EnerVest Energy and Oil Sands Total Return Trust

EnerVest Energy and Oil Sands Total Return Trust

March 21, 2007 09:30 ET

EnerVest Energy and Oil Sands Total Return Trust Announces Financial Results for the Year Ended December 31, 2006

CALGARY, ALBERTA--(CCNMatthews - March 21, 2007) -


EnerVest Oil Sands Management Inc., the Manager of EnerVest Energy and Oil Sands Total Return Trust (TSX:EOS.UN) is pleased to announce the financial results for the year ended December 31, 2006. The following is an excerpt from the management report of fund performance and annual financial statements of EnerVest for the year ended December 31, 2006. The management report of fund performance and annual financial statements can be found on our website at www.enervest.com or on SEDAR at www.sedar.com.

Management Report of Fund Performance

Results of Operations

Ongoing political tension and instability in the Middle East, concerns of a global economic slowdown, and particularly large fluctuations in commodity prices contributed to a rather tumultuous year for the oil and gas sector. The surprise announcement of the Conservative Government's "Tax Fairness Plan" created further instability in the market. Oil and gas royalty trusts and business trusts were impacted the greatest. As a result, EnerVest's return based on its net assets was negative 15.4% for the period. Based on its market price, EnerVest's return was negative 27.5%, the result of the widening discount between the trust's market price and its net asset value. At December 31, 2006, EnerVest units traded at a 9.0% discount to its net asset value. We believe this large discount is substantially due to the Government's October 31 announcement and its negative impact on the sector and is consistent with the widening discounts experienced by other income trust investment funds in the closed-end fund market.

The S&P/TSX finished strongly again for a fifth straight year, reaching new highs in December. At year end prices, equity yields were comfortably above the current and prospective yields on cash or bonds. While earnings growth may slow this year, we are optimistic for continued increases in earnings. Smaller gains in the energy and utilities sectors contributed to the lower performance for the S&P/TSX this year compared to 2005. By comparison, financial services, consumer discretionary and industrial sectors continued their momentum into 2006. Technology and telecommunications rebounded from a poor 2005 to partially offset the performance of the energy and utilities sectors.

The economic drivers of value in the oil sands sector remain intact over the long term: peak global oil production, lack of excess capacity, few new significant discoveries, growth in demand from developing countries, and continued and escalated political instability. These factors contribute to supporting higher long-term oil prices. The Canadian oil sands are a significantly large source of oil with estimated proven recoverable reserves of 175 billion barrels and are located in one of the most politically stable countries in the world.


EnerVest's portfolio is segregated by asset class into Oil Sands Related Issuers, Oil and Gas Issuers, Cash, and Liabilities, net of Other Assets. At December 31, 2006, based on total net assets and net of liabilities, Oil Sands Related Issuers were 61.8% of the portfolio and Oil and Gas Issuers 35.9%. Cash accounted for 2.3% of net assets. Private companies held in the portfolio are approximately 21.0% of the portfolio.

EnerVest's portfolio was acquired gradually during the first half of 2006. Oil and gas royalty trusts were used to provide both the yield for the five percent annual distribution to unitholders, payable monthly, and offset any negative netback erosion from oil sands producers. In the third quarter, volatility in natural gas prices heavily impacted the gas-weighted oil and gas royalty trusts held in the portfolio.

EnerVest began to progressively shift out of royalty trusts and toward companies directly involved in the oil sands as opportunities presented themselves throughout 2006. Acquisitions of Athabasca Oil Sands Corp., North American Oil Sands Corp., and Western Oil Sands Inc. comprise a significant portion of the portfolio at year end, accounting for approximately 17.3%.

Financial Performance

Investment revenues totalled $2,665,910 for the period, the vast majority from distribution income of $2,627,019. Distributions from portfolio assets are currently yielding 7.0% annually. Total expenses for the period were $1,061,297, the largest being administration and service fees of $450,281 and interest of $329,653. Net investment income was $1,594,613 for the period.

Realized losses on dispositions during the period totalled $1,423,434. The portfolio had unrealized losses of $7.2 million during the period as a result of the recent decline in the trust sector, most notably on oil and gas royalty trusts. Return of capital on distributions received for the period totalled $183,308.

The decrease in net assets from operations for the period was $7.2 million, or negative $1.44 per unit. As at December 31, 2006, EnerVest's net assets totalled $37.7 million, or $7.64 per unit, after distributions of $1,670,861 were paid or payable to unitholders during the period.

One element of EnerVest's investment strategy is the use of leverage. EnerVest does not consider substantial levels of debt financing appropriate and its Declaration of Trust limits borrowing to 25% of the value of total assets after giving effect to the leverage. On May 5, 2006, EnerVest entered into a $12.5 million 364-day revolving term credit facility with the Bank of Nova Scotia. The facility is secured by a first-ranking and exclusive charge on EnerVest's portfolio. Advances under the credit facility can be made by way of prime loans, base rate Canada loans, LIBOR loans, bankers' acceptances, or any combination thereof. During the period ended December 31, 2006, advances have been made solely through bankers' acceptances. For each bankers' acceptance, the cost of borrowing equals the discount to the face value of the bankers' acceptance plus a 0.35% per annum stamping fee. EnerVest is also charged a commitment fee equal to 0.10% per annum on the unused portion of the credit facility. The maximum borrowings during the period were $12.5 million, while the minimum amount drawn was nil. As at December 31, 2006, $10.5 million was outstanding, representing 27.8% of EnerVest's net asset value or 21.6% of total assets (as defined under the credit facility).

Cash Distributions

EnerVest commenced monthly distributions in May with the first distribution being paid on June 15, 2006. Monthly distributions of $0.0417 per unit were declared and paid since May, consistent with EnerVest's annual indicative distribution of 5% based on the original issue price of $10 per unit. Distributions are paid to unitholders of record as of the last trading day of the month.

Recent Developments

Income Trust Tax Announcement

On October 31, 2006, the Federal Minister of Finance proposed to apply a tax at the trust level on distributions of certain income from publicly traded mutual fund trusts at rates of tax comparable to the combined federal and provincial corporate tax and to treat such distributions as dividends to the unitholders (the "October 31 Proposals"). On December 21, 2006, the Federal Minister of Finance released draft legislation to implement the October 31 Proposals pursuant to which, commencing January 1, 2011 (provided the trust only experiences "normal growth" and no "undue expansion" before then), certain distributions from the trust which would have otherwise been taxed as ordinary income generally will be characterized as dividends in addition to being subject to tax at corporate rates at the trust level. Assuming the October 31 Proposals are ultimately enacted in their form, the implementation of such legislation could result in adverse tax consequences to the trust and certain Unitholders (including most Unitholders that are tax deferred or non-residents of Canada). It is not known at this time when the October 31 Proposals will be enacted by Parliament, if at all, or whether the October 31 Proposals will be enacted in the form currently proposed.

The surprise announcement had an immediate negative reaction on the income trust sector with some trusts declining ten to twenty five percent of their previously traded price. This had a direct and considerable impact on the portfolio as virtually all income trusts, other than certain excluded real estate investment trusts, were affected. Business trusts and oil and gas royalty trusts were hit particularly hard. Fortunately, despite the negative implications of the October 31 Proposals there are still positive catalysts for the income trust sector which include low interest rates, low core inflation, healthy economic fundamentals and an increased appetite for yield products.

Market Activity

The volatile commodity price environment and dramatic drop in equity markets following the Federal Government's October 31, 2006 announcement of its intention to tax income trusts in 2011 has indirectly impacted the junior oil and gas companies. Consequently, the energy sector is poised for increased takeover activity as a result of a valuation gap between senior and junior exploration and producing companies and royalty trusts. Smaller capitalized oil and gas companies are currently trading below recent multiples, thereby positioning the larger capitalized companies to acquire assets on an accretive basis given their lower cost of capital and limited competition. The acquisition of existing oil sands properties is highly competitive since new oil sands projects are costly and require between US$35 to US$45 per barrel of oil to be at least marginally profitable. High costs, long lead times and more stringent regulations indicate that consolidation will continue, with assets going from smaller companies to larger companies who are either better able to handle or have already passed these barriers to entry.


The following tables show selected key financial information about EnerVest and are intended to help you understand EnerVest's financial performance since inception. This information is derived from EnerVest's audited annual financial statements.

EnerVest's Net Asset Value ("NAV") per Unit
Net asset value, beginning of period $10.00

Increase (decrease) from operations:
Total revenue 0.53
Total expenses (0.21)
Realized losses for period (0.28)
Unrealized losses for period (1.44)
Return of capital (0.04)
Total decrease from operations (2): (1.44)

From net investment income (0.31)
Return of capital (0.02)
Total distributions (3) (0.33)

Net asset value, at December 31 $ 7.64

(1) Results are for the period from April 13, 2006 to December 31, 2006.
(2) Net asset value and distributions are based on the actual number of
units outstanding at the relevant time. The increase/decrease from
operations is based on the weighted average number of units outstanding
over the financial period.
(3) Distributions were paid in cash, reinvested in additional units of
EnerVest, or both.
(4) This schedule is not a reconciliation of NAV since it does not reflect
all of the unitholder transactions as shown on the Statement of Changes
in Net Assets and may therefore not add.

Ratios and Supplemental Data
Net assets (1) 37,714,203
Number of units outstanding (1) 4,934,828
Management expense ratio ("MER") excluding issue costs
and interest (2) 2.43%
MER including issue costs and interest (2) 10.75%
Portfolio turnover rate (3) 26.79%
Trading expense ratio (4) 0.47%
Closing market price $6.95

(1) This information is provided as at December 31, 2006.
(2) Management expense ratio is based on total expenses for the stated
period and is expressed as an annualized percentage of daily average net
assets during the period. The MER has been presented excluding and
including the cost of issuance of EnerVest units and interest expense on
the credit facility.
(3) EnerVest's portfolio turnover rate indicates how actively EnerVest's
portfolio advisor manages its portfolio investments. A portfolio
turnover rate of 100% is equivalent to EnerVest buying and selling all
of the securities in its portfolio once in the course of the period. The
higher a fund's portfolio turnover rate in a period, the greater the
trading costs payable by the fund in the period and the greater the
chance of an investor receiving taxable capital gains in the period.
There is not necessarily a relationship between a high turnover rate and
the performance of a fund.
(4) The trading expense ratio represents total commissions and other
portfolio transaction costs expressed as an annualized percentage of
daily average net assets during the period.


Portfolio Breakdown

Oil Sands Related Issuers 80.07%
Oil and Gas Issuers 46.51%
Cash 2.34%
Other Assets less Liabilities (28.92%)
Net Assets 100.00%

Top 25 Holdings

Issuer Name % of Net Assets
Athabasca Oil Sands Corp. 6.20%
Daylight Resources Trust 5.84%
Western Oil Sands Inc. 5.55%
Progress Energy Trust 5.00%
OPTI Canada Inc. 4.72%
Canadian Oil Sands Trust 4.50%
Canadian Natural Resources Limited 4.45%
Penn West Energy Trust 4.43%
Baytex Energy Trust 4.43%
Fort Chicago Energy Partners L.P. 4.41%
Bonavista Energy Trust 4.11%
Trilogy Energy Trust 3.93%
Enerplus Resources Fund 3.76%
Nexen Inc. 3.74%
Fairborne Energy Trust 3.74%
Eveready Income Fund 3.68%
Black Diamond Income Fund 3.37%
Royal Utilities Income Fund 3.31%
Crescent Point Energy Trust 3.27%
Range Royalty Limited Partnership 3.16%
Paramount Resources Ltd. 2.93%
Athabasca Oil Sands Corp., Warrants 2.82%
North American Oil Sands Corp. 2.68%
Deepwell Energy Services Trust 2.59%
EnCana Corp. 2.56%

Statement of Net Assets
December 31, 2006


Investments 47,741,024
Cash 881,665
Distributions receivable 303,906
Prepaid assets 72,515

Credit facility 10,500,000
Liability for purchase of portfolio assets 499,800
Distributions payable 205,782
Accounts payable to the Administrator 79,325


NET ASSETS 37,714,203



Statement of Operations
For the Period from Inception on February 22, 2006 to December 31, 2006


Distribution income 2,627,019
Interest income 28,891

Administration and service fees 450,281
Interest on credit facility 329,653
General and administrative 73,259
Directors' fees 61,834
Goods and services tax 38,730
Trustees' fees 38,354
Audit fees 26,442
Securityholder reporting costs 25,121
Legal fees 11,592
Custodial fees 6,031


Net realized loss on sale of portfolio assets (1,423,435)
Net change in unrealized portfolio losses (7,231,006)
Return of capital (183,308)





Statement of Changes in Net Assets
For the Period from Inception on February 22, 2006 to December 31, 2006

Net proceeds on issuance of units 47,569,187
Amounts paid for repurchase of units (940,987)
Distributions to unitholders
- from net investment income (1,594,613)
- from return of capital (76,248)


Statement of Investment Portfolio
December 31, 2006

Units / Average Market % of Net
Shares Cost Value Assets
$ $

Athabasca Oil Sands Corp.(1) 935,000 858,500 2,337,500 6.20%
Athabasca Oil Sands Corp.(1)
Warrants 850,000 - 1,062,500 2.82%
Canadian Natural Resources Limited 27,000 1,819,806 1,678,050 4.45%
Canadian Oil Sands Trust 52,000 1,775,265 1,695,720 4.50%
Cross Oil Sands Contracting Ltd.(1) 142,800 499,800 499,800 1.32%
EnCana Corporation 18,000 997,285 965,880 2.56%
Nexen Inc. 22,000 1,431,738 1,412,400 3.74%
North American Oil Sands Corp.(1),
Class A 75,000 900,000 1,012,500 2.68%
Oil Sands Underground Mining
Corp.(1) 166,700 500,100 500,100 1.33%
OPTI Canada Inc. 90,000 1,992,356 1,780,200 4.72%
Paramount Resources Ltd., Class A 46,000 1,983,836 1,104,000 2.93%
Petrobank Energy & Resources Ltd. 47,000 670,776 832,840 2.21%
Petro-Canada 15,000 802,350 716,250 1.90%
Suncor Energy Inc. 8,000 754,263 734,320 1.95%
UTS Energy Corporation 100,000 753,910 451,000 1.19%
Western Oil Sands Inc., Class A 64,000 2,003,164 2,093,440 5.55%
17,743,149 18,876,500 50.05%

Energy Equipment and Services
Deepwell Energy Services Trust 132,300 1,324,269 979,020 2.59%
Empire Industries Ltd. 1,000,000 450,000 430,000 1.14%
Engineered Drilling Solutions
Inc.(1) 200,000 400,000 400,000 1.06%
Flint Energy Services Ltd. 20,000 580,000 595,000 1.58%
North West Upgrading Inc.(1) 225,000 900,000 900,000 2.39%
North West Upgrading Inc.(1)
Warrants 112,500 - - 0.00%
Pure Energy Services Ltd. 26,000 651,300 348,400 0.92%
4,305,569 3,652,420 9.68%

Black Diamond Income Fund 165,000 1,650,000 1,270,500 3.37%
Drive Products Income Fund 75,000 745,642 573,750 1.52%
Eveready Income Fund 218,500 1,642,769 1,387,475 3.68%
Finning International Inc. 10,000 393,500 477,900 1.27%
Torr Canada Inc. 242,400 399,960 193,920 0.51%
Wajax Income Fund 25,000 1,031,138 856,250 2.27%
5,863,009 4,759,795 12.62%

Fort Chicago Energy Partners L.P.,
Class A 145,000 1,699,859 1,663,150 4.41%
1,699,859 1,663,150 4.41%

Royal Utilities Income Fund 110,000 1,110,877 1,248,500 3.31%
1,110,877 1,248,500 3.31%

OIL & GAS ISSUERS (46.51%)

Baytex Energy Trust 75,000 1,628,373 1,671,000 4.43%
Bonavista Energy Trust 55,000 1,959,585 1,548,250 4.11%
Crescent Point Energy Trust 70,000 1,550,740 1,232,000 3.27%
Daylight Resources Trust 215,850 4,264,368 2,203,829 5.84%
Enerplus Resources Fund 28,000 1,654,772 1,419,040 3.76%
Fairborne Energy Trust 135,000 2,028,136 1,410,750 3.74%
Focus Energy Trust 50,000 1,259,961 909,000 2.41%
Penn West Energy Trust 47,000 1,995,437 1,671,790 4.43%
Progress Energy Trust 150,000 2,567,084 1,885,500 5.00%
Range Royalty Limited
Partnership(1), Cl B Ser 1 85,000 1,496,000 1,190,000 3.16%
Shiningbank Energy Income Fund 50,000 889,575 642,500 1.70%
Trilogy Energy Trust 130,000 2,580,752 1,482,000 3.93%
Vault Energy Trust 50,000 374,784 275,000 0.73%
24,249,567 17,540,659 46.51%

TOTAL INVESTMENT PORTFOLIO 54,972,030 47,741,024 126.58%
CASH 881,665 2.34%
LIABILITIES, NET OF OTHER ASSETS (10,908,486) (28.92%)
NET ASSET VALUE 37,714,203 100.00%

(1) indicates private company

EnerVest is an actively managed closed-end trust which invests in a diversified portfolio of: (i) companies and income trusts involved directly and indirectly in the Canadian oil sands; and (ii) traditional oil and gas royalty trusts. EnerVest's investment objectives are to maximize total return through capital appreciation in the portfolio and to provide Unitholders with a consistent monthly cash distribution.

The Toronto Stock Exchange has not reviewed and does not accept responsibility for the adequacy or accuracy of this news release.

Contact Information

  • EnerVest Oil Sands Management Inc.
    Kevin W. Wolfe
    President & Chief Executive Officer
    (403) 571-5550 or Toll Free: 1-800-459-3384
    (403) 571-5554 (FAX)
    EnerVest Oil Sands Management Inc.
    J. Ward Mallabone
    Chief Operating Officer
    (403) 571-5550 or Toll Free: 1-800-459-3384
    (403) 571-5554 (FAX)
    EnerVest Oil Sands Management Inc.
    Kristie Allen
    Investor Relations
    (403) 571-5550 or Toll Free: 1-800-459-3384
    (403) 571-5554 (FAX)
    EnerVest Oil Sands Management Inc.
    Linda Koroluk
    Investor Relations
    (403) 571-5550 or Toll Free: 1-800-459-3384
    (403) 571-5554 (FAX)
    EnerVest Oil Sands Management Inc.
    Suite 2800, 700-9th Avenue S.W.
    Calgary, Alberta, T2P 3V4
    Email: info@enervest.com
    Website: www.enervest.com