MESSAGE TO SHAREHOLDERS
Daylight Energy Ltd. ("Daylight" or the "Company") (TSX:DAY) announces its
financial and operating results for the first quarter of 2011 ("Q1 2011").
Daylight is firmly established as a balanced intermediate oil and natural gas
producer with a current dividend yield of approximately 6% and a sustainable
growth business model. Highlights of Q1 2011 include:
-- Record quarterly funds from operations of $97.7 million.
-- 32% payout ratio with sustainable $0.05 monthly cash dividend per share.
-- Increasing operating netbacks driven by reduced operating and
transportation costs in conjunction with lower royalties.
-- Non-core asset disposition success further focuses asset base and funds
increased 2011 capital program.
Key Events During Q1 2011
In Daylight's press release dated April 19, 2011, operational highlights
included the continued success of the Pembina Cardium horizontal oil program,
the development of a new liquids rich gas play at Pembina in the Rock Creek
formation, drilling of a second Wapiti Montney liquids rich gas well and the
execution of purchase and sale agreements to dispose of further non-core assets
for proceeds of approximately $44 million.
The previously announced Rock Creek liquids rich gas results, with 3 (2.3 net)
wells coming on production with initial rates of 3, 7 and 10 MMcf per day
respectively and liquids yields in excess of 50 bbls per MMcf, opens up an
exciting new opportunity for Daylight in the Pembina area. This development is
illustrative of the opportunities that are continuously emerging in the Deep
Basin region of NW Alberta and NE British Columbia, and provide the primary
rationale behind Daylight's decision to focus our asset base in this key energy
fairway. More than 95% of Daylight's current production is now located in the
Deep Basin. Daylight is pleased to report that, after 30 days of production, the
Rock Creek wells continue to perform above expectation with 30 day average
production rates of 2.2, 4.3 (facility restricted) and 8.4 MMcf per day with
liquids rates continuing to exceed 50 bbls per MMcf. Daylight holds over 70 net
sections of land in the Rock Creek fairway at Pembina.
During Q1 2011, Daylight drilled our previously announced second horizontal gas
well into the liquids rich Montney zone at Wapiti and a new horizontal gas well
into the Nikanassin zone at Elmworth. Daylight plans to complete and initiate
production from both of these wells after spring break-up.
Budget Increases to $350 Million
On April 19, 2011, Daylight announced that the proceeds from the non-core asset
dispositions, which were completed in April 2011, would be used to fund an
increase in Daylight's 2011 capital budget. Based on the robust funds from
operations recorded in Q1 2011 and the very encouraging results noted above from
the Q1 2011 capital program, Daylight is pleased to announce an increase in our
capital budget for 2011 to $350 million.
The increased capital will be used not only to drill additional wells targeting
Pembina Cardium light oil and Rock Creek liquids rich gas, but also to position
the company for future growth by debottlenecking and enhancing our production
infrastructure particularly in our very active Pembina area. Daylight is
targeting the drilling of 6 additional Cardium oil wells for a total of 34 net
wells and 6 additional Rock Creek wells in 2011. Funds will also be used to
enhance Daylight's position in certain emerging oil and liquids rich
opportunities in our core Deep Basin fairway.
As noted recently by other operators in the Deep Basin area, service costs for
certain field operations have been increasing due to higher demand in Western
Canada. Daylight's $350 million 2011 capital budget includes adjustments to
certain costs of 5% to 10% to reflect these increases. Daylight maintains our
operating cost guidance range at $9.50 - $9.90 per boe for 2011 based on the
successful production additions from our 2011 capital program in our lower cost
resource play areas.
The increased $350 million capital budget marks the next step in Daylight's
drive to become the premiere resource play developer in the Deep Basin. With the
delineation phase of our major light oil resource play completed and the
increase to our 2011 capital budget, Daylight is now transitioning to continuous
drilling operations in our Pembina Cardium light oil play, focussing on pad
drilling and downspacing opportunities to further reduce capital costs. Daylight
continues to pursue technical innovations in all of our resource play
developments to ensure minimum costs are deployed for maximum value creation to
our shareholders.
2011 Guidance Update
Daylight's average production of 39,257 boe per day in Q1 2011 included the
previously disclosed disruption at the third party operated K3 gas plant. This
disruption temporarily shut in approximately 8,500 boe per day of Daylight's
liquids rich natural gas (85% natural gas, 15% NGLs) from its West Central and
Wapiti Montney properties from early March to mid-April with an impact of
approximately 2,000 boe per day on Q1 2011 and 1,500 boe per day for Q2 2011.
The K3 gas plant experienced another disruption in early May that the operator
anticipates could be resolved within 2 weeks of the disruption but may continue
for a further 4 to 8 weeks if their proposed repair strategy for the plant is
not successful. Daylight is investigating opportunities to allow our production
to flow sooner but there are no guarantees that an earlier solution will be
available. Subsequent to the March disruption, Daylight reduced K3 gas plant
throughput to approximately 7,000 boe per day by permanently rerouting 1,500 boe
per day of production to a new facility at Marlboro where Daylight holds a 19%
ownership interest. During Q1 2011, several Nisku oil wells began producing
higher water cuts which reduced oil volumes by approximately 1,500 bbls per day
in Q1 2011 and is expected to continue going forward. Daylight has initiated a
program of artificial lift installations to optimize production and reserve
recoveries from these wells, with Nisku oil volumes anticipated to represent
less than 10% of Daylight's corporate production by the end of 2011.
For the near term, the above noted production events have more than offset the
significant production volume additions that Daylight's 2011 capital program has
delivered. Based on the previously noted factors, an assumption that the K3 gas
plant will be down for one month until early June and the impact of our non-core
property dispositions that closed in early Q2 2011 (1,600 boe per day - 90% gas)
net of the significant production additions from our $350 million 2011 capital
program, Daylight is expecting Q2 2011 production volumes to be approximately
36,500 boe per day with Q3 and Q4 2011 production volumes forecast to increase
to approximately 39,000 and 42,000 boe per day respectively. Daylight expects to
exit 2011 with production volumes exceeding 43,000 boe per day and providing a
strong platform for 2012 growth.
Should production at the K3 gas plant remain disrupted for a one month period,
Daylight's 2011 annual cash flow would be reduced by approximately 1%. Daylight
carries contingent business interruption insurance on the K3 gas plant to
replace financial losses beyond this one month period.
First Quarter Financial and Operational Results
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Financial Q1 Q4 Q1
(000s, unless otherwise stated) 2011 2010 2010
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Oil and natural gas revenues $ 158,412 $ 163,960 $ 170,934
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Operating netback 93,554 92,554 80,606
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Funds from operations 97,663 94,465 66,439
$ per share - Basic 0.46 0.46 0.38
- Diluted 0.44 0.43 0.36
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Cash dividends declared 31,628 31,218 41,820
Per share 0.15 0.15 0.24
Payout ratio 32% 33% 63%
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Capital expenditures (1) 115,289 106,789 94,253
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Shares outstanding
Basic 211,882 210,090 174,278
Diluted 238,038 235,320 206,216
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Operational
(Per boe amounts may not add exactly due to rounding)
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Average daily production
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Natural gas (Mcf/d) 145,599 140,378 144,754
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Light oil (bbls/d) 11,444 13,924 10,025
Heavy oil (bbls/d) - - 1,969
NGLs (bbls/d) 3,546 3,223 3,640
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Oil & NGLs (bbls/d) 14,990 17,147 15,634
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Combined (boe/d) 39,257 40,543 39,760
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Average prices received
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Natural gas ($/Mcf) 3.89 3.72 5.29
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Light oil ($/bbl) 84.88 76.93 77.57
Heavy oil ($/bbl) - - 66.20
NGLs ($/bbl) 62.50 58.75 62.12
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Oil & NGLs ($/bbl) 79.59 73.51 72.54
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Combined ($/boe) 44.84 43.96 47.77
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$ per boe
Oil and natural gas revenues 44.84 43.96 47.77
Royalties (10.00) (11.27) (13.47)
Realized gain on derivative contracts 1.98 2.55 -
Operating expenses (9.71) (9.78) (10.86)
Transportation expenses (0.62) (0.65) (0.91)
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Operating netback 26.49 24.81 22.53
Other income 5.46 4.60 -
G&A - cash charge (2.15) (1.84) (1.83)
Acquisition transaction costs - 0.04 -
Cash finance charges (2.15) (2.28) (2.13)
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Funds from operations 27.65 25.33 18.57
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(1) Capital expenditures include additions to property, plant and equipment
and exploration and evaluation assets.
Funds From Operations
-- Record high $97.7 million funds from operations for Q1 2011 up from
$94.5 million recorded in Q4 2010 and $66.4 million recorded in Q1 2010.
-- The increase in funds from operations for Q1 2011 is driven by reduced
operating and transportation costs in conjunction with lower royalties.
Production
-- Daylight's total production volumes for Q1 2011 averaged 39,257 boe per
day, a 3% decrease from Q4 2010 and a 1% decrease from Q1 2010.
-- Production for Q1 2011 is lower than Q4 2010 due to a temporary third
party processing disruption at the K3 gas plant which shut in a
significant portion of Daylight's liquids rich natural gas from its West
Central and Wapiti Montney properties from early March to mid-April with
an impact of approximately 2,000 boe per day on Q1 2011 as well as
higher than expected water cuts and reduced oil production of
approximately 1,500 bbls per day for Q1 2011 related to Nisku oil
volumes.
-- In Q1 2011 average daily production was comprised of 145,599 Mcf per day
of natural gas, 11,444 bbls per day of light oil and 3,546 bbls per day
of NGLs.
Capital
-- In Q1 2011, Daylight drilled a total of 24 gross (17.3 net) wells with a
96% success rate.
-- Drilling program delivered production and reserve additions within the
following core areas:
-- Peace River Arch properties including Elmworth and Wapiti. In Q1
2011, Daylight drilled 6 gross (4.5 net) gas wells.
-- West Central properties including Medicine Lodge and Kaybob. In Q1
2011, Daylight drilled 2 gross (0.6 net) oil wells and 3 gross
(0.4 net) natural gas wells.
-- Pembina properties including Brazeau, Tomahawk, Warburg and East
Pembina. In Q1 2011, Daylight drilled 10 gross (9.0 net) oil wells,
2 gross (2.0 net) natural gas wells and 1 gross (0.8 net) dry Nisku
commitment well.
-- Daylight invested $115.3 million on its capital expenditure program
during Q1 2011 compared to $106.8 million in Q4 2010 and $94.3 million
in Q1 2010. The capital expenditure program continues to provide new
production volumes and Daylight's 2011 capital expenditure program has
been increased to $350 million.
Operating netback
-- Daylight's Q1 2011 light oil price was $84.88 per bbl, 10% higher than
our Q4 2010 light oil price of $76.93 per bbl. Daylight's light oil
price for Q1 2011 was 9% higher than the Q1 2010 light oil price of
$77.57 per bbl.
-- Daylight's Q1 2011 NGLs price of $62.50 per bbl was a 6% increase from
Q4 2010 NGLs price of $58.75 per bbl. Daylight's Q1 2011 NGLs price was
1% higher than the Q1 2010 price of $62.12 per bbl.
-- Daylight's natural gas price during Q1 2011 was $3.89 per Mcf which
represents a 5% increase from the Q4 2010 natural gas price of $3.72 per
Mcf. Daylight's Q1 2011 realized natural gas price was 26% lower than
the Q1 2010 natural gas price of $5.29 per Mcf.
-- Daylight's operating costs during Q1 2011 decreased 1% to $9.71 per boe
as compared to Q4 2010 at $9.78 per boe and were 11% lower than Q1 2010,
at $10.86 per boe. Daylight's operating costs have continued to improve
due to the addition of new production in areas with lower operating
costs per boe, the disposition of non-core assets with higher operating
expenses and active operating cost management. Daylight expects
operating costs to average between $9.50 and $9.90 per boe in 2011.
-- Overall royalty rates decreased to 22.3% of revenue during Q1 2011 from
25.6% of revenue during Q4 2010 due to lower royalties on new production
and the new royalty price curves in effect January 1, 2011 which lowered
the maximum royalty payable on oil production to 40% of revenue versus
the previous maximum of 50%.
-- Natural gas royalties decreased to 3.6% of natural gas revenue in Q1
2011 compared to 5.2% in Q4 2010 due to lower natural gas prices and
royalty holidays not previously recognized by the Crown. Natural gas
royalties decreased in Q1 2011 from 12.8% in Q1 2010 due to lower
natural gas prices. Oil and NGLs royalty rates decreased to 31.2% of
revenue during Q1 2011 as compared to 34.1% of revenue in Q4 2010 and
38.6% of revenue in Q1 2010 due to the reduced Crown royalties on new
production and new royalty curves.
Dividends and payout ratio
-- During Q1 2011, Daylight declared three $0.05 monthly cash dividends per
share totaling $31.6 million ($0.15 per common share) with a resulting
payout ratio of 32%. This represents an enhancement on the reported
payout ratio of 33% during Q4 2010 and 36% during Q1 2010, highlighting
Daylight's sustainable business model of organic growth combined with a
stable dividend payment.
Balance sheet and financial flexibility
-- Daylight's balance sheet provides significant capacity and flexibility,
with approximately $321 million of bank debt drawn against our $625
million credit facility at March 31, 2011.
Tax pools
-- Tax pools of approximately $1.6 billion at March 31, 2011 are available
to shelter cash flow from income tax in current periods and beyond.
Daylight is a growing intermediate oil and natural gas producing company with a
high quality suite of resource play assets in Western Canada. Our highly focused
team utilizes our technical expertise in exploration, exploitation and
development to create long-term value for our shareholders. With our experience
on the forefront of several resource play developments in the Deep Basin,
Daylight is well positioned on the leading edge of exploration for the next
generation of oil and liquids rich resource plays. Our team has developed a
multi-year inventory of repeatable, low risk exploitation resource play projects
with substantial potential reserve additions on assets we currently own and
control in the premier Pembina light oil fairway and Deep Basin areas of Alberta
and British Columbia.
Daylight has approximately 212 million common shares outstanding which trade on
the TSX under the symbol DAY. Daylight Series C and Series D convertible
debentures trade on the TSX under the symbols DAY.DB.C and DAY.DB.D,
respectively.
Interim Unaudited Consolidated Financial Statements and MD&A
Daylight's interim unaudited consolidated financial statements for the three
months ended March 31, 2011, together with the notes thereto, and Management's
Discussion and Analysis for the three months ended March 31, 2011, have been
posted on our website at www.daylightenergy.com and filed under our profile on
SEDAR (www.sedar.com).
An updated corporate presentation is available on Daylight's website at
www.daylightenergy.com.
ADVISORY:
Information Regarding Disclosure in This News Release
The term "boe" is utilized by Daylight in relation to reserves or production to
combine the volumetric measures of natural gas, light oil, heavy oil, and NGLs
to a common "barrel of oil equivalent" term of measurement. Natural gas volumes
have been converted at the ratio of 6,000 cubic feet of natural gas to one boe
and this conversion ratio is based upon an energy equivalent conversion method
primarily applicable at the burner tip and does not represent value equivalence
at the wellhead. Light oil, heavy oil, and NGLs have been converted at the ratio
of one barrel of these liquids to one boe. Use of the terms boe and amounts per
boe without reference to the underlying commodity may be misleading.
Forward-Looking Information and Statements
This press release contains forward-looking statements and forward-looking
information within the meaning of applicable securities laws. The use of any of
the words "expect", "anticipate", "continue", "estimate", "objective",
"ongoing", "may", "will", "project", "should", "believe", "plans", "intends" and
similar expressions are intended to identify forward-looking statements or
information. More particularly and without limitation, this press release
contains forward-looking statements and information concerning: the anticipated
results of Daylight's increased 2011 capital program, and the anticipated
allocation of capital spending with respect to such increase; anticipated
increases in costs of certain drilling, completion and other services throughout
2011; anticipated results of technical improvements, optimization activities and
scale; anticipated third party processing downtime at the K3 Gas Plant, and the
effect of such downtime on Daylight's production and financial results;
anticipated re-routing of certain production temporarily shut-in as a result of
the K3 Gas Plant disruption; anticipated results of applying artificial lift to
Daylight's producing Nisku wells in the Pembina area; anticipated reduction of
Nisku production volumes and the anticipated percentage of 2011 exit production
represented by Nisku wells; anticipated Q2 2011, Q3 2011 and 2011 exit
production volumes; anticipated operating costs for 2011; and anticipated
sustainability of Daylight's business model.
The forward-looking statements and information in this press release are based
on certain key expectations and assumptions made by Daylight, including but not
limited to expectations and assumptions concerning: prevailing and future
commodity prices and exchange rates; applicable royalty rates and tax laws;
future production rates; the performance of existing and future wells;
application of existing technologies and future advancements in technology to
Daylight's operations and drilling activities; the success obtained in drilling
new wells; the inventory of new drilling locations; the sufficiency of budgeted
capital expenditures in carrying out planned activities; downtime associated
with third party processing disruptions and turnarounds; the availability and
cost of labor and services, including but not limited to completion equipment
and services; adequate weather and environmental conditions for drilling and
completion activities, including transportation of associated equipment; the
receipt, in a timely manner, of regulatory and third party approvals; Daylight's
ability to negotiate acceptable terms of sale for non-core assets, including
financial assets, and market demand therefore; and the receipt of required
regulatory and other third party approvals for such dispositions.
Although Daylight believes that the expectations and assumptions on which such
forward-looking statements and information are based are reasonable, undue
reliance should not be placed on the forward-looking statements and information
because Daylight can give no assurance that they will prove to be correct. There
is no representation by Daylight that actual results achieved during the periods
identified in this press release will be the same in whole or in part as those
forecast.
Since forward-looking statements and information address future events and
conditions, by their very nature they involve inherent risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors and risks. These include, but are not limited to the risks
associated with the oil and gas industry in general such as: operational risks
in development, exploration and production; delays or changes in plans with
respect to exploration or development projects or capital expenditures; the
uncertainty of reserve and resource (including original oil in place) estimates;
the uncertainty of estimates and projections relating to production, costs and
expenses; health, safety and environmental risks; risks associated with weather
and the impact on drilling and completion activities and the transportation of
associated equipment; commodity price and exchange rate fluctuations;
processing, marketing and transportation of petroleum and natural gas and loss
of markets; environmental risks; competition; risks associated with utilizing
existing technologies and future technological advancements in Daylight's
operations and drilling activities; failure to realize the anticipated benefits
of acquisitions; risks regarding the integration of acquired entities and
assets; incorrect assessment of the values of acquisitions; Daylight's ability
to negotiate acceptable terms for the disposition of non-core assets, including
financial assets; Daylight's ability to obtain all third party and regulatory
approvals necessary to dispose of such assets; ability to access sufficient
capital from internal and external sources; failure to obtain required
regulatory and other third party approvals; and changes in legislation,
including but not limited to tax laws, royalty rates and environmental laws.
Readers are cautioned that the foregoing list of risk factors is not exhaustive.
Additional information on these and other factors that could affect the
business, operations or financial results of Daylight are included in reports on
file with applicable securities regulatory authorities, including but not
limited to Daylight's Annual Information Form for the year ended December 31,
2010 and Management's Discussion and Analysis for the year ended December 31,
2010, each of which may be accessed on Daylight's SEDAR profile at www.sedar.com
or on our website at www.daylightenergy.com.
The forward-looking statements contained in this press release are made as of
the date hereof and Daylight undertakes no obligation to update publicly or
revise any forward-looking statements or information, whether as a result of new
information, future events or otherwise, unless so required by applicable
securities laws.
Non-GAAP Measures
Throughout this news release we use the terms "funds from operations", "funds
from operations per share", "payout ratio", and "operating netback". "Funds from
operations" and "funds from operations per share" are terms utilized by Daylight
to evaluate operating performance and assess leverage. A reconciliation of cash
provided by operating activities to funds from operations is set forth in the
Management's Discussion and Analysis for the three month period ended March 31,
2011 under the heading "Non-GAAP Measures". "Payout ratio" is a term utilized to
evaluate financial flexibility and the capacity to fund dividends. Payout ratio
is defined on a percentage basis as dividends declared divided by funds from
operations. "Operating netback" is a term utilized by Daylight to evaluate the
operating performance of petroleum and natural gas assets. The term operating
netback is defined as petroleum and natural gas revenues less royalties,
operating, and transportation expenses plus (minus) the realized gain (loss) on
derivative contracts.
Such terms do not have a standardized meaning or definition as prescribed by
International Financial Reporting Standards ("GAAP") and therefore may not be
comparable with calculations of similar measures by other entities. Refer to the
"Non-GAAP Measures" section of the Management's Discussion and Analysis for the
three month period ended March 31, 2011 for further information.
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