Daylight Energy Ltd.

Daylight Energy Ltd.

May 18, 2011 08:00 ET

Daylight Energy Reports First Quarter 2011 Financial and Operating Results- Record Funds from Operations and Liquids Rich Gas Drilling Success Drives Budget Increase to $350 Million

CALGARY, ALBERTA--(Marketwire - May 18, 2011) -


Daylight Energy Ltd. ("Daylight" or the "Company") (TSX:DAY) announces its financial and operating results for the first quarter of 2011 ("Q1 2011"). Daylight is firmly established as a balanced intermediate oil and natural gas producer with a current dividend yield of approximately 6% and a sustainable growth business model. Highlights of Q1 2011 include:

--  Record quarterly funds from operations of $97.7 million. 
--  32% payout ratio with sustainable $0.05 monthly cash dividend per share.
--  Increasing operating netbacks driven by reduced operating and
    transportation costs in conjunction with lower royalties. 
--  Non-core asset disposition success further focuses asset base and funds
    increased 2011 capital program. 

Key Events During Q1 2011

In Daylight's press release dated April 19, 2011, operational highlights included the continued success of the Pembina Cardium horizontal oil program, the development of a new liquids rich gas play at Pembina in the Rock Creek formation, drilling of a second Wapiti Montney liquids rich gas well and the execution of purchase and sale agreements to dispose of further non-core assets for proceeds of approximately $44 million.

The previously announced Rock Creek liquids rich gas results, with 3 (2.3 net) wells coming on production with initial rates of 3, 7 and 10 MMcf per day respectively and liquids yields in excess of 50 bbls per MMcf, opens up an exciting new opportunity for Daylight in the Pembina area. This development is illustrative of the opportunities that are continuously emerging in the Deep Basin region of NW Alberta and NE British Columbia, and provide the primary rationale behind Daylight's decision to focus our asset base in this key energy fairway. More than 95% of Daylight's current production is now located in the Deep Basin. Daylight is pleased to report that, after 30 days of production, the Rock Creek wells continue to perform above expectation with 30 day average production rates of 2.2, 4.3 (facility restricted) and 8.4 MMcf per day with liquids rates continuing to exceed 50 bbls per MMcf. Daylight holds over 70 net sections of land in the Rock Creek fairway at Pembina.

During Q1 2011, Daylight drilled our previously announced second horizontal gas well into the liquids rich Montney zone at Wapiti and a new horizontal gas well into the Nikanassin zone at Elmworth. Daylight plans to complete and initiate production from both of these wells after spring break-up.

Budget Increases to $350 Million

On April 19, 2011, Daylight announced that the proceeds from the non-core asset dispositions, which were completed in April 2011, would be used to fund an increase in Daylight's 2011 capital budget. Based on the robust funds from operations recorded in Q1 2011 and the very encouraging results noted above from the Q1 2011 capital program, Daylight is pleased to announce an increase in our capital budget for 2011 to $350 million.

The increased capital will be used not only to drill additional wells targeting Pembina Cardium light oil and Rock Creek liquids rich gas, but also to position the company for future growth by debottlenecking and enhancing our production infrastructure particularly in our very active Pembina area. Daylight is targeting the drilling of 6 additional Cardium oil wells for a total of 34 net wells and 6 additional Rock Creek wells in 2011. Funds will also be used to enhance Daylight's position in certain emerging oil and liquids rich opportunities in our core Deep Basin fairway.

As noted recently by other operators in the Deep Basin area, service costs for certain field operations have been increasing due to higher demand in Western Canada. Daylight's $350 million 2011 capital budget includes adjustments to certain costs of 5% to 10% to reflect these increases. Daylight maintains our operating cost guidance range at $9.50 - $9.90 per boe for 2011 based on the successful production additions from our 2011 capital program in our lower cost resource play areas.

The increased $350 million capital budget marks the next step in Daylight's drive to become the premiere resource play developer in the Deep Basin. With the delineation phase of our major light oil resource play completed and the increase to our 2011 capital budget, Daylight is now transitioning to continuous drilling operations in our Pembina Cardium light oil play, focussing on pad drilling and downspacing opportunities to further reduce capital costs. Daylight continues to pursue technical innovations in all of our resource play developments to ensure minimum costs are deployed for maximum value creation to our shareholders.

2011 Guidance Update

Daylight's average production of 39,257 boe per day in Q1 2011 included the previously disclosed disruption at the third party operated K3 gas plant. This disruption temporarily shut in approximately 8,500 boe per day of Daylight's liquids rich natural gas (85% natural gas, 15% NGLs) from its West Central and Wapiti Montney properties from early March to mid-April with an impact of approximately 2,000 boe per day on Q1 2011 and 1,500 boe per day for Q2 2011. The K3 gas plant experienced another disruption in early May that the operator anticipates could be resolved within 2 weeks of the disruption but may continue for a further 4 to 8 weeks if their proposed repair strategy for the plant is not successful. Daylight is investigating opportunities to allow our production to flow sooner but there are no guarantees that an earlier solution will be available. Subsequent to the March disruption, Daylight reduced K3 gas plant throughput to approximately 7,000 boe per day by permanently rerouting 1,500 boe per day of production to a new facility at Marlboro where Daylight holds a 19% ownership interest. During Q1 2011, several Nisku oil wells began producing higher water cuts which reduced oil volumes by approximately 1,500 bbls per day in Q1 2011 and is expected to continue going forward. Daylight has initiated a program of artificial lift installations to optimize production and reserve recoveries from these wells, with Nisku oil volumes anticipated to represent less than 10% of Daylight's corporate production by the end of 2011.

For the near term, the above noted production events have more than offset the significant production volume additions that Daylight's 2011 capital program has delivered. Based on the previously noted factors, an assumption that the K3 gas plant will be down for one month until early June and the impact of our non-core property dispositions that closed in early Q2 2011 (1,600 boe per day - 90% gas) net of the significant production additions from our $350 million 2011 capital program, Daylight is expecting Q2 2011 production volumes to be approximately 36,500 boe per day with Q3 and Q4 2011 production volumes forecast to increase to approximately 39,000 and 42,000 boe per day respectively. Daylight expects to exit 2011 with production volumes exceeding 43,000 boe per day and providing a strong platform for 2012 growth.

Should production at the K3 gas plant remain disrupted for a one month period, Daylight's 2011 annual cash flow would be reduced by approximately 1%. Daylight carries contingent business interruption insurance on the K3 gas plant to replace financial losses beyond this one month period.

First Quarter Financial and Operational Results 
Financial                                        Q1          Q4          Q1 
(000s, unless otherwise stated)                2011        2010        2010 
Oil and natural gas revenues            $   158,412 $   163,960 $   170,934 
Operating netback                            93,554      92,554      80,606 
Funds from operations                        97,663      94,465      66,439 
 $ per share - Basic                           0.46        0.46        0.38 
             - Diluted                         0.44        0.43        0.36 
Cash dividends declared                      31,628      31,218      41,820 
 Per share                                     0.15        0.15        0.24 
Payout ratio                                     32%         33%         63%
Capital expenditures (1)                    115,289     106,789      94,253 
Shares outstanding                                                          
 Basic                                      211,882     210,090     174,278 
 Diluted                                    238,038     235,320     206,216 
(Per boe amounts may not add exactly due to rounding)                       
Average daily production                                                    
 Natural gas (Mcf/d)                        145,599     140,378     144,754 
  Light oil (bbls/d)                         11,444      13,924      10,025 
  Heavy oil (bbls/d)                              -           -       1,969 
  NGLs (bbls/d)                               3,546       3,223       3,640 
 Oil & NGLs (bbls/d)                         14,990      17,147      15,634 
 Combined (boe/d)                            39,257      40,543      39,760 
Average prices received                                                     
 Natural gas ($/Mcf)                           3.89        3.72        5.29 
  Light oil ($/bbl)                           84.88       76.93       77.57 
  Heavy oil ($/bbl)                               -           -       66.20 
  NGLs ($/bbl)                                62.50       58.75       62.12 
 Oil & NGLs ($/bbl)                           79.59       73.51       72.54 
 Combined ($/boe)                             44.84       43.96       47.77 
$ per boe                                                                   
Oil and natural gas revenues                  44.84       43.96       47.77 
 Royalties                                   (10.00)     (11.27)     (13.47)
 Realized gain on derivative contracts         1.98        2.55           - 
 Operating expenses                           (9.71)      (9.78)     (10.86)
 Transportation expenses                      (0.62)      (0.65)      (0.91)
Operating netback                             26.49       24.81       22.53 
 Other income                                  5.46        4.60           - 
 G&A - cash charge                            (2.15)      (1.84)      (1.83)
 Acquisition transaction costs                    -        0.04           - 
 Cash finance charges                         (2.15)      (2.28)      (2.13)
Funds from operations                         27.65       25.33       18.57 
(1) Capital expenditures include additions to property, plant and equipment
    and exploration and evaluation assets.

Funds From Operations

--  Record high $97.7 million funds from operations for Q1 2011 up from
    $94.5 million recorded in Q4 2010 and $66.4 million recorded in Q1 2010.
--  The increase in funds from operations for Q1 2011 is driven by reduced
    operating and transportation costs in conjunction with lower royalties. 


--  Daylight's total production volumes for Q1 2011 averaged 39,257 boe per
    day, a 3% decrease from Q4 2010 and a 1% decrease from Q1 2010. 
--  Production for Q1 2011 is lower than Q4 2010 due to a temporary third
    party processing disruption at the K3 gas plant which shut in a
    significant portion of Daylight's liquids rich natural gas from its West
    Central and Wapiti Montney properties from early March to mid-April with
    an impact of approximately 2,000 boe per day on Q1 2011 as well as
    higher than expected water cuts and reduced oil production of
    approximately 1,500 bbls per day for Q1 2011 related to Nisku oil
--  In Q1 2011 average daily production was comprised of 145,599 Mcf per day
    of natural gas, 11,444 bbls per day of light oil and 3,546 bbls per day
    of NGLs. 


--  In Q1 2011, Daylight drilled a total of 24 gross (17.3 net) wells with a
    96% success rate. 
--  Drilling program delivered production and reserve additions within the
    following core areas: 
    --  Peace River Arch properties including Elmworth and Wapiti. In Q1
        2011, Daylight drilled 6 gross (4.5 net) gas wells. 
    --  West Central properties including Medicine Lodge and Kaybob. In Q1
        2011, Daylight drilled 2 gross (0.6 net) oil wells and 3 gross
        (0.4 net) natural gas wells. 
    --  Pembina properties including Brazeau, Tomahawk, Warburg and East
        Pembina. In Q1 2011, Daylight drilled 10 gross (9.0 net) oil wells,
        2 gross (2.0 net) natural gas wells and 1 gross (0.8 net) dry Nisku
        commitment well. 
--  Daylight invested $115.3 million on its capital expenditure program
    during Q1 2011 compared to $106.8 million in Q4 2010 and $94.3 million
    in Q1 2010. The capital expenditure program continues to provide new
    production volumes and Daylight's 2011 capital expenditure program has
    been increased to $350 million. 

Operating netback

--  Daylight's Q1 2011 light oil price was $84.88 per bbl, 10% higher than
    our Q4 2010 light oil price of $76.93 per bbl. Daylight's light oil
    price for Q1 2011 was 9% higher than the Q1 2010 light oil price of
    $77.57 per bbl. 
--  Daylight's Q1 2011 NGLs price of $62.50 per bbl was a 6% increase from
    Q4 2010 NGLs price of $58.75 per bbl. Daylight's Q1 2011 NGLs price was
    1% higher than the Q1 2010 price of $62.12 per bbl. 
--  Daylight's natural gas price during Q1 2011 was $3.89 per Mcf which
    represents a 5% increase from the Q4 2010 natural gas price of $3.72 per
    Mcf. Daylight's Q1 2011 realized natural gas price was 26% lower than
    the Q1 2010 natural gas price of $5.29 per Mcf. 
--  Daylight's operating costs during Q1 2011 decreased 1% to $9.71 per boe
    as compared to Q4 2010 at $9.78 per boe and were 11% lower than Q1 2010,
    at $10.86 per boe. Daylight's operating costs have continued to improve
    due to the addition of new production in areas with lower operating
    costs per boe, the disposition of non-core assets with higher operating
    expenses and active operating cost management. Daylight expects
    operating costs to average between $9.50 and $9.90 per boe in 2011. 
--  Overall royalty rates decreased to 22.3% of revenue during Q1 2011 from
    25.6% of revenue during Q4 2010 due to lower royalties on new production
    and the new royalty price curves in effect January 1, 2011 which lowered
    the maximum royalty payable on oil production to 40% of revenue versus
    the previous maximum of 50%. 
--  Natural gas royalties decreased to 3.6% of natural gas revenue in Q1
    2011 compared to 5.2% in Q4 2010 due to lower natural gas prices and
    royalty holidays not previously recognized by the Crown. Natural gas
    royalties decreased in Q1 2011 from 12.8% in Q1 2010 due to lower
    natural gas prices. Oil and NGLs royalty rates decreased to 31.2% of
    revenue during Q1 2011 as compared to 34.1% of revenue in Q4 2010 and
    38.6% of revenue in Q1 2010 due to the reduced Crown royalties on new
    production and new royalty curves. 

Dividends and payout ratio

--  During Q1 2011, Daylight declared three $0.05 monthly cash dividends per
    share totaling $31.6 million ($0.15 per common share) with a resulting
    payout ratio of 32%. This represents an enhancement on the reported
    payout ratio of 33% during Q4 2010 and 36% during Q1 2010, highlighting
    Daylight's sustainable business model of organic growth combined with a
    stable dividend payment. 

Balance sheet and financial flexibility

--  Daylight's balance sheet provides significant capacity and flexibility,
    with approximately $321 million of bank debt drawn against our $625
    million credit facility at March 31, 2011. 

Tax pools

--  Tax pools of approximately $1.6 billion at March 31, 2011 are available
    to shelter cash flow from income tax in current periods and beyond. 

Daylight is a growing intermediate oil and natural gas producing company with a high quality suite of resource play assets in Western Canada. Our highly focused team utilizes our technical expertise in exploration, exploitation and development to create long-term value for our shareholders. With our experience on the forefront of several resource play developments in the Deep Basin, Daylight is well positioned on the leading edge of exploration for the next generation of oil and liquids rich resource plays. Our team has developed a multi-year inventory of repeatable, low risk exploitation resource play projects with substantial potential reserve additions on assets we currently own and control in the premier Pembina light oil fairway and Deep Basin areas of Alberta and British Columbia.

Daylight has approximately 212 million common shares outstanding which trade on the TSX under the symbol DAY. Daylight Series C and Series D convertible debentures trade on the TSX under the symbols DAY.DB.C and DAY.DB.D, respectively.

Interim Unaudited Consolidated Financial Statements and MD&A

Daylight's interim unaudited consolidated financial statements for the three months ended March 31, 2011, together with the notes thereto, and Management's Discussion and Analysis for the three months ended March 31, 2011, have been posted on our website at and filed under our profile on SEDAR (

An updated corporate presentation is available on Daylight's website at


Information Regarding Disclosure in This News Release

The term "boe" is utilized by Daylight in relation to reserves or production to combine the volumetric measures of natural gas, light oil, heavy oil, and NGLs to a common "barrel of oil equivalent" term of measurement. Natural gas volumes have been converted at the ratio of 6,000 cubic feet of natural gas to one boe and this conversion ratio is based upon an energy equivalent conversion method primarily applicable at the burner tip and does not represent value equivalence at the wellhead. Light oil, heavy oil, and NGLs have been converted at the ratio of one barrel of these liquids to one boe. Use of the terms boe and amounts per boe without reference to the underlying commodity may be misleading.

Forward-Looking Information and Statements

This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends" and similar expressions are intended to identify forward-looking statements or information. More particularly and without limitation, this press release contains forward-looking statements and information concerning: the anticipated results of Daylight's increased 2011 capital program, and the anticipated allocation of capital spending with respect to such increase; anticipated increases in costs of certain drilling, completion and other services throughout 2011; anticipated results of technical improvements, optimization activities and scale; anticipated third party processing downtime at the K3 Gas Plant, and the effect of such downtime on Daylight's production and financial results; anticipated re-routing of certain production temporarily shut-in as a result of the K3 Gas Plant disruption; anticipated results of applying artificial lift to Daylight's producing Nisku wells in the Pembina area; anticipated reduction of Nisku production volumes and the anticipated percentage of 2011 exit production represented by Nisku wells; anticipated Q2 2011, Q3 2011 and 2011 exit production volumes; anticipated operating costs for 2011; and anticipated sustainability of Daylight's business model.

The forward-looking statements and information in this press release are based on certain key expectations and assumptions made by Daylight, including but not limited to expectations and assumptions concerning: prevailing and future commodity prices and exchange rates; applicable royalty rates and tax laws; future production rates; the performance of existing and future wells; application of existing technologies and future advancements in technology to Daylight's operations and drilling activities; the success obtained in drilling new wells; the inventory of new drilling locations; the sufficiency of budgeted capital expenditures in carrying out planned activities; downtime associated with third party processing disruptions and turnarounds; the availability and cost of labor and services, including but not limited to completion equipment and services; adequate weather and environmental conditions for drilling and completion activities, including transportation of associated equipment; the receipt, in a timely manner, of regulatory and third party approvals; Daylight's ability to negotiate acceptable terms of sale for non-core assets, including financial assets, and market demand therefore; and the receipt of required regulatory and other third party approvals for such dispositions.

Although Daylight believes that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward-looking statements and information because Daylight can give no assurance that they will prove to be correct. There is no representation by Daylight that actual results achieved during the periods identified in this press release will be the same in whole or in part as those forecast.

Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to the risks associated with the oil and gas industry in general such as: operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve and resource (including original oil in place) estimates; the uncertainty of estimates and projections relating to production, costs and expenses; health, safety and environmental risks; risks associated with weather and the impact on drilling and completion activities and the transportation of associated equipment; commodity price and exchange rate fluctuations; processing, marketing and transportation of petroleum and natural gas and loss of markets; environmental risks; competition; risks associated with utilizing existing technologies and future technological advancements in Daylight's operations and drilling activities; failure to realize the anticipated benefits of acquisitions; risks regarding the integration of acquired entities and assets; incorrect assessment of the values of acquisitions; Daylight's ability to negotiate acceptable terms for the disposition of non-core assets, including financial assets; Daylight's ability to obtain all third party and regulatory approvals necessary to dispose of such assets; ability to access sufficient capital from internal and external sources; failure to obtain required regulatory and other third party approvals; and changes in legislation, including but not limited to tax laws, royalty rates and environmental laws. Readers are cautioned that the foregoing list of risk factors is not exhaustive. Additional information on these and other factors that could affect the business, operations or financial results of Daylight are included in reports on file with applicable securities regulatory authorities, including but not limited to Daylight's Annual Information Form for the year ended December 31, 2010 and Management's Discussion and Analysis for the year ended December 31, 2010, each of which may be accessed on Daylight's SEDAR profile at or on our website at

The forward-looking statements contained in this press release are made as of the date hereof and Daylight undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.

Non-GAAP Measures

Throughout this news release we use the terms "funds from operations", "funds from operations per share", "payout ratio", and "operating netback". "Funds from operations" and "funds from operations per share" are terms utilized by Daylight to evaluate operating performance and assess leverage. A reconciliation of cash provided by operating activities to funds from operations is set forth in the Management's Discussion and Analysis for the three month period ended March 31, 2011 under the heading "Non-GAAP Measures". "Payout ratio" is a term utilized to evaluate financial flexibility and the capacity to fund dividends. Payout ratio is defined on a percentage basis as dividends declared divided by funds from operations. "Operating netback" is a term utilized by Daylight to evaluate the operating performance of petroleum and natural gas assets. The term operating netback is defined as petroleum and natural gas revenues less royalties, operating, and transportation expenses plus (minus) the realized gain (loss) on derivative contracts.

Such terms do not have a standardized meaning or definition as prescribed by International Financial Reporting Standards ("GAAP") and therefore may not be comparable with calculations of similar measures by other entities. Refer to the "Non-GAAP Measures" section of the Management's Discussion and Analysis for the three month period ended March 31, 2011 for further information.

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