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

Daylight Energy Ltd.

November 01, 2011 17:14 ET

Daylight Energy Reports Third Quarter 2011 Financial and Operating Results

CALGARY, ALBERTA--(Marketwire - Nov. 1, 2011) -

MESSAGE TO SHAREHOLDERS

Daylight Energy Ltd. ("Daylight" or the "Company") (TSX:DAY) announces its financial and operating results for the third quarter of 2011 ("Q3 2011").

Third Quarter Financial and Operational Results

Financial
(000s, unless otherwise stated) Q3 2011 Q2 2011 Q3 2010 YTD 2011 YTD 2010
Oil and natural gas revenues $ 145,108 $ 162,661 $ 161,279 $ 466,181 $ 492,480
Operating netback(1) 85,118 88,180 84,373 266,852 247,211
Funds from operations(1) 69,785 77,093 67,654 244,541 203,839
$ per share - Basic 0.33 0.36 0.33 1.15 1.09
- Diluted 0.31 0.35 0.31 1.08 1.02
Cash dividends declared 31,961 31,871 30,490 95,460 106,608
Per share 0.15 0.15 0.15 0.45 0.57
Payout ratio(1) 46 % 41 % 45 % 39 % 52 %
Capital expenditures(2) 130,555 133,356 72,540 379,200 228,592
Shares outstanding
Basic 213,314 212,643 203,267 213,314 203,267
Diluted 239,806 238,799 235,050 239,806 235,050
Operational
(Per boe amounts may not add exactly due to rounding)
Average daily production
Natural gas (Mcf/d) 133,597 140,611 145,409 139,892 146,379
Light oil (Bbls/d) 9,530 9,883 13,572 10,279 11,936
Heavy oil (Bbls/d) - - 505 - 1,393
NGLs (Bbls/d) 3,672 3,496 3,740 3,572 3,644
Oil & NGLs (Bbls/d) 13,202 13,379 17,817 13,851 16,973
Combined (boe/d) 35,468 36,814 42,052 37,166 41,370
Average prices received
Natural gas ($/Mcf) 3.85 3.91 3.74 3.89 4.31
Light oil ($/Bbl) 87.13 100.78 72.35 90.68 73.72
Heavy oil ($/Bbl) - - 60.57 - 61.70
NGLs ($/Bbl) 63.40 68.94 52.50 64.91 56.77
Oil & NGLs ($/Bbl) 80.53 92.46 67.85 84.03 69.09
Combined ($/boe) 44.47 48.55 41.69 45.95 43.61
$ per boe
Oil and natural gas revenues 44.47 48.55 41.69 45.95 43.61
Royalties (9.69 ) (10.28 ) (11.48 ) (9.99 ) (12.08 )
Realized gain (loss) on derivative contracts
1.62

(1.71
)
2.41

0.64

1.61
Operating expenses (9.65 ) (9.60 ) (10.09 ) (9.65 ) (10.42 )
Transportation expenses (0.67 ) (0.64 ) (0.72 ) (0.64 ) (0.82 )
Operating netback(1) 26.08 26.32 21.81 26.31 21.90
Other income 0.29 1.67 0.04 2.55 0.71
G&A - cash charge (2.30 ) (2.40 ) (2.07 ) (2.28 ) (2.06 )
Acquisition transaction costs - - - - (0.14 )
Cash finance charges (2.71 ) (2.57 ) (2.29 ) (2.47 ) (2.36 )
Cash taxes 0.02 - - - -
Funds from operations(1) 21.38 23.02 17.49 24.11 18.05

(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 Q3 2011 of $69.8 million, compared to $77.1 million recorded in Q2 2011 and $67.7 million recorded in Q3 2010.

Production

  • Daylight's total production volumes for Q3 2011 averaged 35,468 boe per day, a 4% decrease from Q2 2011 and a 16% decrease from Q3 2010.
  • In Q3 2011 average daily production was comprised of 133,597 Mcf per day of natural gas, 9,530 Bbls per day of light oil and 3,672 Bbls per day of NGLs.

Capital

In Q3 2011, Daylight drilled a total of 35 gross (26.0 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 Q3 2011, Daylight drilled 7 gross (1.9 net) natural gas wells and 1 gross (0.3 net) oil well.
  • Pembina properties including Warburg, Brazeau and Tomahawk. In Q3 2011, Daylight drilled 12 gross (10.5 net) oil wells and 10 gross (9.3 net) gas wells.
  • PRA properties including Wapiti and Elmworth. In Q3 2011, Daylight drilled 5 gross (4.0 net) natural gas wells.
  • Daylight invested $130.6 million on its capital expenditure program during Q3 2011 compared to $133.4 million in Q2 2011 and $72.5 million in Q3 2010.

Operating netback

  • Daylight's Q3 2011 light oil realized $87.13 per Bbl, while Q2 2011 light oil realized $100.78 per Bbl, a decrease of 14%. Daylight's light oil price for Q3 2011 was 20% higher than the Q3 2010 light oil price of $72.35 per Bbl.
  • Daylight's Q3 2011 NGLs realized $63.40 per Bbl, an 8% decrease from Q2 2011 NGLs realized price of $68.94 per Bbl. Daylight's Q3 2011 NGLs price was 21% higher than the Q3 2010 price of $52.50 per Bbl.
  • Daylight's natural gas price during Q3 2011 was $3.85 per Mcf, representing a 2% decrease from the Q2 2011 natural gas price of $3.91 per Mcf. Daylight's Q3 2011 realized natural gas price was 3% higher than the Q3 2010 natural gas price of $3.74 per Mcf.
  • Daylight's operating costs during Q3 2011 increased 1% to $9.65 per boe as compared to Q2 2011 at $9.60 per boe and were 4% lower than Q3 2010, at $10.09 per boe. Daylight's YTD 2011 operating expense on a per boe basis decreased 7% to $9.65 per boe from $10.42 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.
  • Overall royalty rates increased slightly to 21.8% of revenue during Q3 2011 from 21.2% of revenue during Q2 2011 and decreased from 27.5% of revenue in Q3 2010 due to lower Crown royalties on new production and new Crown royalty rate curves effective January 1, 2011.
  • Natural gas royalties during Q3 2011 increased to 3.2% of revenue from a recovery of 3.9% of revenue during Q2 2011 which resulted from significant Gas Cost Allowance credits received in Q2 2011. Q3 2011 natural gas royalty rates decreased compared to Q3 2010 royalties of 6.0% of revenue due to lower Crown royalty rates on new production and increased Gas Cost Allowance credits.
  • Light oil and NGLs royalty rates decreased to 30.8% of revenue during Q3 2011 as compared to 32.3% of revenue in Q2 2011 due to decreases in oil and NGLs prices. Q3 2011 light oil and NGLs royalty rates decreased compared to Q3 2010 royalties of 37.2% due to reduced Crown royalties on new production and new Crown royalty rate curves.

Dividends and payout ratio

  • During Q3 2011, Daylight declared three monthly cash dividends totaling $32.0 million ($0.15 per share) with a resulting payout ratio of 46%. YTD 2011, Daylight declared nine monthly cash dividends totaling $95.5 million ($0.45 per share) with a resulting payout ratio of 39%.

Balance sheet

  • At September 30, 2011, approximately $458 million of bank debt was drawn against our $625 million credit facility. Daylight's banking syndicate reviewed and increased the revolving term credit facilities to $650 million in October 2011.

Tax pools

  • Tax pools of approximately $1.7 billion at September 30, 2011 are available to shelter cash flow from income tax in current periods and beyond.

SUBSEQUENT EVENT

On October 9, 2011, Daylight announced it had entered into an agreement (the "Arrangement Agreement") with Sinopec International Petroleum Exploration and Production Corporation and an indirect wholly-owned subsidiary thereof (collectively, "SIPC") for the purchase of all of the issued and outstanding common shares of Daylight at a cash price of $10.08 per common share for total cash consideration of approximately $2.2 billion. The consideration offered for the common shares represents a 43% premium over the 60-day weighted average trading price of the common shares on the TSX up to and including October 7, 2011, the last trading day prior to announcement of the transaction.

The transaction is to be completed by way of a plan of arrangement (the "Arrangement") under the Business Corporations Act (Alberta) and is subject to customary conditions for a transaction of this nature, which include court and regulatory approvals and the approval of 66 2/3% of Daylight shareholders represented in person or by proxy at a special meeting of Daylight securityholders to be held on December 5, 2011 to consider the Arrangement. In addition, under the Arrangement and subject to approval by holders of the Series C Debentures, all of the issued and outstanding Series C Debentures would be converted into common shares (at the $9.60 conversion price applicable to the Series C Debentures, such that 104.1667 common shares would be issued for each $1,000 principal amount of Series C Debentures), and the holders of the Series C Debentures would then receive, in cash, the same $10.08 per common share to be paid to the shareholders, plus accrued and unpaid interest to the closing date. SIPC would also, under the Arrangement and subject to the approval by holders of the Series D Debentures, acquire all of the issued and outstanding Series D Debentures for a cash price of $1,110 per $1,000 of principal amount of Series D Debentures, plus accrued and unpaid interest to the closing date. Completion of the Arrangement is not conditional on debentureholder approval. If the requisite approval of the debentureholders is not obtained, the applicable (or both) series of Debentures will be excluded from the Arrangement and will remain outstanding in accordance with their terms.

Under the Arrangement Agreement Daylight has agreed to suspend future dividends.

A special meeting of the holders of Common Shares and Debentures is scheduled to take place on December 5, 2011 with closing of the Arrangement expected to occur prior to the end of December 2011, subject to satisfaction of certain closing conditions including obtaining all required securityholder, court and regulatory approvals. An information circular and proxy statement containing additional details regarding the Arrangement is expected to be mailed to securityholders in early November 2011.

INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND MD&A

Daylight's interim unaudited consolidated financial statements for the three and nine months ended September 30, 2011, together with the notes thereto, and Management's Discussion and Analysis for the three and nine months ended September 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 Arrangement, including the anticipated date for the meeting of security holders, mailing of the information circular and proxy statement in respect thereof, the anticipated closing date and the receipt of all required regulatory approvals.

In respect of the forward-looking statements and information concerning the anticipated completion of the proposed Arrangement and the anticipated timing for completion of the Arrangement, Daylight has provided such in reliance on certain assumptions that it believes are reasonable at this time, including assumptions as to the time required to prepare and mail Daylight securityholder meeting materials, including the required information circular; the ability of the parties to receive, in a timely manner, the necessary regulatory, court, securityholder and other third party approvals, including but not limited to approvals required to be obtained by SIPC from the Government of The People's Republic of China and Investment Canada Act approval; and the ability of the parties to satisfy, in a timely manner, the other conditions to the closing of the Arrangement. These dates may change for a number of reasons, including unforeseen delays in preparing meeting materials, inability to secure necessary securityholder, regulatory, court or other third party approvals in the time assumed or the need for additional time to satisfy the other conditions to the completion of the Arrangement. Accordingly, readers should not place undue reliance on the forward-looking statements and information contained in this press release concerning these times.

Risks and uncertainties inherent in the nature of the Arrangement include the failure of Daylight or SIPC to obtain necessary securityholder, regulatory, court and other third party approvals, or to otherwise satisfy the conditions to the Arrangement, in a timely manner, or at all. Failure to do so obtain such approvals, or the failure of Daylight or SIPC to otherwise satisfy the conditions to the Arrangement, may result in the Arrangement not being completed on the proposed terms, or at all. In addition, the failure of Daylight to comply with the terms of the Arrangement Agreement may result in Daylight being required to pay a non-completion or other fee to SIPC, the result of which could have a material adverse effect on Daylight's financial position and results of operations and its ability to fund growth prospects and current operations.

Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on other factors that could affect the 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 Daylight's Notice of Annual General Meeting and Information Circular and Proxy Statement dated April 14, 2011, each of which may be accessed on Daylight's SEDAR profile at www.sedar.com. Readers should also refer to the risk factors listed in the information circular and proxy statement to be mailed to securityholders in connection with the Arrangement, which is expected to be mailed in early November 2011.

The forward-looking statements and information contained in this press release are made as of the date hereof and Daylight undertake 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 nine month periods ended September 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 nine month periods ended September 30, 2011 for further information.

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