Parallel Energy Trust

Parallel Energy Trust

January 24, 2012 17:14 ET

Parallel Energy Trust Announces Fourth Quarter 2011 Production and Provides Update on 2012 Operational Initiatives

CALGARY, ALBERTA--(Marketwire - Jan. 24, 2012) -


Parallel Energy Trust (TSX:PLT.UN) ("Parallel" or the "Trust") today announced its fourth quarter production and provided an update on its operating plans for 2012.

The Trust estimates that its average production for the fourth quarter of 2011 was approximately 3,800 boe/day, consisting of 2546 barrels of condensate and natural gas liquids ("NGLs") (67% of total production) and the balance consisting of natural gas. Production during the quarter was a ten percent increase since Parallel acquired the asset in April 2011, and a four percent increase over average production for the third quarter of 2011. During the fourth quarter, production increased to a peak of 4,100 boe/day in early November but subsequently fell from that level as a result of the impact of several isolated operational issues resulting from inclement weather and lower than anticipated results from wells drilled in November and December.

Parallel benefited from a material improvement in condensate yields during the fourth quarter of 2011. Fourth quarter production was comprised of approximately 25% condensate and 42% natural gas liquids ("NGLs"), with the remaining 33% as natural gas, as compared with 20%, 45% and 35%, respectively, in the third quarter. The improved condensate yield and lower natural gas volumes as a percentage of total production materially improved the value of production as condensate receives approximately 80% of WTI pricing. Parallel's condensate production is also collected at the field level, eliminating processing fees, which are between 8% and 10% of production for natural gas and NGLs. The improved condensate yield was due both to ongoing recovery improvement efforts in the field and colder weather, which results in more condensate falling out of the gas stream.

"Our fourth quarter production was impacted by a number of factors that occurred simultaneously, brought on in part by the impact of unusually inclement weather. Taken individually, and spread out over the course of a full operating year, the impact on each quarter would have been much less visible," said Dennis Feuchuk, President and CEO of Parallel Energy Trust. "Our focus remains on preserving the stability of our distributions. We believe strongly that our solid exposure to condensate and NGL prices, disciplined hedging approach and extensive planned drilling program for 2012 have us well positioned to comfortably maintain distributions."


Based on field data, production capacity relating to Parallel's 59% interest in the Panhandle field at year-end 2011 was approximately 4,000 boe/day and production is currently running at these levels. Parallel had forecasted an exit rate at December 31, 2011 of approximately 4,350 boe/day; however, production was impacted by below-forecast results from some of the dual lateral wells drilled and the abandonment of one well bore. This will not impact distributions.

Unusually cold weather and large amounts of snow encountered in northern Texas in late 2011 resulted in unscheduled downtime at third party plants that process Parallel's production, caused wells to freeze up and severely limited access to the field. Parallel has encountered difficulties with extreme weather and unscheduled processing plant outages a number of times in 2011, all of which have impacted production. Planning is currently underway to minimize the effects of weather on production in the future and to address plant reliability issues.

With respect to drilling results, Parallel had originally forecasted that nine gross dual lateral wells would be completed in the fourth quarter. Ultimately, eight gross dual lateral wells were drilled during the quarter of which seven were completed. On average, the dual laterals drilled during the quarter did not meet expectations of initial production of 85 boe/day gross, although they continue to provide economic returns with a return on drilling costs of greater than 30%. Three of the last four gross wells drilled in the fourth quarter produced an average of 25 boe/day gross per well. In addition, a well that spud in early December was abandoned in late December due to downhole problems that rendered the wellbore unusable. The rig has since been moved 15 metres and it is expected the new well will be completed in January 2012.

Drilling Plans

Parallel anticipates that during its 189 well drilling program, it will from time to time produce results that both exceed and fall short of its targets, but that on average, results will remain within the expected range, and that the Trust will continue to meet its targets on an overall basis. In particular, the results of three of the last four wells completed in 2011 are not representative of results achieved on average in 2011 and Parallel does not believe that these results reflect the results that will be achieved on an average basis going forward.

Production results have indicated, however, that dual lateral wells, while still economic, may not provide competitive returns to single laterals or lateral sidetracks. Dual laterals have not resulted in production materially above comparable single laterals and the longer time to completion for dual laterals results in less frequent production additions. Parallel therefore plans to prioritize single laterals ahead of dual laterals, thus shifting its drilling focus to predominantly single laterals and lateral sidetracks for 2012. This decision is intended to allocate capital to the highest return projects first, since, as noted, these wells continue to provide economic returns.

Based on the original reserve report, there are 189 gross drilling locations on Parallel's property, of which to date 23 have been drilled and completed, representing 12% of total drilling inventory. There remain more than 165 gross drilling locations in Parallel's current inventory and drilling and completion methods are continuing to be evaluated to maximize the economic return from all capital spending.

Parallel believes that overall, its 2012 drilling program will generate production levels and returns consistent with those obtained in the second and third quarters of 2011.

2012 Production Forecast

Due to the operational issues and drilling results achieved in the fourth quarter and the resulting exit rate, Parallel has revised its expected production levels for 2012. Parallel is now anticipating production net to Parallel to average between 4,200 and 4,500 boe/day (as compared to its original forecast of 4,600 to 4,800 boe/day) with 2012 exit production rate forecasted to be between 4,500 to 4,700 boe/day net to Parallel. The main assumptions underlying this forecast are as follows:

  • Two rigs running throughout 2012
  • 44 gross wells drilled, of which almost all will be single laterals or lateral sidetracks
  • Average drilling cost of $550,000 gross per well
  • 30 day initial production rates to average 40 boe/day gross per well
  • First year decline rate of 40%, and
  • Drilling metrics of $13,750 per flowing boe/day (based on initial production rate)

2012 Cash Flow Forecast

In addition to the production forecasts, other assumptions underlying 2012 cash flow forecast include:

  • Production mix for the year to average 24% condensate, 43% NGLs and 33% natural gas
  • Operating costs of approximately $5.50 per boe, representing a reduction from operating costs per boe incurred in 2011 due to the increased production levels with most costs remaining fixed
  • Royalty rates and processing fees consistent with 2011
  • General and administrative expense of $3.5 million for the year
  • Exchange rate of 1.01 Canadian dollars to the US dollar, and
  • Commodity price hedges in place as discussed below.

Based on the above assumptions and current forward strip commodity prices for 2012 of US$100 per bbl WTI and US$3.00 NYMEX natural gas price, cash flow is forecasted to be $45 million for 2012. If the Trust did not have a distribution reinvestment program, this cash flow would represent a basic payout ratio (calculated as distributions divided by cash flow available for distributions) of 80% and an all-in payout ratio (calculated as distributions plus capital expenditures divided by cash flow available for distribution) of 116%. With the distribution reinvestment program, the basic and all-in payout ratios based on actual cash distributions will be much lower. The following chart summarizes the basic payout sensitivities to both WTI oil price and NYMEX natural gas price assuming no distribution reinvestment program:

NYMEX Natural Gas Price (US$)
WTI Oil Price (US$) $3.00 $4.00
$80.00 90 % 85 %
$85.00 88 % 83 %
$90.00 85 % 81 %
$95.00 82 % 78 %
$100.00 80 % 76 %

Production Decline Rates

The existing production in the field continues to decline in the 8% to 10% range per annum. This low decline rate relative to most other conventional and non-conventional production in North America is a very important aspect of the sustainability of the Trust's distributions. Most importantly, because of the low decline rate, much less capital is required to maintain production than would be the case with other conventional North American assets which tend to have decline rates in the 30% to 40% range. Therefore, an 85% basic payout ratio for Parallel would tend to provide the same level of sustainability as a 60% to 70% payout ratio for other oil and gas companies with a more common decline rate of 30% to 40%. In addition, Parallel's low decline rate provides a greater cushion to sustain distributions during periods of low commodity prices as production does not fall as quickly if capital expenditures are reduced. Finally, an asset with a low decline rate provides more debt capacity for the same level of production or cash flow than an asset with a higher decline rate since the borrowing base of the asset does not decline as quickly. Therefore, the borrowing capacity of Parallel's asset will be higher, in terms of the borrowing base calculated by banks, than would a similar asset with a much higher decline rate.

Bank Facility

Parallel has a bank facility with a current limit of C$100 million provided by three Schedule 1 Canadian banks. As at the end of December 2011, this facility had undrawn capacity of C$35 million. The facility limit of $100 million was set upon the initial acquisition of 51% of the Panhandle field, and was not increased when the additional 8% of the field was purchased. The borrowing base of C$100 million was reconfirmed in October 2011 and Parallel believes that the borrowing base is not at risk, as condensate and NGL production represent more than 80% of revenues and production has increased since the initial borrowing base was established. Therefore, Parallel is comfortable that additional borrowing capacity is available by way of an increase in the bank facility. Current unutilized borrowing capacity, without any increase in the current bank facility amount, is more than sufficient to fund any portion of expected capital expenditures which might not be covered by operating cash flow for a number of years and provides the ability to either increase capital expenditures or assist in the funding of acquisitions to grow the asset base.

Distribution Reinvestment Program

The Trust instituted a distribution reinvestment program and Premium DRIP™ program in December 2011 which is currently being utilized by approximately 60% of outstanding units. Based on the current number of units outstanding, this represents a reinvestment of approximately $1.8 million per month of distributions. This is more than sufficient to fund the Trust's entire planned capital program. As a result, even in the lowest commodity price forecasts in the above chart, the amount of bank debt will continue to be reduced from current levels. The Trust instituted the DRIP and Premium DRIP™ for the convenience of Unitholders and will continue to evaluate utilization levels based on the Trust's unit price and forecasted requirements for additional funding.

Commodity Price Hedging

As previously announced, Parallel Trust has commodity hedges for an average of 1,600 boe/day for calendar 2012 as follows:

Crude Oil:

- January to December 2012: 1,000 bbls/day at an average floor price of US$92.50 and an average ceiling of US$103.00

Natural Gas Liquids:

- Propane - January to December 2012: 300 bbls/day equivalent at a forward price of US$50.61

- Butane - January to December 2012: 200 bbls/day equivalent at a forward price of US$59.43

Natural Gas:

- January to April 2012: 2,000 mmbtu/day at a floor of US$4.20 and a ceiling of US$5.20

Sustainability of Distributions

The Trust believes that its current distribution level is sustainable for several years based on the following factors:

  • Distributions represent less than a 90% basic payout ratio even at an average WTI oil price of US$85.00 and a NYMEX gas price of US$3.00 based on the Trust's 2012 forecast. At current commodity price levels, the basic payout ratio is 80%;
  • Condensate and NGL production represent more than 80% of current revenue, therefore, natural gas prices are not a significant enough factor that, on their own, would impact the Trust's decision on distribution levels;
  • The low decline rate of the Trust's assets in the 8% to 10% range results in much less capital being required to maintain production than other conventional North American assets which tend to have decline rates in the 30% to 40% range;
  • The original reserve report had projected 189 infill drilling locations, of which 23 were drilled in 2011. Based on the projected 44 wells to be drilled in 2012, the field can sustain this level of drilling activity for almost four years;
  • The Trust has considerable borrowing capacity, which is well in excess of the planned 2012 capital program and which also provides the ability to fund additional asset acquisitions or an increased capital program; and
  • Proceeds from the Trust's distribution reinvestment program and Premium DRIP™ program will provide additional funding for asset purchases or capital expenditures, which will improve the basic and all-in payout ratios.

For the foregoing reasons, Parallel is very comfortable with is current distribution level. Natural gas prices, even if they were to continue to decline, would not have a significant impact on this view.

Parallel continues to look for additional acquisitions to grow the Trust and diversify the asset base and has the financial capacity to acquire additional assets. The Trust is currently completing its year-end 2011 reserve report and expects to be in a position to update reserve information by mid-February, 2012.


Parallel's objectives are to create stable, consistent returns for investors through the acquisition and development of conventional oil and natural gas reserves and production with unexploited low risk potential in certain regions of the United States, and to pay out a portion of available cash to holders of trust units on a monthly basis. The trust units of Parallel are listed on the Toronto Stock Exchange under the symbol "PLT.UN".

Parallel is a "mutual fund trust" under the Income Tax Act (Canada) (the "Tax Act"). The Trust will not be a "SIFT trust" (as defined in the Tax Act), provided that the Trust complies at all times with its investment restriction which precludes the Trust from holding any "non-portfolio property" (as defined in the Tax Act). Further information relating to Parallel and the trust units is set out in Parallel's final prospectus dated April 14, 2011.


Forward-Looking Information

This news release contains forward-looking information that involves substantial known and unknown risks and uncertainties, most of which are beyond the control of Parallel, including, without limitation, those listed under "Risk Factors" and "Notice to Investors-Forward-Looking Statements" in Parallel's final prospectus filed April 14, 2011 (collectively, "forward-looking information"). Forward-looking information in this news release includes, but is not limited to, Parallel's objectives and status as a mutual fund trust and not a SIFT trust, Parallel's expectations and estimates regarding capital expenditure plans, drilling plans, drilling locations, drilling costs per well, current and future production rates, production decline rates, production mix, operating costs, royalty rates, processing fees, general and administrative expenses, commodity prices and foreign exchange rates, availability under bank facility, funds from operations distributions, basic payout ratios, all-in payout ratios, sustainability of distributions and proceeds from the Trust's dividend reinvestment plan and Premium DRIP™. Parallel cautions investors in Parallel's securities about important factors that could cause Parallel's actual results to differ materially from those projected in any forward-looking statements included in this news release. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking and may involve estimates, assumptions and uncertainties which could cause actual results or outcomes to differ materially from those expressed in such forward-looking statements. No assurance can be given that the expectations set out in Parallel's final prospectus or herein will prove to be correct and accordingly, prospective investors should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this press release and Parallel does not assume any obligation to update or revise them to reflect new events or circumstances.

In this news release, Parallel and its subsidiaries are referred to collectively as the "Trust" or "Parallel" for purposes of convenience.

Contact Information

  • Parallel Energy Trust
    Dennis Feuchuk
    President and CEO
    403-781-7888 or Toll Free: 1-855-781-7888

    Parallel Energy Trust
    Rick Miller
    Chief Financial Officer
    403-781-7888 or Toll Free: 1-855-781-7888