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Gold/Mining/Energy : KERM'S KORNER -- Ignore unavailable to you. Want to Upgrade?

To: Herb Duncan who wrote (12986)	10/29/1998 3:59:00 PM
From: Kerm Yerman	Respond to of 15196

EARNINGS / Part 1 of 2 - Renaissance Energy Third Quarter Report RENAISSANCE ENERGY LTD. TSE, ME SYMBOL: RES OCTOBER 29, 1998 CALGARY, ALBERTA--As we enter the final months of the year, the business environment for Renaissance has improved significantly compared to earlier in the year. Cost structures are declining while realized commodity prices, most notably for crude oil, have improved. In addition, our prospect inventory continues to increase through exploration and selective property acquisitions. Natural gas prices are showing marked improvement, especially in Alberta where slower than expected production growth is currently overwhelmed by export capacity growth. Despite the continuing weakness in the benchmark WTI oil price, our realized oil price has increased significantly in recent months due to the narrowing of price differentials between light crude oil and Renaissance's blend of medium gravity oils. Margins have been further improved as our costs have declined significantly through unit service cost reductions of 10 to 20 percent and improved service efficiencies. Natural gas exploration successes, primarily in the southern part of our operations, will provide significant new production additions this winter. Oil exploration has produced 8 new pool discoveries since spring, increasing our development inventory. Recently we have had strategic success acquiring oil properties at, or below our historic costs. Closure on these properties is expected before year end. The third quarter was a period of significant organizational achievement for Renaissance, most significantly the acquisition of Pinnacle Resources. We characterized this transaction as a larger scale property acquisition, equivalent to the total of all our property acquisitions completed over the past five years. Immediately upon closing the Pinnacle acquisition in early July, we focused on the timely and efficient integration of its operations. Where the combined staff of the two companies prior to the transaction approached 1,000, we now total 800 employees dedicated to the profitable management of our assets. By mid-September, we had successfully subleased Pinnacle's former offices and housed all of our head office employees in our existing premises. The amalgamation with Renaissance occurred on October 1st and Pinnacle ceased to exist as a legal entity. Contemporaneously, all of Pinnacle's debt was restructured on a basis compatible with Renaissance's existing credit facilities. The predetermined synergies in the field operations of both companies allowed consolidation and rationalization of the production facilities to be concluded by the end of the third quarter. While the realization of some of the benefits of the acquisition of Pinnacle's reserves has been delayed somewhat by the low oil prices in July and August, we are excited by the profitable growth opportunities presented by these assets - opportunities that we expect to realize over the next 1 to 3 years. Concurrent with the Pinnacle transaction, we announced our intention to sell a group of primarily natural gas assets if we received acceptable bids. Unfortunately, the turmoil in the financial markets spilled over into the acquisition markets and we did not receive satisfactory responses. We terminated all selling efforts in mid-September. We will continue to be cognizant of those selected divestiture opportunities that make sense in the overall management of our property portfolio. STATISTICAL SUMMARY Three Months Nine Months Ended Ended September 30 September 30 Percent 1998 1997 1998 1997 Change -------------------------------------------------------------- FINANCIAL (millions except per share) Gross revenues $ 230 $ 219 $ 585 $ 697 -16 Cash flow from operations $ 102 $ 119 $ 273 $ 387 -29 Per share - basic $ 0.71 $ 1.02 $ 2.17 $ 3.34 -35 - fully diluted $ 0.69 $ 0.98 $ 2.09 $ 3.17 -34 Net income (loss) $ (3) $ 21 $ 1 $ 83 -99 Per share - basic $ (0.02) $ 0.18 $ 0.01 $ 0.71 -99 - fully diluted $ (0.02) $ 0.18 $ 0.01 $ 0.70 -99 PRODUCTION Oil (thousands of barrels) 8,989 7,569 23,069 22,154 + 4 Daily average (barrels) 97,703 82,274 84,501 81,151 Sales price $ 15.57 $ 19.72 $ 13.62 $ 20.87 -35 Royalties (2.19) (3.33) (1.95) (3.76) -48 Operating costs (5.18) (4.96) (5.08) (4.84) + 5 ---------------------------------------- Netback per barrel $ 8.20 $ 11.43 $ 6.59 $ 12.27 -46 ---------------------------------------- Natural gas (million cubic feet) 47,710 38,649 126,223 115,046 +10 Daily average (million cubic feet) 519 420 462 421 Sales price $ 1.89 $ 1.81 $ 2.15 $ 2.04 + 5 Royalties (0.22) (0.23) (0.23) (0.31) -26 Operating costs (0.39) (0.31) (0.37) (0.30) +23 ---------------------------------------- Netback per thousand cubic feet $ 1.28 $ 1.27 $ 1.55 $ 1.43 + 8 ---------------------------------------- Combined (mboe)(x) 13,760 11,434 35,691 33,658 + 6 Daily average (boe) 149,565 124,283 130,736 123,289 Sales price $ 16.73 $ 19.19 $ 16.40 $ 20.71 -21 Royalties (2.18) (3.00) (2.09) (3.53) -41 Royalty abatement 0.03 0.03 0.11 0.03 +267 Operating costs (4.75) (4.33) (4.58) (4.22) + 9 ---------------------------------------- Netback per boe 9.83 11.89 9.84 12.99 -24 General and administrative (0.63) (0.55) (0.66) (0.57) +16 Financial expenses (1.47) (0.73) (1.26) (0.70) +80 Capital taxes (0.29) (0.22) (0.27) (0.22) +23 ---------------------------------------- Cash flow per boe 7.44 10.39 7.65 11.50 -33 Depletion (7.77) (7.29) (7.62) (7.31) + 4 Deferred taxes 0.10 (1.28) 0.01 (1.73) +100 ---------------------------------------- Net income (loss) per boe $ (0.23) $ 1.82 $ 0.04 $ 2.46 -98 ------------------------------------------------------------- (x) 10 mcf of natural gas = 1 barrel of oil OPERATIONAL REVIEW Production Volumes Year over year comparisons of production volumes must be interpreted giving due recognition to the Pinnacle acquisition which was completed effective July 3, 1998. Accordingly, the following summary analyzes the third quarter daily averages: 1998 Third Quarter Average Renaissance Pinnacle Daily Volumes Properties Properties Total ----------------------------------------------------- Oil (barrels) 72,563 25,140 97,703 Natural gas (million cubic feet) 403 116 519 ----------------------------------------------------- Average oil and natural gas volumes from the Renaissance properties decreased 14 percent and 4 percent respectively from the comparable period of 1997 primarily due to natural reservoir decline. This was particularly evident in our oil production as we purposely deferred most of our development program due to the low price environment that has persisted since last fall. Production volumes from the Pinnacle properties have also declined from the first quarter levels of 29,200 bopd and 123 mmcfd, which were the last publicly disclosed averages. Most of the reduction in natural gas volumes was due to the sale of one of the properties. Current consolidated production volumes are marginally higher than the 1998 third quarter averages and are expected to be sustained through year-end. Prices and Netbacks Renaissance's average crude oil price improved markedly between the first half and the third quarter this year, rising to Cdn$15.57 per barrel in the quarter. The September average showed an even more significant improvement to Cdn$16.59 per barrel. On a year-over-year basis, the benchmark WTI oil price slid during the third quarter to average US$14.15 per barrel versus US$19.55 the prior year. On a more positive note, the differential between the Edmonton light oil posted price and Renaissance's average price narrowed to Cdn$4.40 per barrel from Cdn$6.19 during the same period. However, the net result was a 21 percent decline in our average price to Cdn$15.57 per barrel, which accounted for most of the fall in our netback realization. Operating costs per unit rose 4 percent to $5.18 per barrel. The balance in Renaissance's natural gas marketing portfolio is such that we have equal exposure between Alberta pricing and NYMEX pricing. As Alberta prices remained strong during the third quarter, all of the decline in our average realization from first half levels was due to the decline in the benchmark NYMEX natural gas price. The summer is a period of traditional seasonal weakness for United States natural gas prices. Year over year, the average natural gas plant gate price realization was virtually unchanged at $1.80 per mcf. In the 1998 period, hedging gains added a further $0.09 per mcf to our average price. Royalties were unchanged while operating costs rose to $0.39 per mcf due largely to the fixed cost nature of most of our production being spread over a smaller production base. The net result of all of these factors was an identical netback of $1.28 per mcf compared to the same period of 1997. Capital Expenditures Normally, the third quarter is the period of maximum capital expenditures during the year, particularly on oil properties, as we take advantage of the summer weather. This year, however, gross capital expenditures before proceeds of disposition totaled $69 million compared to $235 million in the third quarter of 1997. This was the lowest level of expenditures during this period since 1992 and the first time in many years that we expended less than our cash flow. This was the result of a conscious decision to suspend virtually all operations during July while we assimilated Pinnacle and of the on-going deferral of much of our oil development program due to low oil prices. CAPITAL EXPENDITURES (millions) Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ------------------------------------------------------------- Property acquisitions/ (dispositions),net $ (1) $ 20 $ 8 $ 56 Lease acquisitions and retentions 8 9 45 54 Seismic evaluations 2 13 43 53 Drilling and completion of wells 31 128 182 317 Equipping, pipelining and facilities 14 59 123 184 Site restoration expenditures 1 2 3 7 Head office expenditures 1 2 3 5 Acquisition of Pinnacle Resources Ltd. 1,049 - 1,049 - -------------------------------------- Total expenditures $1,105 $ 233 $1,456 $ 676 ------------------------------------------------------------- NET WELLS DRILLED (Nine months ended September 30) 1998 1997 Explora- Develop- Total Explora- Develop- Total tory ment tory ment -------------------------------------------------------------- Oil 41 112 153 98 449 547 Natural gas 188 36 224 282 21 303 Dry 158 39 197 309 66 375 ---------------------------------------------- Total 387 187 574 689 536 1,225 -------------------------------------------------------------- NET UNDEVELOPED LAND HOLDINGS (thousands of acres) September 30 December 31 1998 1997 --------------------------------------------------------- Alberta 7,614 6,966 Saskatchewan 4,700 3,630 Manitoba 166 163 ----------------------------- Total 12,480 10,759 --------------------------------------------------------- OUTLOOK The global financial markets have experienced considerable turmoil this year. The impact upon world economies and the resulting effect on demand for oil and natural gas is not yet clear. Current low world oil prices have resulted in sharply reduced exploration expenditures, which inevitably will impact supply. In the Western Canadian Sedimentary Basin, the drop in capital expenditures has resulted in decreased medium and heavy crude oil supplies. As North American demand for heavy crude oil exceeds supply, prices have already responded and differentials to light oil prices hover around historic lows. Management is maintaining its focus on optimizing the profitability of our existing operations. Our decisions are based upon the prudent allocation of capital to the best investments available in the business environment of the day. While we expect our capital expenditure budgets to be maintained within available cash flow, we also believe that the current lower cost environment will allow us to stretch our dollars further. Our expenditures will include oil exploration and selected oil development. We are optimistic that the world oil price will continue to improve and, as this occurs, Renaissance will aggressively develop its large inventory of development locations and expand production. Natural gas operations include the connection of existing gas wells and the installation of new gas plants to increase production in the fourth quarter and into 1999. The winter drilling program is in place and will include 150 to 200 tests, balanced between exploration and development efforts. Renaissance continues to hedge future oil and natural prices as opportunities arise. On our oil portfolio, we are not active in hedging the benchmark WTI price and are concentrating all our efforts on fixing the differentials between light and medium crude oil prices. Currently, we have agreed with several refiners to fix the differentials on 20,000 barrels a day of average 1999 production at $3.35 - $3.75 per barrel. We are very active in the natural gas hedging markets, both in fixing the benchmark NYMEX price as well as the basis differential to the Alberta spot market. We currently have unrealized gains of $4.0 million and $4.2 million for the fourth quarter of 1998 and calendar 1999 respectively.

To: Herb Duncan who wrote (12986)	10/29/1998 4:04:00 PM
From: Kerm Yerman	Read Replies (9) \| Respond to of 15196

EARNINGS / Part 2 of 2 - Renaissance Energy Third Quarter Report CALGARY, ALBERTA--We view our business environment as very positive and expect that future commodity prices should allow for the generation of satisfactory returns for our shareholders. While the future remains uncertain, it may well be that the investment community will have positive, but more tempered expectations, of the oil and gas industry. While Renaissance's capital expenditures will be significant, available cash flows will determine overall levels. The internal scrutiny of the capital expenditure budget will result in more value for each dollar spent, thus improving our long term profitability. Clayton H. Woitas Sheldon B. Steeves President & Executive Vice President & Chief Executive Officer Chief Operating Officer Calgary, Alberta October 29, 1998 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET September 30 December 31 (Thousands of dollars) 1998 1997 ------------------------------------------------------------- ASSETS Current Assets Cash $ 2,483 $ 261 Accounts receivable 66,703 80,666 ----------------------------- 69,186 80,927 Property, Plant and Equipment, at cost 6,275,724 4,748,638 Accumulated Depletion and Depreciation (1,644,178) (1,384,278) ----------------------------- 4,631,546 3,364,360 ----------------------------- $4,700,732 $3,445,287 ----------------------------- LIABILITIES Current Liabilities Accounts payable $ 20,691 $ 38,321 Accrued liabilities 69,194 126,831 --------------------------- 89,885 165,152 Site Restoration Accrual 53,641 25,277 Long-Term Debt 1,422,349 781,785 Deferred Income Taxes 426,650 372,108 SHAREHOLDERS' EQUITY Share Capital 2,130,409 1,524,510 Retained Earnings 577,798 576,455 ---------------------------- 2,708,207 2,100,965 ---------------------------- $4,700,732 $3,445,287 ---------------------------- Common Shares Outstanding (thousands) Basic 143,593 116,222 Fully diluted 154,391 125,476 --------------------------- Proceeds Due Upon the Exercise of Stock Options (thousands) $ 295,213 $ 285,405 ------------------------------------------------------------- CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS Three Months Ended Nine Months Ended September 30 September 30 (Thousands of dollars) 1998 1997 1998 1997 ----------------------------------------------------------- Operating Income Petroleum and natural gas revenues $ 230,211 $ 219,427 $ 585,313 $ 697,223 Royalties (29,986) (34,315) (74,524) (118,784) Royalty abatement 463 322 4,012 867 Production expenses (65,362) (49,471) (163,522) (142,076) ------------------------------------------- 135,326 135,963 351,279 437,230 Expenses General and administrative 8,716 6,296 23,502 19,149 Interest on long-term debt 20,256 8,314 44,950 23,597 Capital taxes 3,934 2,550 9,784 7,425 Depletion, depreciation and site restoration 107,000 83,300 271,900 245,900 ------------------------------------------- Income (Loss) Before Income Taxes (4,580) 35,503 1,143 141,159 Deferred income taxes (recovery) (1,400) 14,700 (200) 58,500 ------------------------------------------- Net Income (Loss) (3,180) 20,803 1,343 82,659 Retained Earnings - beginning of period 580,978 522,948 576,455 461,092 ------------------------------------------- Retained Earnings - end of period $ 577,798 $ 543,751 $ 577,798 $ 543,751 ------------------------------------------- Net Income per Common Share Basic $ (0.02) $ 0.18 $ 0.01 $ 0.71 Fully diluted $ (0.02) $ 0.18 $ 0.01 $ 0.70 ------------------------------------------- Weighted Average Number of Common Shares Outstanding (thousands) Basic 143,576 115,992 125,591 115,807 Fully Diluted 154,374 125,291 135,314 125,135 ------------------------------------------- Imputed Interest on the Deemed Exercise of Stock Options (thousands) $ 3,607 $ 3,229 $ 9,920 $ 9,406 ------------------------------------------------------------- Consolidated Statement of Cash Flow Three Months Ended Nine Months Ended September 30 September 30 (Thousands of dollars) 1998 1997 1998 1997 ------------------------------------------------------------- Operating Activities Net Income (Loss) $ (3,180) $ 20,803 $ 1,343 $82,659 Add charges not affecting cash Depletion, depreciation and site restoration 107,000 83,300 271,900 245,900 Deferred income taxes (recovery) (1,400) 14,700 (200) 58,500 ------------------------------------------ Cash flow from operations 102,420 118,803 273,043 387,059 Financing Activities Increase in long-term debt 382,701 67,554 640,564 233,425 Issue of shares 2,037 2,915 6,976 13,842 Issue of shares on acquisition of Pinnacle Resources Ltd. 598,923 - 598,923 - Change in non-cash working capital 16,697 42,962 (61,304) 42,177 -------------------------------------------- 1,000,358 113,431 1,185,159 289,444 Cash Available for Investing Activities 1,102,778 232,234 1,458,202 676,503 Investing Activities Acquisition of Pinnacle Resources Ltd.(1,049,314) - (1,049,314) - Additions to property, plant and equipment (54,796) (230,665) (403,237) (668,772) Site restoration expenditures (814) (2,346) (3,429) (6,963) --------------------------------------------- (1,104,924) (233,011) (1,455,980) (675,735) --------------------------------------------- Increase (Decrease) in Cash (2,146) (777) 2,222 768 Cash, beginning of period 4,629 1,545 261 - ---------------------------------------------- Cash, end of period $ 2,483 $ 768 $ 2,483 $ 768 ---------------------------------------------- Cash flow per common share Basic $ 0.71 $ 1.02 $ 2.17 $3.34 Fully diluted $ 0.69 $ 0.98 $ 2.09 $3.17 ------------------------------------------------------------- Note 1: Effective July 3, 1998 the Company issued 26,954,210 common shares (with an assigned value of $598,922,544) to acquire all the issued and outstanding shares of Pinnacle Resources Ltd. (Pinnacle), a public company engaged in the exploration and development of petroleum and natural gas in Western Canada. The acquisition was accounted for by the purchase method. The Company's Consolidated Statements of Earnings and Cash Flow include operating results of Pinnacle since the effective date. The purchase price was allocated to net assets acquired based on their estimated fair values. Net assets acquired ($000's) Property, plant and equipment $ 1,123,849 Less working capital deficiency (75,561) Less long-term debt (374,830) Less deferred income taxes (54,742) Less site restoration accrual (19,793) ----------- $ 598,923 ----------- Consideration ($000's): Shares issued $ 598,923 ----------- Note 2: The provision for deferred income taxes differs from the result which would be obtained by applying the combined Canadian Federal and Provincial statutory income tax rates to income before income taxes. The difference results from the following: Three Months Ended Nine Months Ended September 30 September 30 (Thousands of dollars) 1998 1997 1998 1997 -------------------------------------------------------------- Net income before tax $(4,580) $35,503 $ 1,143 $141,159 Permanent differences Non-deductible Crown royalties 22,368 24,551 50,947 88,380 Resource allowance (30,094) (33,068) (76,399) (110,673) Non-deductible depletion 8,900 700 10,400 2,300 Non-deductible capital taxes 3,934 2,550 9,784 7,425 Other (3,710) 2,670 3,710 2,481 ------------------------------------- Taxable income $(3,182) $32,906 $ (415) $131,072 -------------------------------------------------------------- As at September 30, 1998 the following deductions were available to claim against future taxable income: Maximum Annual Rate (Thousands of dollars) Amount of Claim (percent) ---------------------------------------------------------- Canadian exploration expense $629,000 100 Canadian development expense 513,000 30 Canadian oil and gas property expense 824,000 10 Undepreciated capital cost 1,189,000 20 - 30 ---------- $3,155,000 ---------------------------------------------------------- Renaissance's effective tax rate is expected to increase significantly in 1998 as a result of the anticipated $19.4 million charge against earnings on the $540.0 million of non-tax based assets. This $540.0 million of assets with no tax basis is the difference between the $1,049.3 million paid for Pinnacle and the tax pools that Renaissance acquired. The effect of the lack of full tax pool coverage on the acquisition will diminish over time as the balance of the non-tax based assets will be reduced by depletion.