August 8, 2005
Mrs. Jill S. Davis
Branch Chief
United States
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-7010
Form 40-F (File No. 333-90736)
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Dear Mrs. Davis,
Reference is made to comments to the Form 40-F (the "FORM 40-F") of
Western Oil Sands Inc., a Canadian corporation (the "COMPANY"), for the fiscal
year ended December 31, 2004 received from the Staff (the "STAFF") of the
Securities and Exchange Commission (the "COMMISSION") in a letter from the
Division of Corporation Finance, dated July 20, 2005 (the "COMMENT LETTER"). The
discussion below is presented in the order of the numbered comments in the
Comment Letter and we have reproduced the comments for ease of reference.
Certain capitalized terms in this letter are used as defined in the Form 40-F.
The Company's responses to the Staff's comments are as follows:
FORM 40-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
CONTROLS AND PROCEDURES, ITEM C
1. WE NOTE YOUR CONCLUSION AS TO THE EFFECTIVENESS OF YOUR DISCLOSURE
CONTROLS AND PROCEDURES IS INCOMPLETE AS IT DOES NOT INDICATE
WHETHER OUR CONTROLS ARE EFFECTIVE OR INEFFECTIVE. PLEASE REVIEW
YOUR DISCLOSURE AND REVISE ACCORDINGLY.
Response to Comment 1:
In response to the Staff's comment we will revise the first paragraph of
Controls and Procedures, Item C, of our Form 40-F as set forth below:
Western Oil Sands maintains disclosure controls and procedures and
internal control over financial reporting designed to ensure that
information required to be disclosed in the reports filed under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Commission's rules and forms.
Western Oil Sands' principal executive and financial officers
evaluated the effectiveness of Western Oil Sands' disclosure
controls and procedures as of the end of the period covered by this
report and concluded that such disclosure controls and procedures
are effective to ensure that information required to be disclosed by
the Registrant in reports it files or submits under the Exchange Act
is (i) recorded, processed, summarized and reported within the time
periods specified and (ii) accumulated and communicated to the
Registrant's management, including its principal executive officer
and principal financial officer, to allow timely decision regarding
required disclosure. However, as recommended by the Commission in
its adopting release, the Registrant will continue to periodically
evaluate its disclosure controls and procedures to ensure that
information is recorded, processed, summarized and reported within
the time period's specified in the Commission's rules and forms.
AUDITORS' REPORT
2. PLEASE AMEND YOUR FILING TO INCLUDE THE SIGNATURE OF THE CHARTERED
ACCOUNTANTS THAT HAVE OPINED ON YOUR FINANCIAL STATEMENTS.
Response to Comment 2:
The Company will include a signed Auditors' Report in an amendment to
our Form 40-F that we will file with the Commission.
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT),
PAGE 3
3. WE NOTE THAT YOUR PRESENTATION OF REVENUE EXCLUDES "THE AMOUNT
RECORDED FOR PURCHASED FEEDSTOCKS AND TRANSPORTATION COSTS
DOWNSTREAM OF EDMONTON". PLEASE TELL US WHY YOU HAVE PRESENTED
REVENUE NET OF THESE COSTS AND CLARIFY THE MEANING OF THE SUBTOTAL
PRESENTED. IN ADDITION, DISTINGUISH BETWEEN THE AMOUNTS EXCLUDED
FROM REVENUE AND THE TYPE OF COSTS INCLUDED IN THE OPERATING EXPENSE
LINE ITEM.
Response to Comment 3:
On the face of the Company's Consolidated Statements of Operations and
Retained Earnings (Deficit) we have included a sub-total under the
caption of Revenues that includes the difference between our gross
revenues and our gross purchased feedstocks and transportation costs to
better reflect the revenues being generated from our business. Currently
our business is derived 100% from our ownership in the Athabasca Oil
Sands Project ("AOSP"), which is a multi-billion dollar Joint Venture
that is exploiting the recoverable bitumen reserves and resources found
in oil sands deposits in the Athabasca region of Alberta, Canada. The
AOSP consists of two key facilities: the Muskeg River Mine, where the
oil sands deposits are mined and partially upgraded, and the Scotford
Upgrader, where the bitumen is further upgraded into synthetic crude oil
and delivered into the North American crude oil marketing system. At the
Scotford Upgrader certain feedstocks are added to our partially upgraded
bitumen before this bitumen is sold. The Company believes that our
shareholders are interested in the revenues being generated by these
bitumen reserves, which in essence is the difference between our
revenues less any feedstocks and transportation, and therefore provided
a sub-total on the face of the Consolidated Statements of Operations and
Retained Earnings (Deficit).
Operating expenses are different from purchased feedstocks and
blendstocks as they are costs incurred to either mine or upgrade the
bitumen into a saleable product. These costs include, but are not
limited to, labour, fuel, natural gas, maintenance, electricity,
catalysts, chemicals and property taxes.
CONSOLIDATED STATEMENT OF CASH FLOWS, PAGE 4
4. WE NOTE IN YOUR RECONCILIATION OF NET EARNINGS TO NET CASH PROVIDED
BY OPERATING ACTIVITIES THAT YOU PRESENT A SUBTOTAL OF NET INCOME
AND VARIOUS CHARGES AND CREDITS ABOVE TOTAL NET CASH FROM OPERATING
ACTIVITIES. WE NOTE THAT THE ILLUSTRATIVE EXAMPLE IN CICA 1540, AND
THAT THE SUBTOTAL PRESENTED DOES NOT INCLUDE NET EARNINGS OR LOSS,
AND ONLY INCLUDES A SUBTOTAL OF "ITEMS NOT EFFECTING CASH". PLEASE
REVISE YOUR PRESENTATION TO COMPLY WITH CICA 1540 FOR CANADIAN GAAP.
Response to Comment 4:
The Company does not believe a revision is required to the subtotal
presented in its consolidated statement of cash flows, as the example
provided in CICA 1540 is provided as an illustrative example and not as
authoritative guidance. Canadian GAAP requires that the companies
utilizing the indirect method for presenting cash flow from operating
activities present a total including the effects of any change in
non-cash working capital, however it does not prescribe that a subtotal
cannot be presented that excludes the effect of any change in non-cash
working capital. The Company has clearly labeled this subtotal as "Cash
From Operations" not "Cash From Operating Activities" to be clear in
this distinction. The Company provides the following excerpt from CICA
1540 paragraph 22 as support for what is required under Canadian GAAP:
"Under the indirect method, the net cash flow form operating
activities is determined by adjusting net income or loss for the
effects of:
a. Non-cash items such as depreciation, provisions for losses,
future taxes, unrealized foreign currency gains and losses,
undistributed profits of equity-accounted investees and
non-controlling interests;
b. Changes during the period in inventories and operating
receivables and payables; c. Other deferrals or accruals of
past or future operating cash receipts or payments; and d.
Revenues, expenses, gains or losses associated with
investing or financing cash flows."
The Company also provides that many other Canadian public
companies consolidated statement of cash flows provide a similar
subtotal, which illustrates that Canadian GAAP does not restrict
from providing a subtotal of cash flow from operations before
changes in working capital.
MANAGEMENT'S DISCUSSION AND ANALYSIS, EXHIBIT 3, PAGE 1
OPERATING RESULTS - HIGHLIGHTS, PAGE 3
5. WE NOTE THAT YOU HAVE DISCLOSED CERTAIN FINANCIAL MEASURES IN OUR
FILINGS THAT APPEAR TO BE NON-GAAP MEASURES, INCLUDING, BUT WITHOUT
LIMITATION, THE FOLLOWING:
a. CASH FLOW PER SHARE - BASIC
b. CASH FLOW FROM OPERATIONS BEFORE CHANGES IN NON-CASH WORKING
CAPITAL.
c. EBITDAX
PLEASE PROVIDE A DETAILED ANALYSIS THAT IDENTIFIES EACH CANADIAN
NON-GAAP FINANCIAL MEASURE THAT YOU HAVE DISCLOSED IN OUR REPORT AND
EXPLAIN WHY THE DISCLOSURE IS APPROPRIATE. REFER TO ITEM B(3) TO THE
GENERAL INSTRUCTIONS FOR THE FORM 40-F AND QUESTION 32 OF THE JUNE
13, 2004 DIVISION OF CORPORATION FINANCES' FREQUENTLY ASKED
QUESTIONS REGARDING THE USE OF NON-GAAP FINANCIAL MEASURES AT
HTTP://WWW.SEC.GOV/DIVISIONS/CORPFIN/FAQS/NONGAAPFAQ.HTM. PLEASE
CONTACT US AT YOUR CONVENIENCE TO DISCUSS THIS COMMENT.
Response to Comment 5:
The Company includes certain non-GAAP financial measures in the
Management's Discussion and Analysis ("MD&A") as investors may use this
information to better analyze our operating performance. This includes
certain per barrel information that can be compared against industry
benchmarks by these investors. The Company indicates in the MD&A that
the additional information should not be considered in isolation or as a
substitute for measures of operating performance prepared in accordance
with Canadian GAAP and that non-GAAP 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. This is included on page 22 of the Exhibit 3 of our Form 40-F,
under the heading "Non-GAAP Financial Measures".
Non-GAAP measures included by the Company in its MD&A and the additional
information provided by these measures are as follows:
o Cash Flow per Share - Basic
o In addition to Net Earnings (Loss) per Share, this
metric provides a better basis for evaluating our
operating performance, as it excludes fluctuations
on the Company's US dollar denominated Senior
Secured Notes and certain other non-cash items, such
as depreciation, depletion and amortization and
future income tax recoveries/expenses.
o Cash Flow from Operations before changes in non-cash
working capital.
o In addition to Net Earnings (Loss) Attributable to
Common Shareholders, this metric provides a better
basis for evaluating our operating performance, as
it excludes fluctuations on the Company's US dollar
denominated Senior Secured Notes and certain other
non-cash items, such as depreciation, depletion and
amortization and future income tax
recoveries/expenses. This provides a useful
indicator of our ability to fund any future capital
requirements under the prevailing economic
conditions during the most recent fiscal period.
o The Company provides a reconciliation in the MD&A
from Net Earnings (Loss), a Canadian GAAP measure,
to Cash Flow from Operations Before Changes in
Non-cash Working Capital, a non-GAAP measure.
o EBITDAX
o Earnings before interest, taxes, depreciation,
depletion, amortization, stock-based compensation,
accretion on asset retirement obligation and foreign
exchange provides a better basis for evaluating our
operating performance, as it excludes 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/expenses. This provides a
useful indicator of our ability to fund our
financing costs and any future capital requirements
under the prevailing economic conditions during the
most recent fiscal period.
o The Company provides a reconciliation in the MD&A
from Net Earnings (Loss) a Canadian GAAP measure, to
EBITDAX, a non-GAAP measure.
o Crude Oil Sales Price per Barrel
o Our realized crude oil sales price per barrel is
provided so investors can compare our sales price
for our production versus numerous industry
benchmarks, including Edmonton PAR and West Texas
Intermediate pricing.
o Operating Expenses per Processed Barrel
o Operating expenses per processed barrel are provided
so investors can compare our per barrel costs versus
numerous competitors throughout the industry and
against company benchmarks. Per unit operating costs
are often considered more relevant given that
production volumes vary between industry
participants, which makes gross numbers between
producers non-comparable.
The Company is in compliance with General Instruction B(3) to Form
40-F. In addition, we have referred to Question 32 of the June 13,
2004 Division of Corporation Finances' Frequently Asked Questions
Regarding the Use of Non-GAAP Financial Measures. That question
states that if a Canadian company includes a non-GAAP financial
measure in an annual report on Form 40-F, the company does not need
to comply with Regulation G or Item 10(e) of Regulation S-K.
OPERATING COSTS, PAGE 8
6. WE NOTE THAT YOUR STATEMENT IN FOOTNOTE (2) THAT "OPERATING EXPENSES
ARE NOW CALCULATED ON THE BASIS OF COSTS ASSOCIATED WITH THE
SYNTHETIC CRUDE SALES EXCLUDING PURCHASED BLEND STOCKS FOR THE
RELEVANT PERIOD." PLEASE EXPLAIN THE NATURE OF THIS CHANGE IN THE
CALCULATION OF OPERATING EXPENSES AND WHETHER OR NOT THERE WAS AN
IMPACT ON YOUR FINANCIAL STATEMENTS.
Response to Comment 6:
The change referred to is a change in the calculation of operating costs
per barrel, as presented and discussed in the MD&A, and had no impact to
the presentation of Operating expenses on the face of the consolidated
statements of operations and retained earnings (deficit). The change was
made to better reflect the volumes of bitumen produced by the Project
after considering the impacts of upgrading. As part of the Project's
operations, bitumen production from the Mine receives an approximate
three per cent uplift as a result of the hydrotreating/hydroconversion
process at the Upgrader. Previously, the Company in its MD&A, disclosed
operating costs per barrels of bitumen produced (or mined bitumen),
which did not take into account this uplift in the barrels even though
there are operating costs associated with producing the hydrogen at the
Upgrader. The revised MD&A presentation on a per barrel processed (or
upgraded bitumen) better reflects, in our view, the operating costs
associated with processing a barrel of upgraded bitumen.
The Company hereby acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in its filings, including the Form 40-F;
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any action with
respect to the Company's filings, including the Form 40-F; and
o the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
If you have any questions concerning the above responses, please do not hesitate
to contact the undersigned at (403) 233-1707.
Sincerely,
/s/ David Dyck
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David Dyck
Senior Vice President &
Chief Financial Officer