"Our second quarter drilling program included six wells as wet field conditions delayed the start of our summer program," said Michael Culbert, President and CEO of Progress. "It did, however, provide us the opportunity to focus on integrating the Foothills and Deep Basin assets that we acquired in the quarter. We have been actively licensing drilling locations, reprocessing and integrating the new seismic with our existing seismic data, and aggressively de-bottlenecking facilities to bring-on behind pipe gas volumes."
Progress generated strong financial results with cash flow of $58.4 million or $0.53 per unit, diluted, for the second quarter of 2007, a two percent increase compared to the second quarter of 2006. Cash distributions declared totaled $29 million resulting in a payout ratio of 50 percent excluding exchangeable shares which do not receive cash distributions, or 56 percent including exchangeable shares.
Progress integrates acquired assets
In the second quarter, Progress participated in 6 gross wells (4.8 net) with three gross wells (2.4 net) drilled in the Deep Basin and three gross wells (2.4 net) drilled at Gilby in south central Alberta. The Deep Basin wells were drilled with a 100 percent success rate and two of the three Gilby wells are commercial gas wells that will be tied in during the third quarter.
Drilling activities in the Deep Basin of northwest Alberta and the northeast British Columbia Foothills will ramp-up through the summer. Progress currently has four rigs operating and will spud its first well at the newly acquired Bubbles field in the Foothills before the end of July. The prolonged wet spring and early summer impacted completion and facilities activities but as of the second week in the third quarter, conditions had improved sufficiently to permit tie-in activities on the balance of the wells from the winter program.
With the closing of Progress' two acquisitions, a large part of the focus during the second quarter was on implementing near to medium term opportunities within the acquired assets. The process is ongoing but has advanced to the point where drilling locations, re-completion candidates and de-bottlenecking opportunities for the balance of 2007 have been identified.
Progress' geophysical efforts were concentrated on the Julienne West 120 square kilometer 3-D seismic program, which has now been evaluated and has expanded the drilling inventory. Much of the 800 square kilometer 3-D seismic from its corporate acquisition has been reprocessed and integrated into its pre-existing 1200 square kilometer database for further evaluation. Progress' drill location inventory at present stands at over 250 locations which represents approximately three to four years of drilling inventory at the current pace. The inventory is expected to grow over the next several quarters as more time is invested in the newly acquired assets and new Crown land acquisitions.
Acquisitions successfully closed
In the second quarter, Progress successfully closed its two previously announced acquisitions. The acquisition of shares of a private company with assets in northeast British Columbia and northwest Alberta closed on April 2, 2007 with an effective date of April 1, 2007. The acquisition price was $389.4 million after closing adjustments and costs and included production of approximately 6,400 boe per day weighted 95 percent to natural gas. The acquisition included 250,000 net undeveloped acres in large contiguous land blocks with high-working interests, over 1,700 square kilometers of 3-D seismic coverage and more than 4,200 kilometers of 2-D data, all of which will assist Progress in building it's ongoing drilling inventory.
The acquisition of the Wapiti area assets in the Deep Basin closed on May 31, 2007. The acquisition amounted to $40.9 million, net of final closing adjustments. The acquisition added approximately 800 boe per day of production, 1.54 million boe of proved plus probable reserves and 31,000 net undeveloped acres of land with varying working interests which will create further opportunities to consolidate working interests within the region. Progress believes there is substantial upside opportunities on the acquired lands which are contiguous with the Trust's Gold Creek property. The acquisition also adds ownership in infrastructure which is strategic to Progress' area expansion plans.
Natural gas prices and low cost structure generate strong cash flows
Progress' average gas price in the quarter was $7.52 per thousand cubic feet ("mcf") including gains on its commodity risk management positions. Progress' natural gas production achieves a premium price to the prices quoted at AECO because of its high heat content nature.
"Natural gas prices have followed their historic pattern and weakened through the shoulder season due to low weather-related demand and rapidly growing inventories," said Mr. Culbert. "Our cost structure and focus on our balance sheet strength, position us to not only weather the cyclical nature of the natural gas business but also to benefit during weaker periods as we demonstrated with the two acquisitions during the quarter."
Operating expenses averaged $6.57 per boe in the second quarter of 2007 compared to $6.15 per boe in the second quarter of 2006. The increase reflects the impact of spring maintenance and the acquisitions in the second quarter which are expected to trend down as the Trust optimizes the assets.
Maintaining financial strength
Capital investment in the second quarter was $55.8 million including $40.9 million associated with the acquisition of the Wapiti assets in the Deep Basin of northwest Alberta. At the end of the second quarter, bank debt outstanding was $261.2 million on total credit facilities of $375 million. Total bank debt, plus working capital deficiency, to annualized second quarter cash flow was 1.8 times.
Progress maintains a consistent price risk management program to mitigate price risk volatility and provide greater certainty of its revenue stream. For the period from April 1, 2007 to October 31, 2007, the Trust has hedges on 40,000 gigajoule ("GJ") per day at a net floor price of $7.04 per GJ.
Progress is well positioned for the implementation of the Canadian government's Tax Fairness Plan beginning in 2011. In aggregate, after giving effect of the corporate acquisition, Progress has substantial tax pools of approximately $1 billion.
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