Bonavista Energy Trust
TSX : BNP.UN

Bonavista Energy Trust

August 09, 2007 16:04 ET

Bonavista Energy Trust Announces Second Quarter Results

CALGARY, ALBERTA--(Marketwire - Aug. 9, 2007) - Bonavista Energy Trust (TSX:BNP.UN) is pleased to report to unitholders its interim consolidated financial and operating results for the three and six months ended June 30, 2007.



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Highlights
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Three Months Six Months
ended June 30, ended June 30,
2007 2006 2007 2006
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Financial
($ thousands, except per unit)
Production revenues 223,878 229,492 449,100 462,325
Funds from operations (1) 126,111 124,249 254,623 251,656
Per unit (1) (2) 1.20 1.22 2.43 2.49
Distributions declared 76,757 83,201 153,293 164,070
Per unit 0.90 0.99 1.80 1.98
Percentage of funds from
operations distributed 61% 67% 60% 65%
Net income 33,936 87,425 95,566 162,835
Per unit (2) 0.32 0.86 0.91 1.61
Total assets 2,115,759 2,024,388
Long-term debt, including
working capital deficiency 577,409 472,250
Unitholders' equity 1,087,869 1,138,911
Capital expenditures:
Exploitation and development 67,715 59,369 158,331 155,824
Acquisitions, net (155) 26,371 810 31,616
Weighted average outstanding
equivalent trust units:
(thousands) (2)
Basic 105,087 101,835 104,699 101,147
Diluted 107,701 105,320 107,385 105,085
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Operating
(boe conversion - 6:1 basis)
Production:
Natural gas (mmcf/day) 171 178 172 179
Oil and liquids (bbls/day) 22,964 22,465 23,198 22,522
Total oil equivalent
(boe/day) 51,533 52,113 51,792 52,382
Product prices: (3)
Natural gas ($/mcf) 7.35 6.88 7.61 7.72
Oil and liquids ($/bbl) 52.66 56.08 51.34 50.53
Operating expenses ($/boe) 8.46 7.92 8.40 7.77
General and administrative
expenses ($/boe) 0.68 0.54 0.67 0.52
Cash costs ($/boe) (4) 10.68 9.76 10.64 9.56
Operating netback ($/boe) (5) 29.11 28.04 29.40 28.33
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NOTES:

(1) Management uses funds from operations to analyze operating performance
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 trust units
outstanding consistent with the calculation of net income per trust
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.


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Three Months ended
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June 30, March 31, December 31, September 30,
Trust Unit Trading Statistics 2007 2007 2006 2006
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($ per unit, except volume)

High 33.54 31.89 35.50 38.34

Low 29.12 25.90 24.52 31.81

Close 30.60 30.85 28.15 32.28

Average Daily Volume 216,676 230,630 472,156 262,161
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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 six months ended June 30, 2007. The results for the second quarter of 2007 represents sixteen 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 first half of 2007 is a testament to the validity and effectiveness of an operationally and technically focused energy trust. The second quarter results for 2007 are also highlighted by an increase in drilling opportunities and a continued high success rate in our drilling program. These factors have led to attractive finding and development costs despite the increasing 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 accomplishments for Bonavista include:

- Produced 51,533 boe per day during the second quarter of 2007, a slight decrease when compared to the 52,113 boe per day reported in the second quarter of 2006. Bonavista's current production rate is approximately 53,500 boe per day;

- Maintained an active capital program during the second quarter of 2007, having invested $67.6 million substantially all in exploitation and development activities, drilling 51 wells with an overall 98% success rate;

- Continued to actively participate at crown land sales, investing $7.6 million in land activity during the second quarter, further enhancing our undeveloped land position and future drilling prospect inventory to more than two years;

- Generated funds from operations of $126.1 million ($1.20 per unit) in the second quarter of 2007 and distributed 61% of these funds to our Unitholders, with the remaining funds reinvested in the business to replace production declines;

- Recorded strong profitable results in the second quarter of 2007, generating $74.9 million of net income before non-recurring charges relating to the taxation of trusts. This results in a strong average return on equity of 27% and a strong net income to funds from operations ratio of 59%;

- Increased bank credit facility effective August 10, 2007 to $1.0 billion providing significant financial flexibility to take advantage of future investment opportunities in 2007 and beyond; and

- Attained the $1.0 billion level or $13.71 per trust unit for cumulative distributions to our unitholders since our reorganization in July 2003.

In June 2007, Bill C-52 Budget Implementation Act, 2007, which contained legislative provisions pertaining to the taxation of distributions from publicly traded Canadian income trusts, royalty trusts and partnerships, passed reading in the Canadian House of Commons and the Senate and has received Royal Assent. This resulted in the accounting recognition of an additional $41.0 million future income tax charge in the second quarter of 2007. This charge against income did not affect funds from operations as it is non-cash, and relates to the differences between the accounting and tax carrying value of certain of the Trust's assets and liabilities. Despite the enactment's significant negative impact on the overall energy trust sector, Bonavista is still well positioned to take advantage of the opportunities arising from the changing landscape. Our success is based on the consistent application of our core philosophy and operating strategies. As such, the application of these principles will not change under the new tax regime, as our team is dedicated to continue creating significant value in the oil and natural gas business for our investors.

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 six months ended June 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 August 9, 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, 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 first six months of 2007, led to the drilling of 134 wells in our four core regions with an overall success rate of 96%. This program resulted in 72 natural gas wells, 56 oil wells and six dry holes. Bonavista continues to emphasize deeper, higher impact drilling opportunities within the Northeast British Columbia and South Central Alberta core areas where we have experienced excellent success and attractive finding and development costs over the past two years. These activities have also lengthened our reserve life index and additional predictability in our overall production base. We also drilled 24 heavy oil targets in the Lloydminster area in the first half resulting in 100% success and stable heavy oil production of 7,800 bbls per day. In addition to the exploitation and development programs, Bonavista executed three complementary acquisitions in its core regions during the first half of 2007.

Production - Production for the second quarter of 2007 decreased slightly to 51,533 boe per day when compared to 52,113 boe per day for the same period a year ago. Production in the second quarter of 2007 was negatively affected by operational challenges resulting from wet conditions early in the quarter delaying certain projects. Average natural gas production decreased 4% to 171 mmcf per day in the second quarter of 2007 from 178 mmcf per day for the same period a year ago. In the second quarter of 2007 total oil and liquids production increased 2% to 22,964 bbls per day (comprised of 15,868 bbls per day of light and medium oil and 7,096 bbls per day of heavy oil) from 22,465 bbls per day (comprised of 15,745 bbls per day of light and medium oil and 6,720 bbls per day of heavy oil) for the same period in 2006. Our current production is approximately 53,500 boe per day consisting of 53% natural gas, 32% light and medium oil and 15% heavy oil. Production for the six months ended June 30, 2007 decreased 1% to 51,792 boe per day when compared to 52,382 boe per day for the same period a year ago. More specifically, average natural gas production decreased 4% to 172 mmcf per day in the first six months of 2007 from 179 mmcf per day in the first six months of 2006 while total oil and liquids production increased 3% to 23,198 bbls per day in the first six months of 2007(comprised of 16,070 bbls per day of light and medium oil and 7,128 bbls per day of heavy oil) from 22,522 bbls per day (comprised of 15,693 bbls per day of light and medium oil and 6,829 bbls per day of heavy oil) in the first six 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 second quarter of 2007 decreased by 2% to $223.9 million from $229.5 million in the second quarter of 2006. This decrease is attributable to a 1% decrease in realized commodity prices and a 1% decrease in average production volumes. In the second quarter of 2007, our natural gas price including realized gains on financial instruments averaged $7.35 per mcf, up 7% from $6.88 per mcf for the same period in 2006. The average oil and liquids price decreased 6% to $52.66 per bbl (comprised of $57.38 per bbl for light and medium oil and $42.09 per bbl for heavy oil) in the second quarter of 2007 from $56.08 per bbl (comprised of $58.23 per bbl for light and medium oil and $51.04 per bbl for heavy oil) for the same period in 2006. Revenues, excluding gains and losses on financial instruments, for the six months ended June 30, 2007 decreased by 3% to $449.1 million when compared to $462.3 million for the same period a year ago due to slightly lower production volumes and average commodity prices. In the first half of 2007, natural gas prices averaged $7.61 per mcf, down 1% from $7.72 per mcf for the same period in 2006. The average oil and liquids price increased 2% to $51.34 per bbl (comprised of $55.74 per bbl for light and medium oil and $41.44 per bbl for heavy oil) in the first half of 2007 from $50.53 per bbl (comprised of $55.00 per bbl for light and medium oil and $40.28 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 reduce volatility in funds from operations, protect acquisition economics and stabilize funds from operations against unpredictable commodity prices. 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 six months ended June 30, 2007.

In the second quarter of 2007, our risk management program on financial instruments resulted in a net gain of $4.7 million consisting of a realized gain of $834,000 and an unrealized gain of $3.8 million. In the same period in 2006, Bonavista recognized a hedging loss of $3.4 million. The realized gain of $834,000 for the second quarter of 2007 consisted of a $43,000 gain on natural gas commodity derivative contracts and a $791,000 gain on crude oil commodity derivative contracts. For the six months ended June 30, 2007, Bonavista realized a gain of $2.9 million which consisted of a $684,000 gain on natural gas commodity derivative contracts and a $2.2 million gain on crude oil commodity derivative contracts. In addition, a $9.2 million unrealized loss on financial instruments was recorded in the first half of 2007. A summary of commodity price risk management contracts in place as at June 30, 2007 is included in note 8 of the consolidated financial statements for the three and six months ended June 30, 2007.

Royalties - For the three months ended June 30, 2007, royalties decreased 17% to $38.2 million from $45.9 million for the same period a year ago, primarily due to 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 second quarter decreased to 17.0% from 20.3% in 2006 primarily due to similar reasons. For the three months ended June 30, 2007, royalties by product, as a percentage of revenues including realized gains and losses on financial instruments were 17.8% for natural gas, 16.5% for light and medium oil and 15.4% for heavy oil. In the second quarter of 2006 royalties by product as a percentage of revenue were 23.1% for natural gas, 18.7% for light and medium oil and 14.4% for heavy oil. For the six months ended June 30, 2007, royalties decreased 19% to $77.2 million from $95.0 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 six month period also decreased from 20.8% in 2006 to 17.1% in 2007, for the same reasons as discussed above. For the six months ended June 30, 2007, royalties by product, as a percentage of revenues including realized gains and losses on financial instruments were 18.2% for natural gas, 16.4% for light and medium oil and 14.4% for heavy oil.

Operating expenses - Operating expenses for the second quarter of 2007 increased 6% to $39.7 million compared to $37.6 million for the same period a year ago. 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 June 30, 2007 increased to $8.46 per boe which is up 7% from $7.92 per boe in the comparable period of 2006. In the second quarter of 2007, per unit operating expenses by product were $1.21 per mcf for natural gas, $9.14 per bbl for light and medium oil and $12.28 per bbl for heavy oil compared to $1.14 per mcf for natural gas, $8.74 per bbl for light and medium oil and $10.81 per bbl for heavy oil for the second quarter of 2006. For the six months ended June 30, 2007 operating costs increased to $78.7 million compared to $73.7 million for the same period a year ago, due to higher per unit costs. For the six months ended June 30, 2007, operating costs increased to $8.40 per boe from $7.77 per boe in the comparable period of 2006. Operating costs by product for the first half of 2007 were $1.18 per mcf for natural gas, $9.06 per bbl for light and medium oil and $12.14 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 June 30, 2007 increased to $10.3 million ($2.19 per boe) compared to $9.6 million ($2.03 per boe) in 2006. The increase in transportation expenses was primarily due to increasing cost pressures and higher oil and liquids production volumes in the second quarter of 2007 versus the same period in 2006. For similar reasons, transportation costs for the six months ended June 30, 2007 increased to $20.4 million ($2.18 per boe) compared to $19.0 million ($2.01 per boe) for the same period a year ago. Transportation expenses by product for the second quarter of 2007 were $0.44 per mcf for natural gas, $0.99 per bbl for light and medium oil and $3.16 per bbl for heavy oil compared to $0.40 per mcf for natural gas, $0.99 per bbl for light and medium oil and $2.77 per bbl for heavy oil for the second quarter of 2006. For the first half of 2007 transportation expenses by product were $0.43 per mcf for natural gas, $0.97 per bbl for light and medium oil and $3.19 per bbl for heavy oil compared to $0.41 per mcf for natural gas, $0.87 per bbl for light and medium oil and $2.75 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 June 30, 2007 increased 28% to $3.2 million from $2.5 million in the same period in 2006 and increased 24% to $6.2 million for the six months ended June 30, 2007 from $5.0 million in the same period in 2006. On a per boe basis, general and administrative expenses increased 26% for the three months ended June 30, 2007 to $0.68 per boe from $0.54 per boe in the same period in 2006 and increased 29% for the six months ended June 30, 2007 to $0.67 per boe from $0.52 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 the Technical Services Agreement with NuVista Energy Ltd., Bonavista provides administrative services and receives a fee, determined on a cost recovery basis. Effective January 1, 2007 fees charged under the Technical Services Agreement were amended to reflect the separation of NuVista's technical and administrative activities from Bonavista. The amended fee charged under this agreement was $370,000 related to general and administrative activities rendered for the three months ended June 30, 2007 as compared to $496,000 in the same period in 2006 and $712,000 for the six months ended June 30, 2007 as compared to $976,000. In connection with its Trust Unit Incentive Rights Plan, Bonavista also recorded a unit-based compensation charge of $1.4 million and $2.8 million for the three and six months ended June 30, 2007 respectively, compared to $1.2 million and $2.4 million for the same periods in 2006.

Financing expenses - Financing expenses, which include interest expense on long-term debt and convertible debentures, increased to $7.2 million for the three months ended June 30, 2007, from $6.7 million for the same period in 2006 and on a boe basis increased to $1.54 per boe for the three months ended June 30, 2007 from $1.40 per boe in the same period in 2006. For the six months ended June 30, 2007, financing expenses increased to $14.8 million from $11.9 million for the same period in 2006 and on a boe basis increased to $1.58 per boe for the first half of 2007 from $1.26 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 June 30, 2007 decreased to $195,000 from $213,000 for the same period in 2006. For the six months ended June 30, 2007 amortization and accretion expenses decreased to $392,000 from $461,000 for the same period in 2006. This decrease is largely attributable to the conversion of debentures into Trust Units since June 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 second quarter of 2007, Bonavista paid cash interest of $7.8 million compared to $7.4 million in 2006. For the six months ended June 30, 2007 Bonavista paid cash interest of $15.0 million compared to $12.3 million for the same period in 2006.

Depreciation, depletion and accretion expenses - Depreciation, depletion and accretion expenses increased 7% to $56.4 million for the three months ended June 30, 2007 from $52.8 million in the same period of 2006. For the six months ended June 30, 2007 depreciation, depletion and accretion expenses also increased by 7% to $111.6 million from $104.2 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 June 30, 2007 the average cost increased to $12.02 per boe from $11.13 per boe for the same period in 2006 and for the six months ended June 30, 2007 the average cost increased to $11.90 per boe from $10.99 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 June 30, 2007, the provision for income and other taxes was $38.0 million compared to a reduction of $17.9 million for the same period of 2006. For the six months ended June 30, 2007, the provision for income and other taxes was $35.1 million compared to a reduction of $18.2 million for the same period in 2006. The income tax provisions for the three and six months ended June 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 three and six months ended June 30, 2007 includes a reduction of $3.7 million related to tax rate reductions enacted during the second quarter of 2007. For each of the three and six month periods ended June 30, 2007, Bonavista made no cash payments relating to capital and income taxes, compared to $471,000 and $785,000, respectively, for the same periods a year ago.

Funds from operations, net income and comprehensive income - For the three months ended June 30, 2007, Bonavista experienced a 2% increase in funds from operations to $126.1 million ($1.20 per unit, basic) from $124.2 million ($1.22 per unit, basic) for the same period in 2006. For the six month period ended June 30, 2007, Bonavista experienced a 1% increase in funds from operations to $254.6 million ($2.43 per unit, basic) from $251.7 million ($2.49 per unit, basic) for the same period in 2006. Funds from operations increased slightly for the three and six months ended June 30, 2007 primarily due to lower realized royalty rates. Net income for the three months ended June 30, 2007, decreased 61% to $33.9 million ($0.32 per unit, basic) from $87.4 million ($0.86 per unit, basic) for the same period of 2006. For the six months ended June 30, 2007, net income decreased to $95.6 million ($0.91 per unit, basic) from $162.8 million ($1.61 per unit, basic) in the first half of 2006. Net income in the current quarter was impacted as a result of a $41.0 million non-cash charge taken to reflect the enactment of the taxation of certain flow through entities. Without this charge, net income for the second quarter and first half of 2007 would have been $74.9 million and $136.6 million, respectively. The decrease in net income, prior to the tax provision to reflect the enactment of the taxation changes, for the three and six months ended June 30, 2007, was largely due to a recovery relating to the reduction in future federal and provincial income tax rates enacted during the second quarter of 2006. Other comprehensive income for the quarter included a charge of $1.3 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 in the quarter of $32.7 million (2006 - $87.4 million). Other comprehensive income for the six months ended June 30, 2007 included a charge of $2.7 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 in the first half of 2007 of $92.9 million (2006 - $162.8 million).

Capital expenditures - Capital expenditures for the three months ended June 30, 2007 were $67.6 million or 54% of funds from operations, which consisted of $67.7 million of exploitation and development spending and $155,000 of net property dispositions. For the same period in 2006, capital expenditures were $85.7 million consisting of $59.4 million of exploitation and development spending and $26.3 million of net property acquisitions. Capital expenditures for the six month period ended June 30, 2007 were $159.1 million, consisting of $158.3 million on exploitation and development spending and $810,000 on net acquisitions. For the same period in 2006 capital expenditures were $187.4 million, consisting of $155.8 million of exploitation and development spending and $31.6 million of net acquisitions. There was a slight decrease in exploitation and development expenditures in 2007 as compared to 2006 due to fewer acquisitions in Bonavista's existing core regions. 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 $30,000 per boe per day. Entering the third 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 June 30, 2007, long-term debt, including working capital deficiency, was $577.4 million with an attractive debt to 2007 annualized funds from operations ratio of 1.1:1 (1.2:1 including convertible debentures). With our bank credit facility recently increased to $1.0 billion in August 2007, Bonavista now has $422.6 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 $340 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 June 30, 2007, Bonavista had 105.3 million equivalent trust units outstanding. This includes 12.3 million exchangeable shares, which are exchangeable into 19.9 million trust units. The exchange ratio in effect at June 30, 2007 for exchangeable shares was 1.61881:1. As at August 9, 2007, Bonavista had 105.5 million equivalent trust units outstanding. This includes 12.3 million exchangeable shares, which are exchangeable into 20.1 million trust units. The exchange ratio in effect at August 9, 2007 for exchangeable shares was 1.63453:1. In addition, Bonavista has 4.0 million trust unit incentive rights outstanding at August 9, 2007, with an average exercise price of $25.38 per trust unit.

As at June 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 91,478 of these debentures converted into trust units, leaving 8,522 debentures with a principal amount of $8.5 million outstanding as at June 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 million, and from the date of issuance to June 30, 2007 there have been 91,533 of these debentures converted into trust units, leaving 43,467 debentures outstanding with a principal amount of $43.5 million.

Distributions - For the three months ended June 30, 2007, the Trust declared distributions of $76.8 million ($0.90 per trust unit), amounting to 61% of funds from operations generated during the period, with the remaining 39% of funds from operations reinvested to fund exploitation, development and acquisition programs. For the six months ended June 30, 2007, the Trust distributed $153.3 million ($1.80 per trust unit), amounting to 60% of funds from operations generated during the period, while the remaining 40% of funds from operations was reinvested to fund exploitation, development and acquisition programs.

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 $8.70 per mmbtu for NYMEX natural gas and US $54.00 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 September 30, 2005 to
June 30, 2007:

----------------------------------------------------------------------------
2007 2006
------------------------------------------------------------
June 30 March 31 December 31 September 30 June 30 March 31
-------- -------- ----------- ------------ ------- ---------
($ thousands,
except per
unit amounts)
Production
revenues 223,878 225,222 220,484 227,271 229,492 232,833
Net income 33,936 61,630 67,635 70,800 87,425 75,410
Net income
per unit:
Basic 0.32 0.59 0.65 0.69 0.86 0.75
Diluted 0.32 0.59 0.65 0.68 0.84 0.74
----------------------------------------------------------------------------
----------------------------------------------------------------------------

2005
--------------------------
December 31 September 30
------------ -------------
($ thousands, except per unit amounts)
Production revenues 293,563 247,612
Net income 103,759 79,242
Net income per unit:
Basic 1.05 0.82
Diluted 1.01 0.79
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 10% and net income has decreased 57%. 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, substantively 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 Canadian Tax Legislation - In June 2007, Bill C-52 Budget Implementation Act, 2007, which contained legislative provisions pertaining to the taxation of distributions from publicly traded Canadian income trusts, royalty trusts and partnerships, passed reading in the Canadian House of Commons and the Senate and has received Royal Assent. This resulted in the accounting recognition of an additional $41.0 million future income tax liability and a non-cash future income tax expense in the second quarter of 2007. This charge against income did not affect funds from operations as it is a non-cash charge relating to the temporary differences between the accounting and tax basis of the Trust's assets and liabilities. Despite the enactment's significant negative impact on the overall energy trust sector, Bonavista is still well positioned to take advantage of the opportunities arising from the changing landscape. Our success is based on the consistent application of our core philosophy and operating strategies. As such, the application of these principles will not change under the new tax regime as our team is dedicated to continue to create significant value in the oil and natural gas business for our investors.

On February 16, 2007, the Alberta government announced that a review of the province's royalty and tax regime (including income tax and freehold mineral taxes) pertaining to oil and natural gas resources, including oil sands, conventional oil and natural gas, and coalbed methane, will be conducted by a panel of experts with the assistance of individual Albertans and key stakeholders. The review panel is to produce a final report that will be presented to the minister of Finance by August 31, 2007.

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 and 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 Actions 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

The Trust continues 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 continue to apply similar proven principles and execute our strategy in a disciplined and cost-effective manner. 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 two years, the quality and quantity of our drilling opportunities continues to increase as we progress further into 2007. 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 could easily benefit Bonavista in the near future due to its proven track record and strong balance sheet. 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 provide the foundation for the future success of the Trust. Today our activity, efficiency, productivity and profitability remain among the strongest levels in our nine and a half year history.

For 2007, Bonavista's capital budget includes drilling approximately 240 wells on existing lands in Bonavista's four core regions. Similar to 2006, these locations generally consist of low to medium risk prospects drilled within close proximity of company owned and operated infrastructures. Recently, Bonavista has been successful in acquiring producing properties in its existing core regions and feels that the current changing landscape will provide additional opportunities to further expand its capital program in the future. The capital required for the 2007 drilling program and our complementary acquisition program is now estimated to be $340 million and should result in stable average daily production levels of approximately 52,500 to 53,000 boe per day in 2007.

We are proud of our achievements over our past nine and a half 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, 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 new government tax regime, as our team remains dedicated to adding Unitholder value in the oil and natural gas business, regardless of the landscape.



----------------------------------------------------------------------------
Consolidated Balance Sheets June 30, December 31,
(thousands) 2007 2006
----------------------------------------------------------------------------
(unaudited)
Assets:
Accounts receivable $ 112,009 $ 116,251
Oil and natural gas properties and equipment 1,962,429 1,910,359
Goodwill 41,321 41,321
----------------------------------------------------------------------------
$ 2,115,759 $ 2,067,931
----------------------------------------------------------------------------
Liabilities and Unitholders' Equity:
Accounts payable and accrued liabilities $ 116,843 $ 122,376
Long-term debt 572,575 512,323
Other long-term obligations 269 1,846
Convertible debentures 49,325 51,170
Asset retirement obligations 98,772 96,324
Future income taxes 190,106 153,639
Unitholders' equity:
Unitholders' capital 845,954 834,625
Exchangeable shares 74,958 75,121
Contributed surplus 5,903 4,973
Convertible debentures 1,071 1,117
Accumulated earnings 156,690 214,417
Accumulated other comprehensive income 3,293 -
----------------------------------------------------------------------------
1,087,869 1,130,253
----------------------------------------------------------------------------
$ 2,115,759 $ 2,067,931
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Consolidated Statements of Operations, Comprehensive Income and Accumulated
Earnings

(thousands, except per
unit amounts) Three Months Six Months
ended June 30, ended June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
(unaudited)
Revenues:
Production $ 223,878 $ 229,492 $ 449,100 $ 462,325
Royalties (38,227) (45,854) (77,242) (94,988)
----------------------------------------------------------------------------

185,651 183,638 371,858 367,337
Realized gains (losses)
on financial instruments 834 (3,446) 2,905 (6,038)
Unrealized gains (losses)
on financial instruments 3,830 - (9,175) -
----------------------------------------------------------------------------
190,315 180,192 365,588 361,299
----------------------------------------------------------------------------
Expenses:
Operating 39,683 37,581 78,726 73,712
Transportation 10,289 9,635 20,409 19,019
General and administrative 3,181 2,540 6,236 4,974
Financing 7,221 6,659 14,769 11,938
Amortization and accretion of
convertible debentures 195 213 392 461
Unit-based compensation 1,421 1,200 2,833 2,373
Depreciation, depletion
and accretion 56,373 52,794 111,601 104,218
----------------------------------------------------------------------------
118,363 110,622 234,966 216,695
----------------------------------------------------------------------------
Income before taxes 71,952 69,570 130,622 144,604
Income and other taxes
(reductions) 38,016 (17,855) 35,056 (18,231)
----------------------------------------------------------------------------
Net income 33,936 87,425 95,566 162,835
Changes in comprehensive
income, net of tax (1,251) - (2,701) -
----------------------------------------------------------------------------
Comprehensive income 32,685 87,425 92,865 162,835
----------------------------------------------------------------------------
Accumulated earnings,
beginning of period 199,511 231,704 214,417 237,163
Distributions declared (76,757) (83,201) (153,293) (164,070)
----------------------------------------------------------------------------
Accumulated earnings, end
of period $ 156,690 $ 235,928 $ 156,690 $ 235,928
----------------------------------------------------------------------------
Net income per unit - basic $ 0.32 $ 0.86 $ 0.91 $ 1.61
----------------------------------------------------------------------------
Net income per unit - diluted $ 0.32 $ 0.84 $ 0.91 $ 1.58
----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


Consolidated Statements of Cash Flows

thousands) Three Months Six Months
ended June 30, ended June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
(unaudited)

Cash provided by (used in):

Operating Activities:
Net income $ 33,936 $ 87,425 $ 95,566 $ 162,835
Items not requiring cash
from operations:
Depreciation, depletion
and accretion 56,373 52,794 111,601 104,218
Amortization and accretion
of convertible debentures 195 213 392 461
Unit-based compensation 1,421 1,200 2,833 2,373
Unrealized (gains) losses
on financial instruments (3,830) - 9,175 -
Future income taxes
(reductions) 38,016 (17,383) 35,056 (18,231)
Asset retirement expenditures (1,093) (1,553) (1,473) (2,207)
Changes in non-cash working
capital items (8,008) (117) (4,273) 6,594
----------------------------------------------------------------------------

117,010 122,579 248,877 256,043
----------------------------------------------------------------------------

Financing Activities:
Issuance of equity, net of
issue costs 3,361 1,468 6,371 3,045
Distributions (76,662) (82,921) (153,106) (162,792)
Changes in long-term debt 29,810 52,674 60,252 91,379
Changes in non-cash
working capital items (534) (734) (271) (418)
----------------------------------------------------------------------------

(44,025) (29,513) (86,754) (68,786)
----------------------------------------------------------------------------

Investing Activities:
Exploitation and development (67,715) (59,369) (158,331) (155,824)
Property acquisitions 55 (26,371) (910) (31,623)
Property dispositions 100 - 100 7
Changes in non-cash working
capital items (5,425) (7,326) (2,982) 183
----------------------------------------------------------------------------

(72,985) (93,066) (162,123) (187,257)
----------------------------------------------------------------------------

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 six months ended June 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:

Under the Plan of Arrangement, Bonavista entered into a Technical Services Agreement ("TSA") with NuVista. Under the TSA, Bonavista receives payment for certain technical and administrative services provided by it to NuVista on a cost recovery basis. Bonavista and NuVista are considered related as two directors of NuVista, one of who is NuVista's chairman, are directors and officers of Bonavista and a director and an officer of NuVista are also officers of Bonavista. TSA charges reflected in these interim consolidated financial statements are based on the proposed changes to the original TSA, effective January 1, 2007. For the three months ended June 30, 2007, fees of $370,000 (2006 - $496,000) relating to general and administrative activities were charged pursuant to the TSA. For the six months ended June 30, 2007, fees of $712,000 (2006 - $976,000) relating to general and administrative activities were charged pursuant to the TSA. In addition, $604,000 was charged to NuVista for costs that are outside of the TSA during the first six months of 2007 relating to NuVista's share of direct charges from third parties. In connection with joint operations, as at June 30, 2007 the amount receivable from NuVista was $461,000.

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 $487.4 million (2006 - $435.1 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:




----------------------------------------------------------------------------
Six Months ended
June 30,
2007 2006
----------------------------------------------------------------------------
(thousands)
Balance, beginning of period $ 96,324 $ 82,819
Accretion expense 3,429 3,041
Liabilities incurred 492 2,984
Liabilities acquired - 1,588
Liabilities settled (1,473) (2,207)
----------------------------------------------------------------------------

Balance, end of period $ 98,772 $ 88,225
----------------------------------------------------------------------------
----------------------------------------------------------------------------


4. Long-term debt:

Effective August 10, 2007 the Trust and its lenders have agreed to increase the credit facility to $1.0 billion. 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 $12.9 million (2006 - $9.4 million) and convertible debentures of $1.8 million (2006 - $2.6 million). For the six months ended June 30, 2007, Bonavista paid cash interest of $15.0 million (2006 - $12.3 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 June 30, 2007:



----------------------------------------------------------------------------
Debt Equity
Component Component
----------------------------------------------------------------------------
(thousands)
Balance, December 31, 2006 $ 51,170 $ 1,117
Accretion 39 -
Issue expenses related to conversions to trust
units 24 -
Amortization of issue expenses 353 -
Conversion to trust units (2,261) (46)
----------------------------------------------------------------------------

Balance, June 30, 2007 $ 49,325 $ 1,071
----------------------------------------------------------------------------
----------------------------------------------------------------------------

6. Unitholders' equity:

a) Authorized:

Unlimited number of voting trust units.

b) Issued and outstanding:

(i) Trust units:

----------------------------------------------------------------------------
Number of
Units Amount
----------------------------------------------------------------------------
(thousands)
Balance, December 31, 2006 84,839 $ 834,625
Issued on conversion of convertible debentures 88 2,261
Issued on conversion of exchangeable shares 42 163
Issued upon exercise of trust unit incentive rights 486 6,371
Issue costs, related to debenture conversions - (24)
Adjustment to equity component of debenture on
conversion - 46
Unit-based compensation - 2,512
----------------------------------------------------------------------------
Balance, June 30, 2007 85,455 $ 845,954
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(ii) Exchangeable shares:

----------------------------------------------------------------------------

Number Amount
----------------------------------------------------------------------------
(thousands)
Balance, December 31, 2006 12,297 $ 75,121
Exchanged for trust units (26) (163)
----------------------------------------------------------------------------
Balance, June 30, 2007 12,271 $ 74,958
----------------------------------------------------------------------------

Exchange ratio, end of period 1.61881 -
----------------------------------------------------------------------------
Trust units issuable on exchange 19,864 $ 74,958
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(iii) Contributed surplus:

----------------------------------------------------------------------------
Amount
----------------------------------------------------------------------------
(thousands)
Balance, December 31, 2006 $ 4,973
Unit-based compensation expense 2,833
Unit-based compensation capitalized 609
Exercise of trust unit incentive rights (2,512)
----------------------------------------------------------------------------
Balance, June 30, 2007 $ 5,903
----------------------------------------------------------------------------
----------------------------------------------------------------------------


c) Trust unit incentive rights plan:

For the three months ended June 30, 2007 there were 52,400 trust unit incentive rights issued with an average exercise price of $31.24 per trust unit and an estimated fair value of $5.28 per trust unit. As at June 30, 2007 there were 3,262,550 trust unit rights outstanding with an average exercise price of $24.55 per trust unit. The Trust uses the fair value based method for the determination of the unit-based compensation costs.



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,
June 30, 2007
----------------------------------------------------------------------------
(thousands)
Trust units 85,221
Exchangeable shares converted at the exchange ratio 19,866
----------------------------------------------------------------------------
Basic equivalent trust units 105,087
Convertible debentures 1,907
Trust unit incentive rights 707
----------------------------------------------------------------------------
Diluted equivalent trust units 107,701
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 tax of $2,569 5,994
Reclassification to net income during the period, net of tax of
$1,411 (2,701)
----------------------------------------------------------------------------

Balance, June 30, 2007 $ 3,293
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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 three months ended June 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 $4.5 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 June 30, 2007 is $58.0 million.

b) Commodity price contracts:

i) Financial instruments:

As at June 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
----------------------------------------------------------------------------
July 1, 2007 -
25,000 gjs/d CDN$ 6.55 - CDN$ 9.00 - AECO October 31, 2007

November 1, 2007 -
5,000 gjs/d CDN$ 7.50 - CDN$ 10.55 - AECO March 31, 2008

April 1, 2008 -
5,000 gjs/d CDN$ 7.00 - CDN$ 9.00 - AECO October 31, 2008

July 1, 2007 -
6,000 bbls/d US$ 60.54 - US$ 77.32 - WTI September 30, 2007

October 1, 2007 -
6,000 bbls/d US$ 60.54 - US$ 77.80 - WTI December 31, 2007

July 1, 2007 -
1,000 bbls/d CDN$ 48.95 - CDN$ 57.20 - Bow River December 1, 2007

January 1, 2008 -
4,000 bbls/d US$ 59.50 - US$ 73.08 - WTI December 31, 2008

January 1, 2009 -
1,000 bbls/d US$ 65.00 - US$ 80.50 - WTI March 31, 2009
----------------------------------------------------------------------------

As at June 30, 2007, the market deficit of these derivative financial
instruments was approximately $4.5 million.

ii) Physical purchase contracts:

As at June 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 July 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) 213-4300
    or
    Ronald J. Poelzer
    Executive Vice President & CFO
    (403) 213-4300
    Website: www.bonavistaenergy.com
    or
    Bonavista Petroleum Ltd.
    700, 311 - 6th Avenue SW
    Calgary, AB T2P 3H2
    (403)213-4300