TKE Energy Trust
TSX : TKE.UN

TKE Energy Trust

August 11, 2005 22:09 ET

TKE Energy Trust Announces First Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Aug. 11, 2005) - TKE Energy Trust (TSX:TKE.UN) ("TKE" or the "Trust") is pleased to provide information with respect to its initial quarterly report. The complete text of the quarterly report, including the MD&A and financial statements, has been filed on SEDAR and may be viewed either on that site (www.sedar.com) or on the Trust's website at www.tketrust.com.

CORPORATE PROFILE

TKE Energy Trust commenced business on November 2, 2004 upon the re-organization of TUSK Energy Inc. by way of Plan of Arrangement. The re-organization has been accounted for using the continuity of interest method. Accordingly, all financial and operating information has been reported as if TKE Energy Trust had always carried on the business of TUSK Energy Inc.

TKE is a new trust committed to delivering consistent distributions to the holders of its Units. The distribution level is set at $0.12 per Unit per month. The eighth monthly distribution of $0.12 per Unit will be paid to Unit holders on August15th, 2005.

The Trust takes a conservative approach to business by: (i) striving to maintain commodity balance in both production and reserves; and (ii) pursuing a balanced program of exploration, development and, if it strengthens the Trust, acquisition. Commodity price risk is managed through a comprehensive price risk management program.

TKE Energy Trust trades on the Toronto Stock Exchange ("TSX") under the symbol "TKE.UN".

SECOND QUARTER HIGHLIGHTS

- reserve additions exceeded total production in the 6 months by 193%;

- RLI of 11.7 years based upon reserves as of June 30, 2005 and production in first half of 2005;

- four new pool discoveries during the period:

-- two Montney oil pools (average 40%) in the Peace River Arch area of northwest Alberta;

-- one Montney gas pool (50%) in the same general area;

-- one multi-zone Mannville gas pool (100%) in our Northeast Alberta focus area.

- successful gas development well at Gage East (15%);

- successful oil development well at Epping (50%);

- completed private placement of 2.9 million units in March for gross proceeds of $31.75 million;

- strong balance sheet with debt approximately equal to cash flow as of June 30th;

- more than $24 million of available credit as of June 30th;

- distributions of $0.12 per month per unit started on January 17th;

- negotiated and closed purchase of pipeline interest in Gage area;

- commissioned central battery and pipelines for Gage oil and gas pools in late June;

- approximately 700 boepd of production behind pipe and awaiting tie-in as of June 30th.



HIGHLIGHTS (Note 1)
June 30, 2005 June 30, 2004
PRODUCT VOLUMES 6 Months 3 Months 6 Months 3 Months
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Oil and NGL's, bpd 1,173 1,057 1,665 1,560
Natural Gas, Mcfd 15,212 14,901 23,352 23,650
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BOEPD (Notes 2 and 3) 3,708 3,541 5,557 5,502
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SUMMARY OF PRODUCT
PRICES

Oil per Barrel $ 52.67 $ 58.88 $ 40.24 $ 44.04
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NGL per Barrel $ 46.15 $ 50.09 $ 33.00 $ 33.29
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Natural Gas per MCF $ 6.95 $ 7.12 $ 6.67 $ 6.85
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FINANCIAL

Cash Distributions
Paid $12,874,949 $ 7,055,072 $ - $ -
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Cash Flow $14,356,543 $ 7,053,474 $22,656,106 $11,393,689
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Net Income $ 3,789,690 $ 1,120,663 $ 4,905,722 $ 2,329,955
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Cash Distributions
Per Unit $ 0.72 $ 0.36 $ - $ -
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Cash Flow Per Unit
(Note 4) $ 0.79 $ 0.36 $ 1.40 $ 0.70
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Net Income Per Unit
(Note 4) $ 0.21 $ 0.06 $ 0.30 $ 0.14
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Capital Expenditures $16,033,767 $ 9,892,001 $18,320,484 $ 8,005,916
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NOTES

(1) TKE Energy Trust commenced business on November 2, 2004 upon the reorganization of TUSK Energy Inc. pursuant to a Plan of Arrangement. For purposes of financial reporting, the conversion is accounted for as a continuity of interest. Accordingly, the "comparative" figures shown are the results of operations and cash flow applicable to TUSK Energy Inc. and its subsidiaries for the 6 months and 3 months ended June 30, 2004. The Plan of Arrangement allocated a portion of the production of TUSK Energy Inc. to an ExploreCo (TUSK Energy Corporation) and, as a consequence, certain of the information included for prior periods is not directly comparable.

(2) Production shown is for TUSK Energy Inc. (see Note 1). Average production from the Shane gas property decreased 1,351 boepd from 1,768 boepd during the first half of 2004 to 417 boepd during the first half of 2005. This high deliverability pool was in the high decline stage of it's life in 2004. The properties transferred to TUSK Energy Corporation pursuant to the Plan of Arrangement represented 120 boepd of TUSK Energy Inc. production during the first half of 2004. As a consequence, the "comparative" production for the first half of 2004 is 4,086 boepd.

(3) Production in the first half of fiscal 2005 was less than anticipated, principally due to delays in the completion construction of battery facilities and pipelines at Gage and construction of pipelines at Norbuck and Hairy Hills. As of June 30, 2005, TKE has 700 boepd of additional production capability behind pipe and awaiting tie-in.

(4) The Plan of Arrangement provided for the issue of 0.50 units of TKE Energy Trust for each common share of TUSK Energy Inc. and, accordingly, the values shown for cash flow per unit and net income per unit shown for the 6 months and three months ended June 30, 2004 are double the per share values shown in the quarterly report of TUSK Energy Inc. for that period. No adjustment has been made to reflect the impact resulting from the transfer of a portion of assets producing during that period to TUSK Energy Corporation upon the close of the Plan of Arrangement.

MESSAGE TO UNITHOLDERS

TKE Energy Trust is please to present financial and operating results for the second quarter of the 2005 fiscal year. This quarter represents our second full quarter of operations as an energy trust.

New Discoveries & Reserves Growth

Three new pool discoveries in the Peace River Arch area, a 100% working interest new pool gas discovery in our northeast Alberta focus area, a gas development well in the Gage East area and an oil development well at Epping, all contributed to significant reserve growth in the first half of the year.

The growth in production, which will occur as a product of the tie-in and further development of these properties, will start after the middle of the third quarter with production expected to rise to approximately 4,500 boepd by the end of the fiscal year. The full impact on production and cash flow will not be felt until the early part of the 2006 fiscal year.

Reserves Additions Underpin Value

Reserve additions by drilling during the first half were 1.3 million boe, while production during the period amounted to 671 Mboe. Net reserve additions increased the overall reserves of the Trust to 15.7 million boe as of June 30th.

Reserve Life Index of 11.7 Years

Reserve life index as of the end of the period considering reserve additions, production and average production during the second quarter was 11.7 years.

Payout Ratio

The payout ratio for the second half of 2005 is expected to be approximately 60%, resulting in a payout ratio for the 2005 fiscal year of approximately 72%.

Production

Production during the second quarter was down about 9% from the levels of the first quarter. Rates will recover during the third quarter and increase in the fourth.

Efforts to replace production declines were frustrated in the second quarter by abnormally wet weather after spring breakup with record levels of precipitation in June. These circumstances were exacerbated by delays in regulatory approvals and land access in key areas. Production is expected to rise to approximately 4,000 boepd toward the end of the third quarter with commencement or resumption of production at a number of properties including Norbuck, Gage East, Hairy Hills and Epping.

Operating Costs

Operating cost per boe was higher during the first half of the year due to general increases in the cost of services, the use of rental equipment and higher fluid handling costs on the single well batteries at Gage before the commissioning of our central battery facility, access issues related to anomalous weather conditions during the second quarter and the payment of municipal taxes in May Operating cost per boe is expected to decrease to less than $10 in the third quarter.

Financial Stability Maintained

TKE maintains a strong balance sheet with a net debt level, at the end of the second quarter, of less than 1 times cash flow. The Trust has un-utilized credit lines of approximately $24 million. Based on estimates of future production and cash flow for the balance of 2005, the debt to cash flow ratio is expected to decrease to approximately 0.75 times.

Our Conundrum - Drill or Purchase?

Last March, TKE raised $31.75 million dollars through the private placement of 2.9 million Trust Units at a price of $10.95 per Unit. This put the Trust in excellent financial condition and we had to make some decisions on the allocation of this capital. Should we purchase or develop new reserves and production? An acquisition of seven to eight hundred boe of additional production would have provided greater cash flow and an improved payout ratio over the near term.

A Decision to Drill

The management team at the Trust has demonstrated the ability to find and develop new oil and gas reserves cost effectively. Average FD&A cost is $10.60 per boe over the last five years, substantially less than the cost of purchasing reserves.

In light of the opportunities facing the Trust and the track record of our management team in developing new reserves efficiently we chose to forego the benefits of purchasing assets in favour of the slower but more cost effective approach of development. Acquisitions may well fit into future strategy as current property development matures.

It takes many months, even in the best of times, to develop new prospects, drill and evaluate discovery wells, drill development wells and construct pipelines and facilities to minimize future production costs. Other factors, including bad weather and regulatory delays, can delay the onset of initial production and the full development of oil and gas pools. The Trust was bitten by both of these during the second quarter but has now returned to the path of gradually increasing production over time.

Capital Expenditures

CAPEX during the second half is expected to be substantially lower than the first with total expenditures planned at $11 million for latter part of the year - roughly equivalent to the cash flow expected to be remaining after distributions during that period. Capital spending as been effective as evidenced by the additional reserves which are attributable to the Trust.

Outlook

TKE Energy Trust will continue to focus on developing its new pools over the coming months and on creating new prospects and projects for future growth and stability through both drilling and strategic acquisition. The management and directors of the Trust have a significant stake and all are committed to our objective - consistent distributions over the long term.

Forward-looking statements may include, but are not limited to, statements concerning estimates of recoverable hydrocarbons, expected hydrocarbon prices, expected costs, statements relating to the continued advancement of the projects and/or prospects of TKE Energy Trust ("TKE" or the "Trust") and other statements which are not historical facts. When used in this document, and in other published information of TKE, the words such as "could," "estimate," "expect," "intend," "may," "potential," "should," and similar expressions are indicative of a forward-looking statement. Although TKE believes that its expectations reflected in the forward-looking statements are reasonable, the potential results suggested by such statements involve risk and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Various factors, which could cause actual results to differ from these forward-looking statements, include the potential that projects and/or prospects in which the Trust is involved will experience technical and mechanical problems, geological conditions in the reservoir which may negatively impact levels of oil and gas production and changes in product prices and other risks not anticipated by TKE or disclosed in the published material of the Trust. Since forward-looking statements address future events and conditions, by their very nature, they involve inherent risks and uncertainties.

Contact Information

  • TKE Energy Trust
    Norman W. Holton
    Chairman & Chief Executive Officer
    (403) 264-8875
    or
    TKE Energy Trust
    Gordon K. Case
    Vice President, Finance & Chief Financial Officer
    (403) 264-8875