2006 Annual Report - NuVista Energy Ltd.

Transcription

NuVista Energy Ltd.
Annual Report/06
Table of Contents
Financial and Operational Highlights.............................1Health, safety and environment........................................ 19
Message to Shareholders............................................................. 3Management’s Discussion & Analysis............................... 20
Operations OVeRview.............................................................................8Management’s Report...................................................................... 32
Undeveloped Land and seismic...............................................15
Auditors’ Report..................................................................................... 32
Reserves...........................................................................................................16Consolidated Financial Statements................................. 33
marketing......................................................................................................18Key Abbreviations.................................................................................. 47
proven track record
ACQUIRE AND
DEVELOP
business model
Poised for grow th
talented
teams
disciplined
approach
corporate profile
NuVista Energy Ltd. (TSX: NVA) is an independent Canadian oil and gas company pursuing a proven growth
strategy, with a focus on natural gas. Formed through the reorganization of Bonavista Petroleum Ltd.
in July 2003, NuVista is engaged in exploration, development and production activities on properties
located in eastern and central Alberta and western Saskatchewan. NuVista creates and sustains
profitable per share growth through OPTIMIZATION and development of its existing land base; prudent
management of controllable costs; and the acquisition and subsequent OPTIMIZATION AND DEVELOPMENT
of new properties in the Western Canadian Sedimentary Basin.
annual meeting information
The annual and special meeting of shareholders of NuVista Energy Ltd. will be held on May 3, 2007, at
3:00 pm in the McMurray Room at the Calgary Petroleum Club. Shareholders who are unable to attend
this meeting are asked to complete and return a proxy to Valiant Trust Company at their earliest
convenience.
Ross Andreachuk
Cynthia Beaudin
Mark Buchanan
Craig Burton
Michelle Carr
Richard Coates
Sabine Cousins
Vern Crone
Steve Dalman
Carmela DaSilva
Richard Deleff
Floyd Dempsey
Douglas DesHarnais
Amanda Domin
Robert Froese
Paul Gingras
Glen Grant
Gerald Greves
Dennis Grover
Kerrie Hamilton
Michael Hanson
Corrine Harder
Terry Hofer
Kelly Holberton
Ross Kenney
Dennis Khattar
Darrin Krueger
Lynn MacDonald
Wendy March
Michael Marshall
Rishma Mawani
Brent McAdam
Maureen McCall
Christopher McCue
Chris McDavid
Dan McKinnon
Travis Melster
Lisa Mensink
Patrick Miles
Carlos Monteiro
Clayton Niedermaier
Leonard Niedermaier
Jasjeet Paul
Ryan Paulgaard
Annabelle Pearson
Tiernan Price
Darren Roblin
Kevin Salzl
Gordon Skulmoski
Derrick Stephenson
Brian Stoebich
William Styan
Cynthia Tabios
Ted Tandoc
Curtis Thiessen
Jane Thorburn
Gordon Timm
Joshua Truba
Jeff Tuck
Laura Usher
Alex Verge
Kevin Wagner
Carrie Walker
Heather Walker
Janet Wannop
Ted Watchuk
Jim Webb
Michael Wert
Amanda Wiltse
Elaine Wo
Financial & operational highlights
Years ended December 31
2006
2005
% Change
192,639
107,091
2.20
2.15
35,284
0.72
0.71
590,084
167,084
296,513
206,728
169,680
104,881
2.40
2.31
39,506
0.90
0.87
432,432
69,903
255,604
238,506
14
2
(8)
(7)
(11)
(20)
(18)
36
139
16
(13)
48,731
49,870
43,765
45,389
11
10
58.2
2,264
11,962
40.5
2,281
9,024
44
(1)
33
7.11
50.25
9.02
43.85
(21)
15
159
103
28
82
106
75
16
86
50
37
75
780,000
597,000
77
525,000
428,000
81
49
39
158.9
6,890
33,367
128.3
5,564
26,953
24
24
24
27.60
20.00
18.17
15.07
52
33
0.9
1.2
1.8
2.1
(50)
(43)
5.0
6.9
5.0
6.5
6
Financial
($ thousands, except per share amounts)
Production revenue
Funds from operations
Per share – basic
Per share – diluted
Net income
Per share – basic
Total assets
Bank loan, net of working capital
Shareholders’ equity
Net capital expenditures
Weighted average common shares outstanding (thousands)
Basic
Diluted
Operating
(boe conversion – 6:1 basis)
Production:
Natural gas (mmcf/d)
Oil and liquids (bbls/d)
Total oil equivalent (boe/d)
Product prices:
Natural gas ($/mcf)
Oil and liquids ($/bbl)
Drilling:
Total wells
Natural gas wells
Oil wells
Average success rate (%)
Undeveloped land:
Gross acres
Net acres
Average working interest (%)
Reserves:
Proved plus probable:
Natural gas (bcf)
Oil and liquids (mbbls)
Total barrels of oil equivalent (mboe)
Finding, development and acquisition costs ($/boe)
Proved
Proved plus probable
Recycle ratio (funds from operations netback per boe/FD&A cost per boe)
Proved
Reserve life index (years)
Proved
page NUVISTA ENERGY LTD.
Message to shareholders
Since NuVista was established through the reorganization of Bonavista Petroleum Ltd. in July 2003, we have
consistently delivered profitable growth, in aggregate and on a per share basis, by applying the same
measured approach as our predecessor. From the outset, we have concentrated on core regions in which
we have proven expertise and in which we could establish a dominant position.
In 2006, we held firm to this model, maintaining a disciplined approach, and our results support our philosophy
and ability to execute our strategy in a cyclical business environment.
2006 Highlights
•Increased production by 33% from 9,024 boe/d in 2005 to 11,962 boe/d and exited 2006 at 13,300 boe/d;
•Increased undeveloped land by 39% to 597,000 net acres and acquired additional seismic data to further
enhance the prospectivity of our undeveloped lands;
•Increased proved plus probable reserves to 33.4 mmboe; a 24 % increase on both a gross and per share
basis;
There are four key reasons why
our strategy will allow us to deliver
profitable growth to our stakeholders over the long term under
varying business conditions.
•Achieved proved plus probable finding, development and acquisition (“FD&A”) costs (including changes in
future capital costs) of $20.00/boe in a highly competitive environment with rising industry costs;
•Completed a significant acquisition of Saskatchewan properties, creating a new core area and expanding
our prospect inventory; and
•Expanded our technical teams and established teams in our land, accounting and human resources areas,
enabling us to operate independently.
Our business plan is designed to succeed over the long term, however, NuVista was not immune to the factors
affecting western Canadian oil and gas producers in 2006. Producers faced the influences of weather, labour
supply, shortages of available services, and volatile commodity prices. Oil prices reached near record highs,
while natural gas prices plunged following one of the warmest North American winters in 100 years. High
industry activity levels over the past two years led to shortages of available equipment and services, rapidly
rising costs, and an overheated acquisition market that saw average acquisition costs per boe/d of production
double from 2004 to 2006.
Despite these challenges, NuVista emerged from 2006 stronger than ever. We are now fully staffed with the team
in place to take the company to the next level. With an undeveloped land base of 597,000 net acres, a large
network of operated production facilities, an extensive proprietary seismic data base, a substantial inventory of
drilling prospects, and a solid balance sheet, the NuVista team is poised to achieve continued growth.
There are four key reasons why our strategy will allow us to deliver profitable growth to our stakeholders over
the long term under varying business conditions.
1.We employ AN ACQUIRE AND DEVELOP business model
NuVista’s acquire and develop business model allows us to add new core areas and new area teams as we
grow. The new area teams allow NuVista to improve our ability to internally generate new drilling prospects
and identify new opportunities. Our teams work within our core areas to create shareholder value through
exploration and development. We have demonstrated our ability to take a purchase of production and turn
it into a core area by adding undeveloped land, facility infrastructure, seismic, and development drilling. Since
we commenced operations in July 2003, we have grown from one core area to five: Northwest Saskatchewan,
Provost, Oyen, West Central Saskatchewan, and Central Alberta. Four dominant core areas represent over 80% of
our production and consume 75% of our exploration and development capital. Each of our core areas continues
to attract capital and provide us with favourable rates of return.
When NuVista sets out to establish a new core area, we look for key factors that will provide the building blocks
for a sustainable core area over the long term. These include:
•Multi-zone potential with at least two or more prospective horizons;
•Operatorship;
•High working interest;
•Medium to shallow depth drilling (less than 2500 metres);
•Drilling success rates in excess of 60%;
•
Ample access to infrastructure, preferably owned by NuVista or by custom processors;
•Synergies with existing operations or play types;
•Crown land or acquired land with exploration and development opportunities;
•
A combination of new exploration and optimization of existing pools; and
•Manageable size, easy to integrate, and accretive to our business plan.
Although the market for acquisitions was very competitive in 2006, we stayed true to our strategy of acquiring
operated properties with high working interests, infrastructure, undeveloped land, and significant lower-risk
development potential. In June, we acquired natural gas properties in Saskatchewan. This acquisition consolidated
our dominant position in Northwest Saskatchewan and established a new core area in West Central Saskatchewan
with significant optimization and development opportunities for both natural gas and heavy oil.
2.We maintain a disciplined approach
We apply our technical and operating expertise within our core areas with a disciplined approach that is based
on six core principles:
•
Maintain focus on core areas. Our core areas are natural gas prone, multi-zone properties where we enjoy
a significant contiguous land base. Prospects on our lands are further enhanced by a large data base of 2D
and 3D seismic, most of which is proprietary.
•Operate production and control facilities. In our four largest core areas, we operate the wells, pipelines,
field compressors, and processing facilities that handle most of our natural gas production. This operational
control gives us a strategic advantage by creating a barrier to entry for third parties looking to establish
footholds in our core areas.
•Hold a high working interest. By minimizing the number of partners, we can ensure our exploration and
development program is not affected by the business plans or risk tolerances of others. Holding a major
interest also provides maximum leverage for our technical teams and ensures our proprietary knowledge
is not shared among several parties, thereby maintaining our competitive advantage.
•
Attract and retain a talented team. Our successful operating philosophy makes NuVista an attractive
employer. We maintain a healthy work environment and reward our people with ownership in NuVista.
•
Establish and maintain a low cost structure. Maintaining control of our operations allows us to manage
our costs, shorten the time between capital investment and cash flow, and quickly adjust capital programs
in response to changing market conditions.
•Maintain financial flexibility. Stewardship of capital and a conservative approach to debt financing
enables NuVista to act quickly and take full advantage of opportunities that fit our business plan.
We intend to continue this disciplined approach as we move forward.
3.We can at tract and retain talented teams
Production Growth Per Share
271
Since July 2003, NuVista has grown from two employees to 53 office and 17 field employees. In 2006, we
increased the size of our technical teams and established new teams in the land, accounting and human
resources areas. This will allow NuVista to operate autonomously with significantly less reliance on the technical
services agreement with Bonavista.
235
NuVista has created a team based organization where idea generation is encouraged. Our team members
are empowered to employ innovative new approaches to create value for our stakeholders. NuVista
continuously strives to be an employer of choice in the oil and natural gas industry and we rely on our people
as a key recruiting source in the current market environment. With each new core area, NuVista adds to our
talented team. The experience, idea generation, and dedication of our team members is an integral part of
our ongoing success.
175
121
102
4.We have a proven track record
*03
03
04
05
06
Exit production per million shares
outstanding (boe/d 6:1)
* at inception July 2, 2003
Reserves Growth Per Share
0.68
NuVista has proven time and again the ability to acquire properties and improve our full cycle value through
our acquire and develop business model. Since inception in July 2003, we have invested approximately $550
million in our capital programs. In our first three and a half years of operations, our capital program has resulted
in attractive proved plus probable FD&A costs of $15.44/boe. We have achieved a recycle ratio of approximately
1.7:1 since inception and a compound annual growth in production of 46%. More important, our production and
reserves per share have grown, with compound annual growth rates of 32% and 44%, respectively. Throughout
this period, we have also maintained a top quartile operating cost structure.
Poised for Continued Gr o w th
0.56
NuVista currently has the richest prospect inventory in its history, including over 250 near-ready prospects, well
in excess of one year’s drilling activity.
0.36
0.27
0.19
*03
03
04
05
06
Total reserves per share outstanding
(boe 6:1)
* at inception July 2, 2003
Our Board of Directors has approved 2007 capital expenditures of $160 million, with approximately $120 million
allocated to exploration and development activities. We expect to participate in 140 to 160 wells. Approximately
one quarter of our exploration and development program will be directed toward acquiring land and seismic,
which continues to support our long term growth in future years. The remaining portion of our capital program
is devoted to tuck-in acquisitions in our existing core areas. With the implementation of this capital program,
production levels are expected to grow by approximately 20 per cent, averaging between 14,300 boe/d and
14,900 boe/d in 2007.
Acquisitions play a significant role in our acquire and develop business model. On March 8, 2007, we announced
a property acquisition in our Central Alberta core area of approximately 800 boe/d, at attractive acquisition
metrics. Early indications are that the cost of acquisitions may trend lower in 2007, and there will be a large
supply of properties for sale. NuVista’s cost of capital has benefited from its proven track record, the strength of
natural gas prices relative to oil prices over the past six months, and from uncertainty within the energy trust
sector caused by the federal government’s plan to tax income trusts. If the acquisition market in 2007 proves
favourable and we identify opportunities that meet our strict acquisition criteria, the portion of our capital
program earmarked for acquisitions may be increased, or our capital program may be expanded.
Given the solid prospects ahead, the greatest challenge our team will face is managing the costs associated with
an industry that for much of 2006 was operating at full capacity in a volatile commodity price environment. It
is precisely because of rising labour, material and supplier costs and volatile commodity prices that we need
to remain vigilant in our operating and financial discipline. We believe NuVista has the foundation in place to
respond appropriately to changes in the broader market.
NuVista currently has the richest
prospect inventory in its history,
including over 250 near-ready
prospects, well in excess of one
year’s drilling activity.
Widely publicized reductions in capital programs by major companies have begun to have a moderating
effect on service costs. We have already experienced significant reductions in stimulation and tie-in costs and
anticipate further reductions in rig day rates after spring break-up. We have also seen land and seismic costs
trend lower thus far in 2007.
Colder weather and the corresponding reduction in natural gas storage to seasonal levels during the first quarter
of 2007 signal that the natural gas price recovery has begun. This has provided NuVista with the confidence that
a repeat of significant erosion in the price of natural gas this summer is unlikely.
We will continue to execute our growth strategy with the same focus and discipline we have applied since
inception.
In Closing
Our results are due to a team effort and we want to express our appreciation for the extraordinary commitment
we receive from the entire NuVista team. Collectively, these individuals deliver the talent, experience, and focus
to our operations that has allowed NuVista to deliver consistent results. We also thank our Board of Directors
for their continued stewardship and guidance in our decision making. Finally, we want to thank you, our
shareholders, for your ongoing confidence in the NuVista team. We will continue to work to earn that confidence.
We are optimistic about the outlook for 2007 and look forward to reporting to you on our progress throughout
the year.
Sincerely,
Alex G. VergeRobert F. Froese
President & CEO
Vice-President, Finance & CFO
March 15, 2007
Operations overview
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1. NORTHWEST SASKATCHEWAN
2. PROVOST
3. OYEN
4. west central SASKATCHEWAN
5. central Alberta
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MAINTAINING FOCUS
NuVista operates primarily in five core areas. we focus on building core areas characterized by multi-zone natural gas production, operatorship,
high working interest, controlled infrastructure and large contiguous blocks of undeveloped lands. Once a core area is established we look for
opportunities to expand our presence in the core area by the optimization and development of existing properties, acquiring undeveloped land or
completing tuck-in acquisitions. Since our inception in July 2003, NuVista has added four new core areas and continues to monitor the acquisition
market for properties that meet our criteria with a view to adding new core areas or completing tuck-in acquisitions in our existing core areas.
1.
Northwest Saskatchewan Core Area
Our Northwest Saskatchewan core area is located 100 km east of Cold Lake near the Alberta-Saskatchewan border. The Northwest Saskatchewan core
area was acquired in August 2005. In June 2006, we acquired additional properties in Northwest Saskatchewan that were contiguous to our existing
operations thereby increasing our dominance in this core area. This area is natural gas prone and characterized by larger, more mature pools with lower
decline rates. Many parts of this core area are winter access and therefore we conduct active first quarter drilling programs in this area.
2. Provost Core Area
Our Provost core area is located west of the Alberta-Saskatchewan border approximately 250 km northeast of Calgary. In 2003, pursuant to the Plan of
Arrangement, NuVista obtained one minor oil property in this area. We have increased our operations in this core area through property acquisitions
in 2004 and 2005, the installation of a two gas processing facilities, addition of undeveloped lands, and exploration and development activities. The
southern portion of this area is predominantly natural gas, while the northern portion is predominantly oil. In 2006, we pursued both oil and natural gas
opportunities in this core area, with particular success with our natural gas drilling program.
3. Oyen Core Area
Our Oyen core area is located 250 km east of Calgary near the Alberta-Saskatchewan border. The majority of the properties in this core area were
obtained through the Plan of Arrangement in 2003, however we are continually adding to our undeveloped land position. This core area primarily
produces natural gas from more than 10 different horizons and NuVista’s control of infrastructure provides it with a competitive advantage. NuVista has
a large proprietary seismic data base that enhances the prospectivity of both NuVista’s developed and undeveloped lands in Oyen. The potential for
deeper exploration in the area was significantly enhanced by changes to baseline well spacing which took effect on July 7, 2006 allowing production
from two wells per section in the Mannville zones and four wells per section in and above the Viking zones.
4. West Central Saskatchewan Core Area
Our West Central Saskatchewan core area is located east of the Alberta–Saskatchewan border approximately 100 km southeast of Lloydminster. The West
Central Saskatchewan core area was acquired in June 2006. This core area has multi-zone production from both natural gas and heavy oil horizons. As
part of this acquisition, we acquired six natural gas processing facilities and approximately 38,000 acres of undeveloped land. When this core area was
acquired it only had natural gas production but we identified the potential for heavy oil production on the acquired lands. While the focus of our 2007
drilling program in this core area will be on confirming the heavy oil potential, we will also pursue natural gas opportunities.
5. Central Alberta Core Area
Our Central Alberta core area is the smallest of NuVista’s core areas and resulted from an acquisition coupled with a farm-in in 2004. During 2006, we
increased our activity in this core area and purchased 15,100 net acres at crown land sales. On March 8, 2007, we announced a property acquisition
with production of approximately 800 boe/d (85% natural gas weighting). This acquisition is expected to close on April 2, 2007. This is the only core area
where we do not control the infrastructure or have a large undeveloped land base. This area has the potential for higher deliverability wells and provides
exploration potential not found in our other core areas. We believe there is potential to opportunistically increase activity levels in this core area and
create shareholder value.
1
Northwest Saskatchewan
R6
R15
T68
T68
Characteristics
2006 Exit Production: 24.0 mmcf/d
Undeveloped Landholdings: 146,300
acres (64% working interest)
Horizons: four horizons less than
800 metres
2006 Wells: 32 drilled or re-entered
2007 Budgeted Wells: approximately 15
drilling or re-entry locations
T54
T54
R6
R16
NuVista land
Northwest Saskatchewan Core Area
Our 2006 average production rate in the Northwest Saskatchewan core area was approximately 23.3 mmcf/d
and our 2006 exit production rate was 24.0 mmcf/d. We operate virtually all of the production in this area and
our facilities process over 95 per cent of our production. Our operations in the area include 18 compressors and
seven main facilities connected with an extensive network of large diameter gathering lines.
This area is gas prone and contains four prospective natural gas horizons at drill depths of less than 800 metres.
In this core area we have 146,300 acres of undeveloped land with an average working interest of 64 per cent.
We have acquired over 6,500 km of seismic, most of which is proprietary. In 2006, we focused on production
optimization maximizing the deliverability, drainage and recovery factor of the existing Colony pools. In 2007 we
will be shifting our focus from optimization to the drilling of new pools and horizons.
In 2006, we drilled or re-entered 32 (22.1 net) wells and achieved an average success rate of 94 per cent. In 2007,
we plan to drill or re-enter approximately 15 wells.
page 10
NUVISTA ENERGY LTD.
2
Provost
R20
R2W4
T46
T46
Characteristics
2006 Exit Production: 1,975 bbls/d and
9.4 mmcf/d
Undeveloped Landholdings: 90,300 (80%
working interest)
Horizons: 10 horizons less than
1,100 metres
2007 Budgeted Wells: 30-35 drilling or
re-entry locations
T34
T34
R22
R2W4
NuVista land
Provost core area
Our 2006 average production rate in the Provost core area was approximately 1,700 bbls/d of oil and 6.1 mmcf/d
of natural gas. NuVista’s 2006 exit production rate was 1,975 bbls/d of oil and 9.4 mmcf/d of natural gas. This core
area contains 90,300 acres of undeveloped land with an average working interest of 80 per cent.
The northern portion of the Provost area is multi-zone and contains both medium-heavy oil and natural gas
targets. Production from our Amisk oil property was curtailed during the period from March to early August
2006 due to the replacement of pipelines. In 2006, NuVista’s focus was the delineation of a pool extension in our
Auburndale property based on land and 3D seismic acquired in 2005. NuVista’s four main oil properties produce
oil ranging from 14o-26o API averaging 18o API. During 2006, a number of oil wells were drilled in multi-zone areas
that resulted in the identification of natural gas reserves that will be pursued in 2007.
The southern portion of this area contains ten prospective natural gas horizons at drill depths of less than 1,100
metres. In 2006, our drilling program in this area resulted in a number of higher deliverability natural gas wells on
promising trends that will be followed up on in 2007. One of these wells began producing in December 2006 at
a reduced rate due to restricted access to a third-party facility. This restriction is expected to be removed by the
end of the March 2007. The second well was connected to a third-party facility in January 2007.
In 2006, we drilled or re-entered 43 (37.5 net) wells and achieved an average success rate of 88 per cent, resulting
in 22 oil wells, 16 natural gas wells and 5 dry holes. During 2007, we plan to drill or re-enter 30 to 35 wells.
page 11
NUVISTA ENERGY LTD.
3
Oyen
R11
R1W4
T30
T30
Characteristics
2006 Exit Production: 19.1 mmcf/d and
115 bbls/d
1,100 metres
2007 Budgeted Wells: 45–50 drilling or
re-entry locations
T20
T20
R11
R2W4
NuVista land
oyen core area
Our 2006 average production rate in the Oyen core area was approximately 19.0 mmcf/d of natural gas and
150 bbls/d of oil, and our 2006 exit production rate was 19.1 mmcf/d of natural gas and 115 bbls/d of oil. Our
operations in the area include six main facilities and a number of field compressors connected with an extensive
network of gathering lines. Our dominant position in Oyen ensures a high degree of flexibility in operating the
production and controlling the pace of development within the area.
This core area contains 304,000 acres of undeveloped land with an average working interest of 85 per cent. The
Oyen area also contains over 215,000 acres of land that is considered to be developed but is included in the
area that received downspacing approval from the Alberta Government in 2006. NuVista’s seismic data base
enhances the prospectivity of both our developed and undeveloped lands in the Oyen core area.
In 2006, we drilled or re-entered 59 (49.4 net) wells and achieved an average success rate of 76 per cent, resulting
in 43 natural gas wells, 2 oil wells, and 14 dry holes. During 2007, we plan to drill or re-enter 45 to 50 wells.
page 12
NUVISTA ENERGY LTD.
4
West Central Saskatchewan
R18
R27
T42
T42
Characteristics
2006 Exit Production: 7.9 mmcf/d
Undeveloped Landholdings:
42,500 acres (74% working interest)
800 metres
2007 Budgeted Wells: 35 - 40 drilling or
re-entry locations
T35
T35
R27
R18
NuVista land
West Central Saskatchewan Core Area
Our daily average production since this core area was acquired in June 2006, was approximately 7.5 mmcf/d
of natural gas. The 2006 exit production rate was 7.9 mmcf/d of natural gas. We operate virtually all of the
production in this area. Our operations in the area include six natural gas proccessing facilities and a number of
field compressors connected with an extensive network of gathering lines. This core area contains 42,500 acres
of undeveloped land with an average working interest of 74 per cent.
In 2006, we drilled or re-entered 8 (6.4 net) wells yielding 4 natural gas wells, 3 oil wells, and 1 dry hole. During
2007, we plan to drill or re-enter 35 to 40 wells with at least half of these wells targeting oil. NuVista hopes
to establish commercial productivity from a number of heavy oil leads on our acquired lands with a view to
installing central facilities and development drilling in the latter part of 2007 or in 2008.
page 13
NUVISTA ENERGY LTD.
5
Central Alberta
R18
R2
T55
T55
Characteristics
2006 Exit Production: 4.2 mmcf/d and
150 bbl/d
Horizons: medium depth (less than 2,500
metres)
2007 Budgeted Wells: 15-20 drilling or
re-entry locations
T44
T44
R18
R2
NuVista land
Central Alberta Core Area
Our 2006 average production rate in the Central Alberta core area was approximately 3.0 mmcf/d of natural gas
and 100 bbls/d of oil and liquids. The 2006 exit production rate was 4.2 mmcf/d of natural gas and 150 bbls/d of
oil and liquids. During 2006, we drilled a high deliverability well that was brought on production in November
but its production was restricted by access to a third-party facility. This production is expected to be tied into
another third-party facility by the end of March 2007, providing reduced operating costs on a per unit basis and
allowing the well to be produced at capability.
This core area contains 13,600 acres of undeveloped land with an average working interest of 57 per cent. We
do not control facilities in this core area although the area is characterized by a number of large underutilized
facilities with extensive gathering networks, many of which are operated by custom processors. In some
instances we connect to more than one facility in order to minimize production disruption.
On March 8, 2007, NuVista announced a tuck-in acquisition in our Central Alberta core area which, upon closing
April 2, 2007, will add approximately 800 boe/d of liquid rich natural gas production to our core holdings in
the area.
In 2006, we drilled or re-entered 17 (11.0 net) wells and achieved an average success rate of 65 per cent, yielding
10 natural gas wells, 1 oil well and 6 dry holes. During 2007, we plan to drill or re-enter 15 to 20 wells.
page 14
NUVISTA ENERGY LTD.
Undeveloped land and seismic
Unde veloped Land
By the end of 2006, NuVista’s undeveloped land had grown to 597,000 net acres from 428,000 net acres at the end of 2005. We invested approximately
$17 million (2005 - $8 million) on undeveloped land as part of our 2005 exploration and development program. Virtually all of our undeveloped land is
located in large, contiguous, high working interest land blocks in our five core areas.
December 31,
Gross acres
Net acres
Average working interest (%)
Estimated value (1) ($ thousands)
(1)
2006
780,000
597,000
77
59,700
2005
% Change
525,000
428,000
81
42,750
49
39
(5)
40
Value estimated by NuVista based on land sale activity in our core areas accounting for land expiries.
In addition to our strong undeveloped land position, we also own approximately 437,000 net acres of developed land. These lands are located within
our core areas and have an average working interest of 66 per cent. With the refinement of new seismic techniques and the identification of new drilling
opportunities on existing lands, our developed land inventory is also playing a significant roll in our 2007 exploration and development program, with
approximately 20 per cent of our planned wells on developed acreage.
We have budgeted to spend $13.5 million on undeveloped land acquisitions in 2007. Our ongoing commitment to enhancing our land position and
seismic data base ensures that we will continue enjoying a rich and renewable prospect inventory in each of our core areas for years to come.
Seismic
NuVista has consistently been a proponent of using both 2D and 3D seismic data to help identify and delineate geological prospects. The use of
seismic in all of our core regions has enabled us to mitigate the risk in our exploration and development programs and thereby lower the finding and
development costs of new reserves. The ongoing use of seismic data allows NuVista to identify a perpetual inventory of high quality prospects over our
undeveloped land base.
In 2006, approximately $12 million of the capital program was allotted to the acquisition of high resolution proprietary seismic data and the purchase of
trade data. Proprietary and trade acquisition of seismic data in 2006 totaled approximately 2,400 kilometers of 2D and 130 square kilometers of 3D data.
Combined with over 1600 kilometers of 2D and 100 square kilometers of 3D data added through property acquisitions in 2006, NuVista has an enviable
seismic data base of more than 19,000 kilometers of 2D data and 750 square kilometers of 3D.
page 15
NUVISTA ENERGY LTD.
Reserves
Reserves Highlights
In 2006, NuVista’s $207 million capital program added 7.7 mmboe of proved reserves and 10.8 mmboe of proved plus probable reserves.
Highlights of the reserve additions for 2006 include:
•Proved plus probable finding, development and acquisition (“FD&A”) costs of $20.00/boe;
•Proved reserves grew 16% to 24.4 mmboes;
•Proved plus probable reserves grew 24% to 33.4 mmboes;
•
Approximately 80% of additions were natural gas;
•
Natural gas weighting of reserves was 79%;
•Proved producing reserves represent 66% of total reserves; and
•Total proved reserves represent 73% of the total reserves.
Summary of reserves
Natural gas Oil and liquids Total
Gross (1)
Net (1)Gross (1)
Net (1)
Gross (1)
Net (1)
(mmcf) (mmcf) (mbbls)
(mbbls) (mboe)
(mboe)
Proved producing 103,669
Proved non-producing
8,002
Proved undeveloped
3,382
Total proved (3) 115,053
Probable 43,807
79,165
6,383
2,779
88,327
33,793
4,603
520
107
5,230
1,660
4,109
434
94
4,637
1,454
21,882
1,854
670
24,406
8,961
17,303
1,498
557
19,358
7,087
Total proved plus probable (3) 158,861 122,120
6,890
6,092
33,367
26,445
Present value of cash flow before tax discounted at: (2)
0%
5%
10%
Proved producing
$
Proved non-producing
Proved undeveloped
595,795
$
50,223
18,683
470,276
$ 392,796
41,640
35,987
12,681
9,640
Total proved (3)
Probable 664,702
272,776
524,597
170,366
Total proved plus probable (3)
937,478
694,963
(1)
(2)
(3)
$
$
438,423
123,461
$ 561,884
“Gross” reserves are the total remaining recoverable reserves owned by NuVista before deduction of royalties. “Net” reserves are defined as those accruing to NuVista after all royalty interests owned by
others, including Crown and freehold royalties, have been deducted.
The pricing forecast used in determining the present value of cash flow is based on the December 31, 2006 forecast determined by GLJ Petroleum Consultants Ltd.
Numbers may not add due to rounding.
page 16
NUVISTA ENERGY LTD.
Reconciliation of Reserves
Natural gasOil and liquids
ProvedProbableTotalProvedProbableTotal
(mmcf)
(mbbls)
Balance, December 31, 2005 99,695
Exploration and development 23,051
Acquisitions 14,897
Revisions (1,349)
Production (21,241)
28,641 128,336
12,071 35,122
6,289 21,186
(3,193) (4,542)
- (21,241)
4,410
1,234
99
315
(826)
1,155
412
27
66
-
5,564
1,646
126
381
(826)
Balance, December 31, 2006 (1) 115,053
43,807 158,861
5,230
1,660
6,890
(1)
Numbers may not add due to rounding.
Reserves highlights
Natural gasOil and liquidsTotal
Reserve life index (years) (1)
Proved
Net reserve replacement ((net additions plus ± revisions)/production)
Proved
4.8
6.6
6.3
8.4
5.0
6.9
1.7
2.4
2.0
2.6
1.8
2.5
Proved
2006Since July 2003
Proved plus
Proved plus
ProbableProvedProbable
Finding, development and acquisition costs ($/boe)
Finding, development and acquisitions (2) Finding and development costs (2)
Acquisition costs (2)
27.06
24.36
20.00
17.85
19.32
19.02
15.44
14.92
34.09
24.19
19.58
15.91
Recycle ratio (funds from operations netback/FD&A costs)
0.9
1.2
1.4
1.7
(1)
(2)
Based on exit production rate.
Including changes in future capital costs.
page 17
NUVISTA ENERGY LTD.
Marketing
CONTRACT POR TFOLIOS
2006 Natural gas price portfolio
2007 Natural gas price portfolio
14%
30%
4%
66%
AECO
Collars
Aggregators
2006 Natural Gas Price Portfolio
4%
82%
AECO
Collars
Aggregators
2007 Forecast Natural Gas Price Portfolio
Natural gas
NuVista has established a natural gas transportation and sales portfolio which will ensure receipt capacity at
reasonable cost and provide an appropriate customer base. Our marketing objectives also include protecting or
securing minimum prices for up to 60% of our net after royalty production for terms not exceeding two years.
Our hedging methodology is primarily comprised of costless collars. In order to control and manage credit
risk and ensure competitive bids, NuVista engages a number of reputable counterparties for our natural gas
transactions. Our sales portfolio also includes sales to traditional aggregators.
Oil and liquids
NuVista sells its oil and liquids production to a variety of purchasers. This enables us to benefit from specific
regional advantages, while maintaining price and delivery flexibility. We continually monitor global and regional
crude oil markets and look for opportunities to hedge up to 60% of net after royalty production.
Additional details on our hedging program are shown in Note 9 of our Consolidated Financial Statements for the
year ended December 31, 2006, on page 46 of this Annual Report.
page 18
NUVISTA ENERGY LTD.
Health, safety and environment
our commitment
We are committed to conducting our operations in a manner that protects the health and safety of our
employees, contractors and the public. We also place high importance on conducting our operations in a
manner that minimizes the impact on the environment. Our policies, practices and procedures relating to
health, safety and environment are an integral part of our daily operations and assist us in achieving these
objectives. NuVista and our industry partners are committed to continually monitoring and reviewing our
operations to improve our health, safety, environmental and social performance.
page 19
NUVISTA ENERGY LTD.
Management’s discussion and analysis
Management’s discussion and analysis (“MD&A”) of financial conditions and results of operations should be read in conjunction with
NuVista’s audited consolidated financial statements for the year ended December 31, 2006. the following md&a of financial condition and
results of operations was prepared at and dated, march 1, 2007, except for the subsequent event disclosure that was prepared at and dated
March 9, 2007. Our audited consolidated financial statements, Annual Report, annual information form and other disclosure documents
for 2006 will be available on or before March 31, 2007 through our filings on SEDAR at www.sedar.com or can be obtained from our website at
www.nuvistaenergy.com.
Basis of Presentation – The financial data presented below has been prepared in accordance with Canadian Generally Accepted Accounting Principles
(“GAAP”). The reporting and the measurement currency is the Canadian dollar. For the purpose of calculating unit costs, natural gas is converted to a
barrel of oil equivalent (“boe”) using six thousand cubic feet of natural gas equal to one barrel of oil unless otherwise stated.
Forward-Looking Statements – Certain information set forth in this document, including management’s assessment of NuVista’s future plans and
operations, contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of
which are beyond NuVista’s control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency
fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified
personnel or management and services, stock market volatility and ability to access sufficient capital from internal and external sources. Readers are
cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be
imprecise and, as such, undue reliance should not be placed on forward-looking statements. NuVista’s actual results, performance or achievement could
differ materially from those expressed in, or implied by, these forward-looking statements, or if any of them do so, what benefits that NuVista will derive
therefrom. NuVista disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.
Non-GAAP Measurements – Within Management’s discussion and analysis, references are made to terms commonly used in the oil and natural gas
industry. Management uses funds from operations to analyze operating performance and leverage. Funds from operations as presented does not have
any standardized meaning prescribed by Canadian GAAP and therefore it may not be comparable with the calculation of similar measures for other
entities. Funds from operations as presented is not intended to represent operating cash flow or operating profits for the period nor should it be viewed
as an alternative to cash flow from operating activities, net income or other measures of financial performance calculated in accordance with Canadian
GAAP. All references to funds from operations throughout this report are based on cash flow from operating activities before changes in non-cash
working capital and abandonment expenditures. Funds from operations per share is calculated based on the weighted average number of common shares
outstanding consistent with the calculation of net income per share. Funds from operations netbacks equal total revenue less royalties, transportation,
operating costs, general and administrative and interest expense and cash taxes. Total boe is calculated by multiplying the daily production by the
number of days in the period.
page 20
NUVISTA ENERGY LTD.
Overview
The tables below set forth a summary of operations, including netbacks for the year ended December 31, 2006 compared to the year ended December
31, 2005 and netbacks on a product basis:
2006
2005
% Change
11,962 boe/d
9,024 boe/d
33
Years ended December 31,
Production
(thousands)
$
Production revenue
192,639
($/boe)
$
44.12
(thousands)
$
169,680
($/boe)
$
(total)
($/boe)
51.52
14
(14)
(47,861)
(10.96)
(40,331)
(12.25)
19
(11)
Transportation costs
(3,194)
(0.73)
(3,064)
(0.93)
4
(22)
Operating expenses
(25,804)
(5.91)
(16,696)
(5.07)
55
17
Field netback
115,780
26.52
109,589
33.27
6
(20)
General and administrative
(3,032)
(0.69)
(1,823)
(0.55)
66
25
Interest
(5,658)
(1.30)
(2,231)
(0.68)
154
92
–
–
(654)
(0.20)
–
–
107,090
24.53
104,881
31.84
2
(23)
(2,276)
(0.52)
(1,516)
(0.46)
50
13
(65,336)
(14.96)
(40,411)
(12.27)
62
22
(4,194)
(0.96)
(23,448)
(7.12)
(82)
(87)
11.99
(11)
(33)
Royalties
Capital taxes
Funds from operations
Stock-based compensation
Depreciation, depletion
and accretion
Future income taxes
Net income
$
35,284
Netback by product
$
39,506
$
Royalties
Operating expenses
151,114
7.11
(thousands)
$
41,525
11,962 boe/d
($/bbl)
$
50.25
(thousands)
$
192,639
($/boe)
$
44.12
(41,714)
(1.96)
(6,147)
(7.43)
(47,861)
(10.96)
(2,709)
(0.13)
(485)
(0.59)
(3,194)
(0.73)
(17,631)
$
2006 Total
2,264 bbls/d
($/mcf )
$
$
Oil and liquids
58.2 mmcf/d
(thousands)
Field netback
8.09
Natural gas
2006 production
Production revenue
$
89,060
(0.83)
$
4.19
(8,173)
$
26,720
(9.89)
$
32.34
(25,804)
$
115,780
(5.91)
$
26.52
page 21
NUVISTA ENERGY LTD.
Operating activities – For the year ended December 31, 2006, NuVista drilled 159 (126 net) wells with a success rate of 82%, resulting in 103 natural gas
wells, 28 oil wells and 28 dry holes. NuVista operated 143 of the wells drilled in 2006. During the fourth quarter of 2006, NuVista participated in 48 (37
net) wells, operating 44 of these wells. The success rate of 79% in this drilling program resulted in 30 natural gas wells and 8 oil wells. NuVista continues
to actively drill in its core regions, with 40 to 45 wells planned for the first quarter of 2007. NuVista has commenced its 2007 first quarter drilling program
participating in 24 wells.
Production – For the year ended December 31, 2006, NuVista’s average production was 11,962 boe/d, comprised of 58.2 mmcf/d of natural gas and 2,264
bbls/d of oil and liquids, which represents a 33% increase over the same period in 2005. The 33% increase results from the success of the 2006 drilling
program, the acquisition of Saskatchewan properties completed in June 2006, a full year of production from the northwest Saskatchewan properties
purchased in August 2005 and was offset by normal production declines. For the fourth quarter of 2006, NuVista’s average production was 12,612
boe/d, comprised of 61.9 mmcf/d of natural gas and 2,296 bbls/d of oil and liquids, which represents a 14% increase over the same period in 2005.
Current production is approximately 13,500 boe/d with 300 boe/d to 500 boe/d expected to be brought on production by late March with the
removal of facility constraints on two wells.
Revenues – For the year ended December 31, 2006, revenues, before transportation costs were $192.6 million, a 14% increase from $169.7 million, for the
same period in 2005. These revenues were comprised of $151.1 million of natural gas and $41.5 million of oil and liquids revenue. The increase in revenues
for the year ended December 31, 2006 compared to the same period of 2005 results from a 33% increase in production partially offset by a 14% decrease in
average realized commodity prices. The 14% decrease in averaged realized commodity prices is comprised of a 21% decrease in the natural gas price
to $7.11/mcf from $9.02/mcf and a 15% increase in the oil and liquids price to $50.25/bbl from $43.85/bbl. Revenues for the three months ended
December 31, 2006 were $49.2 million, a 22% decrease from $63.3 million for the three months ended December 31, 2005 due to lower realized
gas prices.
Commodity hedging – As part of our financial management strategy, NuVista has adopted a disciplined commodity-hedging program. The purpose
of the hedging program is to reduce volatility in the financial results, protect acquisition economics and stabilize cash flow against the unpredictable
commodity price environment. NuVista’s Board of Directors has approved a hedging limit of 60% of forecast production, net of royalties, primarily using
costless collars. Our strategy of using costless collars limits NuVista’s exposure to downturns in commodity prices while allowing for participation in
commodity price increases. For the year ended December 31, 2006, the hedging program resulted in a gain of $11.9 million as compared to a loss of
$1.7 million in the year ended December 31, 2005. The gain of $11.9 million for 2006 consisted of a $11.8 million gain on natural gas hedges and a $0.1
million gain on crude oil hedges. In the fourth quarter of 2006, our hedging program resulted in a gain of $3.5 million primarily on natural gas contracts,
as compared to a loss of $0.9 million in the same period in 2005. The following is a summary of hedging contracts in place as at December 31, 2006:
(a) Financial instruments:
As at December 31, 2006, NuVista has hedged by way of costless collars the following crude oil contracts:
Volume
Average Price ($/bbl)
Term
250 bbls/d
CDN. $76.14 – CDN. $100.19 – WTI
January 1, 2007 – March 31, 2007
250 bbls/d
CDN. $75.92 – CDN. $100.19 – WTI
April 1, 2007 – June 30, 2007
250 bbls/d
CDN. $75.25 – CDN. $100.19 – WTI
July 1, 2007 – September 30, 2007
250 bbls/d
CDN. $74.25 – CDN. $100.19 – WTI
October 1, 2007 – December 31, 2007
250 bbls/d
CDN. $71.86 – CDN. $99.77 – WTI
January 1, 2008 – March 31, 2008
250 bbls/d
CDN. $71.86 – CDN. $98.11 – WTI
April 1, 2008 – June 30, 2008
As at December 31, 2006, NuVista has hedged by way of costless collars the following natural gas contracts:
Volume
Average Price (Cdn$/gj)
5,000 gj/d
$8.50 – $12.25 – AECO
As at December 31, 2006, the market value of the financial instruments was approximately $1.4 million.
page 22
NUVISTA ENERGY LTD.
Term
November 1, 2006 – March 31, 2007
(b) Physical purchase contracts:
As at December 31, 2006, NuVista has entered into direct sale costless collars to sell natural gas as follows:
Volume
7,500 gj/d
Term
$ 8.50 – $ 11.37 – AECO
November 1, 2006 – March 31, 2007
Subsequent to December 31, 2006, the following commodity contracts have been entered into:
Volume
10,000 gj/d
Term
$ 7.50 – $ 8.00 – AECO
April 1, 2007 – October 31, 2007
Term
$ 8.00 – $ 10.50 – AECO
November 1, 2007 – March 31, 2008
Volume
5,000 gj/d
Royalties – Royalties of $47.9 million for the year ended December 31, 2006 were 19% higher than the $40.3 million for the same period of 2005. The
increase in royalties for the year ended December 31, 2006 resulted from revenues that were 14% higher compared to the same period of 2005. Royalty
rates by product for the year ended December 31, 2006 were 28% for natural gas and 15% for oil and liquids compared to 26% for natural gas and 17%
for oil and liquids for the same period in 2005. The increase in the natural gas royalty rates results from higher royalty rates associated with increased
Saskatchewan natural gas production partially offset by the impact of hedging gains not included in the calculation of royalties. Royalties for the three
months ended December 31, 2006 were $10.8 million, a decrease of 33% over the $16.3 million reported for the three months ended December 31, 2005.
The decrease in royalties directly results from lower revenues in the fourth quarter of 2006 compared to the same period in 2005. As a percentage of
revenue, the average royalty rate for the fourth quarter of 2006 was 22% compared to 26% for the comparative period of 2005. Royalty rates by product
for the fourth quarter of 2006 were 24% for natural gas and 13% for oil and liquids compared to 27% for natural gas and 16% for oil and liquids for the
similar period in 2005. The decrease in the natural gas royalty rate was primarily due to hedging gains that are not included in the calculation of royalties.
The decrease in the oil and liquids royalty rate was primarily due to the lower average quality of crude oil produced.
Transportation – For the year ended December 31, 2006, transportation costs were $3.2 million ($0.73/boe) as compared to $3.1 million ($0.93/boe)
for the same period in 2005. Transportation costs were lower on a per unit basis in 2006 due to adjustments to prior period costs recorded in the fourth
quarter. Transportation costs were $500,000 ($0.43/boe) for the three months ended December 31, 2006 as compared to $895,000 ($0.88/boe) for the
fourth quarter of 2005. Per unit transportation for year and three months ended December 31, 2006, were lower than the same periods in 2005 due to
positive adjustments to prior periods.
Operating – Operating expenses were $25.8 million ($5.91/boe) for the year ended December 31, 2006 compared to $16.7 million ($5.07/boe) for
the same period in 2005, an increase of 54%. This increase resulted from 33% higher production volumes and a 17% increase in per unit costs in 2006
compared to 2005. The increase in 2006 per unit costs resulted primarily from higher per unit costs in the three months ended December 31, 2006 and
generally higher industry costs throughout 2006. For the year ended, December 31, 2006, natural gas operating expenses averaged $0.83/mcf and oil and
liquids operating expenses were $9.89/bbl as compared to $0.72/mcf and $7.22/bbl respectively for the same period of 2005. Operating expenses were
$8.2 million ($7.09/boe) for the three months ended December 31, 2006, a 61% increase when compared to $5.1 million ($5.04/boe) for the three months
ended December 31, 2005. This increase resulted from 14% higher production volumes and a 41% increase in per unit costs in the fourth quarter of 2006
compared to the fourth quarter of 2005. The increase in per unit costs for the three months ended December 31, 2006 was due to property taxes, higher
operating costs associated with the start-up of heavy oil production and generally higher industry costs.
page 23
NUVISTA ENERGY LTD.
Despite the increase in per unit operating costs, NuVista remains in the top quartile for oil and natural gas companies in its peer group. NuVista’s per unit
operating costs are forecast to average approximately $6.00/boe in 2007. Oil and natural gas liquids per unit operating costs are expected to trend lower
from fourth quarter 2006 levels and average approximately $10.00/bbl in 2007.
General and administrative – General and administrative expenses, net of overhead recoveries for the year ended December 31, 2006 were $3.0 million
($0.69/boe), an increase of 67% over the $1.8 million ($0.55/boe) for the year ended December 31, 2005. This increase is directly attributable to the
higher production base in NuVista, hiring of NuVista’s own staff as it reduced reliance on the Technical Services Agreement (the “TSA”), higher employee
costs experienced throughout the energy industry and the allocation of higher overhead costs in accordance with the TSA. For the year ended December
31, 2006, Bonavista charged $2.3 million, as compared to $1.2 million in 2005, to NuVista for general and administrative services under the TSA. The TSA
has allowed NuVista to operate with a low overhead cost structure until it attained the level of activity that requires and could financially support its
stand-alone general and administrative staff. As NuVista has achieved this level of operation in 2007, we will be reducing our reliance on the TSA and will
be conducting most of our activities with our own staff. NuVista anticipates terminating the current TSA in late 2007. General and administrative expenses
were $1,150,000 ($0.99/boe) net of overhead recoveries for the three months ended December 31, 2006, as compared to the charge of $721,000 ($0.71/
boe) for the same period in 2005. This increase in per unit costs in the fourth quarter over the year to date results primarily from the accrual of the yearend bonuses and additional staff added in the accounting, land and administrative areas.
2006
December 31,
2005
(thousands)
Gross
$
Overhead recoveries
6,748
$
(3,716)
4,137
(2,314)
Net general and administrative expenses
$
3,032
$
1,823
Per boe
$
0.69
$
0.55
Stock-based compensation – NuVista recorded a stock-based compensation charge of $2.3 million for the year ended December 31, 2006 compared to
$1.5 million for the same period in 2005. Stock-based compensation relates primarily to the granting of stock options. The increase in the expense in 2006
relates to stock options granted in the year and the increase in the cumulative number of stock options outstanding. NuVista recorded a stock-based
compensation charge of $246,000 for the three months ended December 31, 2006, compared to $389,000 for the same period in 2005.
Interest – Interest expense for the year ended December 31, 2006 was $5.7 million ($1.30/boe) versus $2.2 million ($0.68/boe) for the same period of
2005 due primarily to higher average debt levels associated with the acquisition completed in June 2006. Cash paid interest for the year ended December
31, 2006 was $5.5 million compared to $2.2 million for 2005. For the three months ended December 31, 2006, interest expense was $1.9 million ($1.59/
boe), up 122% from $834,000 ($0.82/boe) in the same period of 2005, due to higher average debt levels in 2006 in connection with the acquisition
completed in June 2006. Currently, NuVista’s borrowing rate is 5.28%.
Depreciation, depletion and accretion – Depreciation, depletion and accretion expenses for the year ended December 31, 2006 were $65.3 million, an
increase of 62% over the $40.4 million for the year ended December 31, 2005. This increase was due to a 33% increase in production volumes and a
22% increase in the per unit cost. The per unit cost was $14.96/boe for the twelve months ended December 31, 2006 compared to $12.27/boe in the
same period in 2005. The per unit cost has increased in 2006 compared to 2005 due to the cost of property acquisitions completed in August 2005
and June 2006 coupled with higher industry exploitation and development costs. Depreciation, depletion and accretion expenses were $17.6 million
for the fourth quarter of 2006 compared to $13.2 million for the same period in 2005, an increase of 33%. The average cost per unit was $15.21/boe in
the fourth quarter of 2006 compared to $12.98/boe for the same period in 2005.
page 24
NUVISTA ENERGY LTD.
Income and other taxes – For the year ended December 31, 2006, the provision for income and other taxes was $4.2 million for an effective tax rate of
11%, as compared to $24.1 million for an effective tax rate of 38% for the same period in 2005. The income tax provision for 2006 includes a recovery
of $9.6 million recognized in the second quarter due to federal and provincial tax rate reductions and the repealing of the Large Corporations Tax. The
effective tax rate for 2006 excluding this recovery was 35%. Cash paid for income and other taxes for the year ended December 31, 2006 was $409,000.
For the fourth quarter of 2006, the provision for income and other taxes was $3.0 million for an effective tax rate of 34%, as compared to $9.6 million with
an effective tax rate of 37% for the fourth quarter of 2005. The effective tax rate in the fourth quarter is lower due to the reduction in tax rates and the
elimination of the Large Corporations Tax in 2006.
2006
December 31,
2005
(thousands)
Future income taxes
$
4,194
$
4,194
Large corporations tax
Income and other taxes
$
23,448
$
24,102
–
654
Capital expenditures – Capital expenditures were $206.7 million for the year ended December 31, 2006 consisting of exploitation and development
spending of $120.7 million and $86.0 million of acquisitions, compared to $238.5 million incurred for the twelve months ended December 31, 2005
with $65.9 million on exploitation and development spending and $172.6 million spent on acquisitions. 2006 acquistions include a $81.7 million business
acquisition in northwest and west central Saskatchewan in June 2006 (see note 3). The residual acquisition amount is comprised of minor property acquisitions
carried out during 2006. Capital expenditures were $39.1 million during the fourth quarter of 2006 versus $15.3 million in the same period of 2005 the
majority allocated to exploitation and development activities in both periods.
2006
December 31,
2005
(thousands)
Land and retention costs
$
17,012
$
8,709
Seismic
12,473
8,515
Drilling and completion
61,286
29,972
Facilities and equipment
29,522
18,659
Acquisitions
85,984
173,223
–
(572)
451
–
Dispositions
Corporate
Total capital expenditures
$
206,728
$
238,506
Funds from operations and net income – For the year ended December 31, 2006, NuVista’s funds from operations were $107.1 million ($2.20/share,
basic), a 2% increase from $104.9 million ($2.40/share, basic) for the year ended December 31, 2005. Funds from operations for the year ended 2006 were
slightly higher than 2005 primarily due to higher revenues offset by increased operating and general and administrative costs. In the fourth quarter of
2006, funds from operations were $26.6 million ($0.54/share, basic), a 32% decrease over the $39.3 million ($0.81/share, basic) for the same period in 2005.
The decrease was primarily due to lower natural gas revenues.
For the year ended December 31, 2006 net income decreased 14% to $35.3 million ($0.72/share, basic) from $39.5 million ($0.90/share, basic) for the
same period in 2005. Net income decreased 65% during the fourth quarter of 2006 to $5.8 million ($0.12/share, basic) from the $16.2 million ($0.34/share,
basic) for the same period in 2005. 2006 net income for the fourth quarter and year was lower, compared to the same periods in 2005, for the same factors
impacting funds from operations as well as higher depletion, depreciation and accretion costs.
page 25
NUVISTA ENERGY LTD.
Tax pools – NuVista had approximately $253 million of tax pools as at December 31, 2006 available for deduction against future years’ taxable income.
Based on these estimated tax pools forecasted funds flow from operations and capital expenditures, NuVista does not forecast paying a material amount
of cash income taxes in 2007. The following table summarizes tax pool balances:
Available Balance
(thousands)
Canadian exploration expense
$
Maximum Annual Deduction
(%)
–
100
Canadian development expense
58,000
30
Canadian oil and natural gas property expense
94,000
10
Undepreciated capital cost
98,000
25
3,000
–
Other
Total
$
253,000
Liquidity and capital resources – As at December 31, 2006, bank debt (including working capital) was $167.1 million, resulting in a debt to annualized
fourth quarter funds from operations ratio of approximately 1.5 to 1.0. At December 31, 2006, Nuvista had a working capital deficiency of $14.6 million.
This deficiency is due to increased accounts payable and accrued liabilities and will be funded through available bank lines. NuVista has approximately
$22.7 million of unused bank borrowing capability based on the current line of credit of $180 million. These undrawn bank lines and funds from operations
provide NuVista with the flexibility to fund its planned 2007 capital program. NuVista’s capital program will be monitored and adjusted based on the
outlook for commodity prices and funds from operations. As at March 1, 2007, there were 49,027,358 common shares and 270,789 Class B Performance
Shares outstanding. In addition, there were 3,743,545 stock options outstanding, with an average exercise price of $11.99/share.
Related party activities – Under the Plan of Arrangement with Bonavista, NuVista entered into a TSA with Bonavista. Under this agreement, Bonavista
receives payment for certain technical and administrative services provided by it to NuVista on a cost recovery basis. NuVista and Bonavista are considered
related as two directors of NuVista, one of who is NuVista’s chairman, are directors and officers of Bonavista and a director and an officer of NuVista are
also officers of Bonavista. Pursuant to the TSA, there were fees of $2.3 million charged relating to general and administrative activities and $180,000 of
fees were charged relating to capital expenditure activities for the year ended December 31, 2006 (2005 - $1.7 million and $180,000 respectively). As at
December 31, 2006, amounts payable to Bonavista were $2.7 million (2005 - $1.3 million)
Contractual obligations and commitments – NuVista enters into many contract obligations as part of conducting day-to-day business. Material contract
obligations consist only of our TSA with Bonavista. The TSA has no set termination date and will continue until terminated by either party with six months
prior written notice. Nuvista anticipates terminating the current TSA in late 2007. As NuVista continues to spend money as part of its capital program we
will draw on our bank facility and will have the related contractual obligation. NuVista has not entered into any material commitments to date.
page 26
NUVISTA ENERGY LTD.
Annual financial information – The following table highlights selected annual financial information for the years ended December 31, 2006, 2005
and 2004:
2006
December 31
2005
2004
(thousands, except per share amounts)
$
Production revenue
192,639
$
169,880
$
79,398
35,284
39,506
18,322
Per share – basic
0.72
0.90
0.47
0.71
0.87
0.46
Net income
Balance sheet information:
$
Total assets
590,084
$
432,432
$
173,531
Bank loan
152,485
70,524
28,352
Shareholders’ equity
296,513
255,604
115,110
Quarterly financial information – The following table highlights NuVista’s performance for the eight quarterly reporting periods from March 31, 2005
to December 31, 2006:
2006
2005
Dec. 31
Sept. 30
Jun. 30
Mar. 31
Dec. 31
Sept. 30
Jun. 30
Mar. 31
12,612
12,577
11,357
11,303
11,031
9,874
7,783
7,358
Production revenue
$ 49,195
$ 47,530
$ 45,375
$ 50,540
$ 63,315
$ 48,474
$ 30,626
$
27,265
Net income
$
$
4,082
$ 15,986
$
9,451
$ 16,247
$ 11,339
$
$
5,585
Production (boe/d)
($ thousands, except per share amounts)
5,765
6,335
Net income per share:
Basic
0.12
0.08
0.33
0.20
0.34
0.25
0.16
0.14
Diluted
0.12
0.08
0.32
0.19
0.32
0.24
0.15
0.13
NuVista has seen dramatic growth in its production volumes over the prior eight quarter periods. During the four quarter reporting periods ended
December 31, 2005, revenues and net income increased primarily due to increases in production and commodity prices. Since December 31, 2005,
production growth continued but has not offset lower average realized commodity prices, resulting in lower revenues and net income. Net income
during the three months ended June 30, 2006 increased due to a $9.6 million future income tax recovery relating to changes in tax rates.
Critical accounting estimates – The consolidated financial statements have been prepared in accordance with Canadian GAAP. A summary of
significant accounting policies are presented in note 1 of the Notes to the Consolidated Financial Statements. Certain accounting policies are critical
to understanding the financial condition and results of operations of NuVista.
(a) Proved oil and natural gas reserves – Proved oil and natural gas reserves, as defined by the Canadian Securities Administrators in National
Instrument 51-101 with reference to the Canadian Oil and Natural Gas Evaluation Handbook, are those reserves that can be estimated with a high
degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves.
An independent reserve evaluator using all available geological and reservoir data as well as historical production data has prepared NuVista’s
oil and natural gas reserve estimates. Estimates are reviewed and revised as appropriate. Revisions occur as a result of changes in prices, costs, fiscal
regimes, reservoir performance or a change in NuVista’s development plans. The effect of changes in proved oil and natural gas reserves on the
financial results and position of NuVista is described below.
page 27
NUVISTA ENERGY LTD.
(b) Depreciation and depletion expense – NuVista uses the full cost method of accounting for exploration and development activities whereby all
costs associated with these activities are capitalized, whether successful or not. The aggregate of capitalized costs, net of certain costs related to
unproved properties, and estimated future development costs is amortized using the unit‑of-production method based on estimated proved
reserves. Changes in estimated proved reserves or future development costs have a direct impact on depreciation and depletion expense.
Certain costs related to unproved properties and major development projects may be excluded from costs subject to depletion until proved
reserves have been determined or their value is impaired. These properties are reviewed quarterly to determine if proved reserves should be
assigned, at which point they would be included in the depletion calculation, or for impairment, for which any writedown would be charged
to depreciation and depletion expense.
(c) Full cost accounting ceiling test – The carrying value of property, plant and equipment is reviewed at least annually for impairment. Impairment occurs
when the carrying value of the assets is not recoverable by the future undiscounted cash flows. The cost recovery ceiling test is based on estimates
of proved reserves, production rates, petroleum and natural gas prices, future costs and other relevant assumptions. By their nature, these estimates
are subject to measurement uncertainty and the impact on the financial statements could be material. Any impairment would be charged as
additional depletion and depreciation expense.
(d) Asset retirement obligations – The asset retirement obligations are estimated based on existing laws, contracts or other policies. The fair value of
the obligation is based on estimated future costs for abandonment’s and reclamations discounted at a credit adjusted risk free rate. The costs are
included in property, plant and equipment and amortized over its useful life. The liability is adjusted each reporting period to reflect the passage
of time, with the accretion charged to earnings and for revisions to the estimated future cash flows. By their nature, these estimates are subject
to measurement uncertainty and the impact on the financial statements could be material.
(e) Income taxes – The determination of NuVista’s income and other tax liabilities requires interpretation of complex laws and regulations often
involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the
actual income tax liability may differ significantly from that estimated and recorded.
Update on Regulatory and Financial Reporting Matters
(a) Financial Instruments – Recognition and Measurement – In January 2005, the CICA released new Handbook Section 3855, “Financial Instruments
– Recognition and Measurement” (“Section 3855”), effective for annual and interim periods beginning on or after October 1, 2006. This new section
prescribes when a financial instrument is to be recognized on the balance sheet and at what amount, sometimes using fair value and other times
using cost-based measures. It also specifies how financial instrument gains and losses are to be presented and defines financial instruments to
include accounts receivable and payable, loans, investments in debt and equity securities, and derivative contracts. NuVista has not yet determined
the impact of adopting Section 3855 on its results of operations or financial position.
Comprehensive Income and Equity – In January 2005, the CICA released new Handbook Section 1530, “Comprehensive Income”, and Section
3251, “Equity”, effective for annual and interim periods beginning on or after October 1, 2006. Section 1530 establishes standards for reporting
comprehensive income. The section does not address issues of recognition or measurement for comprehensive income and its components.
Section 3251 establishes standards for the presentation of equity and changes in equity during the reporting period. The requirements in this
section are in addition to Section 1530. NuVista has not yet determined the impact of adopting Sections 1530 and 3251 on its results of operations
or financial position.
Hedges – In April 2005, the CICA released a new Handbook Section 3865, “Hedges”, effective for fiscal periods beginning on or after October 1,
2006. Section 3865 establishes standards for when and how hedge accounting may be applied. Hedge accounting is optional. NuVista has elected
on January 1, 2007 to discontinue the designation of financial instruments as hedges, choosing to account for these instruments using the fair
value method. Changes in the fair market value of all outstanding financial instruments will be reflected on the balance sheet with a corresponding
unrealized gain or loss reflected in income.
page 28
NUVISTA ENERGY LTD.
(b) Internal Control Reporting:
i. Multilateral Instrument 52-109
In December 2005, Canadian Securities Administrator (“CSA”) Staff Notice 52-311 was issued to assist certifying officers in determining the
appropriate form of certificate required under MI 52-109 for various interim and annual filings. In March 2006, the CSA issued notice 52-313 that it
will not proceed with proposed MI 52-111. Rather, the CSA proposes to expand MI-52-109 to require all reporting issuers to certify in their annual
CEO and CFO certifications that they have evaluated the effectiveness of the issuer’s internal control over financial reporting. Issuers will be required
to disclose, in their annual MD&A, their conclusions about the effectiveness of internal controls over financial reporting as of the end of the financial
year based on such evaluation. However, issuers will not be required to have management’s assessment of the effectiveness of internal controls
over financial reporting audited.
For years ending on or after June 29, 2006, issuer’s are required to certify that the issuer has designed internal controls over financial report (versus
evaluated the effectiveness of them) and disclosed in MD&A material changes in internal controls over financial reporting that have occurred in the
last quarter. On February 9, 2007, the CSA issued notice 52-317 proposing that the certification regarding the evaluation of effectiveness of internal
controls over financial reporting would apply in respect of financial years ending on or after June 30, 2008.
ii. Disclosure and Internal Controls
NuVista’s President and Chief Executive Officer (“CEO”) and Vice President, Finance and Chief Financial Officer (“CFO”) are responsible for establishing
and maintaining disclosure controls and procedures and internal controls over financial reporting as defined in MI 52-109.
Disclosure controls and procedures have been designed to ensure that information to be disclosed by NuVista is accumulated and communicated
to management as appropriate to allow timely decisions regarding required disclosure. NuVista’s CEO and CFO have evaluated the effectiveness of
NuVista’s disclosure controls and procedures as at December 31, 2006 and have concluded that they provide reasonable assurance that all material
information relating to NuVista is disclosed in a timely manner
Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of NuVista’s financial reporting and
compliance with generally accepted accounting principles. The CEO and CFO have evaluated NuVista’s internal controls over financial reporting as
at December 31, 2006 based on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and have concluded they are effectively designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP. During the quarter ended
December 31, 2006, there have been no changes to NuVista’s internal controls over financial reporting that have materially, or are reasonably likely
to, materially affect the internal controls over financial reporting.
Because of their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect
misstatements, errors or fraud. Control systems, no matter how well conceived or operated, can provide only reasonable, not absolute assurance
that the objectives of the control systems are met.
Assessment of Business Risks
The following are the primary risks associated with the business of NuVista. These risks are similar to those affecting others in the conventional oil and
natural gas sector. NuVista’s financial position, results of operations are directly impacted by these factors and include:
•Operational risk associated with the production of oil and natural gas;
•
Reserve risk in respect to the quantity and quality of recoverable reserves;
•
Market risk relating to the availability of transportation systems to move the product to market;
•Commodity risk as crude oil and natural gas prices fluctuate due to market forces;
page 29
NUVISTA ENERGY LTD.
•Financial risk such as volatility of the Canadian/US dollar exchange rate, interest rates and debt service obligations;
•
Environmental and safety risk associated with well operations and production facilities;
•Changing government regulations relating to royalty legislation, income tax laws, incentive programs, operating practices and environmental
protection relating to the oil and natural gas industry and the income trust sector; and
•Continued participation of NuVista’s lenders.
NuVista seeks to mitigate these risks by:
•
Acquiring properties with established production trends to reduce technical uncertainty as well as undeveloped land with development
potential;
•
Maintaining a low cost structure to maximize product netbacks and reduce impact of commodity price cycles;
•
Diversifying properties to mitigate individual property and well risk;
•
Maintaining product mix to balance exposure to commodity prices;
•Conducting rigorous reviews of all property acquisitions;
•
Monitoring pricing trends and developing a mix of contractual arrangements for the marketing of products with creditworthy counterparties;
•
Maintaining a hedging program to hedge commodity prices and foreign exchange currency rates with creditworthy counterparties;
•
Ensuring strong third-party operators for non-operated properties;
•
Adhering to NuVista’s safety program and keeping abreast of current operating best practices;
•
Keeping informed of proposed changes in regulations and laws to properly respond to and plan for the effects that these changes may have on our
operations;
•Carrying industry standard insurance to cover losses; and
•
Establishing and maintaining adequate cash resources to fund future abandonment and site restoration costs.
subsequent event
On March 8, 2007, NuVista entered into an agreement to acquire certain natural gas properties in central Alberta for a purchase price of approximately
$36 million, subject to certain closing adjustments. The acquisition has an effective date of January 1, 2007 and is expected to close on April 2, 2007, with
the closing being subject to customary conditions. In connection with this acquisition, NuVista has agreed with its lenders to amend its bank loan facility
to increase the maximum borrowing to $210 million. Prior to the closing of the aquisition, the maximum borrowing permitted by the bank loan facility
will be finalized by the lenders based on a review of year end reserves and the acquired reserves.
page 30
NUVISTA ENERGY LTD.
OUTLOOK
NuVista continues to employ the same core philosophy in 2007 as we have in the past three and one half years. For 2007, NuVista’s Board of
Directors have approved a capital program of $160 million. The 2007 capital program is heavily weighted to our internally generated exploration
and development program. This capital program will see NuVista participating in approximately 140-160 wells, 40-45 of which are expected to be
completed in the first quarter of 2007. The portion of our capital program allocated to acquisitions may be expanded in 2007 if the acquisition market
proves to be more favourable.
NuVista is currently forecasting first quarter of 2007 production to increase throughout the period and average approximately 13,500 boe/d. NuVista’s
guidance of 14,300 boe/d to 14,900 boe/d for 2007 with the implementation of our planned capital program remains unchanged. Based upon
the current commodity price assumptions of US$8.00 per mmbtu Nymex for natural gas and US$62.00 for WTI, NuVista is forecasting funds from
operations of $135 million – $145 million for 2007 ($2.75/share to $2.95/share).
NuVista will continue to focus on its core strategy of cost control and applying the expertise of its own technical staff to its current operating regions,
through both the drilling and strategic acquisitions. The execution of these strategies should enable NuVista to continue to grow its production, cash
flow and net income consistently and profitably. We remain unwavering in our commitment to enhance shareholder value over the long-term in a
diligent and prudent manner by accessing the broad depth and expertise of our team.
page 31
NUVISTA ENERGY LTD.
Management’s and auditors’ reports
Management’s report
The preparation of the accompanying consolidated financial statements in accordance with accounting principles generally accepted in Canada is the
responsibility of management. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial
statements.
Management is responsible for the integrity and objectivity of the financial statements. Where necessary, the financial statements include estimates,
which are based on management’s informed judgments.
Management has established systems of internal controls, which are designed to provide reasonable assurance those assets, are safeguarded from loss or
unauthorized use and to produce reliable accounting records for the preparation of financial information.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. It exercises its
responsibilities primarily through the Audit Committee, all of whose members are non-management directors. The Audit Committee has reviewed the
consolidated financial statements with management and the auditors and has reported to the Board of Directors which have approved the consolidated
financial statements.
KPMG LLP are independent auditors appointed by NuVista’s shareholders. The auditors have considered, for the purposes of determining the nature, timing
and extent of their audit procedures, the Company’s internal controls and have audited the consolidated financial statements in accordance with generally
accepted auditing standards to enable them to express an opinion on the fairness of the financial statements.
Alex G. VergeRobert F. Froese
President and Chief Executive Officer
Vice President, Finance and Chief Financial Officer
March 1, 2007 (except for note 10 which is as at March 9, 2007)
Auditors’ report to shareholders
We have audited the consolidated balance sheets of NuVista Energy Ltd. as at December 31, 2006 and 2005 and the consolidated statements of operations
and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006
and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants
Calgary, Canada
March 1, 2007 (except for note 10 which is as at March 9, 2007)
page 32
NUVISTA ENERGY LTD.
Consolidated balance sheets
2006
December 31,
(thousands)
2005
Assets
Current assets:
Accounts receivable and prepaids
$
Oil and natural gas properties and equipment (notes 3 and 4)
Goodwill (note 3)
25,953
$
18,844
509,692
359,149
54,439
54,439
$
590,084
$
432,432
$
40,552
$
18,223
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities (note 2)
Bank loan (note 6)
152,485
70,524
Asset retirement obligations (note 5)
22,683
14,790
Future income taxes (note 8)
77,851
73,291
194,030
189,831
3,747
2,321
98,736
63,452
296,513
255,604
Shareholders’ equity:
Share capital (note 7)
Contributed surplus (note 7)
Retained earnings
Subsequent Event (note 10)
$
590,084
$
432,432
See accompanying notes to the consolidated financial statements.
Approved on behalf of the Board:
W. Peter Comber, Director
Pentti O. Karkkainen, Director
page 33
NUVISTA ENERGY LTD.
Consolidated statements of operations and retained earnings
2006
2005
(thousands, except per share amounts)
Revenues:
Production
$
Royalties
192,639
$
169,680
(47,861)
(40,331)
144,778
129,349
Expenses:
25,804
16,696
3,194
3,064
General and administrative
3,032
1,823
2,276
1,516
Interest
5,658
2,231
Operating
Depreciation, depletion and accretion
Income before income and other taxes:
Income and other taxes (note 8)
Net income
Retained earnings, beginning of year
65,336
40,411
105,300
65,741
39,478
63,608
4,194
24,102
35,284
39,506
63,452
23,946
Retained earnings, end of year
$
98,736
$
63,452
Net income per share – Basic
$
0.72
$
0.90
Net income per share – Diluted
$
0.71
$
0.87
page 34
NUVISTA ENERGY LTD.
Consolidated statements of cash flows
2006
2005
(thousands)
Cash provided by (used in):
Operating Activities:
Net income
$
35,284
$
39,506
Items not requiring cash from operations:
65,336
Depreciation, depletion and accretion
40,411
2,276
1,516
Future income taxes
4,194
23,448
Asset retirement expenditures
(1,259)
(233)
(Increase) Decrease in non-cash working capital items
7,656
(2,929)
113,487
101,719
2,676
97,760
Financing Activities:
Issuance of share capital, net of share issue costs
Increase in bank loan
81,961
42,172
84,637
139,932
(81,700)
(150,716)
(123,891)
(88,362)
Investing Activities:
Business acquisitions (note 3)
Oil and natural gas properties and equipment
–
572
7,467
(3,145)
(198,124)
(241,651)
Increase (Decrease) in cash
–
–
Cash, beginning of year
–
–
Proceeds on disposal of oil and natural gas properties and equipment
(Increase) Decrease in non-cash working capital items
Cash, end of year
$
–
$
–
page 35
NUVISTA ENERGY LTD.
Notes to consolidated financial statements
Years ended December 31, 2006 and 2005.
1.Significant accounting policies:
NuVista Energy Ltd. (“NuVista”) was established with an effective date of July 2, 2003 under a Plan of Arrangement entered into by Bonavista Energy
Trust (the “Trust”), Bonavista Petroleum Ltd. (“Bonavista”) and NuVista. Under the Plan of Arrangement, various assets of Bonavista comprising of
certain producing and exploration assets were transferred to NuVista.
Management has prepared its consolidated financial statements in accordance Canadian Generally Accepted Accounting Principles and all amounts
stated in Canadian dollars. As a determination of many assets, liabilities, revenue and expenses is dependent upon future events, the preparation
of these consolidated financial statements requires the use of estimates and assumptions, which have been made using careful judgment. In
particular, the amounts recorded for depreciation and depletion of oil and natural gas properties and equipment, the provision for asset retirement
obligations and stock-based compensation are based on estimates. The ceiling test is based on estimates of proved reserves, production rates, oil
and natural gas prices, future costs and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and
the effect on the financial statements of changes in such estimates in future periods could be significant.
(a) Principles of consolidation:
The consolidated financial statements include the accounts of NuVista and its wholly owned subsidiaries and proportionate share of its
partnerships, which are jointly owned with Bonavista.
(b)Oil and natural gas properties and equipment:
NuVista follows the full cost method of accounting, whereby all costs associated with the exploration for and development of oil and natural
gas reserves are capitalized in cost centres on a country-by-country basis. Such costs include land acquisitions, drilling, well equipment and
geological and geophysical activities. Gains or losses are not recognized upon disposition of oil and natural gas properties unless crediting
the proceeds against accumulated costs would result in a change in the rate of depletion by 20% or more.
Costs capitalized in the cost centres, including well equipment, together with estimated future capital costs associated with proved reserves,
are depreciated and depleted using the unit-of-production method which is based on gross production and estimated proved oil and natural
gas reserves as determined by independent engineers. The cost of unproved properties is excluded from the depreciation and depletion base.
For purposes of the depreciation and depletion calculations, oil and natural gas reserves are converted to a common unit of measure on the
basis of their relative energy content, being six thousand cubic feet of natural gas for one barrel of oil. Facilities are depreciated using the
declining balance method over their useful lives, which range from 12 to 15 years.
Oil and natural gas properties and equipment are evaluated in each reporting period to determine whether the carrying amount in a cost
centre is recoverable and does not exceed the fair value of the properties in the cost centre. The carrying amounts are assessed to be
recoverable when the sum of the undiscounted cash flows expected from the production of proved reserves, the lower of cost and market of
unproved properties and the cost of major development projects exceeds the carrying amount of the cost centre. When the carrying amount
is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying amount of the cost centre exceeds the sum
of the discounted cash flows expected from the production of proved plus probable reserves, the lower of cost and market of unproved
properties and the cost of major development projects of the cost centre. The cash flows are estimated using expected future product
prices and costs, and are discounted using a risk-free interest rate.
page 36
NUVISTA ENERGY LTD.
(c) Joint interest operations:
A portion of NuVista’s oil and natural gas operations is conducted jointly with others. Accordingly, the consolidated financial statements reflect
only NuVista’s proportionate interest in such activities.
(d)Goodwill:
Goodwill is tested for impairment on an annual basis in the fourth quarter of each year. If indications of impairment are present, a loss would be
charged to earnings for the amount that the carrying value of goodwill exceeds its fair value.
(e)Asset retirement obligations:
NuVista records a liability for the fair value of legal obligations associated with the retirement of long-lived tangible assets in the period in which they
are incurred, normally when the asset is purchased or developed. On recognition of the liability there is a corresponding increase in the carrying
amount of the related asset known as the asset retirement cost, which is depleted on a unit-of-production basis over the life of the reserves. The
liability is adjusted each reporting period to reflect the passage of time, with the accretion charged to earnings, and for revisions to the estimated
future cash flows. Actual costs incurred upon settlement of the obligations are charged against the liability.
(f )Revenue recognition:
Revenues from the sale of oil and natural gas are recorded when title passes to an external party.
(g) Financial instruments:
(i) Hedge relationships:
From time to time, NuVista may use swap agreements or other financial instruments to hedge its exposure to fluctuations in oil and natural
gas prices. Gains and losses arising from these swap arrangements are reported as adjustments to the related revenue account over the term
of the financial instrument. Financial instruments are not used for speculative purposes. The carrying values of NuVista’s monetary assets and
liabilities approximate their fair values. NuVista formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives
that are used in the hedging transactions are highly effective in offsetting changes in fair value or cash flows of the hedged item. These derivative
contracts, accounted for as hedges, are not recognized on the balance sheet. Realized gains and losses on these contracts are recognized
in petroleum and natural gas revenue and cash flows in the same period in which the revenues associated with the hedged transaction are
recognized. Premiums paid or received are deferred and amortized to earnings over the term of the contract. In the event that a derivative
financial instrument is not designated for hedge accounting or the event that the hedge is ineffective, changes in the fair value of derivative
financial instruments are recorded as income or expenses.
(ii)Credit risk:
NuVista’s accounts receivable are with customers and joint venture partners in the petroleum and natural gas business and are subject to
normal credit risks. Concentration of credit risk is mitigated by marketing production to numerous purchasers under normal industry sale and
payment terms. NuVista routinely assesses the financial strength of its customers. NuVista may be exposed to certain losses in the event of nonperformance by counterparties to financial derivative contracts. NuVista mitigates this risk by entering into transactions with major financial
institutions.
page 37
NUVISTA ENERGY LTD.
(h)Stock-based compensation:
NuVista has equity incentive plans, which are described in note 7. These stock-based compensation plans for employees do not involve the direct
award of stock, or call for the settlement in cash or other assets. Upon the exercise of stock options, consideration received together with the
amount previously recognized in contributed surplus is recorded as an increase to share capital. Compensation costs are recognized in the financial
statements for the performance shares. NuVista uses the fair value method for valuing stock option grants. Under this method, the compensation
cost attributable to all share options granted is measured at fair value at the grant date and expensed over the vesting period with a corresponding
increase to contributed surplus.
(i)Income taxes:
NuVista follows the asset and liability method of accounting for income taxes. Under this method, income tax liabilities and assets are
recognized for the estimated tax consequences attributable to differences between the amounts reported in the consolidated financial statements
of NuVista and its respective tax base using substantively enacted future income tax rates. The effective change in income tax rates on future tax
liabilities and assets is recognized in income in the period in which the change occurs. Temporary differences arising on acquisitions result in future tax
assets and liabilities.
(j) Per share amounts:
Diluted per share amounts reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or
converted to common shares. The treasury stock method is used to determine the dilutive effect of stock options and other dilutive instruments.
2.Relationship with Bonavista Petroleum Ltd.
Under the Plan of Arrangement with Bonavista, NuVista entered into a Technical Services Agreement with Bonavista. Under this agreement, Bonavista
receives payment for certain technical and administrative services provided by it to NuVista on a cost recovery basis. NuVista and Bonavista are
considered related as two directors of NuVista, one of who is NuVista’s chairman, are directors and officers of Bonavista and a director and an officer
of NuVista are also officers of Bonavista. Pursuant to the Technical Services Agreement, there were fees of $2.3 million charged relating to general
and administrative activities and $180,000 of fees were charged relating to capital expenditure activities for the year ended December 31, 2006
(2005 - $1.7 million and $180,000, respectively). As at December 31, 2006 amounts payable to Bonavista were $2.7 million (2005 ‑ $1.3 million).
page 38
NUVISTA ENERGY LTD.
3. Business Acquisitions:
(a) Saskatchewan Properties:
On June 1, 2006, NuVista completed the acquisition of certain natural gas properties in northwest and west central Saskatchewan for a total
purchase price of $81.7 million. Two directors of NuVista are related parties of the vendor. NuVista purchased these properties through a series of
transactions, with the assets being acquired in an existing partnership owned approximately 76% by NuVista and 24% by Bonavista (see Note 2).
The acquisition has been accounted for at the exchange amount, with results of operations included from the date of acquisition. The purchase
equation, which reflects NuVista’s portion of the acquisition, is as follows:
Amount
(thousands)
Net assets acquired:
Oil and natural gas properties
$
Asset retirement obligations
Net assets acquired
84,202
(2,502)
$
81,700
$
81,700
$
81,700
Purchase consideration:
Cash
Total purchase consideration
(b)Northwest Saskatchewan Properties:
On August 4, 2005, NuVista completed the acquisition of certain natural gas weighted properties in northwest Saskatchewan for a total purchase
price of approximately $150.7 million. NuVista purchased these properties through a series of transactions, with the assets being acquired in an
existing partnership owned approximately 76% by NuVista and 24% by Bonavista. The acquisition has been accounted for using the purchase
method, with results of operations included from the date of acquisition. The purchase equation, which reflects the NuVista portion of the acquisition,
is as follows:
Amount
(thousands)
Net assets acquired:
$
153,635
Goodwill
45,000
(2,919)
Future income taxes
Net assets acquired
(45,000)
$
150,716
$
150,716
$
150,716
Purchase consideration:
Cash
Total purchase consideration
page 39
NUVISTA ENERGY LTD.
4.Oil and natural gas properties and equipment:
Accumulated
depreciation and
depletion
Cost
December 31, 2006
Net book value
(thousands)
$
Facilities
529,863
$
108,711
118,603
$
10,279
411,260
98,432
$
638,574
$
128,882
$
509,692
$
354,484
$
59,989
$
294,495
December 31, 2005
(thousands)
Facilities
69,618
$
4,964
424,102
$
64,654
64,953
$
359,149
Unproved property costs of $52.6 million were excluded from the depreciation and depletion calculation for the year ended December 31, 2006
(2005 – $28.3 million). Future development costs of $12.2 million (2005 ‑ $5.3 million) were included in the depreciation and depletion calculation.
For 2006, NuVista capitalized $2.6 million (2005 - $1.3 million) in general and administrative expenses, $0.8 million (2005 - nil) in stock-based
compensation expense and $0.3 million future income taxes related to exploration and development activities.
NuVista has performed the ceiling test under AcG-16 as of December 31, 2006 and no adjustment was required. The impairment test was
calculated using the benchmark reference prices at January 1 for the years 2007 to 2012 and thereafter, adjusted for commodity differentials
specific to NuVista.
Benchmark Reference Price Forecasts:
Year
2007
2008
2009
2010
2011
2012
Thereafter (1)
WTI (US$/bbl)
62.00
60.00
58.00
57.00
57.00
57.12
58.50
7.20
7.45
7.75
7.80
7.85
8.15
8.30
AECO (Cdn$/mmbtu)
(1) Escalated at 2% per year thereafter.
5.Asset retirement obligations:
NuVista’s asset retirement obligations result from net ownership interests in oil and natural gas assets including well sites, gathering systems
and processing facilities. NuVista estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations is
approximately $122.2 million (2005 – $79.5 million), which will be incurred over the next 51 years. The majority of the costs will be incurred between
2010 and 2036. The well reclamation cost assumptions were revised upwards in 2006 to reflect the overall increase in costs experienced in 2006.
A credit-adjusted risk-free rate of 8% (2005 – 8%) and an inflation rate of 2% (2005 – 2%) was used to calculate the fair value of the asset
retirement obligations.
page 40
NUVISTA ENERGY LTD.
A reconciliation of the asset retirement obligations is provided below:
2006
December 31,
2005
(thousands)
Balance, beginning of year
$
14,790
$
5,990
Accretion expense
1,407
767
Liabilities incurred
4,069
2,795
Liabilities acquired (note 3)
2,502
4,271
Liabilities settled
(1,259)
(233)
Changes in assumptions
1,174
1,200
Balance, end of year
$
22,683
$
14,790
6. Bank loan:
NuVista’s revolving bank loan facility is $180 million and provides that borrowing may be made by prime loans, bankers’ acceptances and/or US libor
advances. These advances bear interest at the bank’s prime rate and/or at money market rates plus a stamping fee. The loan is secured by a first
floating charge debenture, general assignment of book debts and NuVista’s oil and natural gas properties and equipment. The facility is subject to
an annual review by the lenders, at which time a lender can request conversion to a term loan for one year. Under the term period, no principal
payments would be required until June 28, 2008 or later, after the annual review. As such, this loan facility is classified as a long-term liability. Cash
paid for interest was $5.5 million for the year ended December 31, 2006 (2005 – $2.2 million).
page 41
NUVISTA ENERGY LTD.
7.Share capital:
(a)Authorized:
Unlimited number of voting Common Shares and 1,200,000 Class B Performance Shares.
(b)Issued:
(i)Common Shares:
Number
Amount
(thousands)
Balance, December 31, 2004
Issued for cash
Conversion of Class B Performance Shares
Exercise of stock options
40,559
$
89,867
7,500
102,109
249
3
68
449
–
483
Reacquired and cancelled
(16)
(34)
–
(3,052)
Cost associated with shares issued, net of future tax benefit
Issued for cash
48,360
–
$
189,825
–
Conversion of Class B Performance Shares
239
3
Exercise of stock options
418
2,733
–
1,508
(2)
(8)
Cost associated with shares issued, net of future tax benefit
–
(34)
49,015
$
194,027
(ii)Class B Performance Shares:
Each Class B Performance Share was issued for a price of $0.01 per share and is convertible into the fraction of a Common Share equal to the
closing trading price of the Common Shares on the Toronto Stock Exchange on the day prior to such conversion less $2.00, if positive,
divided by the Common Share closing price. The Class B Performance Shares will automatically convert into Common Shares as to 25% of
the Class B Performance Shares outstanding on a pro-rata basis from holders on each of July 1, 2004, 2005, 2006 and 2007. If the NuVista
Closing Price less $2.00 is not positive on any conversion date, NuVista will, subject to applicable law, redeem the Class B Performance Shares
that would have otherwise been converted at the redemption price of $0.01 per share. The fair value of each Class B Performance Share was
$2.41 per share, at date of issuance, using the Black-Scholes model. This amount is amortized over the life of the Class B Performance Shares and
is included in stock-based compensation expense. Upon conversion or exercise the related charge to stock-based compensation is reclassified
to Common Shares.
page 42
NUVISTA ENERGY LTD.
Number
Amount
(thousands)
Converted to Common Shares
884
$
9
(292)
(3)
(32)
–
560
Converted to Common Shares
$
6
(278)
(3)
(11)
–
271
$
3
(c)Contributed surplus:
Amount
(thousands)
$
1,516
Conversion of Class B Performance Shares and exercise of stock options
1,288
(483)
$
2,321
2,934
Conversion of Class B Performance Shares and exercise of stock options
(1,508)
$
3,747
(d) Per share amounts:
During the year ended December 31, 2005, there were 48,731,322 (2005 – 43,764,739) weighted average shares outstanding. On a diluted
basis, there were 49,869,565 (2005 – 45,388,708) weighted average shares outstanding after giving effect for dilutive stock options. The number
of anti-dilutive options totaled 1,460,711 at December 31, 2006.
(e)Stock options:
NuVista has established a stock option plan whereby officers, directors, employees and service providers may be granted options to purchase
Common Shares. Options granted vest at the rate of 25% per year and expire two years after the date of vesting to a maximum term of six years.
The total stock options outstanding plus the Class B Performance Shares cannot exceed 10% of the outstanding Common Shares.
page 43
NUVISTA ENERGY LTD.
The summary of stock options transactions for the years ended December 31, 2006 and 2005 is as follows:
2006
Number
Outstanding, beginning of year
2,433,537
$
1,730,500
Granted
Number
Weighted average
exercise price
8.87
1,710,037
14.96
833,000
12.79
$
6.82
Exercised
(417,639)
6.51
(67,901)
6.62
Cancelled
(92,687)
12.36
(41,599)
6.57
11.94
2,433,537
Outstanding, end of year
2005
Weighted average
exercise price
3,653,711
$
$
8.87
The following table summarizes stock options outstanding and exercisable under the plan at December 31, 2006:
Range of exercise prices
Number outstanding
at year-end
Options outstanding
Weighted average
remaining
contractual life
Options exercisable
Weighted average
exercise price
Number exercisable
at year-end
Weighted average
exercise price
$
6.30 to $9.99
1,163,211
1.8 years
$
6.97
685,549
$
6.85
$
10.00 to $14.99
2,038,000
4.8 years
$
13.53
182,000
$
12.48
$
15.00 to $18.10
452,500
4.0 years
$
17.84
20,000
$
15.66
$ 6.30 to $18.10
3,653,711
3.3 years
$
11.94
887,549
$
8.20
(f )Stock-based compensation:
The Company uses the fair value based method for the determination of the stock-based compensation costs. The fair value of each option
granted was estimated on the date of grant using the Black-Scholes option pricing model. The pricing model used the following parameters:
a risk free interest rate of 3.5%; average volatility of 33%; an expected life of 4.5 years; an estimated forfeiture rate of 10%; and dividends of nil.
The weighted average fair value of stock options granted for the year ended December 31, 2006 was $4.88 per share (2005 – $2.77 per share).
Bonavista reimbursed NuVista a total of $98,000 in stock based compensation in 2006.
page 44
NUVISTA ENERGY LTD.
8.Income and other taxes:
The provision for income tax differs from the result of which would have been obtained by applying the combined Federal and Provincial income
tax rate to the income before taxes. This difference results from the following items:
December 31,
Expected tax rate
2006
2005
37.1%
38.6%
(thousands)
Expected tax expense
$
14,642
$
24,553
4,654
4,008
(4,619)
(4,613)
Effect of change in tax rate
(11,327)
(1,004)
844
585
Other
-
(81)
Capital taxes
-
654
Non deductible crown payments, net
Resource allowance
Provision for income and other taxes
$
4,194
$
-
$
24,102
The provision for taxes consists of:
Capital taxes
$
4,194
Future income taxes
Provision for income and other taxes
$
4,194
654
23,448
$
24,102
The significant components of the future income taxes as at December 31, 2006 and 2005 are as follows:
2006
2005
(thousands)
$
77,346
$
77,462
Facilities and well equipment
8,977
2,667
(7,485)
(5,473)
(987)
(1,365)
Share issue costs
Future income taxes
$
77,851
$
73,291
Cash paid for taxes for the year ended December 31, 2006 was $409,000 (2005 - $369,000).
page 45
NUVISTA ENERGY LTD.
9. Hedging activities:
As at December 31, 2006, NuVista has entered into by way of costless collars the following crude oil contracts:
Volume
Average Price ($/bbl)
Term
CDN. $76.14 – CDN. $100.19 - WTI
250 bbls/d
CDN. $75.92 – CDN. $100.19 - WTI
April 1, 2007 – June 30, 2007
250 bbls/d
CDN. $75.25 – CDN. $100.19 - WTI
July 1, 2007 – September 30, 2007
250 bbls/d
CDN. $74.25 – CDN. $100.19 - WTI
October 1, 2007 – December 31, 2007
250 bbls/d
CDN. $71.86 – CDN. $99.77 - WTI
January 1, 2008 – March 31, 2008
250 bbls/d
CDN. $71.86 – CDN. $98.11 - WTI
April 1, 2008 – June 30, 2008
January 1, 2007 – March 31, 2007
As at December 31, 2006, NuVista has hedged by way of costless collars the following natural gas contracts:
Volume
5,000 gj/d
250 bbls/d
$8.50 - $12.25 - AECO
Term
November 1, 2006 – March 31, 2007
As at December 31, 2006, the market value of the financial instruments was approximately $1.4 million.
As at December 31, 2006, NuVista has entered into direct sale costless collars to sell natural gas as follows:
Volume
7,500 gj/d
$8.50 - $11.37 - AECO
Term
November 1, 2006 – March 31, 2007
10. subsequent event:
On March 8, 2007, NuVista entered into an agreement to acquire certain natural gas properties in central Alberta for a purchase price of approximately
$36 million, subject to certain closing adjustments. The acquisition has an effective date of January 1, 2007 and is expected to close on April 2, 2007,
with the closing being subject to customary conditions. In connection with this acquisition, NuVista has agreed with its lenders to amend its bank
loan facility to increase the maximum borrowing to $210 million. Prior to the closing of the aquisition, the maximum borrowing permitted by the
bank loan facility will be finalized by the lenders based on a review of year end reserves and the acquired reserves.
page 46
NUVISTA ENERGY LTD.
Abbreviations
ARTC
Alberta Royalty Tax Credit
bblsBarrels
bbls/dBarrels per day
bcfBillion cubic feet
boeBarrel(s) of oil equivalent
boe/dBarrel(s) of oil equivalent per day
gj
Gigajoule(s)
gj/d
Gigajoule per day
km
Kilometres
mbbls
Thousands of barrels
mcf
Thousand cubic feet
mcf/d
Thousand cubic feet per day
mmboe
Million barrels of oil equivalent
mmbtu
Million British thermal units
mmcf
Million cubic feet
mmcf/d
Million cubic feet per day
sq km
Square kilometres
WTIWest Texas Intermediate
Units of natural gas are converted into a barrel of oil equivalent at a ratio of six thousand cubic feet of natural gas to one barrel of oil.
page 47
NUVISTA ENERGY LTD.
Corporate information
Direc tors
Keith A. MacPhail, Chairman
W. Peter Comber, Barrantagh Investment Management Inc.
Pentti O. Karkkainen, KERN Partners Ltd.
Ronald J. Poelzer, Bonavista Energy Trust
Alex G. Verge, President and CEO
Clayton H. Woitas, Range Royalty Management Ltd.
Grant A. Zawalsky, Burnet, Duckworth & Palmer LLP
Management
Keith A. MacPhail, Chairman
Alex G. Verge, President and CEO
Robert F. Froese, Vice President, Finance and CFO
Steven J. Dalman, Vice President, Engineering
D. Chris McDavid, Vice President, Operations
Patrick W.G. Miles, Vice President, Exploration
Gordon Timm, Vice President, Land
Glenn A. Hamilton, Corporate Secretary
Head Office
700, 311 – 6th Avenue SW
Calgary, Alberta T2P 3H2
Telephone: (403) 538-8500
Facsimile: (403) 538-8505
Email: [email protected]
Website: www.nuvistaenergy.com
page 48
NUVISTA ENERGY LTD.
Corporate information
Auditors
KPMG LLP
Chartered Accountants
Calgary, Alberta
Bankers
Canadian Imperial Bank of Commerce
Bank of Montreal
Royal Bank of Canada
Toronto-Dominion Bank
Calgary, Alberta
Engineering Consultants
GLJ Petroleum Consultants Ltd.
Calgary, Alberta
Legal Counsel
Burnet, Duckworth & Palmer LLP
Calgary, Alberta
Registrar and Transfer Agent
Valiant Trust Company
Calgary, Alberta
Stock Exchange Listing
Toronto Stock Exchange
Trading Symbol “NVA”
For further information contac t
Alex G. Verge,Robert F. Froese,
President and CEOVice President, Finance and CFO
(403) 538-8501
(403) 538-8530
NuVista Energy Ltd.
700, 311 – 6 Avenue SW
Calgary, AB T2P 3H2
Telephone: (403) 538-8500
Facsimile: (403) 538-8505
Email:
[email protected]
Website: www.nuvistaenergy.com
page 49
NUVISTA ENERGY LTD.
700, 311 – 6th Avenue SW
Calgary, Alberta T2P 3H2
Telephone: (403) 538-8500
Facsimile: (403) 538-8505
www.nuvistaenergy.com

2006 Annual Report - NuVista Energy Ltd.

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