into innovative climate change solutions. As an alternate option, large emitters can invest in projects outside of their operations that reduce or offset emissions on their behalf, provided that these projects are based in Alberta. Prior to investing, the offset reductions offered by a prospective operation, must be verified by a third party to ensure that the emission reductions are real.

Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements at this time, it is not possible to predict the impact of those requirements on Bonavista and its operations and financial condition although it is thought to be an immaterial amount at this time.

OUTLOOK

As we celebrate our tenth anniversary since restructuring the company back in 1997, we continue to benefit from all the same qualities that drove the success of Bonavista Petroleum Ltd. as a public company prior to its conversion into an energy trust. We apply similar proven principles and execute our strategy in a disciplined and cost-effective manner much the same as in 1997 when we started on this mission of value creation. The foundation of this strategy is to actively pursue low to medium risk drilling opportunities on the extensive undeveloped land base within our geographically concentrated areas of operations. Despite a very active exploitation and development program over the past year, the quality and quantity of our drilling opportunities continues to increase as we transition from 2007 into 2008. This increase in inventory can be directly attributed to the detailed and tireless work of our talented technical team, who possess a strong commitment and a solid understanding of the Western Canadian Sedimentary Basin. We also continue to search for strategic acquisition opportunities where we can add value utilizing our own technical expertise. This period of commodity price volatility and market uncertainty should benefit Bonavista in the near future due to its proven track record of timely acquisitions and our strong balance sheet. Recently, we have witnessed acquisition prices decreasing to a level that compares favorably with our cost of adding reserves organically. Our prudent approach to capital investment has been very effective in the past, and together with our steadfast commitment to adding Unitholder value and attention to detail will continue to provide the foundation for the future success of the Trust. Today our activity, efficiency, productivity and profitability remain among the strongest levels in our ten year history.

As a result of successful efforts to expand our undeveloped land base in the Bakken trend located in Southeast Saskatchewan and success in our property acquisition programs, Bonavista's 2007 capital budget is approximately $355 million and is anticipated to result in the drilling of approximately 220 wells. For 2008, Bonavista's preliminary capital budget includes drilling approximately 210 to 230 wells on existing lands in Bonavista's four core regions. Similar to 2007, these locations generally consist of low to medium risk prospects drilled within close proximity of Trust owned and operated infrastructure. The capital required to complete this drilling program and our complementary acquisition program is estimated to be in the $290 to $310 million range and should result in stable average daily production levels between 52,000 and 53,000 boe per day in 2008.

We are proud of our achievements over our past ten years and are very excited about the growing opportunities that exist for Bonavista in the future. We would like to thank our employees for their significant effort and their continued enthusiasm and excitement as we pursue these opportunities. Despite the passage of legislation in the Canadian House of Commons on the taxation of distributions from certain publicly traded Canadian trusts and the introduction of the new royalty framework by the Government of Alberta, Bonavista's value creation process has not changed. Throughout many business cycles and changes in the business environment, Bonavista has thrived. Our success is based on the consistent application of our core philosophy and operating strategies. This practice will not change under the federal government's income trust tax regime nor the provincial government's new royalty regime, as our team remains dedicated to adding Unitholder value in the oil and natural gas business, regardless of the landscape.



Consolidated Balance Sheets September 30, December 31,
(thousands) 2007 2006
----------------------------------------------------------------------------
(unaudited)
Assets:
Accounts receivable $ 88,803 $ 116,251
Oil and natural gas properties
and equipment 2,058,030 1,910,359
Goodwill 41,321 41,321
----------------------------------------------------------------------------
$ 2,188,154 $ 2,067,931
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Unitholders' Equity:
Accounts payable and accrued liabilities $ 109,946 $ 122,376
Long-term debt and other obligations 669,085 514,169
Convertible debentures 49,227 51,170
Asset retirement obligations 102,620 96,324
Future income taxes 185,012 153,639
Unitholders' equity:
Unitholders' capital 847,961 834,625
Exchangeable shares 74,947 75,121
Contributed surplus 7,070 4,973
Convertible debentures 1,066 1,117
Accumulated earnings 138,708 214,417
Accumulated other comprehensive income 2,512 -
----------------------------------------------------------------------------
1,072,264 1,130,253
----------------------------------------------------------------------------
$ 2,188,154 $ 2,067,931
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Consolidated Statements of Operations, Comprehensive Income and Accumulated
Earnings
(thousands, except per unit amounts) Three Months Nine Months
ended September 30, ended September 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(unaudited)
Revenues:
Production $ 219,885 $ 227,270 $ 668,985 $ 689,595
Royalties (35,535) (40,930) (112,777) (135,918)
----------------------------------------------------------------------------
184,350 186,340 556,208 553,677
Realized gains (losses) on
financial instruments 1,438 (4,131) 4,343 (10,169)
Unrealized losses on financial
instruments (4,373) - (13,548) -
----------------------------------------------------------------------------
181,415 182,209 547,003 543,508
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Expenses:
Operating 41,778 38,430 120,504 112,142
Transportation 10,624 10,172 31,033 29,191
General and administrative 3,479 2,723 9,715 7,697
Financing 9,525 7,338 24,294 19,276
Amortization and accretion of
convertible debentures 193 202 585 663
Unit-based compensation 1,709 1,803 4,542 4,176
Depreciation, depletion
and accretion 59,877 54,301 171,478 158,519
----------------------------------------------------------------------------
127,185 114,969 362,151 331,664
----------------------------------------------------------------------------
Income before taxes 54,230 67,240 184,852 211,844
Income and other
taxes (reductions) (4,760) (3,560) 30,296 (21,791)
----------------------------------------------------------------------------
Net income 58,990 70,800 154,556 233,635
Changes in comprehensive
income, net of taxes (781) - (3,482) -
----------------------------------------------------------------------------
Comprehensive income 58,209 70,800 151,074 233,635
----------------------------------------------------------------------------
Accumulated earnings, beginning
of period 156,690 235,928 214,417 237,163
Distributions declared (76,972) (83,650) (230,265) (247,720)
----------------------------------------------------------------------------
Accumulated earnings,
end of period $ 138,708 $ 223,078 $ 138,708 $ 223,078
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income per unit - basic $ 0.56 $ 0.69 $ 1.47 $ 2.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income per unit - diluted $ 0.55 $ 0.68 $ 1.47 $ 2.26
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


----------------------------------------------------------------------------
Consolidated Statements of Cash Flows

(thousands) Three Months Nine Months
ended September 30, ended September 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
(unaudited)
Cash provided by (used in):
Operating Activities:
Net income $ 58,990 $ 70,800 $ 154,556 $ 233,635
Items not requiring cash
from operations:
Depreciation, depletion
and accretion 59,877 54,301 171,478 158,519
Amortization and accretion
of convertible debentures 193 202 585 663
Unit-based compensation 1,709 1,803 4,542 4,176
Unrealized losses on financial
instruments 4,373 - 13,548 -
Future income taxes
(reductions) (4,760) (3,629) 30,296 (21,860)
Asset retirement expenditures (2,081) (625) (3,554) (2,832)
Changes in non-cash working
capital items 10,384 2,117 6,111 8,293
----------------------------------------------------------------------------
128,685 124,969 377,562 380,594
----------------------------------------------------------------------------
Financing Activities:
Issuance of equity, net of
issue costs 809 1,795 7,180 4,840
Distributions (76,940) (83,509) (230,046) (246,301)
Changes in long-term debt 96,375 31,866 156,627 123,245
Changes in non-cash working
capital items 512 815 241 397
----------------------------------------------------------------------------
20,756 (49,033) (65,998) (117,819)
----------------------------------------------------------------------------
Investing Activities:
Exploitation and development (50,889) (65,995) (209,220) (221,819)
Property acquisitions (98,311) (4,619) (99,221) (36,242)
Property dispositions - 100 100 107
Changes in non-cash working
capital items (241) (5,422) (3,223) (4,821)
----------------------------------------------------------------------------
(149,441) (75,936) (311,564) (262,775)
----------------------------------------------------------------------------
Changes in cash - - - -
Cash, beginning of period - - - -
----------------------------------------------------------------------------

Cash, end of period $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


BONAVISTA ENERGY TRUST

Notes to Consolidated Financial Statements

For the three and nine months ended September 30, 2007 (unaudited)

Structure of the Trust and Basis of Presentation:

Bonavista Energy Trust (the "Trust" or "Bonavista") is an open-ended unincorporated investment trust governed by the laws of the Province of Alberta. The Trust was established on July 2, 2003 under a Plan of Arrangement entered into by the Trust, Bonavista Petroleum Ltd. ("BPL") and its subsidiaries and partnerships and NuVista Energy Ltd. ("NuVista"). Under the Plan of Arrangement, a wholly-owned subsidiary of the Trust amalgamated with BPL and became the successor company. The Trust has two significant subsidiaries in which it owns 100% of the common shares of BPL (excluding the exchangeable shares - see note 6) and 100% of the units of Bonavista Trust (2003) ("BT"). The activities of these entities are financed through interest bearing notes from the Trust and third party debt as described in the notes to the consolidated financial statements. The business of the Trust is carried on through the entities owned by the subsidiaries of the Trust, Bonavista Petroleum, a general partnership ("BP") and Bonavista Energy Limited Partnership ("BELP"). The net income of the Trust is generated from interest on notes advanced to its subsidiaries, royalty payments on oil and natural gas assets owned by BP, as well as any dividends or distributions paid by its subsidiaries. The Trustee must declare payable to the Trust Unitholders all of the taxable income of the Trust.

The unaudited consolidated financial statements include the accounts of the Trust and its wholly-owned subsidiaries and partnerships, and have been prepared by management in accordance with Canadian Generally Accepted Accounting Principles. The interim consolidated financial statements and notes should be read in conjunction with the consolidated financial statements for the year ended December 31, 2006. Certain amounts have been reclassified to conform to the current period's presentation.

1. Changes in accounting policy:

Financial Instruments and Hedging Activities

Effective January 1, 2007, Bonavista adopted the Canadian Institute of Chartered Accountants ("CICA") section 3855, "Financial Instruments - Recognition and Measurement", section 3865, "Hedges", section 1530, "Comprehensive Income", and section 3861, "Financial Instruments - Disclosure and Presentation". Bonavista has adopted these standards prospectively and the comparative interim consolidated financial statements have not been restated. Transition amounts have been recorded in accumulated other comprehensive income.

As at January 1, 2007, the following adjustments were made to the consolidated balance sheet on adoption of the new standards:



----------------------------------------------------------------------------
January 1, 2007
----------------------------------------------------------------------------
(thousands)
Accounts receivable - financial instruments $ 8,563
Future income taxes (2,569)
Accumulated other comprehensive income (5,994)
----------------------------------------------------------------------------


(a) Financial instruments - recognition and measurement

This new standard requires all financial instruments within its scope, including all derivatives, to be recognized on the balance sheet initially at fair value. Subsequent measurement of all financial assets and liabilities except those held-for-trading and available for sale are measured at amortized cost determined using the effective interest rate method. Held-for-trading financial assets are measured at fair value with changes in fair value recognized in earnings. Available-for-sale financial assets are measured at fair value with changes in fair value recognized in comprehensive income and reclassified to earnings when derecognized or impaired.

Additional disclosure requirements for financial instruments have been approved by the CICA, and will be required disclosure for Bonavista beginning January 1, 2008.

(b) Derivatives

Bonavista continues to utilize financial derivatives and non-financial derivatives, such as commodity sales contracts requiring physical delivery, to manage the price risk attributable to anticipated sale of oil and natural gas production. Bonavista has elected to account for its commodity sales contracts which were entered into and continue to be held for the purpose of receipt or delivery of non-financial items in accordance with its expected purchase, sale or usage requirements as executory contracts on an accrual basis rather than as non-financial derivatives. Prior to adoption of the new standards, physical receipt and delivery contracts did not fall within the scope of the definition of a financial instrument and were also accounted for as executory contracts.

Prior to January 1, 2007, Bonavista applied hedge accounting to its forward sales contracts. On January 1, 2007, Bonavista discontinued hedge accounting for all existing financial derivatives. Net derivative gains in accumulated other comprehensive income at January 1, 2007 was reclassified to income in future periods as the original hedged transactions affect net income. From that date forward, the changes in fair value of such derivatives have been recognized in net income when incurred. Discontinuing hedge accounting did not affect the Trust's reported cash flows.

(c) Embedded derivatives

On adoption, Bonavista elected to recognize, as separate assets and liabilities, only for those embedded derivatives in hybrid instruments issued, acquired or substantively modified after January 1, 2003. Bonavista did not identify any material embedded derivatives, which required separate recognition and measurement.

(d) Other comprehensive income

The new standards require a new statement of comprehensive income, which is comprised of net income and other comprehensive income, which, for Bonavista, relates to changes in gains or losses on derivatives designated as cash flow hedges. Bonavista has prepared a statement showing the changes in the accumulated other comprehensive income.

2. Business relationships:

Bonavista receives payment for certain administrative services provided by it to NuVista. Bonavista and NuVista are considered related as two directors of NuVista, one of whom is NuVista's chairman, are directors and officers of Bonavista and a director and an officer of NuVista are also officers of Bonavista. For the three months ended September 30, 2007, fees of $22,000 (2006 - $590,000) relating to general and administrative activities were charged. For the nine months ended September 30, 2007, fees of $32,000 (2006 - $1.6 million) relating to general and administrative activities were charged. In addition, $358,000 was charged to NuVista for costs during the first nine months of 2007 relating to NuVista's share of direct charges from third parties. In connection with joint operations, as at September 30, 2007 the amount receivable from NuVista was $1.1 million.

3. Asset retirement obligations:

The Trust's asset retirement obligations result from net ownership interests in oil and natural gas assets including well sites, gathering systems and processing facilities. The Trust estimates the total undiscounted amount of expenditures required to settle its asset retirement obligations is approximately $506.0 million (2006 - $440.3 million) which will be incurred over the next 51 years. The majority of the costs will be incurred between 2010 and 2037. A credit-adjusted risk-free rate of 7.5% (2006 - 7.5%) and an inflation rate of 2% (2006 - 2%) were used to calculate the fair value of the asset retirement obligations.



A reconciliation of the asset retirement obligations is provided below:

----------------------------------------------------------------------------
Nine Months ended
September 30,
2007 2006
----------------------------------------------------------------------------
(thousands)
Balance, beginning of period $ 96,324 $ 82,819
Accretion expense 5,218 4,598
Liabilities incurred 656 3,100
Liabilities acquired 3,976 1,588
Liabilities settled (3,554) (2,832)
----------------------------------------------------------------------------
Balance, end of period $ 102,620 $ 89,273
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. Long-term debt:

The Trust has a $1.0 billion credit facility with a syndicate of chartered banks. This facility is an unsecured, covenant-based, extendible revolving facility and includes a $50 million working capital facility. The facility provides that advances may be made by way of prime rate loans, bankers' acceptances and/or US dollar LIBOR advances. These advances bear interest at the banks' prime rate and/or at money market rates plus a stamping fee. The facility is a three year revolving credit and may, at the request of the Trust with the consent of the lenders, be extended on an annual basis. At present, no principal payments are required under the credit facility until August 10, 2010.

Under the terms of the credit facility, the Trust has provided the covenant that its consolidated senior debt borrowing will not exceed three times net income before interest, taxes and depreciation, depletion and accretion; consolidated total debt will not exceed three and one half times consolidated net income before interest, taxes and depreciation, depletion and accretion; and consolidated senior debt borrowing will not exceed one-half of consolidated total debt plus consolidated unitholders' equity of the Trust.

Financing expenses include interest on bank loans of $21.6 million (2006 - $15.7 million) and convertible debentures of $2.7 million (2006 - $3.6 million). For the three months ended September 30, 2007, Bonavista paid cash interest of $9.0 million (2006 - $6.6 million).

5. Convertible debentures:

The debt component of the debentures has been recorded net of the fair value of the conversion feature and issue costs. The fair value of the conversion feature of the debentures included in Unitholders' equity at the date of issue was $4.7 million. The issue costs are amortized to net income over the term of the obligation and the debt component of the obligation is adjusted for the amortization as well as for the portion of issue costs relating to conversions. The debt portion is accreted over the term of the obligation to the principal value on maturity with a corresponding charge to net income. The following table sets out the convertible debenture activities to September 30, 2007:



----------------------------------------------------------------------------
Debt Equity
Component Component
----------------------------------------------------------------------------
(thousands)
Balance, December 31, 2006 $ 51,170 $ 1,117
Accretion 57 -
Issue expenses related to conversions
to trust units 27 -
Amortization of issue expenses 528 -
Conversion to trust units (2,555) (51)
----------------------------------------------------------------------------
Balance, September 30, 2007 $ 49,227 $ 1,066
----------------------------------------------------------------------------
----------------------------------------------------------------------------

6. Unitholders' equity:

a) Authorized:

Unlimited number of voting trust units.

b) Issued and outstanding:

(i) Trust units:

----------------------------------------------------------------------------
Number Amount
----------------------------------------------------------------------------
(thousands)
Balance, December 31, 2006 84,839 $ 834,625
Issued on conversion of convertible
debentures 99 2,555
Issued on conversion of exchangeable shares 44 174
Issued upon exercise of trust unit
incentive rights 585 7,180
Issue costs related to debenture
conversions - (27)
Adjustment to equity component of
debenture on conversion - 51
Unit-based compensation - 3,403
----------------------------------------------------------------------------
Balance, September 30, 2007 85,567 $ 847,961
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(ii) Exchangeable shares:

Number Amount
----------------------------------------------------------------------------
(thousands)
Balance, December 31, 2006 12,297 $ 75,121
Exchanged for trust units (28) (174)
----------------------------------------------------------------------------
Balance, September 30, 2007 12,269 $ 74,947
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exchange ratio, end of period 1.66859 -
----------------------------------------------------------------------------
Trust units issuable on exchange 20,472 $ 74,947
----------------------------------------------------------------------------
----------------------------------------------------------------------------


(iii) Contributed surplus:

Amount
----------------------------------------------------------------------------
(thousands)
Balance, December 31, 2006 $ 4,973
Unit-based compensation expense 4,542
Unit-based compensation capitalized 958
Exercise of trust unit incentive rights (3,403)
----------------------------------------------------------------------------
Balance, September 30, 2007 $ 7,070
----------------------------------------------------------------------------
----------------------------------------------------------------------------


c) Trust unit incentive rights plan:

For the three months ended September 30, 2007 there were 744,700 trust unit incentive rights issued with an average exercise price of $30.90 per trust unit and an estimated fair value of $7.83 per trust unit. As at September 30, 2007 there were 3,835,575 trust unit rights outstanding with an average exercise price of $25.24 per trust unit. The Trust uses the fair value based method for the determination of the unit-based compensation costs. The fair value of each incentive right granted was estimated on the date of grant using the modified Black-Scholes option-pricing model. In the pricing model, the risk free interest was 3.5%; volatility of 30%; a forfeiture rate of 10% and an expected life of 4.5 years.

d) Per unit amounts:

The following table summarizes the weighted average trust units, exchangeable shares and convertible debentures used in calculating net income per trust unit:



----------------------------------------------------------------------------
Three Months
ended,
September 30, 2007
----------------------------------------------------------------------------
(thousands)
Trust units 85,509
Exchangeable shares converted at the exchange ratio 20,474
----------------------------------------------------------------------------
Basic equivalent trust units 105,983
Convertible debentures 1,862
Trust unit incentive rights 560
----------------------------------------------------------------------------
Diluted equivalent trust units 108,405
----------------------------------------------------------------------------
----------------------------------------------------------------------------


For the purposes of calculating net income per trust unit on a diluted basis, the net income has been increased by $1.1 million with respect to the accretion, amortization and interest expense on the convertible debentures.

e) Accumulated other comprehensive income:

The following table summarizes the amounts recognized on adoption of the new accounting standards for financial instruments and also the amortization of the amount recognized in accumulated other income on January 1, 2007:



----------------------------------------------------------------------------
(thousands)
Balance, January 1, 2007 $ -
Transition adjustment for discontinuance
of hedge accounting, net of taxes of $2,569 5,994
Reclassification to net income during the
period, net of taxes of $1,077 (3,482)
----------------------------------------------------------------------------
Balance, September 30, 2007 $ 2,512
----------------------------------------------------------------------------
----------------------------------------------------------------------------


7. Income taxes:

As a result of the recent changes to income trust tax legislation modifying the taxation of certain flow through entities including mutual fund trusts and their unitholders, a non-cash provision for future income taxes of $41.0 million was recorded in the nine months ended September 30, 2007, resulting from the book basis of the assets and liabilities in the Trust and its subsidiary trust, exceeding their tax basis. These changes apply a tax at the trust level on distributions of certain income at a rate of tax comparable to the combined federal and provincial corporate tax rate. The distribution tax will only apply in respect of distributions of income and will not apply to returns of capital. It is expected that Bonavista will not be subject to the recent tax changes until January 1, 2011. Previously, future income taxes were recorded only on the temporary differences in the corporate subsidiaries of the Trust.

8. Financial instrument activities:

a) Balance sheet financial instruments:

Bonavista's financial instruments recognized in the Consolidated Balance Sheet consist of accounts receivable, accounts payable, long-term debt, and other long-term obligations. The fair market value of the Trust's derivative financial instruments is $10.0 million and is included in accounts payable. Unless otherwise noted, carrying values reflect the current fair value of the Trust's financial instruments. The estimated fair values of recognized financial instruments have been determined based on Bonavista's assessment of available market information and appropriate methodologies, or through comparisons to similar instruments. The fair market value of the convertible debentures as at September 30, 2007 is $55.7 million.

b) Commodity price contracts:

i) Financial instruments:

As at September 30, 2007, the Trust has hedged by way of costless collars to sell natural gas (gjs/d) and crude oil (bbls/d) as follows:



----------------------------------------------------------------------------
Volume Average Price Term
----------------------------------------------------------------------------
25,000 gjs/d CDN$ 6.55 - CDN$ 9.00 - AECO October 1, 2007 -
October 31, 2007
5,000 gjs/d CDN$ 7.50 - CDN$ 10.55 - AECO November 1, 2007 -
March 31, 2008
5,000 gjs/d CDN$ 7.00 - CDN$ 9.00 - AECO April 1, 2008 -
October 31, 2008
6,000 bbls/d US$ 60.54 - US$ 77.32 - WTI October 1, 2007 -
September 30, 2007
6,000 bbls/d US$ 60.54 - US$ 77.80 - WTI October 1, 2007 -
December 31, 2007
1,000 bbls/d CDN$ 48.95 - CDN$ 57.20 - Bow River October 1, 2007 -
December 1, 2007
6,000 bbls/d US$ 62.17 - US$ 75.01 - WTI January 1, 2008 -
December 31, 2008
2,000 bbls/d US$ 65.00 - US$ 80.50 - WTI January 1, 2009 -
March 31, 2009
----------------------------------------------------------------------------


As at September 30, 2007, the market deficit of these derivative financial instruments was approximately $10.0 million.

ii) Physical purchase contracts:

As at September 30, 2007, the Trust has entered into direct sale costless collars to sell natural gas as follows:



----------------------------------------------------------------------------
Volume Average Price (CDN$ - AECO) Term
----------------------------------------------------------------------------
35,000 gjs/d $ 6.68 - $ 9.18 October 1, 2007 -
October 31, 2007
20,000 gjs/d $ 7.75 - $ 10.53 November 1, 2007 -
March 31, 2008
----------------------------------------------------------------------------


INVESTOR INFORMATION

Bonavista Energy Trust is a natural gas weighted energy trust which is committed to maintaining its emphasis on operating high quality oil and natural gas properties, delivering consistent distributions to unitholders and ensuring financial strength and sustainability.

Corporate information provided herein contains forward-looking information. The reader is cautioned that assumptions used in the preparation of such information, particularly those pertaining to cash distributions, production volumes, commodity prices, operating costs and drilling results, which are considered reasonable by Bonavista at the time of preparation, may be proven to be incorrect. Actual results achieved during the forecast period will vary from the information provided herein and the variations may be material. There is no representation by Bonavista that actual results achieved during the forecast period will be the same in whole or in part as those forecast.

Contact Information

  • Bonavista Energy Trust
    Keith A. MacPhail
    President & CEO
    (403) 213-4315
    or
    Ronald J. Poelzer
    Executive Vice President & CFO
    (403) 213-4308
    Website: www.bonavistaenergy.com
    or
    Bonavista Petroleum Ltd.
    700, 311 - 6th Avenue SW
    Calgary, AB T2P 3H2
    (403) 213-4300