EXHIBIT 99.1
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WESTERN OIL SANDS - Q1
WESTERN OIL SANDS - 2005 INTERIM REPORT Q1
FOR THE THREE MONTH PERIOD ENDED MARCH 31
MESSAGE TO SHAREHOLDERS
WESTERN OIL SANDS INC. ("WESTERN") IS PLEASED TO REPORT ITS FIRST QUARTER 2005
RESULTS AND PROVIDE AN OPERATIONAL UPDATE FOR THE ATHABASCA OIL SANDS PROJECT
(THE "PROJECT" OR THE "AOSP"). DURING THE FIRST QUARTER OF 2005, WESTERN
GENERATED NET REVENUE OF $91.7 MILLION, EBITDAX OF $27.4 MILLION, CASH FLOW FROM
OPERATIONS OF $10.8 MILLION ($0.20 PER SHARE) AND A NET LOSS OF $1.9 MILLION
($0.04 PER SHARE). BY COMPARISON, IN THE FIRST QUARTER OF 2004, WESTERN
GENERATED NET REVENUE OF $82.7 MILLION, EBITDAX OF $25.7 MILLION, CASH FLOW FROM
OPERATIONS OF $9.0 MILLION ($0.18 PER SHARE) AND A NET LOSS OF $5.7 MILLION
($0.11 PER SHARE).
Relative to the first quarter of 2004, financial results during the
first quarter of 2005 were impacted by a 42 per cent increase in West Texas
Intermediate ("WTI") prices, expensing additional repair costs at the Upgrader,
a higher percentage of heavy oil sales, wider light to heavy crude oil
differentials, and a decrease in volumes subject to hedge contracts. In the
first quarter of 2005, a $2.7 million unrealized foreign exchange loss ($2.2
million net of tax) was included in net earnings, compared to a loss of $8.1
million ($6.4 million net of tax) for the first quarter of 2004. Excluding the
impact of Western's hedging activities, EBITDAX was $64.2 million compared to
$43.1 million for the first quarter of 2004 and cash flow from operations was
$47.6 million ($0.89 per share) in the first quarter of 2005.
HIGHLIGHTS
o During the first quarter of 2005, production averaged 132,516 barrels per
day (26,503 barrels per day net to Western) compared to 135,985 barrels per day
(27,197 barrels per day net to Western) in the first quarter of 2004. Production
for the quarter was lower than anticipated due to an unplanned shutdown of one
train at the Scotford Upgrader in the fourth quarter of 2004 that continued into
January 2005, and the subsequent unplanned shutdown of the same train in
mid-March. Production in the first quarter of 2005 increased by 21 per cent over
the fourth quarter of 2004. During the shutdown in the fourth quarter of 2004,
planned 2005 maintenance work on Train 1 at the Upgrader was completed. A
planned maintenance shutdown of Train 2 is scheduled to begin in September and
will result in a single-train operation for a period of one to two months.
o On March 22, we announced our intent to split our common shares on a
three-for-one basis. If regulatory and shareholder approval is received at the
Annual and Special Meeting, shareholders of record on June 1, 2005 will receive
three Class A Common Shares for every one share held bringing total outstanding
Common Shares to approximately 160 million. We believe this will stimulate
additional trading liquidity in Western's Common Shares and generate a broader
shareholder base.
o Subsequent to the end of first quarter and effective April 15, 2005, Mr.
James Houck joined Western as President and Chief Executive Officer. With over
35 years in the energy industry, Mr. Houck brings a wealth of experience and
knowledge as he is a seasoned international senior executive officer. I have
every confidence that Jim will successfully lead and direct Western through its
next phase of growth and, in the process, deliver substantial shareholder value.
As I have previously communicated, with Jim's appointment I have assumed the
role of Chairman of the Board of Directors. It is with great pride that I
relinquish the role of President and Chief Executive Officer as Western has
grown from a start-up enterprise to a world renowned oil sands developer and
producer. I look forward to actively participating in the strategic planning of
Western and continuing to implement strong Board governance in my role as
Chairman in the years to come.
WESTERN OIL SANDS INTERIM REPORT - 1
WESTERN OIL SANDS - Q1
AOSP EXPANSION UPDATE
Western, together with its partners, is developing strategies to increase
production capacity by de-bottlenecking existing facilities and developing
additional resources, and increasing production to potentially 500,000 to
600,000 barrels per day (100,000 to 120,000 barrels per day net to Western). The
Project has received regulatory approval for a portion of this development and
this process will continue with all of our stakeholders in the Athabasca region.
Engineering work on the first expansion project is progressing. This expansion
is expected to add between 90,000 to 100,000 barrels per day (18,000 to 20,000
barrels per day net to Western) with construction commencing in 2006.
As announced on April 29, 2005, regulatory applications have been filed
to expand capacity at both the Muskeg River Mine and Scotford Upgrader. The
Muskeg River Mine expansion includes developing additional mining areas on the
west side of Lease 13 and Lease 90, adding another bitumen extraction train to
the existing plant and a number of de-bottlenecking projects. These plans will
increase the capacity of the Muskeg River Mine from 155,000 to about 300,000
barrels per day (31,000 to about 60,000 net to Western). Regulatory approval for
this expansion project is anticipated in mid-2006. This, in combination with the
Jackpine Mine approval received in 2004, would provide the AOSP with regulatory
approvals for mining developments encompassing all of Lease 13 and Lease 90,
totaling 500,000 barrels per day of bitumen.
The Scotford Upgrader expansion plan includes adding a third bitumen
upgrading train which, along with de-bottlenecking of the existing facilities,
will increase upgrading capacity to approximately 300,000 barrels per day.
Regulatory approval for this expansion project is also anticipated in mid-2006.
Further additions to upgrading capacity will be made in a timely manner to bring
total capacity to 500,000 barrels per day in line with future mining expansions.
The Joint Venture partners plan to further develop the leases in the
Athabasca area by employing a continuous construction, "building-block"
approach. As part of this strategy, the Project would start construction of the
first 100,000 barrel per day mining expansion on Lease 13 in 2006, concurrent
with a similar-sized expansion of the Scotford Upgrader and de-bottlenecking
projects at both facilites. The development strategy will evolve as we consider
various factors including the outcome of the regulatory process, market
conditions, final project costs and approvals, and sustainable development
considerations.
On behalf of the Board of Directors,
Guy J. Turcotte,
Chairman
May 1, 2005
WESTERN OIL SANDS INTERIM REPORT - 2
WESTERN OIL SANDS - Q1
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WAS
PREPARED AS OF MAY 1, 2005 AND SHOULD BE READ IN CONJUNCTION WITH THE INTERIM
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED MARCH 31, 2005
AND 2004 AND THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AT DECEMBER 31, 2004
INCLUDED IN THE ANNUAL REPORT. IT OFFERS MANAGEMENT'S ANALYSIS OF OUR FINANCIAL
AND OPERATING RESULTS AND CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS RELATING
BUT NOT LIMITED TO OUR OPERATIONS, ANTICIPATED FINANCIAL PERFORMANCE, BUSINESS
PROSPECTS AND STRATEGIES. FORWARD-LOOKING INFORMATION TYPICALLY CONTAINS
STATEMENTS WITH WORDS SUCH AS "ANTICIPATE", "ESTIMATE", "EXPECT", "POTENTIAL",
"COULD", OR SIMILAR WORDS SUGGESTING FUTURE OUTCOMES. WE CAUTION READERS TO NOT
PLACE UNDUE RELIANCE ON FORWARD-LOOKING INFORMATION BECAUSE IT IS POSSIBLE THAT
PREDICTIONS, FORECASTS, PROJECTIONS AND OTHER FORMS OF FORWARD-LOOKING
INFORMATION MAY DIFFER MATERIALLY FROM ACTUAL RESULTS ACHIEVED BY WESTERN.
WESTERN DOES NOT MAINTAIN A POLICY NOR IS UNDER ANY OBLIGATION TO UPDATE
PUBLICLY OR REVISE ANY FORWARD-LOOKING INFORMATION CONTAINED IN THE FOLLOWING
DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AS A RESULT OF NEW
INFORMATION OR EVENTS.
BY ITS NATURE, OUR FORWARD-LOOKING INFORMATION INVOLVES NUMEROUS ASSUMPTIONS,
INHERENT RISKS AND UNCERTAINTIES. A CHANGE IN ANY ONE OF THESE FACTORS COULD
CAUSE ACTUAL EVENTS OR RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING INFORMATION. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THE
FOLLOWING: MARKET CONDITIONS, LAW OR GOVERNMENT POLICY, OPERATING CONDITIONS AND
COSTS, PROJECT SCHEDULES, OPERATING PERFORMANCE, DEMAND FOR OIL, GAS, AND
RELATED PRODUCTS, PRICE AND EXCHANGE RATE FLUCTUATIONS, COMMERCIAL NEGOTIATIONS
OR OTHER TECHNICAL AND ECONOMIC FACTORS.
OVERVIEW
Western Oil Sands Inc. ("Western") is a Canadian oil sands corporation that
holds a 20 per cent undivided ownership interest in a multi-billion dollar Joint
Venture that is exploiting the recoverable bitumen resources found in oil sands
deposits in the Athabasca region of Alberta, Canada. Shell Canada Limited and
Chevron Canada Limited hold the remaining 60 per cent and 20 per cent undivided
ownership interests, respectively, in the Joint Venture. The Athabasca Oil Sands
Project (the "AOSP" or the "Project"), which includes facilities owned by the
Joint Venture and third parties, uses established processes to mine oil sands
deposits, extract and upgrade the bitumen into synthetic crude oil and vacuum
gas oil. Currently, apart from our interest in the Project, we have no other
material assets nor do we have any other ongoing operations. Western continued,
however, to identify, evaluate and pursue other oil sands and related business
opportunities.
WESTERN OIL SANDS INTERIM REPORT - 3
WESTERN OIL SANDS - Q1
HIGHLIGHTS
THREE MONTHS ENDED MARCH 31 2005 2004
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OPERATING DATA
Bitumen Production (bbls/d) 26,503 27,197
Synthetic Crude Sales (bbls/d) 34,488 35,786
Operating Expense per Processed Barrel ($/bbl) 25.46 20.70
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FINANCIAL DATA ($ THOUSANDS, EXCEPT AS INDICATED)
Net Revenue 91,743 82,684
Realized Crude Oil Sales Price - Oil Sands ($/bbl) (1) (2) 38.76 34.61
EBITDAX (1) (3) 27,416 25,732
Cash Flow from Operations (4) 10,770 9,048
Cash Flow per Share - Basic ($/Share) (1) (5) 0.20 0.18
Net Loss (6) 1,944 5,703
Net Loss Per Share ($/Share)
Basic & Diluted 0.04 0.11
Net Capital Expenditures (7) 17,554 5,458
Total Assets 1,499,588 1,457,418
Long-term Financial Liabilities 827,553 903,999
Weighted Average Shares Outstanding - Basic (Shares) 53,319,434 50,673,495
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(1) PLEASE REFER TO PAGE 14 FOR A DISCUSSION OF NON-GAAP FINANCIAL MEASURES.
(2) THE REALIZED CRUDE OIL SALES PRICE IS THE REVENUE DERIVED FROM THE SALE OF
WESTERN'S SHARE OF THE PROJECT'S SYNTHETIC CRUDE OIL, NET OF HEDGING ACTIVITIES,
DIVIDED BY THE CORRESPONDING VOLUME. PLEASE REFER TO PAGE 6 FOR CALCULATION.
(3) EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, DEPLETION, AMORTIZATION,
STOCK BASED COMPENSATION, ACCRETION ON ASSET RETIREMENT OBLIGATION AND FOREIGN
EXCHANGE AS CALCULATED ON PAGE 10.
(4) CASH FLOW FROM OPERATIONS IS EXPRESSED BEFORE CHANGES IN NON-CASH WORKING
CAPITAL.
(5) CASH FLOW PER SHARE IS CALCULATED AS CASH FLOW FROM OPERATIONS DIVIDED BY
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC.
(6) WESTERN HAS NOT PAID DIVIDENDS IN ANY OF THE ABOVE REFERENCED PERIODS.
(7) NET CAPITAL EXPENDITURES ARE CAPITAL EXPENDITURES NET OF ANY INSURANCE
PROCEEDS RECEIVED DURING THE PERIOD.
OPERATING RESULTS
PRODUCTION
During the first quarter of 2005, production from the Mine averaged 132,516
barrels per day (26,503 barrels per day net to Western) of bitumen compared to
135,985 barrels per day (27,197 barrels per day net to Western) in the first
quarter of 2004. An unplanned shutdown of one train at the Scotford Upgrader in
the fourth quarter of 2004 that continued into 2005 reduced production. In
addition, a subsequent unplanned shutdown of the same train occurred in
mid-March which also impacted production. Full production resumed in early
April. In the fall of this year, operations will be impacted by a planned
turnaround on Train 2 at the Scotford Upgrader scheduled to begin in September
and extending for a period of one to two months.
WESTERN OIL SANDS INTERIM REPORT - 4
WESTERN OIL SANDS - Q1
REVENUE
NET REVENUE
THREE MONTHS ENDED MARCH 31
($ THOUSANDS, EXCEPT AS INDICATED) 2005 2004
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REVENUE
Oil Sands (1) 120,309 112,713
Marketing 45,576 19,522
Transportation 247 322
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Total Revenue 166,132 132,557
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PURCHASED FEEDSTOCKS AND TRANSPORTATION
Oil Sands 27,565 29,701
Marketing 46,383 19,478
Transportation 441 694
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Total Purchased Feedstocks and Transportation 74,389 49,873
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NET REVENUE
Oil Sands (1) 92,744 83,012
Marketing (807) 44
Transportation (194) (372)
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Total Net Revenue 91,743 82,684
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SYNTHETIC CRUDE SALES (bbls/d) 34,488 35,786
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REALIZED CRUDE OIL SALES PRICE ($/bbl) (2) 38.76 34.61
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(1) OIL SANDS REVENUE AND NET REVENUE ARE PRESENTED NET OF WESTERN'S HEDGING
ACTIVITIES.
(2) REALIZED CRUDE OIL SALES PRICE ($/BBL) IS CALCULATED AS OIL
SANDS REVENUE DIVIDED BY TOTAL SYNTHETIC CRUDE SALES FOR THE PERIOD.
Western recorded crude oil sales revenue of $166.1 million in the first
quarter of 2005, which included $120.3 million from proprietary production,
compared to crude oil sales revenue of $132.6 million in the first quarter of
2004, $112.7 million of which was from proprietary production. This
year-over-year increase is largely a result of a higher realized selling price
per barrel due to higher underlying WTI prices, together with fewer physical
barrels subject to fixed price swap contracts compared to the prior year period.
Oil sands sales volumes, which include bitumen and purchased
feedstocks, averaged 34,488 barrels per day in the first quarter of 2005
compared to 35,786 barrels per day in the first quarter of 2004, due to the
operational issues encountered during the first quarter of 2005.
The first quarter of 2005 was characterized by continued buoyancy in
commodity prices with WTI averaging US$49.84 per barrel for the quarter. This
represents a three per cent increase compared to the fourth quarter of 2004 and
a 42 per cent increase compared the prior year period. Heavy oil differentials,
which correlate to movements in WTI, widened during these same time periods.
With heavy oil products in the overall sales mix, absolute commodity prices and
heavy oil market differentials affect average synthetic crude oil price
realizations. Western's price differential widened compared to the prior year
period as a result of the following: (1) broader market forces which caused
heavy oil differentials to widen by over US$9.00 per barrel; (2) an increased
percentage of heavy oil sales in the overall sales mix; and (3) fewer barrels
subject to fixed price swap contracts. Western's differential narrowed compared
to the fourth quarter of 2004
WESTERN OIL SANDS INTERIM REPORT - 5
WESTERN OIL SANDS - Q1
due to a greater percentage of lighter crude in our overall sales mix as
operations approached historical norms.
Western generated net revenue of $91.7 million in the first quarter of
2005, after considering the impact of purchased feedstocks and transportation
costs downstream of Edmonton and hedging activities. By comparison, Western
generated net revenue of $82.7 million in the first quarter of 2004. Feedstocks
are crude products introduced at the Upgrader. Some are introduced into the
hydrocracking/hydrotreating process and some are used to create various blends
of synthetic crude oil products. The cost of these feedstocks depends upon world
oil markets and the spread between heavy and light crude oil prices.
As far as Western's hedging program is concerned, during the first
quarter of 2005, our hedging activities resulted in an overall decrease to net
revenue of $36.8 million or $11.85 per barrel. Western's hedged barrels for the
balance of the year are 7,000 barrels per day at WTI $26.87 versus 14,000
barrels per day for the first quarter of 2005 and 20,000 barrels per day for
2004. The remaining hedge will have a material impact on earnings and cash flow
should WTI remain at present levels. Hedging activities are more fully discussed
in the Financial Risks section of this MD&A.
OPERATING COSTS
Western's unit cash operating costs were $25.46 per processed barrel for the
first quarter of 2005 compared to $20.70 per processed barrel for the first
quarter of 2004 (restated to conform to the presentation adopted during the
second quarter of 2004). This increase is directly attributable to the repairs
associated with the unplanned shutdown in the first quarter of 2005. Actual
repair costs are included in operating costs. Moreover, as the majority of our
operating costs are fixed in nature, lower than anticipated production results
in a higher unit operating cost. Higher operating costs compared to the same
time period last year also reflect higher natural gas costs.
Compared to the fourth quarter of 2004, unit operating costs decreased
$2.76 per processed barrel in the first quarter of 2005. This decrease was
largely the result of increased bitumen production providing better coverage of
fixed operating costs in the quarter, together with the completion of the
majority of the repairs associated with production interruptions in the fourth
quarter of 2004 offset by higher natural gas costs.
The AOSP is committed to achieving continuous improvement in the
operational performance of the facilities, which should result in a
corresponding decrease in unit operating costs. This will be achieved through a
combination of increased reliability and efficiency at the Mine, growth in
production through de-bottlenecking as well as other growth activities and
constant cost management.
THREE MONTHS ENDED MARCH 31
($ THOUSANDS, EXCEPT AS INDICATED) 2005 2004
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OPERATING EXPENSES FOR BITUMEN SOLD
Operating Expense - Income Statement 59,188 51,824
Operating Expense - Inventoried 788 (939)
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Total Operating Expenses For Bitumen Sold 59,976 50,885
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Sales (BARRELS PER DAY)
WESTERN OIL SANDS INTERIM REPORT - 6
WESTERN OIL SANDS - Q1
THREE MONTHS ENDED MARCH 31
($ THOUSANDS, EXCEPT AS INDICATED) 2005 2004
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Total Synthetic Crude Sales 34,488 35,786
Purchased Upgrader Blend Stocks 8,314 8,766
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Synthetic Crude Sales Excluding Blend Stocks 26,174 27,020
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OPERATING EXPENSES PER PROCESSED BARREL ($/BBL) (1) 25.46 20.70
(1) OPERATING EXPENSES PER PROCESSED BARREL ($/BBL) IS CALCULATED AS TOTAL
OPERATING EXPENSES FOR BITUMEN SOLD DIVIDED BY SYNTHETIC CRUDE SALES EXCLUDING
BLEND STOCKS.
The above table calculates operating expenses per processed barrel on
the basis of the operating costs that are associated with the synthetic crude
sales, excluding purchased blend stocks, for the relevant period. This
calculation recognizes that, intrinsic in the Project's operations, bitumen
production from the Mine receives an approximate three per cent uplift as a
result of the hydrotreating/hydroconversion process, which is included in
synthetic crude sales excluding blendstocks.
ROYALTIES
Royalties of $0.7 million in the first quarter of 2005 remained unchanged from
the first quarter of 2004. Year-over-year amounts are consistent as a result of
higher deemed bitumen royalty prices offset by lower production volumes.
Compared to the fourth quarter of 2004, royalties increased $0.2 million in the
first quarter of 2005 primarily as a result of increases in production volumes.
CORPORATE RESULTS
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses ("G&A") were $2.6 million for the first
quarter of 2005 compared to $2.0 million for the first quarter of 2004 due to
the increased number of employees within Western, together with additional costs
associated with regulatory compliance. This also represents a moderate increase
compared to the fourth quarter of 2004 due to payment of year-end cash bonuses
and additional travel expenses incurred in the first quarter.
INSURANCE EXPENSE
Insurance expenses were $1.9 million for the first quarter of 2005 compared to
$2.5 million in the first quarter of 2004. Insurance expenses are lower compared
to the prior year period due to lower premiums associated with the various
corporate policies, combined with the strengthening of the Canadian dollar as
the premiums are paid in US dollars but reported for financial statement
purposes in Canadian dollars. Insurance expenses in the first quarter of 2005
were comparable to those incurred in the fourth quarter of 2004.
INTEREST EXPENSE
Interest expense totaled $15.1 million in the first quarter of 2005 compared to
$15.8 million in the first quarter of 2004. This four per cent decrease is a
result of the Canadian dollar strengthening against the US dollar during this
period compared to the prior year period, thereby reducing interest charges on
our US denominated Notes which are reported in Canadian dollars. Interest
expense increased by $0.8 million in the first quarter of 2005 compared to the
fourth quarter of 2004, reflecting the marginal weakening of the Canadian dollar
during the first quarter against the US dollar together with an increase in the
balance drawn on the Revolving Credit Facility.
DEPRECIATION, DEPLETION AND AMORTIZATION
WESTERN OIL SANDS INTERIM REPORT - 7
WESTERN OIL SANDS - Q1
Depreciation, depletion and amortization ("DD&A") totaled $10.5 million for the
first quarter of 2005 compared to $10.6 million for the first quarter of 2004.
This minor decrease is a result of marginally lower bitumen production and an
increased reserve base which decreases the unit of production amount expensed
for depletion.
FOREIGN EXCHANGE
During the first quarter of 2005, Western reported a foreign exchange loss of
$2.9 million compared to a loss of $8.2 million in the first quarter of 2004.
This decrease is a result of the strengthening of the Canadian dollar against
the US dollar during this period. As reference points, the noon-day closing
foreign exchange rate on March 31, 2004 was $1.3105 Cdn/US compared to $1.2036
Cdn/US on December 31, 2004 and $1.2096 Cdn/US on March 31, 2005. In terms of
average rates for the respective periods, the average rate for the first quarter
of 2005 was $1.227 Cdn/US compared to an average rate of $1.3178 Cdn/US for the
prior year period and $1.2207 Cdn/US for the fourth quarter of 2004.
INCOME TAXES
For the first quarter of 2005, Western had an income tax expense of $0.06
million compared to an income tax recovery of $3.5 million for the same period
last year. Included in this expense is a future income tax recovery of $0.6
million (2004 $4.2 million), which reflects the net increase in Western's future
income tax asset.
NET LOSS
During the first quarter of 2005, Western reported a net loss of $1.9 million
($0.04 per share) compared to a net loss of $5.7 million ($0.11 per share) in
the first quarter of 2004. Net losses include the impact of unrealized foreign
exchange losses on our US dollar denominated debt. In the first quarter of 2005,
there was an unrealized foreign exchange loss of $2.7 million compared to an
unrealized loss of $8.1 million in the first quarter of 2004.
The following table provides the reconciliation between Net Loss, Cash
Flow from Operations (before changes in non-cash working capital) and EBITDAX:
RECONCILIATION: NET LOSS TO EBITDAX
THREE MONTHS ENDED MARCH 31
($ THOUSANDS) 2005 2004
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NET LOSS (1,944) (5,703)
Add (Deduct):
Depreciation, Depletion and Amortization 10,498 10,561
Accretion on Asset Retirement Obligation 141 125
Stock-based Compensation 641 152
Unrealized Foreign Exchange Loss 2,700 8,145
Future Income Tax Recovery (648) (4,232)
Cash Settlement on Performance Share Units (596) --
Cash Settlement on Asset Retirement Obligation (22) --
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CASH FLOW FROM OPERATIONS, BEFORE CHANGES
IN NON-CASH WORKING CAPITAL 10,770 9,048
Add:
Interest 15,086 15,848
WESTERN OIL SANDS INTERIM REPORT - 8
WESTERN OIL SANDS - Q1
THREE MONTHS ENDED MARCH 31
($ THOUSANDS) 2005 2004
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Realized Foreign Exchange Loss 234 68
Large Corporations Tax 708 768
Cash Settlement on Performance Share Units 596 --
Cash Settlement on Asset Retirement Obligation 22 --
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EBITDAX 27,416 25,732
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EBITDAX (Earnings before Interest, Taxes, Depreciation, Depletion,
Amortization, Stock-based Compensation, Accretion on Asset Retirement Obligation
and Foreign Exchange) was $27.4 million for the first quarter of 2005,
reflecting a seven per cent increase over the $25.7 million recorded for the
first quarter of 2004. Excluding the impact of Western's hedging activities,
EBITDAX was $64.2 million for the first quarter of 2005 compared to $43.1
million for the first quarter of 2004, an increase of 49 per cent. First quarter
2005 EBITDAX increased $48.9 million over the fourth quarter of 2004. Excluding
the impact of hedging activities, EBITDAX in the first quarter 2005 improved
$38.5 million or 150 per cent compared to the fourth quarter of 2004. The
improvement in EBITDAX, both from the previous years' comparative quarter and
the previous quarter, is mainly the result of increases in the average synthetic
crude sales price offset by one-time charges associated with the repairs to
address the operational issues encountered during the first quarter, together
with higher variable costs which are correlated to higher WTI prices.
Cash flow from operations before changes in non-cash working capital
("cash flow from operations") was $10.8 million for the first quarter of 2005
compared to $9.0 million recorded in the first quarter of 2004. First quarter
2005 cash flow from operations increased $48.7 million over the fourth quarter
of 2004. This increase compared to the prior year period is the result of higher
bitumen production through a return to more normal operations and an increase in
the average synthetic crude sales price.
FINANCIAL POSITION
BANK DEBT
During the first quarter of 2005, Western drew an additional $13.0 million from
its credit facilities as a result of the production interruptions which
commenced during the fourth quarter and continued into the first quarter of
2005. Western also successfully refinanced the $100 million Senior Credit
Facility through its assumption into Western's $240 million Revolving Credit
Facility, thereby increasing the Revolving Credit Facility to $340 million. All
such bank debt is now classified as a long-term liability.
Western has previously communicated that the total capacity of the
Revolving Credit Facility and Senior Credit Facility was limited to $281 million
based on certain covenants. This ceiling is a function of the before tax net
present value of Western's share of the proved reserves associated with the
Project based on a constant price discounted at 10%. As a result of Western's
most recent independent appraisal of reserves, total debt capacity under the
recently combined Revolving Credit Facility increased to $299 million. As at
March 31, 2005, $229 million had been drawn on this Revolving Credit Facility.
WESTERN OIL SANDS INTERIM REPORT - 9
WESTERN OIL SANDS - Q1
CAPITAL EXPENDITURES
Western's capital expenditures totaled $17.6 million in the first quarter of
2005. This included $11.0 million for de-bottlenecking and AOSP project capital,
$0.9 million for sustaining capital, $3.3 million for growth and new venture
investments and $2.4 million for other corporate purposes. Capital expenditures
in the first quarter of 2004 totaled $5.5 million.
ANALYSIS OF CASH RESOURCES
Cash balances totaled $5.7 million at March 31, 2005 compared to $4.7 million at
March 31, 2004. Cash inflows included: $10.8 million cash flow from operations,
$13.0 million increase in bank lines and $0.8 million from the exercise of
employee stock options. Cash outflows included: $4.7 million decrease in
non-cash working capital, $17.6 million of capital expenditures and $0.3 million
in repayment of obligations under capital lease and deferred charges.
The decrease in non-cash working capital during the first quarter of
2005 was the result of a $7.3 million increase in accounts receivable, an $11.4
million increase in inventory and a $0.7 million increase in prepaid expenses,
offset by a $14.6 million increase in accounts payable. The increase in accounts
payable reflects an additional three months of accrued interest on the US
denominated debt, increased accruals related to both Oil Sands and Marketing
feedstocks costs, and the increased accrual on hedging activities. The increase
in accounts receivable is the result of both increased sales volumes and
increased commodity prices. Inventory is higher as a result of higher prices
associated with purchased feedstocks combined with increased volumes of upgraded
inventory compared to the end of the fourth quarter of 2004.
INSURANCE CLAIMS
The Joint Venture achieved a satisfactory final settlement with insurers for
recovery of costs resulting from the January 2003 fire and related freezing
damage at the Mine site. However, certain insurers also involved in the Cost
Overrun and Delay Insurance dispute with Western continue to withhold insurance
proceeds payable to Western for these damages. The amounts withheld are
approximately equal to the amounts recovered. During the first quarter of 2005,
we received no insurance proceeds, and the total recovered to date under the
insurance coverage provided in our Joint Venture construction policies remains
at $16.1 million for our share.
Western and its Joint Venture partners have filed a joint arbitration
notice with the insurers in respect of the $500 million delay in start-up claim
related to the fire at the Muskeg River Mine on January 6, 2003 and the
arbitration hearings are expected to begin in late 2005. In addition,
arbitration proceedings have commenced for Western's limits claim on its $200
million Cost Overrun and Delay Insurance policy. The arbitration panel has
established a schedule for the arbitration hearings to commence in mid 2006.
Following each of these arbitration hearings, we expect to receive a binding
decision from the respective panels with regard to our claims.
WESTERN OIL SANDS INTERIM REPORT - 10
WESTERN OIL SANDS - Q1
FINANCIAL RISKS
The objective of Western's hedging program is to mitigate exposure to the
volatility of crude oil prices, thereby stabilizing current and future cash flow
from the sale of our synthetic crude products, protecting the base capital
program and ensuring the funding of debt obligations. To this end, Western has
the following contracts outstanding as at March 31, 2005:
HEDGING SUMMARY
UNREALIZED
DECREASE TO
INSTRUMENT NOTIONAL VOLUME HEDGE PERIOD SWAP PRICE FUTURE REVENUE
(BBLS/D) (US$/BBL) (CDN $ THOUSANDS)
- --------------------------------------------------------------------------------------------------------
WTI Swaps 7,000 April 1, 2005 to December 31, 2005 US$26.87 $ (72,692)
- --------------------------------------------------------------------------------------------------------
The strengthening in the price of crude oil since this program was
initiated resulted in Western not participating in Edmonton PAR increases to the
extent of our hedged volumes. The impact of this program on Western's revenue is
described in the following table:
THREE MONTHS ENDED MARCH 31, (UNAUDITED) 2005 2004
- -------------------------------------------------------------------------------------------------------
Decrease in Revenue - $ thousands 36,794 17,350
Decrease in Revenue - $/bbl 11.85 5.33
- -------------------------------------------------------------------------------------------------------
OUTLOOK FOR 2005
The first quarter of 2005 was characterized by operational performance issues
resulting in lower than anticipated production volumes, higher unit costs and
lower prices realizations - all of which were offset by higher commodity prices.
We believe the financial impact of lower production volumes, which takes into
account the planned turnaround scheduled for September, will be offset by
continued strength in sales price realizations through the balance of 2005. As a
result, Western continues to expect cash flow to approximate $160 million ($3.00
per share pre-split) and net earnings to approximate $66 million ($1.25 per
share pre-split) in 2005.
The AOSP's operations are extremely complex. Since start-up, we have
obtained important learning and experience regarding the intricacies of the
Project. This knowledge is proving invaluable as we continue to focus on plant
reliability in order to attain production levels at or above design rate
capacity of 155,000 barrels per day. We remain committed to continually
improving the reliability of the Project for the balance of the year.
We intend to allocate capital throughout 2005 for the de-bottlenecking
initiatives that have been previously disclosed. Capital will also be allocated
towards expansion initiatives. The Owners are currently finalizing a formal
feasibility study. The study will be used to provide greater certainty
surrounding the activities that must occur regarding the expansion plans, in
addition to greater cost certainty associated with these activities.
EXPANSIONS
The Joint Venture partners' strategy of achieving its longer-term goal to
produce more than 500,000 barrels per day (100,000 barrels per day net to
Western) has been refined to take into account valuable learnings
WESTERN OIL SANDS INTERIM REPORT - 11
WESTERN OIL SANDS - Q1
from the original project execution and new construction techniques. The Joint
Venture partners plan to further develop the leases in the Athabasca area by
employing a continuous construction, "building-block" approach. Initially, each
building block would be sized at approximately 100,000 barrels per day. As part
of this strategy, the Project would start construction of the first 100,000
barrel per day mining expansion on Lease 13 in 2006, concurrent with a
similar-sized expansion of the Scotford Upgrader and de-bottlenecking projects
at both facilities. Opportunities to integrate new production trains with
existing facilities will be considered where practical to reduce construction
and operating costs. Additional building blocks, including both mining and
upgrading expansions, would follow in due course.
Western believes this continuous construction strategy would avoid the
unnecessary costs associated with repeatedly mobilizing and demobilizing large
teams of human resources in addition to achieving economies of scale in many
areas including engineering design costs, logistics, owner's costs and volume
purchasing in these very large projects.
Subject to final investment approvals, construction of the first
expansion projects on Lease 13 and at the Scotford Upgrader is expected to start
in 2006 and to be completed in 2009. These projects, including de-bottlenecking
of the existing facilities, are expected to increase synthetic crude production
to about 300,000 barrels a day by 2010. A capital cost estimate for these
projects will be provided in 2006 following regulatory and investment approvals.
BUSINESS RISKS
Western is subject to a number of business risks that are typical given the
nature of Western's operations. These risks are described in Western's previous
public disclosures, including the 2004 Annual Report, which are available on the
Company's website.
NON-GAAP FINANCIAL MEASURES
Western includes cash flow from operations per share, cash flow from operations
excluding hedging activities, earnings before interest, taxes, depreciation,
depletion and amortization, stock-based compensation, accretion on asset
retirement obligation and foreign exchange gains ("EBITDAX"), and EBITDAX
excluding hedging activities as investors may use this information to better
analyze our operating performance. We also include certain per barrel
information, such as realized crude oil sales price, to provide per unit numbers
that can be compared against industry benchmarks, such as the Edmonton PAR
benchmark. The additional information should not be considered in isolation or
as a substitute for measures of operating performance prepared in accordance
with Canadian Generally Accepted Accounting Principles ("GAAP"). Non-GAAP
financial measures do not have any standardized meaning prescribed by Canadian
GAAP and are therefore unlikely to be comparable to similar measures presented
by other issuers. Management believes that, in addition to Net Earnings (Loss)
per Share and Net Earnings (Loss) Attributable to Common Shareholders (both
Canadian GAAP measures), cash flow from operations per share and EBITDAX provide
a better basis for evaluating our operating performance, as they both exclude
fluctuations on the US dollar denominated Senior Secured Notes and certain other
non-cash items, such as depreciation, depletion and amortization, and future
income tax recoveries. In addition, EBITDAX provides a useful indicator of our
ability to fund our financing costs and any future capital requirements.
WESTERN OIL SANDS INTERIM REPORT - 12
WESTERN OIL SANDS - Q1
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31 AS AT DECEMBER 31
($ THOUSANDS) 2005 2004
- -------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current Assets
Cash $ 5,679 $ 3,715
Accounts Receivable 69,884 62,564
Inventory 25,548 14,186
Prepaid Expense 6,426 5,771
------------------------------------
107,537 86,236
------------------------------------
Capital Assets (NOTE 1) 1,359,146 1,351,745
Deferred Charges 17,746 18,378
Future Income Taxes (NOTE 9) 15,159 14,511
------------------------------------
1,392,051 1,384,634
------------------------------------
$ 1,499,588 $ 1,470,870
------------------------------------
LIABILITIES
Current Liabilities
Accounts Payable and Accrued Liabilities $ 102,298 $ 87,679
Current Portion Long-term Debt (NOTE 2) -- 95,000
Current Portion of Lease Obligations (NOTE 3) 3,849 5,230
------------------------------------
106,147 187,909
Long-term Liabilities
Long-term Debt (NOTE 2) 773,320 662,620
Lease Obligations (NOTE 3) 54,233 53,474
Asset Retirement Obligation (NOTE 4) 8,310 8,191
835,863 724,285
------------------------------------
942,010 912,194
------------------------------------
SHAREHOLDERS' EQUITY
Share Capital (NOTE 5) 546,500 545,699
Contributed Surplus (NOTE 8) 1,290 1,245
Retained Earnings 9,788 11,732
557,578 558,676
------------------------------------
$ 1,499,588 $ 1,470,870
------------------------------------
Commitments and Contingencies (NOTE 10)
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WESTERN OIL SANDS INTERIM REPORT - 13
WESTERN OIL SANDS - Q1
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31
(UNAUDITED - $ THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004
- -------------------------------------------------------------------------------------------------------------
REVENUES
Revenues (NOTE 11) $ 166,132 $ 132,557
Less: Purchased Feedstocks and Transportation 74,389 49,873
------------------------------------
91,743 82,684
------------------------------------
EXPENSES
Operating 59,188 51,825
Royalties 661 680
General and Administrative 2,581 1,987
Insurance 1,897 2,460
Interest (NOTE 7) 15,086 15,848
Stock-based Compensation (NOTE 8) 641 152
Accretion on Asset Retirement Obligation (NOTE 4) 141 125
Depreciation, Depletion and Amortization 10,498 10,561
Foreign Exchange Loss 2,934 8,213
------------------------------------
93,627 91,851
------------------------------------
NET LOSS BEFORE INCOME TAXES (1,884) (9,167)
Income Tax Expense (Recovery) (NOTE 9) 60 (3,464)
------------------------------------
NET LOSS (1,944) (5,703)
Retained Earnings (Deficit) at Beginning of Period 11,732 (7,720)
------------------------------------
RETAINED EARNINGS (DEFICIT) AT END OF PERIOD $ 9,788 $ (13,423)
------------------------------------
NET LOSS PER SHARE (NOTE 6)
Basic $ (0.04) $ (0.11)
------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WESTERN OIL SANDS INTERIM REPORT - 14
WESTERN OIL SANDS - Q1
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31
(UNAUDITED - $ THOUSANDS) 2005 2004
- -------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net Loss $ (1,944) $ (5,703)
Non-cash Items:
Stock-based Compensation (NOTE 8) 641 152
Accretion on Asset Retirement Obligation (NOTE 4) 141 125
Depreciation, Depletion and Amortization 10,498 10,561
Unrealized Foreign Exchange Loss (NOTE 2) 2,700 8,145
Future Income Tax Recovery (NOTE 9) (648) (4,232)
Cash Items:
Cash Settlements of Asset Retirement Obligation (NOTE 4) (22) --
Cash Settlement of Performance Share Unit Plan (NOTE 8) (596) --
------------------------------------
CASH FROM OPERATIONS 10,770 9,048
Decrease (Increase) in Non-Cash Working Capital (NOTE 12) (5,443) 17,915
------------------------------------
5,327 26,963
------------------------------------
FINANCING ACTIVITIES
Issue of Share Capital (NOTE 5) 801 600
Issue (Repayment) of Long-term Debt, Net 13,000 (16,000)
Deferred Charges -- (4)
Repayment of Obligations Under Capital Lease (335) (336)
------------------------------------
CASH GENERATED (USED) 13,466 (15,740)
------------------------------------
INVESTING ACTIVITIES
Capital Expenditures (17,554) (10,061)
Insurance Proceeds (NOTE 10) -- 4,603
Decrease (Increase) in Non-Cash Working Capital (NOTE 12) 725 (4,877)
------------------------------------
CASH INVESTED (16,829) (10,335)
------------------------------------
Increase in Cash 1,964 888
Cash at Beginning of Period 3,715 3,770
------------------------------------
CASH AT END OF PERIOD $ 5,679 $ 4,658
------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WESTERN OIL SANDS INTERIM REPORT - 15
WESTERN OIL SANDS - Q1
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR DOLLAR AMOUNTS IN THOUSANDS)
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS INCLUDE THE ACCOUNTS OF WESTERN
OIL SANDS INC. AND ITS SUBSIDIARIES (THE "CORPORATION"), AND ARE PRESENTED IN
ACCORDANCE WITH CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED USING THE SAME ACCOUNTING
POLICIES AND METHODS OF COMPUTATION AS THE CONSOLIDATED FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 2004. THE DISCLOSURES PROVIDED BELOW ARE INCREMENTAL
TO THOSE INCLUDED IN THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS. THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO IN THE CORPORATION'S
ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2004.
1. CAPITAL ASSETS
MARCH 31, 2005 (UNAUDITED) COST ACCUM. DD&A* NET BOOK VALUE
- -------------------------------------------------------------------------------------------------------------
Oil Sands Project $ 1,353,840 $ (68,393) $ 1,285,447
Oil Sands Project Assets Under Capital Lease 52,705 (2,817) 49,888
Other Assets 24,927 (1,116) 23,811
- -------------------------------------------------------------------------------------------------------------
$ 1,431,472 $ (72,326) $ 1,359,146
- -------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004
Oil Sands Project $ 1,341,395 $ (58,955) $ 1,282,440
Oil Sands Project Assets Under Capital Lease 52,705 (2,439) 50,266
Other Assets 20,105 (1,066) 19,039
- -------------------------------------------------------------------------------------------------------------
$ 1,414,205 $ (62,460) $ 1,351,745
- -------------------------------------------------------------------------------------------------------------
* ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
2. LONG-TERM DEBT
MARCH 31, 2005 DECEMBER 31, 2004
- -------------------------------------------------------------------------------------------------------------
(UNAUDITED)
US$450 million Senior Secured Notes $ 544,320 $ 541,620
Senior Credit Facility -- 95,000
Revolving Credit Facility 229,000 121,000
- -------------------------------------------------------------------------------------------------------------
773,320 757,620
Less: Current Portion of Long-term Debt -- (95,000)
- -------------------------------------------------------------------------------------------------------------
$ 773,320 $ 662,620
- -------------------------------------------------------------------------------------------------------------
THE CORPORATION REFINANCED THE $100 MILLION SENIOR CREDIT FACILITY UTILIZING A
CLAUSE INCLUDED IN THE $240 MILLION REVOLVING CREDIT FACILITY. THIS CLAUSE
ENABLED THE CORPORATION TO INCREASE THE REVOLVING CREDIT FACILITY BY $100
MILLION BY INCREASING THE COMMITMENTS OF THE CURRENT SYNDICATE, AFTER RECEIVING
THEIR CONSENT. THE TERMS OF THIS INCREASE ARE CONSISTENT WITH THOSE INCLUDED IN
THE ORIGINAL $240 MILLION REVOLVING CREDIT FACILITY. THE $100 MILLION SENIOR
CREDIT FACILITY WAS TO MATURE AND BE REPAYABLE ON APRIL 23, 2005.
UNDER THE TERMS OF THE SENIOR SECURED NOTES THERE IS A LIMIT ON THE AMOUNT
AVAILABLE FOR DRAWDOWN. THIS LIMIT IS DETERMINED AS A FUNCTION OF THE NET
PRESENT VALUE OF CASH FLOW BEFORE INCOME TAXES DISCOUNTED AT 10 PER CENT FROM
OUR PROVED RESERVES DETERMINED ON A CONSTANT PRICING BASIS BY THE INDEPENDENT
RESERVES EVALUATORS. AS A RESULT OF BOTH THE RESERVES EVALUATION AND THE $100
MILLION INCREASE DESCRIBED ABOVE, THE AMOUNT AVAILABLE FOR DRAWDOWN FOR GENERAL
CORPORATE PURPOSES INCREASED FROM $181 MILLION TO $299 MILLION.
THE CORPORATION INCREASED THE AMOUNT ISSUED IN LETTERS OF CREDIT UNDER THE
REVOLVING CREDIT FACILITY FROM $8.1 MILLION AT DECEMBER 31, 2004 TO $8.9 MILLION
AT MARCH 31, 2005.
THE CORPORATION'S US DOLLAR DENOMINATED SENIOR SECURED NOTES ARE TRANSLATED INTO
CANADIAN DOLLARS AT THE PERIOD END EXCHANGE RATE. THE UNREALIZED FOREIGN
EXCHANGE LOSS ARISING ON THE NOTES FOR THE THREE MONTH PERIOD ENDING MARCH 31,
2005 WAS $2.7 MILLION (2004 - $8.1 MILLION). AS AT MARCH 31, 2005, A TOTAL OF
$164.5 MILLION OF UNREALIZED FOREIGN EXCHANGE GAINS HAD BEEN RECOGNIZED FROM THE
INCEPTION OF THE NOTES, APPROXIMATELY $92 MILLION OF WHICH WAS CAPITALIZED AS IT
OCCURRED PRIOR TO COMMERCIAL OPERATIONS.
WESTERN OIL SANDS INTERIM REPORT - 16
WESTERN OIL SANDS - Q1
3. LEASE OBLIGATIONS
MARCH 31, 2005 DECEMBER 31, 2004
- ----------------------------------------------------------------------------------------
(UNAUDITED)
Obligations Under Capital Lease $ 51,274 $ 51,609
Operating Lease Guarantee Obligation 6,808 7,095
- ----------------------------------------------------------------------------------------
58,082 58,704
Less : Current Portion (3,849) (5,230)
- ----------------------------------------------------------------------------------------
$ 54,233 $ 53,474
- ----------------------------------------------------------------------------------------
THE CAPITAL LEASE OBLIGATION RELATES TO THE CORPORATION'S SHARE OF CAPITAL COSTS
FOR THE HYDROGEN-MANUFACTURING UNIT WITHIN THE OIL SANDS PROJECT. REPAYMENTS OF
THE PRINCIPAL OBLIGATION ARE $1.3 MILLION PER YEAR AND ARE SCHEDULED TO REMAIN
AT THAT LEVEL UNTIL REPAID.
UNDER THE MOBILE EQUIPMENT LEASE THE CORPORATION IS COMMITTED TO PAY ITS 20 PER
CENT SHARE OF AN AMOUNT EQUAL TO 85 PER CENT OF THE ORIGINAL COST OF THE
EQUIPMENT TO THE LESSOR AT THE END OF THE TERMS OF THE LEASE. ACCORDINGLY, THE
CORPORATION RECOGNIZES, AS A LIABILITY, A PORTION OF THIS FUTURE PAYMENT AS IT
RELATES TO THE SERVICE LIFE OF THE EQUIPMENT THAT HAS PASSED. DURING THE THREE
MONTHS ENDED MARCH 31, 2005 THE CORPORATION PAID $1.4 MILLION IN RESPECT TO THIS
OBLIGATION (MARCH 31, 2004 - NIL).
4. ASSET RETIRMENT OBLIGATION
THE CORPORATION, IN ASSOCIATION WITH ITS 20 PER CENT WORKING INTEREST IN THE OIL
SANDS PROJECT IS RESPONSIBLE FOR ITS SHARE OF FUTURE DISMANTLEMENT AND SITE
RESTORATION COSTS IN THE MINING, EXTRACTING AND UPGRADING ACTIVITIES. DURING THE
THREE MONTHS ENDED MARCH 31, 2005, THE CORPORATION INCURRED $0.02 MILLION IN
COSTS ASSOCIATED WITH THIS OBLIGATION (MARCH 31, 2004 - NIL). THE FOLLOWING
TABLE PRESENTS THE RECONCILIATION OF THE ASSET RETIREMENT OBLIGATION FOR THE
THREE MONTHS ENDED MARCH 31, 2005 AND 2004:
THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2005 2004
- ----------------------------------------------------------------------------------------
Asset Retirement Obligation at Beginning of Year $ 8,191 $ 7,137
Liabilities Incurred -- --
Liabilities Settled (22) --
Accretion on Asset Retirement Obligation 141 125
- ----------------------------------------------------------------------------------------
$ 8,310 $ 7,262
- ----------------------------------------------------------------------------------------
5. SHARE CAPITAL ISSUED AND OUTSTANDING:
(UNAUDITED) NUMBER OF SHARES AMOUNT
- ----------------------------------------------------------------------------------------
COMMON SHARES
Balance at December 31, 2004 53,278,762 $ 545,699
Issued on Exercise of Employee Stock Options 84,492 801
- ----------------------------------------------------------------------------------------
TOTAL ISSUED SHARE CAPITAL AT MARCH 31, 2004 53,363,254 $ 546,500
- ----------------------------------------------------------------------------------------
OUTSTANDING:
STOCK OPTIONS 1,235,044
- -------------------------------------------------------------------
DILUTED SHARES AT MARCH 31, 2004 54,598,298
- -------------------------------------------------------------------
6. NET EARNINGS (LOSS) PER SHARE
THE BASIC WEIGHTED AVERAGE NUMBER OF SHARES FOR THE THREE-MONTH PERIOD ENDED
MARCH 31, 2005 IS 53,319,494 (MARCH 31, 2004 - 50,673,495). DUE TO A LOSS FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2005 AND 2004, ZERO INCREMENTAL SHARES
ARE INCLUDED FOR THE DILUTED EARNINGS PER SHARE WEIGHTED AVERAGE NUMBER BECAUSE
THE EFFECT WOULD BE ANTI-DILUTIVE.
WESTERN OIL SANDS INTERIM REPORT - 17
WESTERN OIL SANDS - Q1
7. INTEREST EXPENSE
THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2005 2004
- ----------------------------------------------------------------------------------------
Interest on Long-term Debt $ 14,539 $ 15,370
Interest on Obligations Under Capital Lease 547 478
- ----------------------------------------------------------------------------------------
$ 15,086 $ 15,848
- ----------------------------------------------------------------------------------------
CASH INTEREST PAID FOR THE THREE-MONTH PERIOD ENDING MARCH 31, 2005 WAS $5.0
MILLION (MARCH 31, 2004 - $3.2 MILLION).
8. STOCK-BASED COMPENSATION
(a) STOCK OPTION PLAN
UNDER THE CORPORATION'S STOCK-BASED COMPENSATION PLAN 63,890 OPTIONS WERE
GRANTED DURING THE THREE-MONTH PERIOD ENDED MARCH 31, 2005 AT AN AVERAGE
EXERCISE PRICE OF $59.35 (MARCH 31, 2004 - 66,183 OPTIONS AT AN AVERAGE EXERCISE
PRICE OF $32.48). THE FAIR VALUES OF ALL OPTIONS GRANTED DURING THE PERIOD ARE
ESTIMATED AS AT THE GRANT DATE USING THE BLACK-SCHOLES OPTION-PRICING MODEL. THE
WEIGHTED-AVERAGE FAIR VALUES OF THE OPTIONS AND THE ASSUMPTIONS USED IN THEIR
DETERMINATION ARE AS FOLLOWS:
THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2005 2004
- ----------------------------------------------------------------------------------------
Weighted-average Fair Value $ 20.56 $ 12.30
Risk Free Interest Rate 4.06% 4.12%
Expected Life (in years) 6.00 6.00
Expected Volatility 0.26 0.30
Dividend Per Share $ -- $ --
- ----------------------------------------------------------------------------------------
(b) PERFORMANCE SHARE UNIT PLAN
UNDER THE PERFORMANCE SHARE UNIT PLAN ("PSUP") 11,031 UNITS VESTED DURING
FEBRUARY 2005 AND THE REQUIRED COMMON SHARES WERE DISTRIBUTED TO THE PSUP UNIT
HOLDERS. THESE UNITS REPRESENTED THE FIRST VESTING OF THE PSUP AND THE COMMON
SHARES WERE ACQUIRED FROM THE SECONDARY MARKET AT AN AVERAGE PRICE OF $54.03.
DURING THE THREE-MONTH PERIOD ENDING MARCH 31, 2005, THE CORPORATION GRANTED
37,960 PSUP UNITS. AT MARCH 31, 2005 THERE WERE 60,026 PSUP UNITS OUTSTANDING.
(c) STOCK-BASED COMPENSATION
DURING 2003, THE CORPORATION ADOPTED CICA 3870 "STOCK-BASED COMPENSATION AND
OTHER STOCK-BASED PAYMENTS" WHICH RESULTS IN THE RECOGNITION OF COMPENSATION
EXPENSE FOR ANY OPTIONS OR PSUP UNITS GRANTED ON OR AFTER JANUARY 1, 2003 UNDER
THE FAIR VALUE METHOD. FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2005, THE
CORPORATION HAS RECOGNIZED $0.6 MILLION IN RESPECT TO STOCK-BASED COMPENSATION
FOR THESE OPTIONS AND PSUP UNITS (MARCH 31, 2004 - $0.2 MILLION).
UNDER CICA 3870 NO COMPENSATION EXPENSE IS REQUIRED TO BE RECOGNIZED FOR STOCK
OPTIONS GRANTED BEFORE JANUARY 1, 2003. HAD COMPENSATION EXPENSE BEEN DETERMINED
BASED ON THE FAIR VALUE METHOD FOR AWARDS MADE ON OR AFTER JANUARY 1, 2002 BUT
BEFORE JANUARY 1, 2003, THE CORPORATION'S NET EARNINGS (LOSS) AND NET EARNINGS
(LOSS) PER SHARE WOULD HAVE BEEN ADJUSTED TO THE PROFORMA AMOUNTS INDICATED
BELOW:
THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2005 2004
- ----------------------------------------------------------------------------------------
Compensation Expense $ 220 $ 224
Net Loss - as Reported (1,944) (5,703)
- ----------------------------------------------------------------------------------------
Net Loss - Proforma $ (2,164) $ (5,927)
- ----------------------------------------------------------------------------------------
Basic Net Earnings (Loss) per share:
- as Reported $ (0.04) $ (0.11)
- ----------------------------------------------------------------------------------------
- Proforma $ (0.04) $ (0.12)
- ----------------------------------------------------------------------------------------
(d) CONTRIBUTED SURPLUS
THE FOLLOWING TABLE PRESENTS THE RECONCILIATION OF CONTRIBUTED SURPLUS FOR THE
THREE MONTHS ENDED MARCH 31, 2005 AND 2004:
THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2005 2004
- ----------------------------------------------------------------------------------------
Contributed Surplus Beginning of Year $ 1,245 $ 278
Stock-based Compensation Expense 641 152
Cash Settlement of Performance Share Unit Plan (596) --
- ----------------------------------------------------------------------------------------
Contributed Surplus End of Period $ 1,290 $ 430
- ----------------------------------------------------------------------------------------
WESTERN OIL SANDS INTERIM REPORT - 18
WESTERN OIL SANDS - Q1
9. INCOME TAX
THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2005 2004
- ----------------------------------------------------------------------------------------
Large Corporations Tax $ 708 $ 768
Future Income Tax Recovery (648) (4,232)
- ----------------------------------------------------------------------------------------
INCOME TAX EXPENSE (RECOVERY) $ 60 $ (3,464)
- ----------------------------------------------------------------------------------------
THE FUTURE INCOME TAX ASSET CONSISTS OF:
MARCH 31, 2005 DECEMBER 31, 2004
- ----------------------------------------------------------------------------------------
(UNAUDITED)
Future Income Tax Assets:
Net Losses Carried Forward $ 59,058 $ 61,697
Share Issue Costs 1,253 1,355
Impairment of Long-lived Assets 796 796
Future Income Tax Liabilities:
Capital Assets in Excess of Tax Values (30,925) (34,242)
Unrealized Foreign Exchange Gain (12,194) (12,648)
Debt Issue Costs (2,829) (2,447)
- ----------------------------------------------------------------------------------------
NET FUTURE INCOME TAX ASSET $ 15,159 $ 14,511
- ----------------------------------------------------------------------------------------
THE FOLLOWING TABLE RECONCILES INCOME TAXES CALCULATED AT THE CANADIAN STATUTORY
RATE OF 37.62% (2004 - 38.87%) WITH ACTUAL INCOME TAXES:
THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2005 2004
- ----------------------------------------------------------------------------------------
Net Loss Before Income Taxes $ (1,884) $ (9,167)
- ----------------------------------------------------------------------------------------
Income Tax Recovery at Statutory Rate (709) (3,563)
Effect of Tax Rate Changes and Timing of Use 433 (541)
Non-taxable Portion of Foreign Exchange Loss 562 1,811
Impact of Resource Allowance (934) (1,939)
Large Corporations Tax 708 768
- ----------------------------------------------------------------------------------------
INCOME TAX EXPENSE (RECOVERY) $ 60 $ (3,464)
- ----------------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
THE JOINT VENTURE IN 2004 ACHIEVED A SATISFACTORY FINAL SETTLEMENT WITH INSURERS
FOR RECOVERY OF COSTS RESULTING FROM THE JANUARY 2003 FIRE AND RELATED FREEZING
DAMAGE AT THE MINE SITE. HOWEVER, CERTAIN INSURERS ALSO INVOLVED IN THE COST
OVERRUN AND DELAY INSURANCE DISPUTE WITH THE CORPORATION CONTINUE TO WITHHOLD
INSURANCE PROCEEDS PAYABLE TO THE CORPORATION FOR THESE DAMAGES. THESE AMOUNTS
BEING WITHHELD ARE APPROXIMATELY EQUAL TO THE AMOUNTS RECOVERED. DURING THE
FIRST QUARTER OF 2005, THE CORPORATION RECEIVED NO INSURANCE PROCEEDS, AND THE
TOTAL RECOVERED BY THE CORPORATION TO DATE UNDER THE INSURANCE COVERAGE PROVIDED
IN THE JOINT VENTURE CONSTRUCTION POLICIES REMAINED AT $16.1 MILLION.
THE CORPORATION AND ITS JOINT VENTURE PARTNERS HAVE FILED A JOINT ARBITRATION
NOTICE WITH THE INSURERS IN RESPECT OF THE $500 MILLION DELAY IN START-UP CLAIM
RELATED TO THE FIRE AT THE MUSKEG RIVER MINE ON JANUARY 6, 2003. IN ADDITION,
ARBITRATION PROCEEDINGS HAVE COMMENCED FOR THE CORPORATION'S LIMITS CLAIM ON ITS
$200 MILLION COST OVERRUN AND DELAY INSURANCE POLICY. THE ARBITRATION PANEL HAS
ESTABLISHED A SCHEDULE FOR THE ARBITRATION HEARINGS TO COMMENCE IN MID-2006.
FOLLOWING EACH OF THESE ARBITRATION HEARINGS, THE CORPORATION EXPECTS TO RECEIVE
A BINDING DECISION FROM THE RESPECTIVE PANELS WITH REGARD TO THIS CLAIM.
NO AMOUNTS, OTHER THAN THOSE COLLECTED AT MARCH 31, 2005, HAVE BEEN RECOGNIZED
IN THESE STATEMENTS RELATING TO THESE INSURANCE POLICIES NOR WILL AN AMOUNT BE
RECOGNIZED UNTIL THE PROCEEDS ARE RECEIVED.
WESTERN OIL SANDS INTERIM REPORT - 19
WESTERN OIL SANDS - Q1
11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
THE CORPORATION HAS ENTERED INTO VARIOUS COMMODITY-PRICING AGREEMENTS DESIGNED
TO MITIGATE THE EXPOSURE TO THE VOLATILITY OF CRUDE OIL PRICES IN US DOLLARS.
THE AGREEMENTS ARE SUMMARIZED AS FOLLOWS AT MARCH 31, 2005:
UNREALIZED
DECREASE
NOTIONAL TO FUTURE
VOLUME SWAP PRICE REVENUE
INSTRUMENT (BBLS/D) HEDGE PERIOD (US$/BBL) (CDN $'S)
- ---------------------------------------------------------------------------------------------
WTI Swaps 7,000 April 1 to June 30, 2005 US$26.87 $ (24,084)
WTI Swaps 7,000 July 1 to September 30, 2005 US$26.87 (24,653)
WTI Swaps 7,000 October 1 to December 31, 2005 US$26.87 (23,955)
- ---------------------------------------------------------------------------------------------
$ (72,692)
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THE CORPORATION, IN ACCORDANCE WITH ITS ACCOUNTING POLICY FOR DERIVATIVE
FINANCIAL INSTRUMENTS, INCLUDES ANY SETTLEMENT OF THESE RISK MANAGEMENT
ACTIVITIES IN REVENUE. THE FOLLOWING SUMMARIZES THE IMPACT OF THESE RISK
MANAGEMENT ACTIVITIES:
THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2005 2004
- ---------------------------------------------------------------------------------------
Decrease to Revenue $ 36,794 $ 17,350
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12. CHANGES IN NON-CASH WORKING CAPITAL
THREE MONTHS ENDED MARCH 31 (UNAUDITED) 2005 2004
- ---------------------------------------------------------------------------------------
Source (Use):
Operating Activities
Accounts Receivable $ (7,320) $ 3,427
Inventory (11,362) (2,570)
Prepaid Expense (655) 558
Accounts Payable and Accrued Liabilities 13,894 16,500
- ---------------------------------------------------------------------------------------
$ (5,443) $ 17,915
- ---------------------------------------------------------------------------------------
Investing Activities
Accounts Receivable $ -- $ 614
Accounts Payable and Accrued Liabilities 725 (5,491)
- ---------------------------------------------------------------------------------------
$ 725 $ (4,877)
- ---------------------------------------------------------------------------------------
CORPORATE INFORMATION
OFFICERS
GUY J. TURCOTTE
CHAIRMAN OF THE BOARD
JAMES C. HOUCK
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JOHN FRANGOS
EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER
DAVID A. DYCK
VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER
CHARLES W. BERARD
CORPORATE SECRETARY
WESTERN OIL SANDS INTERIM REPORT - 20
WESTERN OIL SANDS - Q1
SENIOR MANAGEMENT
STEVE REYNISH
SENIOR VICE PRESIDENT, OPERATIONS
GERRY LUFT
VICE PRESIDENT, MARKETING
JACK D. JENKINS
VICE PRESIDENT, CORPORATE PLANNING & HUMAN RESOURCES
RAY MORLEY
VICE PRESIDENT, BUSINESS DEVELOPMENT
DIRECTORS
GUY J. TURCOTTE
CHAIRMAN OF THE BOARD,
WESTERN OIL SANDS, CALGARY, ALBERTA
GEOFFREY A. CUMMING
VICE CHAIRMAN,
GARDINER GROUP CAPITAL LIMITED, TORONTO
DEPUTY CHAIRMAN, EMERALD CAPITAL LIMITED
AUCKLAND, NEW ZEALAND
GLEN F. ANDREWS
RETIRED, FORMERLY PRESIDENT,
BHP COPPER NORTH AMERICA
BAINBRIDGE ISLAND, WASHINGTON
TULLIO CEDRASCHI
PRESIDENT & CHIEF EXECUTIVE OFFICER,
CN INVESTMENT DIVISION
MONTREAL, QUEBEC
WALTER W. GRIST*
MANAGING DIRECTOR,
BROWN BROTHERS HARRIMAN & CO.
NEW YORK, NEW YORK
OYVIND HUSHOVD
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
GABRIEL RESOURCES LIMITED
TORONTO, ONTARIO
JOHN W. LILL
EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER,
DYNATEC CORPORATION
RICHMOND HILL, ONTARIO
BRIAN F. MACNEILL*
CHAIRMAN,
PETRO-CANADA
CALGARY, ALBERTA
RANDALL OLIPHANT**
CHAIRMAN AND CEO
ROCKCLIFF GROUP LIMITED
TORONTO, ONTARIO
ROBERT G. PUCHNIAK
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
JAMES RICHARDSON & SONS LIMITED
WINNIPEG, MANITOBA
MAC H. VAN WIELINGEN
CO-CHAIRMAN,
ARC FINANCIAL CORPORATION
CALGARY, ALBERTA
* RETIRED FROM THE BOARD EFFECTIVE FEBRUARY 14, 2005.
** NEW APPOINTEE EFFECTIVE FEBRUARY 24, 2005.
WESTERN OIL SANDS INTERIM REPORT - 21
WESTERN OIL SANDS - Q1
HEAD OFFICE
SUITE 2400, ERNST & YOUNG TOWER
440 - 2 AVENUE S.W.
CALGARY, ALBERTA T2P 5E9
PHONE: (403) 233-1700
FAX: (403) 296-0122
WEBSITE
WWW.WESTERNOILSANDS.COM
AUDITORS
PRICEWATERHOUSECOOPERS LLP
CALGARY, ALBERTA
LEGAL COUNSEL
MACLEOD DIXON LLP
CALGARY, ALBERTA
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
WASHINGTON, D.C., USA
EVALUATION ENGINEERS
GILBERT LAUSTSEN JUNG ASSOCIATES LTD.
CALGARY, ALBERTA
REGISTRAR AND TRANSFER AGENT
VALIANT TRUST COMPANY
CALGARY, ALBERTA
STOCK EXCHANGE LISTING
THE TORONTO STOCK EXCHANGE
TRADING SYMBOL: WTO
WESTERN OIL SANDS INTERIM REPORT - 22