EXHIBIT 99.6
------------
VERMILION ENERGY TRUST
FIRST QUARTER REPORT - MARCH 31, 2004
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis (MD&A) dated May 6, 2004,
of Vermilion's operating and financial results for the quarter ended March 31,
2004 compared with the corresponding period in the prior year. This discussion
should be read in conjunction with the Trust's audited consolidated financial
statements for the years ended December 31, 2003 and 2002, together with
accompanying notes, as contained in the Trust's 2003 Annual Report.
Oil and gas prices for the first quarter of 2004 remained strong in comparison
with the first quarter of 2003. The WTI reference price for oil averaged $35.15
US per bbl for the three month period, Dated Brent was $31.95 US per bbl and
AECO reference price for gas was $6.41 Cdn per mcf. This compares to $33.86 per
bbl for WTI, $31.53 per bbl for Brent and $8.33 per mcf, Cdn AECO for the first
three months of 2003. While oil prices were stronger this quarter over last, gas
prices were $1.92 Cdn AECO per mcf less than the first quarter 2003. The main
reason for the lower netbacks in the first quarter 2004 is the year over year
increase in the Cdn/US exchange rate resulting in lower realized Canadian dollar
oil prices. While the first quarter 2003 Cdn AECO prices were stronger than the
pricing in 2004, Vermilion's gas hedging in 2003 lowered our realized price to
make it very similar to 2004 pricing. In 2004, Vermilion's operating netback
equalled $21.61 per boe, down 11% over the $24.17 reported for the first three
months of 2003. The cash flow netback of $18.10 per boe for the first three
months was up 4% over the $17.35 recorded in 2003. Cash flow netbacks were
slightly stronger as 2003 netbacks included the impact of the one-time cash
costs incurred in the re-organization of Vermilion into a Trust.
Total revenues for the first quarter of 2004 were $77.6 million compared to
$87.6 million for the first quarter of 2003. Vermilion's combined crude oil &
NGL price was $40.14 per bbl for the first quarter of 2004, a decrease of 12%
over the $45.40 per bbl reported for the first quarter of 2003. The Canadian
dollar has strengthened considerably over the first quarter 2003 which accounts
for the Canadian dollar pricing decline in the first quarter 2004 as oil prices
are referenced in U.S. dollars. The natural gas price realized in the first
quarter of 2004 was $6.74 per mcf compared to $6.46 per mcf realized a year ago,
a 4% year-over-year increase. The impact of Vermilion's hedging program reduced
prices by $2.84 per boe on a combined basis for the three month period ended
March 31, 2004, compared to a hedging loss of $3.16 per boe in the first three
months of 2003. Net earnings in the quarter increased to $7.2 million ($0.12 per
unit) from a loss of $1.2 million ($(0.02) per unit) in the first quarter 2003.
Earnings in the quarter were affected by the new accounting policies adopted in
the quarter. The most significant changes to earnings were unit compensation
expense which added an additional expense of $4.14 per boe and the loss on
derivative instruments which decreased earnings by $6.22 per boe. The loss in
2003 came as a result of reorganization costs incurred in Vermilion's conversion
to a Trust.
Vermilion continues to manage its risk exposure through prudent commodity and
currency hedging strategies. Physical and financial natural gas contracts for
13,632 GJ/d remain in place for the calendar year of 2004 with various price
structures resulting in an average floor price of $4.71/GJ. Vermilion has WTI
hedges covering 2,250 bbls/d in 2004 at US$24.35/bbl; and 1,500 bbls/d in 2005
at US$24.80/bbl. Vermilion has Brent hedges covering 2,250 bbls/d in 2004 at
US$22.93/bbl; and 1,500 bbls/d in 2005 at US$23.37/bbl.
Vermilion has Canadian/US dollar currency swaps in place covering its oil hedge
positions for 2004 of US$32.0 million in currency hedges averaging approximately
US$0.71 per CDN dollar.
Total royalties, net of ARTC, increased to $9.67 per boe or 24.0% of sales in
the first quarter of 2004, compared with $9.54 per boe, or 22.5% of sales in the
first quarter of 2003. The increase on a per boe basis is due mostly to a
decrease in volumes from quarter to quarter. In France, royalties for the most
part are calculated on a unit of production basis and do not react to price
changes.
Operating costs increased to $6.16 per boe in 2004 from $5.45 per boe in the
first quarter of 2003. In Canada, processing costs in the Peace River Arch area,
workovers designed to increase production and increased power costs resulting
from the strong gas prices in the year have contributed to the year over year
increase. Operating costs in the first quarter were 11% lower than the $6.90 per
boe reported for the fourth quarter of 2003.
General and administrative expenses for the year increased to $1.58 per boe from
$1.15 per boe in the first quarter of 2003. The increase is mainly due to a
reduction in the total costs capitalized combined with lower average production
volumes.
Interest expense decreased to $0.69 per boe for the first quarter of 2004 from
$0.95 per boe for the corresponding period in 2003 as a result of lower average
debt levels due to the December 2003 financing issue.
Depletion and depreciation expenses increased from $10.41 per boe in the first
quarter of 2003 to $10.85 per boe in 2004. The increase is due mainly to the
increased costs of finding reserves in Canada.
The Trust's current tax provision has increased to $1.24 per boe in the first
quarter of 2004 from $0.66 per boe in the first three months of 2003. The
current provision is based on an estimated $8 million tax liability in France
for the year, while in Canada, it is anticipated that there will be no current
taxes due. The recovery in future income taxes is a result of the taxable
portion of distribution payments made to unitholders. In the Trust's structure,
payments are made between the operating company and the Trust transferring both
income and future income tax liability to the unitholder. Therefore it is the
opinion of management that no cash income taxes in Canada are expected to be
paid by the operating company in the future, and as such, the future income tax
liability recorded on the balance sheet related to Canadian operations will be
recovered through earnings over time. During the period ended March 31, 2004, a
reduction in the Alberta corporate income tax rate was substantially enacted.
This reduction amounted to a recovery of future income taxes of approximately $2
million in the three months ended March 31, 2004.
A foreign exchange gain of $0.45 per boe was recorded for the first quarter of
2004 with a gain of $0.02 per boe in the first quarter of 2003. The gain is
related to the strengthening Euro and the resulting impact on working capital in
our France operations.
Capital spending for the first three months totalled $16.6 million compared to
$13.3 million spent in the first quarter of 2003. The capital for the first
quarter of 2004 was funded through cash flow and incremental bank debt and was
primarily spent on the eight wells drilled in the quarter including one drilling
operation and one completion operation in France.
Vermilion's debt (net of working capital) on March 31, 2004 was $85.7 million
including the book value of Aventura shares held as current assets. There were
no changes to Vermilion's credit facility in the first quarter. The facility
structure is comprised of a one year revolving period with a one year term to
follow with a final settlement payment required at the end of the second year.
Vermilion has established a reclamation fund to fund the payment of
environmental and site restoration costs for its assets. The reclamation fund
will be funded by Vermilion Resources and owned by the Trust. Contributions in
the first quarter totaled $0.4 million or $0.20 per boe of production in the
Trust. Contribution levels to the reclamation fund will be reviewed on a regular
basis and may be adjusted to ensure reclamation obligations associated with the
Trust's assets will be substantially funded when the costs are forecast to be
incurred.
Vermilion maintained monthly distributions at $0.17 per unit for the quarter
distributing a total of $30.3 million compared to $17.7 million for the same
period in 2003.
During the quarter over 400,000 units were issued on conversion of exchangeable
shares, unit rights exercised, bonus plan and distribution reinvestment plan.
Unitholders' capital increased during the
quarter as a result of the issuance of those units. This increase in equity was
offset by cash distributions of $30.3 million in the first quarter.
CICA Accounting Guideline 13 (AcG-13), "Hedging Relationships", became effective
for fiscal years beginning on or after July 1, 2003. AcG-13 addresses the
identification, designation, documentation and effectiveness of hedging
transactions for the purposes of applying hedge accounting. It also establishes
conditions for applying or discontinuing hedge accounting. Under the new
guideline, hedging transactions must be documented and it must be demonstrated
that the hedges are sufficiently effective in order to continue hedge accounting
for positions hedged with derivatives. Vermilion is not applying hedge
accounting to its hedging relationships, electing instead to account for its
hedging activities on a mark-to-market basis. The fair value of derivatives in
the quarter resulted in a $6.22 pre-tax per boe reduction to earnings.
In the first quarter of 2004, Vermilion adopted the new CICA Handbook section
3110, "Asset Retirement Obligations." This standard focuses on the recognition
and measurement of liabilities related to legal obligations associated with the
retirement of property, plant and equipment. Under this standard, these
obligations are initially measured at fair value and subsequently adjusted for
the accretion of discount and any changes in the underlying cash flows. The
asset retirement cost is to be capitalized to the related asset and amortized
into earnings over time. The adoption of CICA Handbook section 3110 allows for
the cumulative effect of the change in accounting policy to be booked to
accumulated income with the restatement of prior period comparatives. The
adoption of the asset retirement obligation accounting policy, which has been
applied retroactively, resulted in a new line item to the income statement
called accretion expense which was $0.16 per boe in the first quarter.
The Trust has a Unit Rights Incentive Plan (the "Plan") for directors, officers
and employees. The exercise price of the rights granted may be reduced in future
periods under certain conditions. The amount of the reduction cannot be
reasonably estimated as it is dependent upon a number of factors. Therefore, it
is not possible to determine a fair value for the rights granted using a
traditional option-pricing model and compensation expense has been determined
based on the intrinsic value of the rights at the date of exercise or at the
date of the financial statements for unexercised rights. The Trust adopted the
provisions outlined in Section 3870 Stock Based Compensation of the CICA
Handbook in the period and applied the new policy retroactively. Unit
compensation expense in the quarter was $4.14 per boe.
The Trust made a strategic decision to sell its interest in Trinidad operations.
On May 6, 2004, the Trust completed the sale of the shares of its subsidiary,
Aventura, for gross proceeds of $164.6 million. As a result, the Trust realized
an estimated $63.2 million (net of tax) gain on the sale of shares, which will
be recorded in the second quarter. At March 31, 2004, Vermilion's interest in
Aventura was reflected as an asset held for sale on the balance sheet with the
consolidated earnings impact shown under discontinued operations. Accordingly
the prior years' results were re-stated in accordance with generally accepted
accounting policies. The earnings from discontinued operations in the quarter
amounted to $0.46 per boe.
The amounts recorded for depletion and depreciation of property, plant and
equipment and the provision for future site restoration and abandonment costs
are based on estimates. The ceiling test calculation is based on estimates of
proved reserves, production rates, oil and natural gas prices, future costs and
other relevant assumptions. By their nature, these estimates are subject to
measurement uncertainty, and the effect on the consolidated financial statements
from changes in such estimates in future years could be significant.
Effective January 1, 2004 the Trust adopted Accounting Guideline 16 "Oil and Gas
Accounting - Full Cost", which replaces Accounting Guideline 5 "Full Cost
Accounting in the Oil and Gas Industry". Accounting Guideline 16 ("AcG-16")
modifies how impairment is tested and is consistent with CICA section 3063
"Impairment of Long-lived Assets". Under AcG-16, impairment is recognized if the
carrying amount of the capital assets exceed the sum of the undiscounted cash
flows expected to result from the Trust's proved reserves.
If the carrying value is not fully recoverable, the amount of impairment is
measured by comparing the carrying amounts of the capital assets to an amount
equal to the estimated net present value of future cash flows from proved plus
probable reserves. This calculation incorporates risks and uncertainties in the
expected future cash flows which are discounted using a risk-free rate. Any
excess carrying value above the net present value of the future cash flows would
be recorded as a permanent impairment.
Previously, impairment was tested based on undiscounted future net revenues
using proved reserves, and providing for future general and administrative
expenses, carrying costs, and taxes. The adoption of AcG-16 had no effect on the
Trust's financial results.
Vermilion has a pipeline transportation commitment that runs to October 31,
2005, and has minimum annual payment requirements of Cdn$0.1 million.