EXHIBIT 99.1
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WESTERN OIL SANDS - Q2
WESTERN OIL SANDS Q2 - 2005
For the six month period ended June 30
Message to Shareholders
WESTERN OIL SANDS INC. ("WESTERN") IS PLEASED TO REPORT ITS SECOND QUARTER 2005
RESULTS AND PROVIDE AN OPERATIONAL UPDATE FOR THE ATHABASCA OIL SANDS PROJECT
(THE "PROJECT" OR THE "AOSP"). DURING THE SECOND QUARTER OF 2005, WESTERN
GENERATED RECORD RESULTS INCLUDING: NET REVENUE OF $148.2 MILLION, EBITDAX OF
$84.1 MILLION, CASH FLOW FROM OPERATIONS OF $68.0 MILLION ($0.42 PER SHARE) AND
NET EARNINGS OF $28.7 MILLION ($0.18 PER SHARE). BY COMPARISON, IN THE SECOND
QUARTER OF 2004, WESTERN GENERATED NET REVENUE OF $93.3 MILLION, EBITDAX OF
$35.5 MILLION, CASH FLOW FROM OPERATIONS OF $19.4 MILLION ($0.12 PER SHARE) AND
A NET LOSS OF $9.2 MILLION ($0.06 PER SHARE).
Relative to the second quarter of 2004, financial results during the
second quarter of 2005 were positively impacted by a 15 per cent increase in
production, a 39 per cent increase in West Texas Intermediate ("WTI") prices and
a decrease in volumes subject to hedge contracts partially offset by wider light
to heavy crude oil price differentials. In the second quarter of 2005, a $7.2
million unrealized foreign exchange loss ($6.0 million net of tax) was included
in net earnings, compared to a foreign exchange loss of $13.5 million ($11.3
million net of tax) for the second quarter of 2004. Excluding the impact of
Western's hedging activities, EBITDAX was $104.9 million, net earnings were
$41.6 million, and cash flow from operations was $88.8 million ($0.55 per share)
in the second quarter of 2005 compared to $62.7 million, $7.5 million and $46.6
million ($0.30 per share), respectively, in the second quarter of 2004.
HIGHLIGHTS
o During the second quarter of 2005, the Project achieved record production
averaging approximately 163,800 barrels per day (32,760 barrels per day net
to Western), an increase of 15 per cent compared to 142,000 barrels per day
(28,400 barrels per day net to Western) in the second quarter of 2004. The
Project achieved another significant milestone during the second quarter of
2005, attaining cumulative production of 100 million barrels in just over
two years of full operations. One-time operational issues experienced in the
first quarter of 2005 were systematically addressed, setting the stage for
robust production in the second quarter whereby the Project experienced
reliable production performance for three consecutive months. Production in
the second quarter of 2005 represents a 24 per cent increase over the first
quarter of 2005. As a result of sustained high production levels, operating
costs for the quarter decreased to $19.38 per processed barrel.
o As announced on June 27, 2005, the Joint Venture partners agreed to settle
the loss of profits insurance claim relating to the January 6, 2003 fire.
The AOSP Joint Venture reached a settlement in the amount of $220 million.
Western's pro rata share is $44 million. Similar to the claim proceeds
relating to the physical damage stemming from the fire, certain insurers in
the loss of profits claims are withholding payment to Western as these same
insurers provided coverage on Western's construction and delay policy which
is currently in arbitration proceedings. Western will initially receive
$19.4 million from this settlement and we are attempting to finalize a
contingent settlement for the balance of $24.6 million. The settlement
amount is recorded as a reduction to capital assets in our second quarter
balance sheet and, as such, did not impact earnings.
o Western's previously announced three-for-one stock split was approved by
shareholders at our Annual and Special Meeting held on May 11, 2005.
Western's Class A Common Shares ("Common Shares) began trading on a
post-split basis on May 30, 2005, bringing our outstanding Common Shares to
approximately 160 million.
o Albian Sands Energy, operator of the Muskeg River Mine, reported two
significant safety milestones. On July 1, 2005, Albian achieved one year
without a lost time incident and July 5, 2005 marked four million man hours
without a lost time incident. As we move forward with our expansion, the
AOSP remains committed to the highest standards in health, safety and the
environment and building on our achievements to date.
WESTERN OIL SANDS INTERIM REPORT - 1
WESTERN OIL SANDS - Q2
AOSP EXPANSION UPDATE
Western, together with its partners, continues to make significant progress in
advancing the continuous construction expansion initiative. The Owners have
adopted a management system which requires rigorous adherence to a staged
protocol for completing project milestones, with the next major milestone being
the ordering of long lead time equipment and the completion of the first
expansion development plan. This management tool will be critical to the success
of the expansions as the Owners assess the capital costs of the expansions in
the face of major increases in the cost of materials and services for the
industry. Concurrent with this process, the Owners are securing Engineering
Procurement and Construction Management (EPCM) contractors for the construction
of both upstream and downstream facilities. The Project also continues to move
forward with the de-bottlenecking program with the objective of increasing
production to the 180,000 to 200,000 barrel per day range by 2007 to 2008.
The Project's environmental permit for the first expansion is before
the Energy Utilities Board and was filed on April 29, 2005; the Owners
anticipate final approval in mid-2006. The Project has held its first public
hearing in this regard and the regulatory agencies are evaluating the
application in the normal course of business. The Project is also preparing the
environmental application for the full development of the AOSP's leases with
approval anticipated in mid-2008, coincident with a final investment decision on
the second and third expansions. The Project is on track for this larger
application.
BEYOND THE AOSP
In addition to our primary objective of developing and growing the sizeable
resource base that we have available to us through the AOSP, Western is
critically examining new strategic business opportunities. As part of our
long-term strategy, Western's plan includes expanding the scope of our
interests, domestically or internationally, by taking our core competencies and
skills and applying them to new ventures. As an entrepreneurial, growth-oriented
company, our goal is to continue to identify opportunities to enhance
shareholder value.
On behalf of the Board of Directors
/s/ James C. Houck
- --------------------------
President and Chief Executive Officer
July 27, 2005
WESTERN OIL SANDS INTERIM REPORT - 2
WESTERN OIL SANDS - Q2
Management's Discussion and Analysis
THE FOLLOWING DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WAS
PREPARED AS OF JULY 27, 2005 AND SHOULD BE READ IN CONJUNCTION WITH THE INTERIM
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS ENDED JUNE 30, 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 continues,
however, to identify, evaluate and pursue other oil sands and related business
opportunities in order to enhance shareholder value.
HIGHLIGHTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------
OPERATING DATA
Bitumen Production (bbls/d) 32,757 28,400 29,647 27,798
Synthetic Crude Sales (bbls/d) 44,503 35,661 39,523 35,723
Operating Expense per Processed Barrel ($/bbl) 19.38 20.11 22.03 20.40
FINANCIAL DATA ($ THOUSANDS, EXCEPT AS INDICATED)
Net Revenue 148,167 93,275 239,910 175,959
Realized Crude Oil Sales Price ($/bbl) (1) (2) 48.93 36.07 44.52 35.34
EBITDAX (1) (3) 84,063 35,468 111,479 61,200
WESTERN OIL SANDS INTERIM REPORT - 3
WESTERN OIL SANDS - Q2
HIGHLIGHTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
Cash Flow from Operations (4) 68,019 19,369 78,789 28,417
Cash Flow per Share - Basic ($/Share) (1) (5) (8) 0.42 0.12 0.49 0.18
Net Earnings (Loss) (6) 28,650 (9,159) 26,706 (14,862)
Net Earnings (Loss) Per Share - Basic ($/Share) (8) 0.18 (0.06) 0.17 (0.09)
Net Capital Expenditures (7) (12,900) 7,261 4,654 12,719
Long-term Financial Liabilities 810,214 770,976 810,214 770,976
Weighted Average Shares
Outstanding - Basic (Shares) 160,120,507 157,594,179 160,039,942 156,506,457
- ----------------------------------------------------------------------------------------------------------------------------
(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. (8) PER SHARE AMOUNTS FOR FISCAL 2004
TIME PERIODS HAVE BEEN RESTATED TO TAKE INTO ACCOUNT THE THREE-FOR-ONE
STOCK SPLIT.
OPERATING RESULTS
PRODUCTION
During the second quarter of 2005, production from the Mine rose 15 percent and
averaged a record 163,785 barrels per day (32,757 barrels per day net to
Western) of bitumen compared to 142,000 barrels per day (28,400 barrels per day
net to Western) in the second quarter of 2004. Operational challenges and the
resulting repairs that occurred prior to this quarter were systematically
addressed with steps taken to mitigate the likelihood of recurrence in the
future. These operational issues were not design related and, once rectified,
the Project achieved sustained, reliable levels of production well in excess of
the design rate during the quarter. Operational education continues to take
place on a monthly basis which will serve to enhance the sustainability of
higher than design production rates for the Project.
REVENUE
NET REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
($ THOUSANDS, EXCEPT AS INDICATED) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
REVENUE
Oil Sands (1) 198,929 117,057 319,238 229,770
Marketing 44,667 25,232 90,243 44,754
Transportation 622 492 869 814
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Total Revenue 244,218 142,781 410,350 275,338
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PURCHASED FEEDSTOCKS AND TRANSPORTATION
Oil Sands 51,098 23,926 78,663 53,627
Marketing 44,460 25,088 90,843 44,566
Transportation 493 492 934 1,186
- -------------------------------------------------------------------------------------------------------------------
Total Purchased Feedstocks and Transportation 96,051 49,506 170,440 99,379
- -------------------------------------------------------------------------------------------------------------------
WESTERN OIL SANDS INTERIM REPORT - 4
WESTERN OIL SANDS - Q2
NET REVENUE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
($ THOUSANDS, EXCEPT AS INDICATED) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Oil Sands (1) 147,831 93,131 240,575 176,143
Marketing 207 144 (600) 188
Transportation 129 - (65) (372)
- -------------------------------------------------------------------------------------------------------------------
Total Net Revenue 148,167 93,275 239,910 175,959
- -------------------------------------------------------------------------------------------------------------------
SYNTHETIC CRUDE SALES (bbls/d) 44,503 35,661 39,523 35,723
- -------------------------------------------------------------------------------------------------------------------
REALIZED CRUDE OIL SALES PRICE ($/bbl) (2) 48.93 36.07 44.52 35.34
- -------------------------------------------------------------------------------------------------------------------
(1) OIL SANDS REVENUE AND NET REVENUE ARE PRESENTED NET OF WESTERN'S HEDGING
ACTIVITIES.
(2) REALIZED CRUDE OIL SALES PRICE ($/BBL) IS CALCULATED AS OIL SANDS REVENUE
LESS ANY TRANSPORTATION COSTS DIVIDED BY SYNTHETIC CRUDE SALES VOLUME.
Western recorded crude oil sales revenue of $244.2 million in the
second quarter of 2005, including $198.9 million from proprietary production
compared to $142.8 million in the second quarter of 2004, $117.1 million of
which was from proprietary production. This 71 per cent year-over-year increase
is largely a result of record production during the quarter, along with a higher
realized selling price per barrel due to higher underlying crude oil prices. The
increase was also a function of fewer physical barrels subject to fixed price
swap contracts offset, in part, by materially wider heavy oil differentials.
Oil sands sales volumes, including bitumen and purchased feedstocks,
averaged 44,503 barrels per day in the second quarter of 2005 exceeding the
35,661 barrels per day recorded in the second quarter of 2004, due to higher
production levels experienced during the second quarter of 2005.
The second quarter of 2005 was again characterized by higher commodity
prices with WTI averaging US$53.17 per barrel for the quarter. This represents a
39 per cent increase compared to the prior year period and a seven per cent
increase compared to the first quarter of 2005. Heavy oil differentials, which
generally 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 broader market forces which caused heavy oil differentials
to widen by nearly US$10.00 per barrel. This was offset by fewer barrels subject
to fixed price swap contracts compared to the second quarter of 2004. Western's
price differential widened slightly compared to the first quarter of 2005
largely due to the continued wide light to heavy oil differential.
Western generated net revenue of $148.2 million in the second 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 $93.3 million in the second quarter of 2004. Feedstocks
are crude products introduced at the Upgrader. Some are introduced into the
hydrocracking/hydrotreating process and others are used to create various blends
of synthetic crude oil products. The cost of these feedstocks depends on world
oil markets and the spread between heavy and light crude oil prices.
During the second quarter of 2005, our hedging activities resulted in
an overall decrease to net revenue of $20.8 million or $5.14 per barrel compared
to an overall decrease to net revenue of $36.8 million or $11.85 per barrel in
the first quarter of 2005 and $27.3 million or $8.40 per barrel during the same
time period in the prior year. Western's hedged volumes for the balance of the
year remains at 7,000 barrels per day at US$26.87 WTI 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.
WESTERN OIL SANDS INTERIM REPORT - 5
WESTERN OIL SANDS - Q2
OPERATING COSTS
Western's unit cash operating costs decreased to $19.38 per processed
barrel in the second quarter of 2005 compared to $20.11 per processed barrel for
the second quarter of 2004. This decrease is a function of the reliability of
operations during the quarter which resulted in strong production levels. The
operating cost profile of oil sands projects are predominantly fixed in nature
and, as such, higher production levels translate into lower overall unit costs.
Variable costs, however, increased during the quarter largely due to higher
natural gas prices, additional maintenance costs at the Mine associated with
increased reliability which supported record production, and an increase in the
costs of materials and services caused by a high commodity price environment. We
continue to focus on reducing operating costs in all areas of operations despite
the cost pressures associated with a high commodity price environment and the
increased demand within the industry.
Compared to the first quarter of 2005, unit operating costs decreased
$6.08 per processed barrel or 24 per cent in the second quarter of 2005. This
decrease was largely the result of increased bitumen production providing
greater coverage of fixed operating costs in the quarter, together with the
completion of the repairs during the first quarter of 2005 at the Upgrader, and
offset by higher natural gas costs. High cost product inventory at the end of
the first quarter was sold during the second quarter partially offsetting the
reduction in unit costs.
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30
($ THOUSANDS, EXCEPT AS INDICATED) 2005 2004 2005 2004
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OPERATING EXPENSES FOR BITUMEN SOLD
Operating Expense - Income Statement 55,347 52,828 114,490 104,653
Operating Expense - Inventoried 3,286 (1,694) 4,074 (2,633)
- -------------------------------------------------------------------------------------------------------------------
Total Operating Expenses For Bitumen Sold 58,633 51,134 118,564 102,020
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SALES (BARRELS PER DAY)
Total Synthetic Crude Sales 44,503 35,661 39,523 35,723
Purchased Upgrader Blend Stocks (11,247) (7,717) (9,789) (8,242)
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Synthetic Crude Sales Excluding Blend Stocks 33,256 27,944 29,735 27,481
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES PER PROCESSED BARREL ($/bbl) (1) 19.38 20.11 22.03 20.40
- -------------------------------------------------------------------------------------------------------------------
(1) OPERATING EXPENSES PER PROCESSED BARREL ($/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 $0.9 million in the second quarter of 2005 were slightly higher
than the second quarter of 2004 as a result of increased production compared to
the prior year period, together with higher deemed bitumen royalty prices.
Compared to the first quarter of 2005, royalties increased $0.2 million in the
second quarter of 2005 primarily due to growth in production volumes.
WESTERN OIL SANDS INTERIM REPORT - 6
WESTERN OIL SANDS - Q2
CORPORATE RESULTS
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses ("G&A") were $2.5 million for the second
quarter of 2005 compared to $1.8 million for the second quarter of 2004 due to
an increased number of employees within Western and higher regulatory compliance
costs.
INSURANCE EXPENSE
Insurance expenses were $1.9 million for the second quarter of 2005 compared to
$2.4 million in the second quarter of 2004. This decrease is due to lower
premiums associated with the various corporate policies, combined with the
strengthening of the Canadian dollar over the comparable periods as the premiums
are paid in US dollars but reported for financial statement purposes in Canadian
dollars. Insurance expenses in the second quarter of 2005 were comparable to
those incurred in the first quarter of 2005.
RESEARCH AND BUSINESS DEVELOPMENT
Western incurred $3.4 million in AOSP-related research and other business
development expenses during the second quarter of 2005. As previously
communicated in this report, Western has been more actively pursuing possible
new business ventures and technologies which could enhance our existing oil
sands assets.
INTEREST EXPENSE
Interest expense totaled $15.7 million in the second quarter of 2005 compared to
$16.1 million in the second quarter of 2004. This slight 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 $0.6 million in the second quarter of 2005 compared to the first
quarter of 2005 as a result of an increase in the carrying costs under the
Revolving Credit Facility, combined with a slight weakening of the Canadian
dollar against the US dollar during this time period.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization ("DD&A") totaled $13.0 million for the
second quarter of 2005 compared to $11.8 million for the second quarter of 2004.
This increase is the result of higher bitumen production partially offset by an
increased reserve base which decreases the unit of production amount expensed
for depletion.
FOREIGN EXCHANGE
During the second quarter of 2005, Western reported a foreign exchange loss of
$7.0 million compared to a loss of $13.5 million in the second quarter of 2004.
As reference points, the noon-day closing foreign exchange rate on June 30, 2004
was $1.3404 Cdn/US compared to $1.2096 Cdn/US on March 31, 2005 and $1.2256
Cdn/US on June 30, 2005. In terms of average rates for the respective periods,
the average rate for the second quarter of 2005 was $1.2439 Cdn/US compared to
$1.3592 Cdn/US for the prior year period and $1.227 Cdn/US for the first quarter
of 2005.
INCOME TAXES
For the second quarter of 2005, Western had an income tax expense of $18.5
million compared to $2.7 million for the same period last year. Included in this
expense is a future income tax expense of $17.9 million (2004 - $2.8 million),
which reflects the expected use of Western's non-capital loss carry-forwards
during the second quarter of 2005, and a corresponding reduction in the future
income tax assets associated with these carry-forwards.
NET EARNINGS (LOSS)
During the second quarter of 2005, Western reported record net earnings of $28.7
million ($0.18 per share) compared to a net loss of $9.2 million ($0.06 per
share) in the second quarter of 2004. Net earnings (loss) include the impact of
unrealized foreign
WESTERN OIL SANDS INTERIM REPORT - 7
WESTERN OIL SANDS - Q2
exchange losses on our US dollar denominated debt. In the second quarter of
2005, there was an unrealized foreign exchange loss of $7.2 million compared to
an unrealized loss of $13.5 million in the second quarter of 2004. Excluding the
impact of Western's hedging activities, net earnings were $41.6 million in the
second quarter of 2005.
The following table provides the reconciliation between Net Earnings
(Loss), Cash Flow from Operations (before changes in non-cash working capital)
and EBITDAX:
RECONCILIATION: NET EARNINGS (LOSS) TO EBITDAX
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
($ THOUSANDS) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) ATTRIBUTABLE TO
COMMON SHAREHOLDERS 28,650 (9,159) 26,706 (14,862)
Add (Deduct):
Depreciation, Depletion and Amortization 13,037 11,771 23,535 22,332
Accretion on Asset Retirement Obligation 143 125 284 250
Stock-based Compensation 1,082 392 1,723 544
Unrealized Foreign Exchange Gain 7,200 13,455 9,900 21,600
Future Income Tax Expense (Recovery) 17,928 2,785 17,280 (1,447)
Cash Settlement on Performance Share Units - - (596) -
Cash Settlement on Asset Retirement Obligation (21) - (43) -
- -------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATIONS, BEFORE CHANGES
IN NON-CASH WORKING CAPITAL 68,019 19,369 78,789 28,417
Add:
Interest 15,660 16,074 30,746 31,922
Realized Foreign Exchange Loss (231) 68 3 136
Large Corporations Tax 594 (43) 1,302 725
Cash Settlement on Performance Share Units - - 596 -
Cash Settlement on Asset Retirement Obligation 21 - 43 -
- -------------------------------------------------------------------------------------------------------------------
EBITDAX 84,063 35,468 111,479 61,200
- -------------------------------------------------------------------------------------------------------------------
EBITDAX (Earnings before Interest, Taxes, Depreciation, Depletion,
Amortization, Stock-based Compensation, Accretion on Asset Retirement Obligation
and Foreign Exchange) was $84.1 million for the second quarter of 2005,
reflecting a 137 per cent increase over the $35.5 million recorded for the
second quarter of 2004, establishing a quarterly record for Western. Excluding
the impact of Western's hedging activities, EBITDAX was $104.9 million for the
second quarter of 2005 compared to $62.7 million for the second quarter of 2004,
an increase of 67 per cent. Second quarter 2005 EBITDAX increased $56.6 million
over the first quarter of 2005. Excluding the impact of hedging activities,
EBITDAX in the second quarter of 2005 improved $40.7 million or 63 per cent
compared to the first quarter of 2005. The improvement in EBITDAX, both from the
previous years' comparative quarter and the previous quarter, is the result of
record production during the quarter together with improved sale price
realizations.
WESTERN OIL SANDS INTERIM REPORT - 8
WESTERN OIL SANDS - Q2
Cash flow from operations before changes in non-cash working capital
("cash flow from operations") increased 251 per cent to a record $68.0 million
for the second quarter of 2005 compared to $19.4 million in the second quarter
of 2004. Cash flow from operations in the second quarter of 2005 increased $57.2
million over the first quarter of 2005, an increase in excess of five times.
Compared to the prior year period, this increase is the result of higher bitumen
production combined with stronger price realizations and 7,000 barrels subject
to fixed priced swap contracts.
FINANCIAL POSITION
BANK DEBT
During the second quarter of 2005, Western reduced its Revolving Credit Facility
by $25 million as a result of the strong cash flow from operations during the
quarter. Western will continue to reduce the amount of debt outstanding as cash
flow from operations permit. Western also intends to apply the $19.4 million to
be received pursuant to the Section III insurance settlement against existing
bank lines.
As mentioned in our first quarter report, Western has $299 million in
capacity under the Revolving Credit Facility. This capacity 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 per cent.
As at June 30, 2005, $204 million had been drawn on this Revolving Credit
Facility.
CAPITAL EXPENDITURES
Western's capital expenditures totaled $9.3 million in the second quarter of
2005 compared to $9.1 million in the second quarter of 2004. Insurance proceeds
of $22.2 million offset this amount to derive a net reduction to the capital
base of $12.9 million. The $22.2 million is comprised of $19.4 million pursuant
to the Owner's settlement on its loss of profits claim and $2.8 received during
the quarter through the Joint Venture pursuant to the errors and omissions
policy settlement. Further discussion regarding Western's insurance proceedings
is detailed below.
ANALYSIS OF CASH RESOURCES
Cash balances totaled $4.4 million at June 30, 2005 compared to $5.7 million at
March 31, 2005. Cash inflows included: $68.0 million cash flow from operations,
$2.8 million from insurance proceeds and $0.2 million from the exercise of
employee stock options. Cash outflows included: a $25 million decrease in bank
lines, a $37.7 million decrease in non-cash working capital, $9.3 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 second quarter of
2005 was the result of a $19.4 million increase in accounts receivable due to
higher revenues, an $18.7 million decrease in accounts payable and a $2.2
million increase in prepaid expenses offset by a $2.6 million decrease in
inventory. The decrease in accounts payable reflects only two months of accrued
interest on Western's long-term notes at June 30, 2005 compared to five months
accrued at March 31, 2005, reduced amounts owed under hedging contracts and
reduced volumes associated with marketing buy and sell transactions. The
increase in accounts receivable is the result of both increased sales volumes
and increased commodity prices. Inventory is lower as a result of a greater
proportion of lower priced volumes than high priced volumes compared to the end
of the first quarter of 2005.
INSURANCE CLAIMS
As announced on June 27, 2005, the Joint Venture reached a settlement for the
loss of profits policy referred to as Section III in the amount of $220 million.
Western's pro rata share is $44 million. Western announced that it was to
receive $16.3 million initially; however, further discussions with certain of
the insurance carriers, increased this amount to $19.4 million. The
WESTERN OIL SANDS INTERIM REPORT - 9
WESTERN OIL SANDS - Q2
remaining balance is being withheld by certain insurers who are common to
Western's cost overrun and start-up delay policy, known as Section IV. Western
is attempting to finalize a contingent settlement for the balance of $24.6
million. Once the Section III settlement payment outlined above is remitted,
total insurance proceeds received to date will be $38.3 million. Included in
this amount is $2.8 million received through the Joint Venture for payments
under the Errors & Omissions Policy related to the initial construction settled
previously.
Regarding Western's $200 million Section IV policy, arbitration
proceedings are continuing with arbitration hearings expected to commence in
mid-2006. Following these hearings, we expect to receive a binding decision from
the panel regarding this claim which, in turn, will finalize the payments that
have been withheld to Western under Section I and Section III. The total amount
claimed by Western from insurers is $244 million.
FINANCIAL RISKS
The objective of Western's hedging program is to mitigate exposure to the
volatility of crude oil prices, thereby stabilizing current and future cash flow
from the sale of our synthetic crude products, protecting the base capital
program and ensuring the funding of debt obligations. To this end, Western has
the following contracts outstanding as at June 30, 2005:
HEDGING SUMMARY
Unrealized
Decrease to
Notional Volume Swap Price Future Revenue
Instrument (bbls/d) Hedge Period (US$/bbl) (Cdn $ Thousands)
- -------------------------------------------------------------------------------------------------------------------
WTI Swaps 7,000 July 1, 2005 to December 31, 2005 US$26.87 $ (49,250)
- -------------------------------------------------------------------------------------------------------------------
As a result of the continued strength in crude oil prices since this
program was initiated, Western has not realized the full impact of increases 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Decrease in Revenue - $ thousands 20,803 27,272 57,597 44,622
Decrease in Revenue - $/bbl 5.14 8.40 8.05 6.86
- -------------------------------------------------------------------------------------------------------------------
OUTLOOK FOR BALANCE OF 2005
The second quarter of 2005 represented Western's best quarter to date by several
measures. The Project operated at record production levels during the second
quarter and it is anticipated that this will set the stage for the balance of
the year. Western is also updating its guidance with respect to cash flow from
operations to reflect the continued strength in the crude oil pricing market.
Using a forecasted US$50 WTI and a Cdn/US exchange rate of $0.80 for the balance
of fiscal 2005 results in a cash flow from operations of $177 million. This
includes the impact of existing crude oil hedges for the balance of 2005. No
change is forecasted from our previously issued guidance with respect to net
earnings of approximately $66 million. We continue to anticipate average 2005
production of 140,000 to 145,000 barrels per day (28,000 to 29,000 barrels per
day net to Western) which incorporates planned maintenance scheduled for
September/October.
Since the beginning of the year, Western has augmented and strengthened
its core competencies, not only from the perspective of our current Project but
also with respect to other hydrocarbon opportunities. As part of our long-term
strategy, Western is, and will continue to, identify and pursue opportunities
with significant resource potential, both domestically and internationally,
which may ultimately contribute to further shareholder value creation and
minimize overall company risk
WESTERN OIL SANDS INTERIM REPORT - 10
WESTERN OIL SANDS - Q2
through diversification. Should any of these opportunities develop, we will
communicate material developments in a timely manner.
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"), EBITDAX excluding
hedging activities and net earnings 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 - 11
WESTERN OIL SANDS - Q2
Consolidated Balance Sheets
AS AT JUNE 30 AS AT DECEMBER 31
($ THOUSANDS) 2005 2004
- -----------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Current Assets
Cash $ 4,403 $ 3,715
Accounts Receivable 108,659 62,564
Inventory 22,957 14,186
Prepaid Expense 8,627 5,771
-------------------------------------------
144,646 86,236
-------------------------------------------
Capital Assets (NOTE 1) 1,334,676 1,351,745
Deferred Charges 17,121 18,378
Future Income Taxes (NOTE 9) - 14,511
-------------------------------------------
1,351,797 1,384,634
-------------------------------------------
$ 1,496,443 $ 1,470,870
LIABILITIES
Current Liabilities
Accounts Payable and Accrued Liabilities $ 83,579 $ 87,679
Current Portion Long-term Debt (NOTE 2) - 95,000
Current Portion of Lease Obligations (NOTE 3) 3,895 5,230
-------------------------------------------
87,474 187,909
Long-term Liabilities
Long-term Debt (NOTE 2) 755,520 662,620
Lease Obligations (NOTE 3) 54,694 53,474
Asset Retirement Obligation (NOTE 4) 8,432 8,191
Future Income Tax (NOTE 9) 2,769 -
-------------------------------------------
821,415 724,285
-------------------------------------------
908,889 912,194
-------------------------------------------
SHAREHOLDERS' EQUITY
Share Capital (NOTE 5) 546,744 545,699
Contributed Surplus (NOTE 8) 2,372 1,245
Retained Earnings 38,438 11,732
-------------------------------------------
587,554 558,676
-------------------------------------------
$ 1,496,443 $ 1,470,870
-------------------------------------------
Commitments and Contingencies (NOTE 10)
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WESTERN OIL SANDS INTERIM REPORT - 12
WESTERN OIL SANDS - Q2
Consolidated Statements of Operations
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED - $ THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
REVENUES
Revenues (NOTE 11) $ 244,218 $ 142,781 $ 410,350 $ 275,338
Less: Purchased Feedstocks and Transportation 96,051 49,506 170,440 99,379
----------------------------------------------------------
148,167 93,275 239,910 175,959
----------------------------------------------------------
EXPENSES:
Operating 55,347 52,828 114,490 104,653
Research and Business Development 3,448 - 4,135 -
Royalties 886 768 1,547 1,448
General and Administrative 2,540 1,808 4,479 3,795
Insurance 1,883 2,403 3,780 4,863
Interest (NOTE 7) 15,660 16,074 30,746 31,922
Stock-based Compensation (NOTE 8) 1,082 392 1,723 544
Accretion on Asset Retirement Obligation (NOTE 4) 143 125 284 250
Depreciation, Depletion and Amortization 13,037 11,771 23,535 22,332
Foreign Exchange Loss 6,969 13,523 9,903 21,736
----------------------------------------------------------
100,995 99,692 194,622 191,543
----------------------------------------------------------
NET EARNINGS (LOSS)
BEFORE INCOME TAXES 47,172 (6,417) 45,288 (15,584)
Income Tax Expense (Recovery) (NOTE 9) 18,522 2,742 18,582 (722)
----------------------------------------------------------
NET EARNINGS (LOSS) 28,650 (9,159) 26,706 (14,862)
Retained Earnings (Deficit) at Beginning of Period 9,788 (13,423) 11,732 (7,720)
----------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
AT END OF PERIOD $ 38,438 $ (22,582) $ 38,438 $ (22,582)
----------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE (NOTE 6)
Basic $ 0.18 $ (0.06) $ 0.17 $ (0.09)
Diluted $ 0.18 $ (0.06) $ 0.16 $ (0.09)
----------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WESTERN OIL SANDS INTERIM REPORT - 13
WESTERN OIL SANDS - Q2
Consolidated Statements of Cash Flows
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED - $ THOUSANDS) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net Earnings (Loss) $ 28,650 $ (9,159) $ 26,706 $ (14,862)
Non-cash Items:
Stock-based Compensation (NOTE 8) 1,082 392 1,723 544
Accretion on Asset Retirement Obligation (NOTE 4) 143 125 284 250
Depreciation, Depletion and Amortization 13,037 11,771 23,535 22,332
Unrealized Foreign Exchange Loss (NOTE 2) 7,200 13,455 9,900 21,600
Future Income Tax Expense (Recovery) (NOTE 9) 17,928 2,785 17,280 (1,447)
Cash Items:
Cash Settlement of Asset
Retirement Obligation (NOTE 4) (21) - (43) -
Cash Settlement of Performance
Share Unit Plan (NOTE 8) - - (596) -
CASH FROM OPERATIONS 68,019 19,369 78,789 28,417
Decrease in Non-Cash Working Capital (NOTE 12) (37,945) (23,865) (43,388) (5,950)
30,074 (4,496) 35,401 22,467
FINANCING ACTIVITIES
Issue of Share Capital (NOTE 5) 244 68,504 1,045 69,104
Share Issue Expenses (NOTE 5) - (2,865) - (2,865)
Repayment of Long-term Debt, Net (25,000) (56,000) (12,000) (72,000)
Deferred Charges - (22) - (26)
Repayment of Obligations Under Capital Lease (335) (335) (670) (671)
CASH GENERATED (USED) (25,091) 9,282 (11,625) (6,458)
INVESTING ACTIVITIES
Capital Expenditures (9,308) (9,089) (26,862) (19,150)
Insurance Proceeds (NOTE 10) 22,208 1,828 22,208 6,431
Decrease (Increase) in Non-Cash
Working Capital (NOTE 12) (19,159) 342 (18,434) (4,535)
CASH INVESTED (6,259) (6,919) (23,088) (17,254)
(Decrease) Increase in Cash (1,276) (2,133) 688 (1,245)
Cash at Beginning of Period 5,679 4,658 3,715 3,770
CASH AT END OF PERIOD $ 4,403 $ 2,525 $ 4,403 $ 2,525
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
WESTERN OIL SANDS INTERIM REPORT - 14
WESTERN OIL SANDS - Q2
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
JUNE 30, 2005 (UNAUDITED) COST ACCUM. DD&A* NET BOOK VALUE
- -------------------------------------------------------------------------------------------------------------------
Oil Sands Project $ 1,335,823 $ (80,257) $ 1,255,566
Oil Sands Project Assets Under Capital Lease 52,705 (3,292) 49,413
Other Assets 30,886 (1,189) 29,697
- -------------------------------------------------------------------------------------------------------------------
$ 1,419,414 $ (84,738) $ 1,334,676
- -------------------------------------------------------------------------------------------------------------------
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
JUNE 30, 2005 DECEMBER 31, 2004
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
US$450 million Senior Secured Notes $ 551,520 $ 541,620
Senior Credit Facility - 95,000
Revolving Credit Facility 204,000 121,000
- -------------------------------------------------------------------------------------------------------------------
755,520 757,620
Less: Current Portion of Long-term Debt - (95,000)
- -------------------------------------------------------------------------------------------------------------------
$ 755,520 $ 662,620
- -------------------------------------------------------------------------------------------------------------------
The Corporation's US dollar denominated Senior Secured Notes (the "Notes") are
translated into Canadian dollars at the period end exchange rate. The unrealized
foreign exchange loss arising on the Notes for the three and six month periods
ending June 30, 2005 was $7.2 million and $9.9 million respectively (June 30,
2004 - $13.5 million and $21.6 million). As at June 30, 2005, a total of $157.3
million of unrealized foreign exchange gains had been recognized from the
inception of the Notes, approximately $92 million of which has been capitalized
as it occurred prior to commercial operations.
WESTERN OIL SANDS INTERIM REPORT - 15
WESTERN OIL SANDS - Q2
3. LEASE OBLIGATIONS
JUNE 30, 2005 DECEMBER 31, 2004
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Obligations Under Capital Lease $ 50,938 $ 51,609
Operating Lease Guarantee Obligation 7,651 7,095
- -------------------------------------------------------------------------------------------------------------------
58,589 58,704
Less : Current Portion (3,895) (5,230)
- -------------------------------------------------------------------------------------------------------------------
$ 54,694 $ 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 Operating Lease for Mobile Equipment, 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 and six month periods ending June 30, 2005 the
Corporation paid $0.1 million and $1.5 million, respectively, in regards to this
obligation (June 30, 2004 - nil).
4. ASSET RETIREMENT 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
six months ended June 30, 2005, the Corporation incurred $0.04 million in costs
associated with this obligation (June 30, 2004 - nil). The following table
presents the reconciliation of the Asset Retirement Obligation for the three and
six month periods ending June 30, 2005 and 2004:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Asset Retirement Obligation at Beginning of Period $ 8,310 $ 7,262 $ 8,191 $ 7,137
Liabilities Settled (21) - (43) -
Accretion on Asset Retirement Obligation 143 125 284 250
- -------------------------------------------------------------------------------------------------------------------
Asset Retirement Obligation at End of Period $ 8,432 $ 7,387 $ 8,432 $ 7,387
- -------------------------------------------------------------------------------------------------------------------
5. SHARE CAPITAL
The number of common shares and stock options outstanding reflect a
three-for-one split of the Corporation's common shares on May 30, 2005.
ISSUED AND OUTSTANDING
(UNAUDITED) NUMBER OF SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------------
COMMON SHARES
Balance at December 31, 2004 159,836,286 $ 545,699
Issued for Cash 314,776 1,045
- -------------------------------------------------------------------------------------------------------------------
TOTAL ISSUED SHARE CAPITAL AT JUNE 30, 2005 160,151,062 $ 546,744
- -------------------------------------------------------------------------------------------------------------------
OUTSTANDING
STOCK OPTIONS 3,805,832
- --------------------------------------------------------------------------------------
DILUTED SHARES AT JUNE 30, 2005 163,956,894
- --------------------------------------------------------------------------------------
WESTERN OIL SANDS INTERIM REPORT - 16
WESTERN OIL SANDS - Q2
6. NET EARNINGS (LOSS) PER SHARE
The basic and diluted weighted average number of shares outstanding, both
current and prior period, reflect a three-for-one stock split of the
Corporation's common shares on May 30, 2005. The basic weighted average number
of shares for the three and six-month periods ended June 30, 2005 are
160,120,507 and 160,039,942 respectively (June 30, 2004 - 157,594,179 and
156,506,457 respectively). The diluted weighted average number of shares for the
three and six-month periods ended June 30, 2005 were 162,180,067 and 162,169,374
respectively. Due to a loss for the three and six-month period ended June 30,
2004 zero incremental shares are included for the diluted earnings per share
weighted average number because the effect would be anti-dilutive.
7. INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Interest on Long-term Debt $ 15,017 $ 15,596 $ 29,556 $ 30,966
Interest on Obligations Under Capital Lease 643 478 1,190 956
- -------------------------------------------------------------------------------------------------------------------
$ 15,660 $ 16,074 $ 30,746 $ 31,922
- -------------------------------------------------------------------------------------------------------------------
Cash interest paid for the three and six month periods ending June 30, 2005 was
$26.5 million and $31.5 million, respectively (June 30, 2004 - $28.0 million and
$31.2 million, respectively). Cash interest of $0.1 million was received for the
three and six month periods ending June 30, 2005 (June 30, 2004 - $0.1 million).
8. STOCK-BASED COMPENSATION
(a) STOCK OPTION PLAN
Under the Corporation's stock-based compensation plan 162,000 options were
granted during the three-month period ended June 30, 2005 at an average exercise
price of $17.46 (June 30, 2004 - no options were granted). 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Granted 162,000 - 353,670 198,549
Weighted-average Fair Value $ 7.57 $ - $ 7.18 $ 4.10
Risk Free Interest Rate 3.79% 4.51% 3.93% 4.32%
Expected Life (in Years) 6.00 6.00 6.00 6.00
Expected Volatility 30% 30% 26-30% 30%
Dividend Per Share $ - $ - $ - $ -
- -------------------------------------------------------------------------------------------------------------------
(b) PERFORMANCE SHARE UNIT PLAN
At June 30, 2005, there were 179,745 PSUP units outstanding, after considering
the three-for-one stock split effective May 30, 2005.
(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 and six-month periods ending June 30, 2005,
the Corporation has recognized $1.1 million and $1.7 million, respectively, in
stock-based compensation for these options and PSUP units (June 30, 2004 - $0.4
million and $0.5 million, respectively).
WESTERN OIL SANDS INTERIM REPORT - 17
WESTERN OIL SANDS - Q2
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 SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------
Compensation Expense $ 222 $ 225 $ 442 $ 449
Net Earnings (Loss) 28,650 (9,047) 26,706 (14,862)
- -----------------------------------------------------------------------------------------------------------------
Proforma Net Earnings (Loss) $ 28,428 $ (9,272) $ 26,264 $ (15,311)
- -----------------------------------------------------------------------------------------------------------------
Basic Net Earnings (Loss) Per Share
- as Reported $ 0.18 $ (0.06) $ 0.17 $ (0.09)
- Proforma $ 0.18 $ (0.06) $ 0.16 $ (0.10)
- -----------------------------------------------------------------------------------------------------------------
Diluted Net Earnings (Loss) Per Share
- as Reported $ 0.18 $ (0.06) $ 0.16 $ (0.09)
- Proforma $ 0.18 $ (0.06) $ 0.16 $ (0.10)
- -----------------------------------------------------------------------------------------------------------------
(d) CONTRIBUTED SURPLUS
The following table presents the reconciliation of Contruted Surplus for the
three-month and six-month periods ending June 30, 2005 a 2004:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------
Contributed Surplus Beginning of Period $ 1,290 $ 430 $ 1,245 $ 278
Stock-based Compensation Expense 1,082 392 1,723 544
Cash Settlement of Performance Share Unit Plan - - (596) -
- -----------------------------------------------------------------------------------------------------------------
Contributed Surplus End of Period $ 2,372 $ 822 $ 2,372 $ 822
- -----------------------------------------------------------------------------------------------------------------
9. INCOME TAX
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) 2005 2004 2005 2004
- -----------------------------------------------------------------------------------------------------------------
Large Corporations Tax $ 594 $ (43) $ 1,302 $ 725
Future Income Tax Expense (Recovery) 17,928 2,785 17,280 (1,447)
- -----------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (RECOVERY) $ 18,522 $ 2,742 $ 18,582 $ (722)
- -----------------------------------------------------------------------------------------------------------------
The future income tax (liability) asset consists of:
June 30, 2005 December 31, 2004
- -----------------------------------------------------------------------------------------------------------------
Future Income Tax Assets:
Net Losses Carried Forward $ 39,033 $ 61,697
Share Issue Costs 1,152 1,355
Impairment of Long-lived Assets 796 796
Future Income Tax Liabilities:
Capital Assets in Excess of Tax Values (29,553) (34,242)
Unrealized Foreign Exchange Gain (10,984) (12,648)
Debt Issue Costs (3,213) (2,447)
- -----------------------------------------------------------------------------------------------------------------
NET FUTURE INCOME TAX (LIABILITY) ASSET $ (2,769) $ 14,511
- -----------------------------------------------------------------------------------------------------------------
WESTERN OIL SANDS INTERIM REPORT - 18
WESTERN OIL SANDS - Q2
she following table reconciles income taxes calculated at the Canadian statutory
rate of 37.62% (2004 - 38.87%) with actual income taxes:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(UNAUDITED) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes $ 47,172 $ (6,417) $ 45,288 $ (15,584)
- -------------------------------------------------------------------------------------------------------------------
Income Tax Expense Recovery at Statutory Rate 17,746 (2,495) 17,037 (6,058)
Effect of Tax Rate Changes and Timing of Use 603 (373) 1,036 (914)
Non-taxable Portion of Foreign Exchange Loss 1,498 2,954 2,060 4,765
Impact of Resource Allowance (3,108) (2,065) (4,042) (4,004)
Provision to Actual 764 4,764 764 4,764
Stock-based Compensation 425 - 425 -
Large Corporations Tax 594 (43) 1,302 725
- -------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (RECOVERY) $ 18,522 $ 2,742 $ 18,582 $ (722)
- -------------------------------------------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
During the three months ended June 30, 2005, the Oil Sands Project reached a
settlement in respect of the insurance coverage provided under Section III of
the Joint Venture construction policies for the loss of profits claim arising
from the January 6, 2003 fire that occurred at the Muskeg River Mine. The
Corporation is to receive $19.4 million as part of this settlement and is
attempting to finalize a contingent settlement for its remaining share of the
settlement proceeds in the amount of $24.6 million from those insurance
underwriters that also subscribed to Corporation's cost overrun and start up
delay policy, known as Section IV. This remaining settlement amount would become
payable to the Corporation in the event that it is successful in the arbitration
proceedings that are presently ongoing against the Section IV insurance
underwriters. The $19.4 million is included in accounts receivable at June 30,
2005 and was applied against the cost of the Oil Sands Project, as the
Corporation capitalized the costs related to this claim as they were incurred
prior to the date commercial operations commenced.
During the three months ended June 30, 2005, the Corporation received $2.8
million in respect of an errors and omission settlement being negotiated by the
Oil Sands Project. This errors and omission insurance policy related to initial
construction and as such these proceeds have been applied against the cost of
the Oil Sands Project.
No further amounts, other than the $19.4 million Section III settlement
described above and those collected at June 30, 2005, have been recognized in
these statements relating to the Corporation's insurance policies, nor will any
further amount be recognized until the proceeds are received or settled.
11. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Corporation has entered into various commodity-pricing agreements designed
to mitigate the exposure to the volatility of crude oil prices in US dollars.
The agreements are summarized as follows at June 30, 2005:
Unrealized
Decrease
Notional to Future
Volume Swap Price Revenue
Instrument (bbls/d) Hedge Period (US$/bbl) (Cdn $'s)
- -------------------------------------------------------------------------------------------------------------------
WTI Swaps 7,000 July 1 to September 30, 2005 US$26.87 $ (24,214)
WTI Swaps 7,000 October 1 to December 31, 2005 US$26.87 (25,036)
- -------------------------------------------------------------------------------------------------------------------
$ (49,250)
- -------------------------------------------------------------------------------------------------------------------
WESTERN OIL SANDS INTERIM REPORT - 19
WESTERN OIL SANDS - Q2
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 Six Months Ended
June 30 June 30
(UNAUDITED) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Decrease to Revenue $ 20,803 $ 27,272 $ 57,597 $ 44,622
- -------------------------------------------------------------------------------------------------------------------
12. CHANGES IN NON-CASH WORKING CAPITAL
Three Months Ended Six Months Ended
June 30 June 30
(UNAUDITED) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Source (Use):
Operating Activities
Accounts Receivable $ (19,395) $ (11,868) $ (26,715) $ (8,441)
Inventory 2,591 (5,142) (8,771) (7,712)
Prepaid Expense (2,201) 1,367 (2,856) 1,925
Accounts Payable and Accrued Liabilities (18,940) (8,222) (5,046) 8,278
- -------------------------------------------------------------------------------------------------------------------
$ (37,945) $ (23,865) $ (43,388) $ (5,950)
- -------------------------------------------------------------------------------------------------------------------
Investing Activities
Accounts Receivable $ (19,380) $ - $ (19,380) $ 614
Accounts Payable and Accrued Liabilities 221 342 946 (5,149)
- -------------------------------------------------------------------------------------------------------------------
$ (19,159) $ 342 $ (18,434) $ (4,535)
- -------------------------------------------------------------------------------------------------------------------
WESTERN OIL SANDS INTERIM REPORT - 20
WESTERN OIL SANDS - Q2
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
SENIOR VICE PRESIDENT, FINANCE
AND CHIEF FINANCIAL OFFICER
CHARLES W. BERARD
CORPORATE SECRETARY
SENIOR MANAGEMENT
STEVE REYNISH
SENIOR VICE PRESIDENT, MINING 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
DAVID J. BOONE
PRESIDENT AND DIRECTOR,
ESCAVAR ENERGY
CALGARY, ALBERTA
TULLIO CEDRASCHI
PRESIDENT & CHIEF EXECUTIVE OFFICER,
CN INVESTMENT DIVISION
MONTREAL, QUEBEC
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
RANDALL OLIPHANT
CHAIRMAN AND CEO
ROCKCLIFF GROUP LIMITED
WESTERN OIL SANDS INTERIM REPORT - 21
WESTERN OIL SANDS - Q2
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
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