Baytex Energy Trust reported that cash flow from operations for the fourth quarter was a record $98.7 million, an increase of 32% compared to $75.0 million for the third quarter of 2007. Baytex received an average oil price of $56.37/bbl in the fourth quarter, an increase of 11% compared to $50.85/bbl in the third quarter as benchmark WTI price increased 20% to an average of US$90.68/bbl.
Natural gas prices also improved in the fourth quarter, with Baytex receiving an average wellhead price of $6.31/Mcf, 9% higher than that in the third quarter. In addition to the increase in production and commodity prices, cash flow in the fourth quarter was aided by the following non-recurring items. Firstly, with the expiry of the Frontier heavy oil supply agreement on December 31, 2007, inventory in transit via the Express Pipeline was settled at year-end, resulting in an additional $6.0 million of sales proceeds being reported in the fourth quarter.
A similar amount of sales proceeds from inventory adjustment will also be recorded in the first quarter of 2008. Secondly, we terminated the interest rate swap arrangement associated with our senior subordinated notes during the quarter, resulting in a cash gain of $2.0 million. We have reverted to paying the fixed rate coupon of 9.625% on these notes.
Lloyd Blend heavy oil pricing differentials averaged 36% of WTI price for the fourth quarter compared to 29% in the third quarter, in part due to lower seasonal demand. This higher differential was also caused by several operational issues in December, including the shut-down of the main pipeline to the Chicago refining region for a short period following an accident, and two refinery accidents affecting Canadian through-put.
These issues have since been rectified, and Lloyd Blend differential has narrowed significantly and is expected to average below 25% in the first quarter of 2008, reflecting fundamental improvements brought on by infrastructure development and supply issues affecting the North American market.
The cash flow capability of Baytex's asset base under prevailing commodity prices is demonstrated by our results in the second half of 2007. Our average production of 38,698 boe/d in the second half was 77% weighted towards crude oil. Cash flow in this six-month period was $174 million ($2.09 per basic unit), generated under average benchmarks of WTI price at US$83.03, CAD/USD exchange rate at 1.0132, Lloyd Blend differential at 33% and AECO monthly index gas price at C$5.65/Mcf.
Capital spending during this period was $84 million, or 48% of cash flow. Combined with payout ratios in the second half of 44% net of DRIP and 52% before DRIP, our financial position continued to improve alongside operational gains.
Total net monetary debt, excluding notional mark-to-market liabilities and future income tax assets at the end of the year, was $444 million and represented a reduction of $23 million from the end of the third quarter. This net debt represents 1.3 times annualized second half 2007 cash flow. Baytex's excellent financial strength, together with our industry-leading capital efficiency and prudent operational and financial practices, will position us well to continue to deliver superior market performance under the current operating environment.
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