MESSAGE TO SHAREHOLDERS
Daylight Energy Ltd. ("Daylight" or the "Company") (TSX:DAY) announces its
financial and operating results for the second quarter of 2011 ("Q2 2011") and
its land position in the emerging Duvernay shale opportunity in Alberta.
Daylight has assembled an asset base that includes multiple resource play
opportunities targeting light oil, natural gas liquids ("NGLs") and natural gas
across our premier Deep Basin core area in Northeast British Columbia and
Northwest Alberta. Daylight has made substantial progress in the development of
these key resource play opportunities, including our previously announced second
Wapiti Montney well which produced at a peak rate of over 10 MMcf per day in May
2011 and attained an average production rate of 9.1 MMcf per day plus 450 Bbls
per day of associated NGLs for the month of June 2011. In addition, Daylight has
been actively drilling light oil in the Cardium at Pembina, stacked Cadomin and
Nikanassin natural gas horizons at Elmworth and is proceeding with drilling
additional oil and liquids rich natural gas opportunities within our core area.
During 2011 Daylight has expended approximately $100 million at Crown land
sales, primarily focused on the Duvernay shale. Daylight has accumulated several
contiguous blocks of Duvernay rights within our Pembina core area, where
Daylight has significant oil and gas handling infrastructure in place. Daylight
has also assembled Duvernay rights in the Kaybob area. The Duvernay prospect in
Alberta has recently attracted significant industry attention, with many
industry participants comparing the Duvernay to the Eagle Ford shale development
in Texas. The Duvernay is considered to be the primary source rock in the
Western Canadian sedimentary basin. In total, Daylight now owns and controls
over 130,000 net acres of Duvernay rights in Alberta, which the Company believes
are prospective for oil and liquids rich natural gas. Daylight plans to initiate
a four well pilot project in Q1 2012, with an initial three wells planned in
Pembina and one in the Kaybob area. In addition, Daylight acquired complementary
Montney rights at Wapiti and additional lands adjacent to our Medicine Lodge
Cardium asset which are prospective for liquids rich natural gas. An updated
corporate presentation including Q2 2011 financial and operating results, as
well as type curves, capital costs and economic analysis for Daylight's key
resource play opportunities can be accessed at www.daylightenergy.com.
Second Quarter Financial and Operational Results
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Financial Q2 Q1 Q2 YTD YTD
(000s, unless
otherwise stated) 2011 2011 2010 2011 2010
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Oil and natural gas
revenues $ 162,661 $ 158,412 $ 160,267 $ 321,073 $ 331,201
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Operating netback (1) 88,180 93,554 82,232 181,734 162,838
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Funds from operations
(1) 77,093 97,663 69,746 174,756 136,185
$ per share - Basic 0.36 0.46 0.37 0.83 0.75
- Diluted 0.35 0.44 0.35 0.78 0.71
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Cash dividends
declared 31,871 31,628 34,298 63,499 76,118
Per share 0.15 0.15 0.18 0.30 0.42
Payout ratio (1) 41% 32% 49% 36% 56%
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Capital expenditures
(2) 133,356 115,289 61,799 248,645 156,052
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Shares outstanding
Basic 212,643 211,882 203,258 212,643 203,258
Diluted 238,799 238,038 235,063 238,799 235,063
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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) 140,611 145,599 148,966 143,091 146,872
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Light oil (Bbls/d) 9,883 11,444 12,173 10,659 11,105
Heavy oil (Bbls/d) - - 1,722 - 1,845
NGLs (Bbls/d) 3,496 3,546 3,551 3,521 3,595
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Oil & NGLs (Bbls/d) 13,379 14,990 17,446 14,180 16,545
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Combined (boe/d) 36,814 39,257 42,273 38,029 41,023
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Average prices
received
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Natural gas ($/Mcf) 3.91 3.89 3.94 3.90 4.60
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Light oil ($/Bbl) 100.78 84.88 72.12 92.30 74.56
Heavy oil ($/Bbl) - - 56.92 - 61.85
NGLs ($/Bbl) 68.94 62.50 55.89 65.71 59.03
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Oil & NGLs ($/Bbl) 92.46 79.59 67.32 85.70 69.77
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Combined ($/boe) 48.55 44.84 41.66 46.65 44.61
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$ per boe
Oil and natural gas
revenues 48.55 44.84 41.66 46.65 44.61
Royalties (10.28) (10.00) (11.41) (10.14) (12.40)
Realized gain (loss)
on derivative (1.71) 1.98 2.30 0.18 1.19
Operating expenses (9.60) (9.71) (10.33) (9.66) (10.59)
Transportation
expenses (0.64) (0.62) (0.85) (0.63) (0.88)
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Operating netback (1) 26.32 26.49 21.37 26.40 21.93
Other income 1.67 5.46 2.04 3.62 1.06
G&A - cash charge (2.40) (2.15) (2.25) (2.27) (2.05)
Acquisition
transaction costs - - (0.41) - (0.21)
Cash finance charges (2.57) (2.15) (2.64) (2.36) (2.39)
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Funds from operations
(1) 23.02 27.65 18.11 25.39 18.34
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(1) See "Non-GAAP Measures"
(2) Capital expenditures include additions to property, plant and equipment
and exploration and evaluation assets.
Funds from Operations
-- Funds from operations for Q2 2011 of $77.1 million, compared to record
$97.7 million recorded in Q1 2011 and $69.7 million recorded in Q2 2010.
Production
-- Daylight's total production volumes for Q2 2011 averaged 36,814 boe per
day, a 6% decrease from Q1 2011 and a 13% decrease from Q2 2010,
primarily as a result of the previously disclosed disruption at the
third-party operated K3 gas plant, non-core asset dispositions and a
turnaround at Daylight's Brazeau light oil facility in June 2011.
-- In Q2 2011 average daily production was comprised of 140,611 Mcf per day
of natural gas, 9,883 Bbls per day of light oil and 3,496 Bbls per day
of NGLs.
Capital
In Q2 2011, Daylight drilled a total of 3 gross (1.9 net) wells with 100%
success. This program provided production and reserve additions within the
following core areas:
-- West Central properties including Medicine Lodge and Kaybob. In Q2 2011,
Daylight drilled 1 gross (0.1 net) natural gas well.
-- Pembina properties including Warburg, Brazeau and Tomahawk. In Q2 2011,
Daylight drilled 2 gross (1.8 net) oil wells.
-- Daylight invested $133.4 million on its capital expenditure program
during Q2 2011 compared to $115.3 million in Q1 2011 and $61.8 million
in Q2 2010.
-- Daylight's $100 million investment in land is in addition to our
previously announced $350 million capital program for 2011.
Operating netback
-- Daylight's Q2 2011 light oil realized $100.78 per Bbl while Q1 2011
light oil realized $84.88 per Bbl an increase of 19% per Bbl. Daylight's
light oil price for Q2 2011 was 40% higher than the Q2 2010 light oil
price of $72.12 per Bbl.
-- Daylight's Q2 2011 NGLs realized $68.94 per Bbl a 10% increase from Q1
2011 NGLs realized price of $62.50 per Bbl. Daylight's Q2 2011 NGLs
price was 23% higher than the Q2 2010 price of $55.89 per Bbl.
-- Daylight's natural gas price during Q2 2011 was $3.91 per Mcf
representing a 1% increase from the Q1 2011 natural gas price of $3.89
per Mcf. Daylight's Q2 2011 realized natural gas price was 1% lower than
the Q2 2010 natural gas price of $3.94 per Mcf.
-- Daylight's operating costs per boe decreased 1% to $9.60 per boe during
Q2 2011 as compared to Q1 2011 at $9.71 per boe and were 7% lower than
Q2 2010 at $10.33 per boe. Daylight's YTD 2011 operating expense on a
per boe basis decreased 9% to $9.66 per boe from $10.59 per boe in YTD
2010. 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 $9.80 per boe in 2011.
-- Overall royalty rates decreased to 21.2% of revenue during Q2 2011 from
22.3% of revenue during Q1 2011 due to lower royalties on new production
as well as natural gas royalty credits received during Q2 2011.
-- Natural gas royalties recovered 3.9% of natural gas revenue in Q2 2011
compared to an expense of 3.6% in Q1 2011 due to lower natural gas
prices and royalty credits received during the quarter that exceeded the
value of the total natural gas royalties paid.
-- Light oil and NGLs royalty rates increased to 32.3% of revenue during Q2
2011 as compared to 31.2% of revenue in Q1 2011 due to significant
increases in oil and NGL prices.
Dividends and payout ratio
-- During Q2 2011, Daylight declared three monthly cash dividends totaling
$31.9 million ($0.15 per share) with a resulting payout ratio of 41%.
YTD 2011, Daylight declared six monthly cash dividends totaling $63.5
million ($0.30 per share) with a resulting payout ratio of 36%.
Balance sheet and financial flexibility
-- Daylight's balance sheet provides significant capacity and flexibility,
with approximately $437 million of bank debt drawn against our $625
million credit facility at June 30, 2011.
Tax pools
-- Tax pools of approximately $1.6 billion at June 30, 2011 are available
to shelter cash flow from income tax in current periods and beyond.
2011 Guidance update
-- Daylight targeted resumption of drilling, completion and tie-in
operations in late May 2011; however, continued wet weather conditions
have delayed planned operations. While some field operations have
resumed, the weather related delays will impact previously forecast Q3
2011 production volumes which we now expect to be similar to our Q2 2011
production volumes. Daylight does not anticipate additional weather
related delays for the balance of 2011 and maintains its Q4 2011
production guidance at 42,000 boe per day.
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 its technical expertise in exploration, exploitation and
development to create long-term value for our shareholders. 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. 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. Daylight has approximately 213 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 and
six months ended June 30, 2011, together with the notes thereto, and
Management's Discussion and Analysis for the three and six months ended June 30,
2011, have been posted on our website at www.daylightenergy.com and filed under
our profile on SEDAR (www.sedar.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 2011 capital program; anticipated Q3 2011 and Q4 2011
production volumes; anticipated operating costs for 2011; the prospective nature
of Daylight's resource play assets for oil, natural gas and NGLs; the planned
timing and location of drilling operations on Daylight's undeveloped Duvernay
lands; the anticipated impact of weather delays on production volumes for Q3
2011 and Q4 2011, and that weather delays are not expected to impact Daylight's
operations for the balance of 2011.
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, or the lack
thereof, associated with third-party processing operations; the availability and
cost of labor and services, including but not limited to drilling and completion
equipment and services; the availability of additional capital on acceptable
terms; the availability of input materials and equipment required to drill,
complete, tie-in and equip new wells, including but not limited to the
availability of water and other substances required to complete new wells or
recomplete existing wells; 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; the receipt of
required regulatory and other third-party approvals for such dispositions; the
realization of the anticipated benefits of the acquisitions, including the
acquisition of undeveloped lands which Daylight considers prospective for
hydrocarbons; the accuracy of Daylight's geological interpretation of its
drilling and undeveloped land opportunities; and the existing and future
regulatory and legal framework governing Daylight's business and operations and
our ability to comply with current and future environmental and other laws,
including but not limited to environmental laws and regulations associated with
drilling and completion technologies and water use.
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; competition; risks associated with utilizing existing technologies
and future technological advancements in Daylight's operations and drilling and
completion activities; failure to realize the anticipated benefits of
acquisitions, including the acquisition of undeveloped lands which Daylight
considers prospective for hydrocarbons; risks associated with the accuracy, or
lack thereof, of Daylight's geological interpretation of its drilling and
undeveloped land opportunities; 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, or to access such capital on acceptable terms; the impact
of global social and economic conditions on Daylight's business, operations and
access to capital, including but not limited to government credit issues and the
potential inability to service rising debt levels and adequately fund
obligations on an ongoing basis; geological, technical, drilling and processing
problems and other difficulties in producing oil, NGLs and natural gas reserves;
failure to obtain required regulatory and other third-party approvals; changes
in legislation, including but not limited to tax laws, royalty rates and
environmental laws applicable to our business and operations, including
environmental laws and regulations associated with drilling and completion
technologies, water use and the use of certain chemicals in our operations, and
our ability to comply with current and future environmental and other 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 and six month periods ended
June 30, 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 and six month periods ended June 30, 2011 for further information.
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