Eagle Energy Trust

Eagle Energy Trust

August 09, 2013 08:00 ET

Eagle Energy Trust Releases Second Quarter Financial Results: Trust Earns $3.9 Million in Q2 on Funds Flow of $12.0 Million and Remains on Track to Meet 2013 Guidance

CALGARY, ALBERTA--(Marketwired - Aug. 9, 2013) - Eagle Energy Trust (the "Trust") (TSX:EGL.UN) is pleased to report its financial and operating results for the second quarter of 2013. The Trust's unaudited interim condensed consolidated financial statements for the six months ended June 30, 2013 and related management's discussion and analysis have been filed with the securities regulators and are available on the Trust's website at www.EagleEnergyTrust.com or on SEDAR at www.sedar.com. In addition, the Trust has posted video commentary from management regarding its current operations and the second quarter results on its website at http://www.eagleenergytrust.com/videos.

In this press release, references to "Eagle" include the Trust and its operating subsidiaries.

Highlights for the three months ended June 30, 2013

Eagle's results demonstrate continued improvements in operational execution as well as significantly lower corporate decline rates than previously forecast.

  • Average working interest production was 3,022 barrels of oil equivalent per day ("boe/d") (82% oil, 10% natural gas liquids, 8% natural gas), a 3% increase from the first quarter of 2013 and a 26% increase from the second quarter of 2012.

  • Eagle remains on track to meet its 2013 full year production guidance of 2,900 to 3,100 boe/d, which represents a greater than 10% year over year increase from the full year 2012 average.

  • Second quarter field operating costs, excluding transportation, were $7.84 per boe, a 13% reduction when compared to the first quarter of 2013 at $9.04 per boe, and a 40% reduction when compared to the second quarter of 2012 at $13.04 per boe.

  • Total field operating costs, including transportation, were $2.8 million ($10.22 per boe). The significant reduction from the prior year was due to improved operating procedures, including reducing salt water disposal costs, resizing submersible pumps and negotiating lower power contracts.

  • Second quarter funds flow from operations was $12.0 million ($0.39 per unit), consistent with first quarter 2013 results, and up 66% from the second quarter of 2012.

  • Achieved top-decile second quarter field netbacks of $52.20 per boe. Realized oil prices were at a premium to benchmark $US West Texas Intermediate ("WTI"). Premium pricing negotiated by Eagle in its 2013 marketing arrangements contributed to top decile per boe field netbacks. With 100% of its production coming from Texas, Eagle has a substantial revenue advantage over Canadian producers.

  • Second quarter distributions were held steady at $0.26 per unit or $0.0875 per unit per month.

  • Acquired the remaining 7.5% interest in its Midland properties for cash consideration of approximately $US 8.6 million (the "Acquisition"). The Acquisition added approximately 70 boe/d of production. The Trust now owns all of the working interest in the Midland properties.

  • Increased the borrowing base under Eagle's credit facility from $US 48.5 million to $US 61.0 million and syndicated the facility to include a second major Canadian chartered bank as a new lender.

  • Drilled, tied in and brought on stream 3 (2.4 net) wells in Luling, Texas. Drilled 4 (4.0 net) wells and brought on stream 2 (2.0 net) wells in Midland. With the 2013 drilling program commencing, as planned, in the second quarter, production contributions from new drills placed on production late in the quarter during clean-up were negligible. The wells are performing to expectations.

Richard Clark, President and Chief Executive Officer of Eagle stated, "Eagle continues its commitment to 'excel through the basics' with a strong second quarter performance. Our average daily production remains ahead of our internal budget, as well as our market guidance. We continue to deliver significant quarter over quarter reductions in operating costs. Perhaps, most importantly, we are demonstrating management's belief that our corporate declines are substantially lower than market consensus. We continue to manage our balance sheet and maintain our distributions without increasing our debt. All of these factors line up to underpin the sustainability of Eagle's business."

Operations Update

Eagle is currently drilling its fifth and final well in its 2013 drilling program for the Midland area. The first three wells have been completed, are on stream and are performing to expectations. The fourth well is scheduled to be fracced in August.

In the Luling area, Eagle commenced its drilling program in late May and is currently moving on to its sixth well. Three of the new wells have been tied in and brought on stream and the fourth well is scheduled to come on stream in August. New well production in the Luling area is performing to expectations.


This outlook section is intended to provide unitholders with information about Eagle's expectations as at the date of this press release for production and capital expenditures for 2013. Readers are cautioned that the information may not be appropriate for any other purpose. This information constitutes forward-looking information. Readers should note the assumptions, risks and discussion in the section titled "Note Regarding Forward-Looking Statements" at the end of this press release.

Eagle maintains its guidance as previously provided in its management discussion and analysis for the first quarter 2013. Eagle's guidance is as follows:

2013 Guidance
Capital Budget $US 26.0 mm (1 )
Working Interest Production 2,900 - 3,100 boe/d
Operating Costs (inclusive of transportation) $12.00 - $14.00 per boe
Funds Flow from Operations $45.0 mm (2 )
(1) Note that the capital budget amount excludes the $US 8.6 million cost of the Acquisition.
(2) 2013 funds flow from operations of $45.0 million has been estimated using the following assumptions:
a. based on actual results through to June 30, 2013 and the Acquisition;
b. full year average working interest production of 3,100 boe/d, which is at the upper end of the guidance range;
c. July - December benchmark pricing of $US 90.00 per barrel WTI oil, $US 2.90 per Mcf NYMEX gas and $US 39.60 per barrel NGLs (NGLs price is calculated as 44% of the WTI price);
d. July - December field marketing contracts currently in place for both Midland and Luling;
e. July - December average operating costs (inclusive of transportation) of $13.00 per boe; and
f. July - December foreign exchange rate at $1.00 CDN/US.

A table showing the sensitivity of Eagle's 2013 funds flow to changes in production and commodity prices is set out below under the heading "2013 Sensitivities".

Calculations and commentary regarding the sustainability of Eagle's distributions

The following table sets out Eagle's 2013 guidance with respect to its projected payout ratios, debt to trailing cashflow, and percentage to be drawn on its credit facility.

2013 Guidance Notes
Payout Ratios (as a percentage of funds flow)
Basic Payout Ratio (i.e., assuming annualized Distribution at $1.05/unit) 71 % (1 )
Plus: Capital Expenditures 57 % (2 )
Equals: Corporate Payout Ratio 128 % (3 )
Adjusted Payout Ratio (Distribution - DRIP proceeds + Capital Expenditures) 83 % (4 )
Financial Strength
Debt to trailing cashflow 0.88x (5 )
% Drawn on existing credit facility at end of period 66 % (6 )
(1) Eagle calculates its basic payout ratio as follows:
Unitholder Distributions = Basic Payout Ratio
Funds flow from Operations
A table showing the sensitivity of Eagle's basic payout ratio to production and pricing is set out below under the heading "2013 Sensitivities".
(2) Capital expenditures generally exclude corporate and property acquisitions because these are evaluated separately on their own merits. The $US 8.6 million Acquisition has therefore been excluded from this percentage.
(3) Eagle calculates its corporate payout ratio as follows:
Capital Expenditures + Unitholder Distributions = Corporate Payout Ratio
Funds flow from Operations
A table showing the sensitivity of Eagle's corporate payout ratio to production and pricing is set out below under the heading "2013 Sensitivities".
(4) Assumes 65% unitholder participation in Eagle's Premium Drip™ and distribution reinvestment programs is unchanged throughout 2013. As is the case with any manner of equity funding, Eagle weighs the benefits from this method of financing and will make adjustments as deemed prudent.
(5) Increased due to the $US 8.6 million Acquisition being financed by bank debt.
(6) The borrowing base under the credit facility is $US 61.0 million.

2013 Sensitivities

The following tables show the sensitivity of Eagle's funds flow, corporate payout ratio and basic payout ratio to changes in commodity price and production.

Sensitivity of Funds Flow ($ millions) to Commodity Price and Production

2013 (Jul - Dec) Average WTI
$US 80.00 $US 90.00 $US 100.00
2013 Average Working Interest Production (boe/d) 2,900 40.7 42.0 44.1
3,100 44.1 45.0 48.1
3,300 47.4 49.4 52.2

Sensitivity of Corporate Payout Ratio to Commodity Price and Production

2013 (Jul - Dec) Average WTI
$US 80.00 $US 90.00 $US 100.00
2013 Average Working Interest Production (boe/d) 2,900 144 % 140 % 133 %
3,100 133 % 128 % 122 %
3,300 124 % 119 % 112 %

Sensitivity of Basic Payout Ratio to Commodity Price and Production

2013 (Jul - Dec) Average WTI
$US 80.00 $US 90.00 $US 100.00
2013 Average Working Interest Production (boe/d) 2,900 79 % 77 % 73 %
3,100 73 % 71 % 67 %
3,300 68 % 65 % 62 %


(1) Annual distributions are held at current levels of $1.05 per unit per year.
(2) No new equity issued, other than under the distribution reinvestment program.
(3) Field operating costs, including transportation, of $13.00 per barrel.

The Trust remains on track to meet its 2013 guidance. The six planned wells in the Luling Salt Flat field commenced drilling in May and costs are at or below budget. The program will continue to primarily target the Edwards "A" zone; however, the Edwards "B" and "C" zones have also been shown to be productive by the Trust on its acreage. Eagle anticipates further development in these zones as its technical team continues to enhance its understanding of the subsurface.

To improve rig efficiency and utilization, thereby lowering drilling costs, the Midland five well Permian drilling program was accelerated by one month. This timing difference resulted in higher capital expenditures during the quarter and higher quarter end debt levels than originally planned, but costs are at or below budget. Annual capital expenditures and expected year end debt levels, however, remain unchanged. The Midland drilling program will continue to target multiple pay zones from the Clearfork through to the Atoka. Several horizontal plays are also being drilled by other operators in the Martin county area. Eagle is focusing on three zones for potential horizontal drilling on its acreage next year.

Summary of quarterly results

The following table shows selected information for the Trust's second fiscal quarter of 2013 and information for the comparative period in 2012.

Q2/2013 Q1/2013 Q4/2012 Q3/2012 Q2/2012
($000's except for boe/d and per unit amounts)
Sales volumes - boe/d 3,022 2,928 2,986 2,825 2,400
Revenue, net of royalties 17,162 16,805 16,519 15,181 13,077
per boe 62.42 63.77 60.13 58.41 59.90
Funds flow from operations 11,977 11,884 9,905 9,039 7,233
per boe 43.56 45.10 36.06 34.78 33.13
per unit - basic 0.39 0.40 0.34 0.32 0.31
per unit - diluted 0.39 0.40 0.32 0.32 0.31
Income (loss) 3,919 4,080 (403 ) (1,095 ) 8,567
per unit - basic & diluted 0.13 0.14 (0.02 ) (0.04 ) 0.37
Cash distributions declared 7,960 7,828 7,653 7,512 6,628
per issued unit 0.2625 0.2625 0.2625 0.2625 0.2625
Current assets 11,443 9,913 14,464 14,209 18,758
Current liabilities 19,874 11,982 17,512 23,723 28,158
Total assets 311,271 283,112 284,802 283,913 291,273
Total non-current liabilities 50,654 39,873 42,111 35,136 27,192
Unitholders' equity 240,743 231,257 225,179 225,055 235,923
Units outstanding for accounting purposes 30,707(1 ) 29,960(1 ) 29,269(1 ) 28,654(1 ) 27,895(1 )
Units issued 30,813 30,066 29,375 28,783 28,283
(1) Units outstanding for accounting purposes exclude those units issued due to the performance conditions that have to be met to enable such units to be released from escrow.

Working interest sales volumes for the second quarter of 2013 averaged 3,022 boe/d (82% oil, 10% natural gas liquids, 8% natural gas). The year over year increase is attributable to the Midland properties acquisition, 9 (8.4 net) additional oil wells being tied-in in the Midland area, and an additional 16 (12.8 net) oil wells being brought on stream in the Luling area since June 30, 2012. For the six months ended June 30, 2013, working interest sales volumes were 30% higher than the comparable 2012 period. As above, the increase is due to drilling activity and the Midland properties acquisition.

The Trust's quarterly revenue is 94% derived from oil, 4% from natural gas liquids and 2% from natural gas. Canadian dollar realized oil prices were 105% of benchmark $US WTI for the quarter while natural gas liquid prices were approximately 37% of benchmark $US WTI.

The Trust enters into marketing contracts in the field to obtain the most favourable pricing. Management monitors pricing regularly and endeavours to maximize realized sales prices while minimizing counterparty risk. A key part of the Trust's strategy is to acquire U.S. properties which are close to markets and, in so doing, realize premium sales prices compared to Canadian production.

In the Luling area, a field marketing agreement is in place from March 2013 through August 2013 which fixes the Trust's reference price to Louisiana Light Sweet instead of WTI. When other field pricing adjustments that were concurrently fixed are also considered, the result is Eagle realizing a premium to the WTI price of $US 4.67 per barrel (excluding transportation costs). Recently, Eagle executed a similar field marketing agreement for the period from September 2013 to February 2014 in which it fixed the other field pricing adjustments (which resulted in a $US 3.76 per barrel improvement to Eagle's realized price when compared to the expiring agreement), but let the differential between Louisiana Light Sweet and WTI float. Eagle continues to monitor this spread and has the ability to fix this differential in the future.

In the Midland area, a marketing agreement is in place from March 2013 through August 2013 that limits the discount from the WTI price to $US 2.14 per barrel (excluding transportation costs). Recently, Eagle executed a similar field marketing agreement for the period from September 2013 to February 2014 that results in a premium to the WTI price of $US 0.83 per barrel (excluding transportation costs).

Income (loss) on a quarterly basis often does not move directionally or by the same amount as movements in funds flow from operations. This is primarily due to items of a non-cash nature that factor into the calculation of income (loss), and those that are required to be fair valued at each quarter end. By way of example, second quarter 2013 funds flow from operations increased slightly when compared to the first quarter 2013, while second quarter income decreased slightly. This occurred because a unit-based compensation recovery of $1.2 million was calculated based on fair values in the first quarter while a $2.6 million unit based compensation expense was calculated in the second quarter.

Total non-current liabilities increased in the second quarter of 2013, versus the first quarter of 2013 due to the start of the 2013 drilling program.

Non-IFRS Financial Measures

Statements throughout this press release make reference to the terms "field netback" and "funds flow from operations" which are non-International Financial Reporting Standards ("IFRS") financial measures that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other issuers. Management believes that "field netback" and "funds flow from operations" provide useful information to investors and management since such measures reflect the quality of production, the level of profitability, the ability to drive growth through the funding of future capital expenditures and the sustainability of distributions to unitholders. Funds flow from operations is calculated before changes in non-cash working capital. Field netback is calculated by subtracting royalties and operating costs from revenues. See the "Non-IFRS financial measures" section of the MD&A for a reconciliation of funds flow from operations and field netback to earnings (loss) for the period, the most directly comparable measure in the Trust's condensed consolidated interim financial statements. Other financial data has been prepared in accordance with IFRS.

Note Regarding Forward-Looking Statements

Certain of the statements made and information contained in this press release are forward-looking statements and forward looking information (collectively referred to as "forward-looking statements") within the meaning of Canadian securities laws. All statements other than statements of historic fact are forward-looking statements.

Forward‐looking statements include those pertaining to Eagle's 2013 capital budget amount and specific uses, average working interest production for 2013, drilling inventory and drilling program for 2013 and beyond, 2013 operating costs, commodity prices, funds flow from operations, cash available from the distribution reinvestment and Premium Drip™ programs, payout ratios, debt to trailing cash flow and percentage to be drawn on its credit facility at the end of 2013 and specific uses, sensitivities of the payout ratios and funds flow to commodity price and production, sustainability of production, and amount of, and sustainability of, distributions on the Trust's units. In determining its drilling program, timing for bringing wells onto production, production rates from the wells, operating costs and funds flow from operations, management has made assumptions relating to, among other things, anticipated future production from wells in the Salt Flat field and Midland area, regulatory approvals, future commodity prices and US/Canadian dollar exchange rates, the regulatory framework governing taxes and environmental matters in the U.S. and Texas, the ability to market future production from the Salt Flat field and Midland area, and future capital expenditures and the geological and engineering reserves estimates in respect of Eagle's properties in the Salt Flat Field and Midland area. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect.

These assumptions necessarily involve known and unknown risks and uncertainties inherent in the oil and gas industry such as geological, environmental, technical, drilling and processing problems, unexpected operational delays and challenges, the volatility of oil and gas prices, commodity supply and demand, fluctuations in currency and interest rates, obtaining regulatory approvals, competition for services and supplies, as well as other business risks that are set out in the Trust's Annual Information Form dated March 22, 2013 under the heading "Risk Factors".

As a result of these risks, actual performance and financial results in 2013 may differ materially from any projections of future performance or results expressed or implied by these forward‐looking statements. Eagle's production rates, operating costs and 2013 capital budget, and the Trust's distributions, are subject to change in light of ongoing results, prevailing economic circumstances, obtaining regulatory approvals, commodity prices and industry conditions and regulations. Accordingly, readers are cautioned that events or circumstances could cause results to differ materially from those set out in this press release. New factors emerge from time to time, and it is not possible for management to predict all of these factors or to assess in advance the impact of each such factor on the operations of Eagle, or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement.

Undue reliance should not be placed on forward-looking statements, which are inherently uncertain, are based on estimates and assumptions, and are subject to known and unknown risks and uncertainties (both general and specific) that contribute to the possibility that the future events or circumstances contemplated by the forward looking statements will not occur. Although management believes that the expectations conveyed by the forward-looking statements are reasonable based on information available to it on the date the forward-looking statements were made, there can be no assurance that the plans, intentions or expectations upon which forward-looking statements are based will in fact be realized. Actual results will differ, and the difference may be material and adverse to the Trust and its unitholders.

Oil and Natural Gas Measures

This press release contains disclosure expressed as "boe" or "boe/d". All oil and natural gas equivalency volumes have been derived using the conversion ratio of six thousand cubic feet ("Mcf") of natural gas to one barrel ("bbl") of oil. Equivalency measures may be misleading, particularly if used in isolation. A conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the well head. In addition, given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalent of six to one, utilizing a boe conversion ratio of 6 Mcf: 1 bbl would be misleading as an indication of value.

About Eagle Energy Trust

Eagle is an oil and gas energy trust created to provide investors with a publicly traded, oil and natural gas focused, reliable distribution paying investment, with favourable tax treatment relative to taxable Canadian corporations.

All material information pertaining to Eagle Energy Trust may be found under Eagle's issuer's profile at www.sedar.com or on Eagle's website at www.EagleEnergyTrust.com.

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