Daylight Energy Ltd.
TSX : DAY
TSX : DAY.DB.C
TSX : DAY.DB.D

Daylight Energy Ltd.

August 03, 2011 02:01 ET

Daylight Energy Reports Second Quarter 2011 Financial and Operating Results and Announces Position in the Emerging Duvernay Shale Opportunity

CALGARY, ALBERTA--(Marketwire - Aug. 3, 2011) -

MESSAGE TO SHAREHOLDERS

Daylight Energy Ltd. ("Daylight" or the "Company") (TSX:DAY) announces its financial and operating results for the second quarter of 2011 ("Q2 2011") and its land position in the emerging Duvernay shale opportunity in Alberta. Daylight has assembled an asset base that includes multiple resource play opportunities targeting light oil, natural gas liquids ("NGLs") and natural gas across our premier Deep Basin core area in Northeast British Columbia and Northwest Alberta. Daylight has made substantial progress in the development of these key resource play opportunities, including our previously announced second Wapiti Montney well which produced at a peak rate of over 10 MMcf per day in May 2011 and attained an average production rate of 9.1 MMcf per day plus 450 Bbls per day of associated NGLs for the month of June 2011. In addition, Daylight has been actively drilling light oil in the Cardium at Pembina, stacked Cadomin and Nikanassin natural gas horizons at Elmworth and is proceeding with drilling additional oil and liquids rich natural gas opportunities within our core area.

During 2011 Daylight has expended approximately $100 million at Crown land sales, primarily focused on the Duvernay shale. Daylight has accumulated several contiguous blocks of Duvernay rights within our Pembina core area, where Daylight has significant oil and gas handling infrastructure in place. Daylight has also assembled Duvernay rights in the Kaybob area. The Duvernay prospect in Alberta has recently attracted significant industry attention, with many industry participants comparing the Duvernay to the Eagle Ford shale development in Texas. The Duvernay is considered to be the primary source rock in the Western Canadian sedimentary basin. In total, Daylight now owns and controls over 130,000 net acres of Duvernay rights in Alberta, which the Company believes are prospective for oil and liquids rich natural gas. Daylight plans to initiate a four well pilot project in Q1 2012, with an initial three wells planned in Pembina and one in the Kaybob area. In addition, Daylight acquired complementary Montney rights at Wapiti and additional lands adjacent to our Medicine Lodge Cardium asset which are prospective for liquids rich natural gas. An updated corporate presentation including Q2 2011 financial and operating results, as well as type curves, capital costs and economic analysis for Daylight's key resource play opportunities can be accessed at www.daylightenergy.com.

Second Quarter Financial and Operational Results


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Financial                    Q2         Q1         Q2        YTD        YTD 
(000s, unless                                                               
 otherwise stated)         2011       2011       2010       2011       2010 
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Oil and natural gas                                                         
 revenues             $ 162,661  $ 158,412  $ 160,267  $ 321,073  $ 331,201 
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Operating netback (1)    88,180     93,554     82,232    181,734    162,838 
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Funds from operations                                                       
 (1)                     77,093     97,663     69,746    174,756    136,185 
 $ per share - Basic       0.36       0.46       0.37       0.83       0.75 
             - Diluted     0.35       0.44       0.35       0.78       0.71 
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Cash dividends                                                              
 declared                31,871     31,628     34,298     63,499     76,118 
 Per share                 0.15       0.15       0.18       0.30       0.42 
Payout ratio (1)             41%        32%        49%        36%        56%
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Capital expenditures                                                        
 (2)                    133,356    115,289     61,799    248,645    156,052 
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Shares outstanding                                                          
 Basic                  212,643    211,882    203,258    212,643    203,258 
 Diluted                238,799    238,038    235,063    238,799    235,063 
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Operational                                                                 
(Per boe amounts may not add exactly due to rounding)                       
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Average daily                                                               
 production                                                                 
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 Natural gas (Mcf/d)    140,611    145,599    148,966    143,091    146,872 
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  Light oil (Bbls/d)      9,883     11,444     12,173     10,659     11,105 
  Heavy oil (Bbls/d)          -          -      1,722          -      1,845 
  NGLs (Bbls/d)           3,496      3,546      3,551      3,521      3,595 
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 Oil & NGLs (Bbls/d)     13,379     14,990     17,446     14,180     16,545 
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 Combined (boe/d)        36,814     39,257     42,273     38,029     41,023 
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Average prices                                                              
 received                                                                   
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 Natural gas ($/Mcf)       3.91       3.89       3.94       3.90       4.60 
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  Light oil ($/Bbl)      100.78      84.88      72.12      92.30      74.56 
  Heavy oil ($/Bbl)           -          -      56.92          -      61.85 
  NGLs ($/Bbl)            68.94      62.50      55.89      65.71      59.03 
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 Oil & NGLs ($/Bbl)       92.46      79.59      67.32      85.70      69.77 
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 Combined ($/boe)         48.55      44.84      41.66      46.65      44.61 
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$ per boe                                                                   
Oil and natural gas                                                         
 revenues                 48.55      44.84      41.66      46.65      44.61 
 Royalties               (10.28)    (10.00)    (11.41)    (10.14)    (12.40)
 Realized gain (loss)                                                       
  on derivative           (1.71)      1.98       2.30       0.18       1.19 
 Operating expenses       (9.60)     (9.71)    (10.33)     (9.66)    (10.59)
 Transportation                                                             
  expenses                (0.64)     (0.62)     (0.85)     (0.63)     (0.88)
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Operating netback (1)     26.32      26.49      21.37      26.40      21.93 
 Other income              1.67       5.46       2.04       3.62       1.06 
 G&A - cash charge        (2.40)     (2.15)     (2.25)     (2.27)     (2.05)
 Acquisition                                                                
  transaction costs           -          -      (0.41)         -      (0.21)
 Cash finance charges     (2.57)     (2.15)     (2.64)     (2.36)     (2.39)
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Funds from operations                                                       
 (1)                      23.02      27.65      18.11      25.39      18.34 
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(1)  See "Non-GAAP Measures" 
(2)  Capital expenditures include additions to property, plant and equipment
    and exploration and evaluation assets. 

Funds from Operations

--  Funds from operations for Q2 2011 of $77.1 million, compared to record
    $97.7 million recorded in Q1 2011 and $69.7 million recorded in Q2 2010.

Production

--  Daylight's total production volumes for Q2 2011 averaged 36,814 boe per
    day, a 6% decrease from Q1 2011 and a 13% decrease from Q2 2010,
    primarily as a result of the previously disclosed disruption at the
    third-party operated K3 gas plant, non-core asset dispositions and a
    turnaround at Daylight's Brazeau light oil facility in June 2011. 
--  In Q2 2011 average daily production was comprised of 140,611 Mcf per day
    of natural gas, 9,883 Bbls per day of light oil and 3,496 Bbls per day
    of NGLs. 

Capital

In Q2 2011, Daylight drilled a total of 3 gross (1.9 net) wells with 100% success. This program provided production and reserve additions within the following core areas:


--  West Central properties including Medicine Lodge and Kaybob. In Q2 2011,
    Daylight drilled 1 gross (0.1 net) natural gas well. 
--  Pembina properties including Warburg, Brazeau and Tomahawk. In Q2 2011,
    Daylight drilled 2 gross (1.8 net) oil wells. 
--  Daylight invested $133.4 million on its capital expenditure program
    during Q2 2011 compared to $115.3 million in Q1 2011 and $61.8 million
    in Q2 2010. 
--  Daylight's $100 million investment in land is in addition to our
    previously announced $350 million capital program for 2011. 

Operating netback

--  Daylight's Q2 2011 light oil realized $100.78 per Bbl while Q1 2011
    light oil realized $84.88 per Bbl an increase of 19% per Bbl. Daylight's
    light oil price for Q2 2011 was 40% higher than the Q2 2010 light oil
    price of $72.12 per Bbl. 
--  Daylight's Q2 2011 NGLs realized $68.94 per Bbl a 10% increase from Q1
    2011 NGLs realized price of $62.50 per Bbl. Daylight's Q2 2011 NGLs
    price was 23% higher than the Q2 2010 price of $55.89 per Bbl. 
--  Daylight's natural gas price during Q2 2011 was $3.91 per Mcf
    representing a 1% increase from the Q1 2011 natural gas price of $3.89
    per Mcf. Daylight's Q2 2011 realized natural gas price was 1% lower than
    the Q2 2010 natural gas price of $3.94 per Mcf. 
--  Daylight's operating costs per boe decreased 1% to $9.60 per boe during
    Q2 2011 as compared to Q1 2011 at $9.71 per boe and were 7% lower than
    Q2 2010 at $10.33 per boe. Daylight's YTD 2011 operating expense on a
    per boe basis decreased 9% to $9.66 per boe from $10.59 per boe in YTD
    2010. 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 $9.80 per boe in 2011. 
--  Overall royalty rates decreased to 21.2% of revenue during Q2 2011 from
    22.3% of revenue during Q1 2011 due to lower royalties on new production
    as well as natural gas royalty credits received during Q2 2011. 
--  Natural gas royalties recovered 3.9% of natural gas revenue in Q2 2011
    compared to an expense of 3.6% in Q1 2011 due to lower natural gas
    prices and royalty credits received during the quarter that exceeded the
    value of the total natural gas royalties paid. 
--  Light oil and NGLs royalty rates increased to 32.3% of revenue during Q2
    2011 as compared to 31.2% of revenue in Q1 2011 due to significant
    increases in oil and NGL prices. 

Dividends and payout ratio

--  During Q2 2011, Daylight declared three monthly cash dividends totaling
    $31.9 million ($0.15 per share) with a resulting payout ratio of 41%.
    YTD 2011, Daylight declared six monthly cash dividends totaling $63.5
    million ($0.30 per share) with a resulting payout ratio of 36%. 

Balance sheet and financial flexibility

--  Daylight's balance sheet provides significant capacity and flexibility,
    with approximately $437 million of bank debt drawn against our $625
    million credit facility at June 30, 2011. 

Tax pools

--  Tax pools of approximately $1.6 billion at June 30, 2011 are available
    to shelter cash flow from income tax in current periods and beyond. 

2011 Guidance update

--  Daylight targeted resumption of drilling, completion and tie-in
    operations in late May 2011; however, continued wet weather conditions
    have delayed planned operations. While some field operations have
    resumed, the weather related delays will impact previously forecast Q3
    2011 production volumes which we now expect to be similar to our Q2 2011
    production volumes. Daylight does not anticipate additional weather
    related delays for the balance of 2011 and maintains its Q4 2011
    production guidance at 42,000 boe per day. 

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 its technical expertise in exploration, exploitation and development to create long-term value for our shareholders. 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. 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. Daylight has approximately 213 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 and six months ended June 30, 2011, together with the notes thereto, and Management's Discussion and Analysis for the three and six months ended June 30, 2011, have been posted on our website at www.daylightenergy.com and filed under our profile on SEDAR (www.sedar.com).

ADVISORY:

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 2011 capital program; anticipated Q3 2011 and Q4 2011 production volumes; anticipated operating costs for 2011; the prospective nature of Daylight's resource play assets for oil, natural gas and NGLs; the planned timing and location of drilling operations on Daylight's undeveloped Duvernay lands; the anticipated impact of weather delays on production volumes for Q3 2011 and Q4 2011, and that weather delays are not expected to impact Daylight's operations for the balance of 2011.

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, or the lack thereof, associated with third-party processing operations; the availability and cost of labor and services, including but not limited to drilling and completion equipment and services; the availability of additional capital on acceptable terms; the availability of input materials and equipment required to drill, complete, tie-in and equip new wells, including but not limited to the availability of water and other substances required to complete new wells or recomplete existing wells; 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; the receipt of required regulatory and other third-party approvals for such dispositions; the realization of the anticipated benefits of the acquisitions, including the acquisition of undeveloped lands which Daylight considers prospective for hydrocarbons; the accuracy of Daylight's geological interpretation of its drilling and undeveloped land opportunities; and the existing and future regulatory and legal framework governing Daylight's business and operations and our ability to comply with current and future environmental and other laws, including but not limited to environmental laws and regulations associated with drilling and completion technologies and water use.

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; competition; risks associated with utilizing existing technologies and future technological advancements in Daylight's operations and drilling and completion activities; failure to realize the anticipated benefits of acquisitions, including the acquisition of undeveloped lands which Daylight considers prospective for hydrocarbons; risks associated with the accuracy, or lack thereof, of Daylight's geological interpretation of its drilling and undeveloped land opportunities; 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, or to access such capital on acceptable terms; the impact of global social and economic conditions on Daylight's business, operations and access to capital, including but not limited to government credit issues and the potential inability to service rising debt levels and adequately fund obligations on an ongoing basis; geological, technical, drilling and processing problems and other difficulties in producing oil, NGLs and natural gas reserves; failure to obtain required regulatory and other third-party approvals; changes in legislation, including but not limited to tax laws, royalty rates and environmental laws applicable to our business and operations, including environmental laws and regulations associated with drilling and completion technologies, water use and the use of certain chemicals in our operations, and our ability to comply with current and future environmental and other 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 www.sedar.com or on our website at www.daylightenergy.com.

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 and six month periods ended June 30, 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 and six month periods ended June 30, 2011 for further information.

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