EXHIBIT 99.1
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WESTERN OIL SANDS 2007 INTERIM REPORT
for the three-month period ended March 31
TO OUR SHAREHOLDERS
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Western Oil Sands Inc. (OWesternO) generated net revenue of $179.2 million,
EBITDAX of $81.1 million, cash flow from operations of $63.0 million ($0.39 per
share) and net earnings of $31.6 million ($0.20 per share) in the first quarter
of 2007. By comparison, in the first quarter of 2006 Western generated net
revenue of $139.2 million, EBITDAX of $62.1 million, cash flow from operations
of $47.8 million ($0.30 per share) and a net loss of $24.8 million (restated)
($0.15 per share). In the first quarter of 2007, net earnings included $12.8
million ($11.0 million net of tax) in net unrealized foreign exchange and risk
management (mark-to-market) losses compared to net unrealized foreign exchange
and risk management (mark-to-market) losses of $68.3 million ($45.2 million net
of tax) for the first quarter of 2006.
Production during the first quarter of 2007 averaged 32,325 barrels per
day compared to 25,945 barrels per day in the first quarter of 2006,
representing a 25 per cent increase and the best first quarter winter
performance ever for the Athabasca Oil Sands Project (OAOSPO). Western's
financial performance during the first quarter of 2007 was positively impacted
by this increase together with a significant (29 per cent) narrowing of the
light to heavy crude oil differential and a weaker Canadian dollar relative to
the US dollar compared to the prior year period. These positive developments
were partially offset by an eight per cent decrease in West Texas Intermediate
(OWTIO) prices.
HIGHLIGHTS
o Western announced future growth plans for the AOSP with proposed permit
applications for Expansions3 through 5 of the Project. These plans would
facilitate mineable bitumen production to approximately 770,000 barrels
per day, or 154,000 barrels per day net to Western. These plans are
consistent with Western's stated long term objective of growing its total
oil sands production to in excess of 200,000 barrels per day. Western now
believes this production target is attainable through current operations,
Expansion 1 through 5 and in-situ volumes. Western continues to see
potential for mining expansions beyond Expansion 5 based on the resource
potential of the unevaluated leases associated with the AOSP.
o WesternZagros Limited (OWesternZagrosO), a wholly-owned subsidiary of
Western confirmed that its Exploration and Production Sharing Agreement
(OEPSAO) was ratified by the Kurdistan Regional Government (OKRGO) and
confirmed by His Excellency Nerchivan Barzani, Prime Minister of Iraqi
Kurdistan. As part of the ratification process, WesternZagros worked with
the KRG to finalize its EPSA area boundary and other key terms in line
with draft petroleum legislation. The final EPSA area encompasses 2,120
square acres (approximately 524,000 acres) and holds a number of high
potential exploratory prospects.
o Western completed its first winter drilling program on our operated
in-situ properties. Results from the 13 core-holes drilled will be
analyzed over the course of the summer by both Western internal
professionals as well as contracted external laboratory agencies.
Disclosure of the resource potential together with future anticipated
drilling programs will be announced as details become known. Not one
recordable injury event occurred during the drilling program, reflecting
Western's emphasis on safe work conditions and commitment to corporate
social responsibility.
o During the first quarter, Western announced the appointment of Ms. Joanne
L. Alexander to the position of Vice President and General Counsel. Ms.
Alexander also serves as Corporate Secretary and as an Officer of the
Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of financial condition and results of operations was
prepared as of April 25, 2007 and should be read in conjunction with the
Interim Unaudited Consolidated Financial Statements for the periods ended March
31, 2007 and 2006 and the Audited Consolidated Financial Statements at December
31, 2006 included in the Annual Report. It offers Management's analysis of the
financial and operating results of Western Oil Sands Inc. (OWesternO) 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 OanticipateO, OestimateO, OexpectO, OpotentialO, OcouldO, or
similar words suggesting future outcomes. We caution readers and prospective
investors of the Company's securities to not place undue reliance on
forward-looking information as by its nature, it is based on current
expectations regarding future events that involve a number of assumptions,
inherent risks and uncertainties, which could cause actual results to differ
materially from those anticipated by Western. These risks include, but are not
limited to, risks of commodity prices in the marketplace for crude oil and
natural gas; risks associated with the extraction, treatment and upgrading of
mineable oil sands deposits; size and scope of expansions; risks surrounding
the level and timing of capital expenditures required to fulfill the Project's
growth strategy; risks of financing these growth initiatives at commercially
attractive levels; risks of being unable to participate in expansion and
corresponding loss of voting rights in the Athabasca Oil Sands Project
(OAOSPO); risks relating to the execution of the Project's optimization
strategy; risks involving the uncertainty of estimates involved in the reserve
and resource estimation process and ore body configuration/geometry,
uncertainty in the assessment of asset retirement obligations, uncertainty in
the estimation of future income taxes, uncertainty in the estimation of
stock-based compensation and employee future benefits and uncertainty in
treatment of capital for royalty purposes; risks surrounding health, safety and
environmental matters; risk of foreign exchange rate fluctuations; risks and
uncertainties associated with securing the necessary regulatory approvals for
expansion initiatives; risks surrounding major interruptions in operational
performance together with any associated insurance proceedings thereto; and
risks associated with identifying, negotiating and completing our other
business development activities, both those that relate to oil sands activities
and those that do not, either domestically or abroad. Risks associated with our
international initiatives include, but are not limited to, political and
economic conditions in the countries in which we intend to operate, risks
associated with acts of insurgency or terrorism, changes in market conditions,
political risks, including changes in law or government policy, the risks
associated with negotiating with foreign governments and risks generally
associated with international activity.
For additional information relating to the risks and uncertainties facing
Western, refer to Western's Annual Information Form for the year ended December
31, 2006 which is available on SEDAR at www.sedar.com.
HIGHLIGHTS
Three Months Ended March 31 2007 2006
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Operating Data
Bitumen Production (bbls/d) 32,325 25,945
Synthetic Crude Sales (bbls/d) 40,555 37,188
Operating Expense per Processed Barrel ($/bbl) 24.07 26.12
Financial Data ($ thousands, except as indicated)
Net Revenue 179,240 139,248
Realized Crude Oil Sales Price - Oil Sands ($/bbl) (1)(2) 58.49 55.31
EBITDAX (1)(3) 81,084 62,100
Cash Flow from Operations (4) 62,991 47,770
Cash Flow per Share - Basic ($/Share) (1)(5) 0.39 0.30
Risk Management Loss (19,037) (67,724)
Net Earnings (Loss) (6) 31,634 (24,833) (9)
Net Earnings (Loss) Per Share ($/Share)
Basic 0.20 (0.15) (9)
Diluted 0.19 (0.15)
Net Capital Expenditures (7) 160,511 35,331
Long-term Financial Liabilities (8) 748,242 661,765
Long-term Debt 635,183 525,195
Weighted Average Shares Outstanding - Basic (Shares) 161,493,276 160,568,322
================================================================================================================
(1) Please refer to page 13 for a discussion of Non-GAAP financial measures.
(2) Realized Crude Oil Sales Price ($/bbl) is calculated as Oil Sands Revenue
less any transportation costs, net of hedging activities, divided by total
Synthetic Crude Sales for the period. Please refer to page 4 for
calculation.
(3) Earnings before interest, taxes, depreciation, depletion, amortization,
stock based compensation, accretion on asset retirement obligation, risk
management 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) Long-term financial liabilities includes long-term debt, option premium
liability and lease obligations.
(9) Amounts restated to reflect changes in accounting treatment for stock
based compensation under EIC-162.
OPERATING RESULTS
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Production
During the first quarter of 2007, Western's net bitumen production averaged
32,325 barrels per day, a 25 per cent increase over the 25,945 barrels per day
recorded in the first quarter of 2006. Production in the first quarter of 2006
was impacted by the unplanned outage and subsequent replacement of the conveyor
belt at the Mine. Compared to the fourth quarter of 2006, production in the
first quarter of 2007 is lower due to seasonal conditions which present
additional operational challenges.
REVENUE
NET REVENUE
Three Months Ended March 31 ($ thousands, except as indicated) 2007 2006
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Revenue
Oil Sands (1) 213,558 185,355
Marketing and Transportation 90,731 22,405
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Total Revenue 304,289 207,760
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Purchased Feedstocks and Transportation
Oil Sands 34,830 46,205
Marketing and Transportation 90,219 22,307
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Total Purchased Feedstocks and Transportation 125,049 68,512
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Net Revenue
Oil Sands (1) 178,728 139,150
Marketing and Transportation 512 98
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Total Net Revenue 179,240 139,248
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Synthetic Crude Sales (bbls/d) 40,555 37,188
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Realized Crude Oil Sales Price ($/bbl) (2) 58.49 55.31
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(1) Oil Sands Revenue and Net Revenue are presented net of Western's hedging
activities.
(2) Realized Crude Oil Sales Price ($/bbl) is calculated as Oil Sands Revenue
less any transportation costs divided by total Synthetic Crude Sales for
the period. For the three months ended March 31, 2007, $0.1 million
(Q1-2006 - $0.2 million) has been incurred for transportation costs
related to Oil Sands.
Western recorded a 46 per cent increase in crude oil sales revenue of
$304.3 million in the first quarter of 2007, including $213.6 million from the
sale of proprietary production, compared to $207.8 million in the first quarter
of 2006, including $185.4 million from the sale of proprietary production. This
year-on-year increase is predominantly the result of increased production in
the quarter combined with a higher realized selling price per barrel, the
latter being a function of a narrowing in the heavy crude oil differential and
weakening of the Canadian dollar relative to the US dollar partially offset by
lower underlying crude oil prices.
Western generated net revenue of $179.2 million in the first quarter of
2007, after considering the impact of purchased feedstocks and transportation
costs downstream of Edmonton. By comparison, net revenue of $139.2million was
recorded in the first quarter of 2006. Feedstocks are crude oil products
introduced into the hydrocracking/hydrotreating process and blendstocks
introduced into synthetic crude oil products. The cost of these feedstocks
varies with world oil markets and the spread between heavy and light crude oil
prices.
Oil sands sales volumes, which include bitumen and purchased feedstocks,
averaged 40,555 barrels per day in the first quarter of 2007 compared to 37,188
barrels per day in the first quarter of 2006. This represents a nine per cent
increase.
During the first quarter of 2007 WTI crude oil averaged US$58.16 per
barrel for the quarter, a three per cent decrease over the fourth quarter of
2006 and an eight per cent decrease compared to the prior year period. Edmonton
PAR prices averaged four per cent higher in the first quarter of 2007 compared
to the fourth quarter of 2006, primarily due to the weakening of the US/Cdn
dollar exchange rate. As Western measures its blended differential to Edmonton
PAR, the weakening of the US/Cdn exchange rate serves to improve overall sales
price realizations.
Western's realized price increased to $58.49 per barrel in the first
quarter of 2007 compared to $55.31 per barrel the prior year period. Sales
price realizations increased by $3.41 per barrel from the fourth quarter of
2006. The narrowing of the heavy crude oil differential in the first quarter of
2007 compared to both the prior year period and the fourth quarter of 2006 is
largely responsible for the improvement in sales price realizations. This
narrowing of heavy crude oil differentials is thought to be due in part by the
reversal of crude oil pipelines into the US Midwest and Gulfcoast regions
creating incremental demand for US refineries to process heavy Canadian crude
oil and unlock the value inherent in the heavy crude oil differential. The
heavy crude oil differential averaged $19 per barrel (33 per cent of WTI) in
the first quarter of 2007 compared to approximately $23 per barrel (38 per cent
of WTI) in the fourth quarter of 2006 and over $29 per barrel (46 per cent of
WTI) in the first quarter of 2006. Other factors that contributed to improved
sales price realizations were a general weakening of the US/Cdn exchange rate
over both of these comparable periods as well as local Alberta synthetic supply
constraints that placed additional demand on light synthetic crude oil which is
used by heavy oil producers to transport product to various markets. During the
first quarter of 2007, the light to heavy crude oil sales mix and the
corresponding sales price realization increased due to improvements recently
introduced in the hydro-conversion process at the Upgrader.
OPERATING COSTS
Western's unit cash operating costs were $24.07 per processed barrel for the
first quarter of 2007 compared to $26.12 per processed barrel for the first
quarter of 2006 and $20.12 per processed barrel for the fourth quarter of 2006.
Compared to the first quarter of 2006, this decrease is largely attributable to
the 25 per cent increase in production which provides greater economies of
scale over the cost structure which is primarily fixed in nature together with
lower natural gas costs in the first quarter of 2007. This was partially offset
by minor repair costs incurred during the quarter associated with seasonal
conditions.
Compared to the fourth quarter of 2006, unit operating costs increased
$3.95 per processed barrel in the first quarter of 2007. This increase was
largely due to seasonal factors which resulted in additional repairs and
maintenance impeding performance of some of the units, particularly at the
Mine.
Three Months Ended March 31 ($ thousands, except as indicated) 2007 2006
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Operating Expenses For Bitumen Sold
Operating Expense - Income Statement 70,278 63,930
Operating Expense - Inventoried 239 (1,631)
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Total Operating Expenses For Bitumen Sold 70,517 62,296
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Sales (barrels per day)
Total Synthetic Crude Sales 40,555 37,188
Purchased Upgrader Blend Stocks 7,997 10,687
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Synthetic Crude Sales Excluding Blend Stocks 32,558 26,501
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Operating Expenses Per Processed Barrel ($/bbl) (1) 24.07 26.12
======================================================================================================
(1) Operating Expenses Per Processed Barrel ($/bbl) is calculated as Total
Operating Expenses For Bitumen Sold divided by Synthetic Crude Sales
Excluding Blend Stocks.
The preceding 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. The
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 $1.2 million were recorded in the first quarter of 2007 compared
to $0.6 million in the first quarter of 2006. Year-on-year amounts have
increased as a result of increased production and higher deemed bitumen royalty
prices. Compared to the fourth quarter of 2006, royalty expenditures are
consistent as lower production volumes were offset by higher deemed bitumen
prices.
Royalties are calculated at one per cent of the gross revenue from the
bitumen produced (based on its deemed value prior to upgrading) until recovery
of all capital costs associated with the AOSP, together with a return on
capital equal to the Government of Canada's federal long-term bond rate. After
full capital cost recovery, the royalty is calculated as the greater of one per
cent of the gross revenue on the bitumen produced or 25 per cent of the net
revenue on the bitumen produced based on deemed bitumen prices.
During the fourth quarter 2006, Western announced its participation in the
first 100,000 barrel per day expansion of the AOSP and we fully expect to
participate in subsequent mining expansions of the AOSP. As such, Western
assumes that additional capital incurred to construct future expansions will be
added to the capital base for royalty purposes, extending our royalty horizon
in the absence of any legislative amendments to the royalty regime. At current
commodity prices, Western does not anticipate conversion to the 25 per cent of
net bitumen revenues for the next several years, however, a temporary increase
to the higher percentage may be incurred until applicable government rulings
can be completed with respect to AOSP Expansion 1. Incremental amounts incurred
during this interim period would be refundable. The move to the higher royalty
rate may be accelerated or postponed depending on future crude oil prices,
foreign exchange rates and the timing and inclusion of capital expenditures and
the Alberta government's treatment of bitumen extraction expansion efforts.
The Alberta government has announced a review of the oil and gas royalties
including oil sands. A panel has been selected and public consultation will
occur over the coming months. It is anticipated that recommendations will be
made to the Minister in late summer. Western, combined with industry
representation through the Canadian Association of Petroleum Producers (CAPP),
will actively participate in the review process in order to present the
opportunities, challenges, and economics associated with oil sands development
today and in the future.
CORPORATE RESULTS
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RESEARCH, BUSINESS DEVELOPMENT AND OTHER EXPENSE
Western incurred $18.3 million in research, business development and other
expenses in the first quarter of 2007, $5.9 million of which relates
specifically to AOSP-related research and development projects. Also included
is Western's share of a judgment issued against the Joint Venture Owners and
Albian Sands Energy in respect of a contractual matter at the Mine. The final
amount of the judgment, estimated at approximately $5.8 million net to Western,
has not yet been settled or paid. Western and its other Joint Venture Owners
are considering whether to appeal this decision. Net of this judgment,
research, business development and other expenses totaled $12.5 million
compared to $6.0 million recorded for the prior year period. The increase is
the result of additional efforts in research and business development involving
Western's Kurdistan and in-situ opportunities.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses (OG&AO) were $6.5 million for the first
quarter of 2007 compared to $8.9 million (restated for EIC-162 treatment for
stock based compensation) for the first quarter of 2006. This decrease is
largely due to the retroactive treatment for stock based compensation which
increased first quarter 2006 reported G&A by $5.0 million. Net of this
adjustment, G&A was slightly higher due to the increased number of employees
within Western, together with additional consulting costs for various corporate
initiatives.
INSURANCE EXPENSE
Insurance expenses were $4.0 million for the first quarter of 2007 compared to
$2.7 million in the first quarter of 2006. Insurance expenses were higher
compared to the prior year period due to additional premiums associated with
increased levels of coverage combined with a weakening of the US/Cdn exchange
rate as the premiums are paid in US dollars but reported for financial
statement purposes in Canadian dollars.
INTEREST EXPENSE
During the first quarter of 2007, financing charges totaled $14.6 million, $5.6
million of which was capitalized relating to AOSP Expansion 1. Capitalized
interest will increase in the future as we expect to employ a combination of
cash flow and debt financing to fund our share of the capital costs of AOSP
Expansion 1. This represents a moderate increase from the $13.0 million
incurred for financing charges in the first quarter of 2006. Interest expense
for the three months ended March 31, 2007 is comprised of $12.6 million
(Q1-2006 - $11.3 million) related to interest charges on debt obligations, $0.6
million (Q1-2006 - $0.7 million) on capital lease obligations, $0.7 million
(Q1-2006 - $1.0 million) on the option premium liability and $0.7 million
(Q1-2006 - nil) for amortization of debt financing costs. The option premium
liability relates to Western's strategic crude oil risk management program
implemented in the third quarter of 2005, and the decision to defer the
premiums associated with the put and call options purchased and sold,
respectively. Imbedded in the prices of the deferred options is a financing
charge which is reported as interest expense. The 12 per cent increase in total
interest expense compared to the first quarter of 2006 is a function of two
items: 1) Western carrying larger balances in its Revolving Credit Facility
associated with funding our share of the AOSP Expansion 1 capital costs, and 2)
the weakening of the US/Cdn exchange rate thereby increasing interest charges
on our US denominated Notes (reported in Canadian dollars). Interest expense
increased by $0.9 million in the first quarter of 2007 compared to the fourth
quarter of 2006 as well due to higher levels of debt and a weakening of the
US/Cdn exchange rate. Western's total interest charges will increase over the
balance of 2007, and over the next several years, as we continue to fund our
share of the anticipated capital costs through a combination of cash flow from
operations and incremental borrowings. Western will continue to assess funding
requirements as part of our normal course business model.
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization (ODD&AO) totaled $13.1 million for the
first quarter of 2007 compared to $10.5 million in the first quarter of 2006.
Higher amounts are recorded over the prior year period due to increased levels
of production. Incremental reserves associated with AOSP Expansion 1 will not
be included in the depreciation rate until the assets associated with AOSP
Expansion 1 commence operations, anticipated in 2010.
FOREIGN EXCHANGE
During the first quarter of 2007, Western reported a foreign exchange gain of
$5.8 million compared to a loss of $0.4 million in the first quarter of 2006.
This gain is the result of a stronger month-end Canadian dollar relative to the
US dollar compared to the previous quarter's month-end rate which results in a
lower Canadian equivalent amount on Western's US$450 million long-term debt and
deferred option premium liability. As reference points, the noon-day foreign
exchange rate on March 31, 2007 was $0.8674 US/Cdn compared to $0.8581 US/Cdn
on December 31, 2006 and $0.8568 US/Cdn on March 31, 2006. The average rate for
the first quarter of 2007 was $0.8537 US/Cdn compared to $0. 8659 US/Cdn for
the prior year period and $0.8784 US/Cdn for the fourth quarter of 2006.
RISK MANAGEMENT ACTIVITIES
Western began to realize the benefits and associated costs of the strategic
crude oil hedging program executed in the third quarter of 2005 in its
financial statements. Premiums associated with the program were funded out of
cash flow from operations due to Western's decision to defer the premiums. In
January 2007, a number of Western's US$55 per barrel put options settled
in-the-money for Western as WTI averaged US$54.35 per barrel for the month. The
$0.1 million settlement was recorded as a realized risk management gain on our
income statement. WTI continues to trade within the band established by the
collar which is a weighted average floor price of US$52.42 on 20,000 barrels
per day and a ceiling price of US$92.41 on an average 13,333 barrels per day
for the period January 2007 through to December 2009.
Western is not utilizing hedge accounting treatment under Canadian GAAP
for this program and, as a result, certain mark-to-market adjustments will flow
through our financial statements. These adjustments are created from the
changes in the fair market value of the financial instruments employed over the
time period in question. For the period ended March 31, 2007, Western's risk
management assets decreased significantly in value from the amount recorded as
at December 31, 2006 resulting in a mark-to-market loss of $19.0 million ($15.1
million net of tax) primarily due to the moderate weakening in WTI prices
during the quarter together with less time value associated with the options as
they approach maturity. This loss does not impact stated cash flow from
operations.
March 31 (Unaudited) ($ thousands) 2007 2006
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Risk Management Asset - Beginning of Period 26,308 98,426
Decrease in Fair Value 19,157 67,697
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Risk Management Asset - End of Period 7,151 30,702
Less: Current Portion (1) 2,986 1,933
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Risk Management Asset - Long-term Portion 4,165 28,769
===============================================================================
(1) Current portion represents the fair value of the risk management program
that expires within the next 12 months.
INCOME TAXES
For the first quarter of 2007, Western had an income tax expense of $11.8
million compared to an income tax recovery of $9.9 million for the same period
last year. The recovery in the first quarter of 2006 largely resulted from a
risk management loss whereas the expense for the first quarter of 2007 is
largely the result of increased profitability due to increased production
levels and higher sales price realizations.
During the first quarter of 2007, the Federal Government announced its
intention to phase out the Accelerated Capital Cost Allowance (OACCAO) that
permitted oil sands companies to claim a higher amount against taxable income
than normally permitted for assets of this nature. As it relates to the AOSP
and Western specifically, it is currently envisioned that capital associated
with Expansion 2 and beyond will not be eligible for ACCA, however, base
operations and AOSP Expansion 1 capital will be included in the ACCA pool with
the ability to claim in excess of 25 per cent subject to the extent of taxable
income from that operation. Such a change in corporate tax rules will not have
a material impact on Western's reported earnings and cash flow from operations.
NET EARNINGS
During the first quarter of 2007, Western reported net income of $31.6 million
($0.20 per share) compared to a net loss of $24.8 million (restated) ($0.15 per
share) in the first quarter of 2006. Net earnings in the first quarter of 2007
includes the impact of $19.2 million ($15.3 million net of tax) in unrealized
risk management losses, $6.3 million ($4.3 million net of tax) in unrealized
foreign exchange gains on our US dollar denominated debt and option premium
liability and $5.8 million related to Western's share of the judgment against
the AOSP Owners and Albian Sands Energy.
Three Months Ended March 31 ($ thousands) 2007 2006
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Net Earnings (Loss) 31,634 (24,833)
After Tax Impact of:
Add (Deduct):
Unrealized Risk Management Loss 15,250 67,724
Unrealized Foreign Exchange (Gain)/Loss (4,287) 636
Net Earnings Excluding Unrealized Gain (Loss) 42,597 43,527
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Net Earnings Excluding Unrealized Gain (Loss) Per Share ($)
Basic 0.26 0.27
Diluted 0.26 0.27
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The following table provides the reconciliation between Net Earnings
(Loss), Cash Flow from Operations (before changes in non-cash working capital)
and EBITDAX:
RECONCILIATION: NET EARNINGS (LOSS) TO EBITDAX
Three Months Ended March 31 ($ thousands) 2007 2006
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Net Earnings (Loss) 31,634 (24,833)
Add (Deduct):
Depreciation, Depletion and Amortization 13,050 10,546
Accretion on Asset Retirement Obligation 338 155
Amortization of Financing Charges 736 -
Stock-based Compensation 2,088 5,049
Unrealized Foreign Exchange (Gain) Loss (6,315) 636
Unrealized Risk Management Loss 19,157 67,724
Future Income Tax Expense (Recovery) 11,751 (10,383)
Interest Expense on Option Premium Liability 650 952
Cash Settlement on Performance Share Units (3,806) (2,076)
Cash Settlement on Option Premium Liability (6,292) -
- ------------------------------------------------------------------------------------------------------
Cash Flow From Operations, Before Changes in Non-Cash Working Capital 62,991 47,770
Add (Deduct):
Interest (excluding interest on Option Premium Liability and
capitalized interest) 7,561 12,077
Realized Foreign Exchange Loss (Gain) 537 (266)
Realized Risk Management Gain (120) -
Current Taxes 17 443
Cash Settlement on Performance Share Units 3,806 2,076
Cash Settlement on Option Premium Liability 6,292 -
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EBITDAX 81,084 62,100
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EBITDAX (Earnings before Interest, Taxes, Depreciation, Depletion,
Amortization, Stock-based Compensation, Accretion on Asset Retirement
Obligation, Foreign Exchange and Risk Management) was $81.1 million for the
first quarter of 2007, reflecting a 31 per cent increase over the $62.1 million
recorded for the first quarter of 2006 due in large part to increased
production and higher sales price realizations. First quarter 2007 EBITDAX
decreased $18.5 million compared to the fourth quarter of 2006. This decrease
in EBITDAX is the result of lower production stemming from seasonal issues
partially offset by higher sale price realizations.
Cash flow from operations before changes in non-cash working capital
(Ocash flow from operationsO) was $63.0 million for the first quarter of 2007
compared to $47.8 million in the first quarter of 2006. First quarter 2007 cash
flow from operations decreased $28.1 million over the fourth quarter of 2006.
This decrease is primarily the result of lower bitumen production partially
offset by an increase in the average synthetic crude oil sales price.
FINANCIAL POSITION
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BANK DEBT
During the first quarter of 2007, Western drew an additional $52 million under
its $340 million Revolving Credit Facility bringing the amount outstanding to
$129 million as at March 31, 2007. Additional amounts drawn were used to
partially fund Western's share of capital expenditures for Expansion 1 during
the quarter. As at March31, 2007, the undrawn capacity of the Revolving Credit
Facility equated to $194 million, net of amounts allocated to letters of
credit.
Western's debt to total capitalization as at March 31, 2007 remained
relatively unchanged at 49 per cent compared to the prior year period and as at
December 31, 2006. Western anticipates the extent of leverage will increase as
Western continues to fund its share of capital expenditures for AOSP
Expansion1, together with Western-led initiatives through a combination of cash
flow from operations and incremental borrowings.
CAPITAL EXPENDITURES
Western's capital expenditures totaled $160.5 million in the first quarter of
2007 compared to $35.3 million for the comparable period in 2006. Capital
expenditures in the first quarter of 2007 included $10.5 million for base
operations, $4.6 million for sustaining capital, $114.4 million for expansion
related capital including capitalized interest, $8.3 million related to
Western's Kurdistan initiative and $22.7 million for business development and
corporate expenditures largely consisting of in-situ winter core-hole drilling
programs for both Western operated lands and Western's 20 per cent interest in
Chevron's Ells River In-situ Project.
ANALYSIS OF CASH RESOURCES
Cash balances totaled $5.5 million at March 31, 2007 compared to $15.7 million
at March 31, 2006. Cash inflows included: $63.0 million in cash flow from
operations, $52.0 million from Revolving Credit Facility drawdowns, $1.3
million from the exercise of employee stock options and a $46.9 million
decrease in non-cash working capital. Cash outflows included: capital
expenditures of $160.5 million and $0.3 million repayment of obligations under
capital lease.
During the first quarter of 2007, the decrease in non-cash working capital
was the result of a $5.6million decrease in accounts receivable, a $45.3
million increase in accounts payable and a $3.2 million decrease in prepaid
expenses, offset by a $7.2 million increase in inventory. The decrease in
accounts receivable is the result of decreased sales volumes stemming from the
lower production in the quarter. The increase in accounts payable reflects an
additional three months of accrued interest on the US denominated debt and
increased accruals related to the construction of AOSP Expansion 1. Inventory
was higher as a result of additional barrels of finished product in inventory,
together with higher production costs associated with these barrels.
INSURANCE CLAIMS
There were no new developments during the first quarter of 2007 with respect to
Western's ongoing arbitration proceedings concerning the Cost Overrun and
Project Delay insurance policy, known as Section IV. Western anticipates that
formal arbitration hearings will commence this year. Amounts owing under all
Western's insurance claims total $244 million as of March 31, 2007.
FLOW-THROUGH SHARES
As communicated during 2006, the Canada Revenue Agency (OCRAO) proposed to
challenge the characterization of certain expenditures capitalized as Canadian
Exploration Expense (OCEEO) which were incurred in 2001 and 2002 and renounced
to subscribers of the flow-through share offerings equaling $29.2 million in
2001 and $19.5 million in 2002. Western has yet to be formally reassessed and
continues to work with the other Joint Venture Owners to seek resolution of
this potential challenge. If the CRA is successful in assessing a change in the
characterization of these expenditures, the resulting reduction would impact
Western's obligations under the indemnity provisions in the subscription
agreements for the flow-through shares and, in turn, would impact Western's
reported results.
OUTLOOK FOR THE REMAINDER OF 2007
Western continues to focus on the four key initiatives which drive the
Company's growth strategy - the AOSP, in-situ development, downstream
integration, and the Kurdistan oil opportunity through our wholly-owned
subsidiary WesternZagros Limited. Western is working diligently on the
execution of these initiatives and believes that significant long-term growth
potential lies ahead of us as we continue on our path of adding significant
value for all our stakeholders. Western anticipates its share of production
from the AOSP to average approximately 33,000 to 35,000 barrels per day in
2007, unchanged from prior guidance.
Through both mining and in-situ development, Western's production profile
could exceed 200,000 barrels per day in the next 15 to 20 years. Given this
profile, Western continues to pursue downstream integration opportunities to
maximize value from our oil sands resources and undeveloped acreage position.
Related to these initiatives, Western announced that it intends to explore and
pursue opportunities that will realize the full value of its assets and future
growth potential. This may result in an acquisition or sale of assets, merger
or other corporate transaction. Western's advisors, Goldman, Sachs & Co. and TD
Securities Inc., are assisting in these activities under the oversight of an ad
hoc committee of independent directors of the Board. This committee's role is
to direct the scope of work activities, advise the Board of Directors on a
timely and regular basis and to make recommendations to the Board of Directors.
While we are encouraged with the number and quality of attractive
opportunities, as a matter of policy, Western does not discuss any specific
business opportunity until such time as it has been fully considered, it is
material and it becomes a disclosable event. In addition, there can be no
assurances that any of these activities will result in the consummation of an
agreement or transaction or result in any change to Western's current ongoing
business strategy.
AOSP EXPANSION 1 UPDATE
Construction and engineering activity is progressing rapidly at both the mine
site and the upgrader with a combined work force of over 3,000 personnel. Field
construction progress includes the completion of the primary separation cell
piling work, continued progress with respect to the deep underground facilities
and building foundations in extraction and tailings, continued advancement on
the Albian Village in support of first phase occupancy, headway on the potable
water and sewage treatment plants. Detailed modules fabrication and field
construction schedules continue to be refined for the mine site, with module
fabrication scheduled to begin in mid-2007. At the upgrader, activity has
focused on the construction of the dilbit tank, the winter piling program and
installation of deep underground piping. Approximately four million man-hours
have been recorded thus far without a lost-time incident. Overall progress is
on plan with respect to both cost and schedule.
With respect to Expansion 1, capital expenditures are expected to continue
to grow over the next couple of years as development efforts accelerate.
Western plans to implement a comprehensive financing plan, comprised of cash
flow from operations and incremental borrowings, to provide the platform by
which we will meet our financials commitments for this first 100,000 barrel per
day expansion.
BUSINESS AND FINANCIAL RISKS
Western is subject to a number of business and financial risks that are typical
given the nature of Western's operations. These risks are described in
Western's previous public disclosures, including the 2006 Annual Report and
Annual Information Form, which are available on the Company's website and
SEDAR.
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, foreign exchange gains and gains or losses on risk
management activities (OEBITDAXO), 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 prices, 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 (OGAAPO). 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 per
Share and Net Earnings 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.
CHANGES IN ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
Stock-based Compensation for Employees
Eligible to Retire Before the Vesting Date
For the year ended December 31, 2006, Western retroactively adopted Emerging
Issues Committee Abstract 162 (OEIC-162O). EIC-162 required Western to
recognize stock-based compensation expense for awards granted to employees
eligible for retirement under stock-based compensation plans that contain
provisions that allow an employee to continue vesting in an award in accordance
with the stated vesting terms after the employee has retired. Accordingly,
stock-based compensation expense for the three month period ended March 31,
2006 was increased by $3.2 million, included in general and administrative
expense, representing the additional compensation expense recognized for
employees eligible for retirement during the vesting period.
FINANCIAL INSTRUMENTS
On January 1, 2007, Western adopted the CICA Handbook sections 3855 OFinancial
Instruments - Recognition and Measurement,O 3862 OFinancial Instruments -
Disclosures,O 3863 OFinancial Instruments - Presentation,O 3865 OHedges,O 1530
OComprehensive Income,O and 3251 OEquity.O Other than the effect on Deferred
Charges as described under Financial Instruments below, the adoption of the
financial instruments standards has not affected the current or comparative
period balances on the consolidated financial statements as all financial
instruments identified have been fair valued.
Section 3855 requires that all financial assets be classified as
held-for-trading, available-for-sale, held-to-maturity, or loans and
receivables and that all financial liabilities must be classified as
held-for-trading or other. Financial assets and financial liabilities
classified as held-for-trading are measured at fair value with changes in those
fair values recognized in earnings. Financial assets held-to-maturity, loans
and receivables, and other financial liabilities are measured at amortized cost
using the effective interest method of amortization. Available-for-sale
financial assets are measured at fair value with unrealized gains and losses,
including changes in foreign exchange rates, being recognized in other
comprehensive income. Investments in equity instruments classified as
available-for-sale that do not have a quoted market price in an active market
are measured at cost.
Derivative instruments are always carried at fair value and reported as
assets where they have a positive fair value and as liabilities where they have
a negative fair value. Derivatives may be embedded in other financial
instruments. Under the new Financial Instrument standards, derivatives embedded
in other financial instruments are valued as separate derivatives when their
economic characteristics and risks are not clearly and closely related to those
of the host contract; the terms of the embedded derivative are the same as
those of a free standing derivative; and the combined contract is not held for
trading. When an entity is unable to measure the fair value of the embedded
derivative separately, the combined contract is treated as a financial asset or
liability that is held-for-trading and measured at fair value with changes
therein recognized in the earnings.
The fair value of a financial instrument on initial recognition is
normally the transaction price, i.e. the fair value of the consideration given
or received. Subsequent to initial recognition, fair values are based on quoted
market prices where available from active markets, otherwise fair values are
estimated based upon market prices at reporting date for other similar assets
or liabilities with similar terms and conditions, or by discounting future
payments of interest and principal at estimated interest rates that would be
available to Western at the reporting date.
Transaction costs are expensed as incurred for financial instruments
classified or designated as held-for-trading. Transaction costs related to
other financial instruments are generally capitalized and are then amortized
over the expected life of the instrument using the effective interest method.
Accordingly, the Deferred Charges balance of $13.5 million, consisting of
transaction costs relating to the Senior Secured Notes, was reclassified
against Long-term Debt effective January 1, 2007 under prospective application.
For the three month period ended March 31, 2007, $0.7 million of these costs
were included in interest expense under the effective interest method.
HEDGES
Section 3865 replaces the guidance formerly in Section 1650, OForeign Currency
TranslationO and Accounting Guideline 13, OHedging RelationshipsO by specifying
how hedge accounting is applied and what disclosures are necessary when it is
applied. Western does not have any derivative instruments that have been
designated as hedges.
COMPREHENSIVE INCOME
Section 1530 establishes new standards for reporting the display of
comprehensive income, consisting of Net Income and Other Comprehensive Income
(OOCIO). OCI is the change in equity (net assets) of an enterprise during a
reporting period from transactions and other events from non-owner sources and
excludes those resulting from investments by owners and distributions to
owners. Western had no such transactions and events which would require the
disclosure of OCI for the three month period ended March 31, 2007. Any changes
in these items would be presented in a consolidated statement of comprehensive
income.
EQUITY
Section 3251 replaces Section 3250, OSurplusO and establishes standards for the
presentation of equity and changes in equity during a reporting period,
including changes in Accumulated Other Comprehensive Income (OAccumulated
OCIO). Any cumulative changes in OCI would be included in Accumulated OCI and
be presented as a new category of Shareholder's Equity on the consolidated
balance sheets.
ACCOUNTING CHANGES
On January 1, 2007, Western adopted CICA Handbook Section 1506, OAccounting
ChangesO, which revises and replaces former Section 1506, OAccounting ChangesO.
The Section establishes criteria for changing accounting policies, together
with the accounting treatment and disclosure of changes in accounting policies
and estimates, and correction of errors.
Determining the Variability to be Considered in Applying AcG-15 On January 1,
2007, Western prospectively adopted the Emerging Issues Committee issued
Abstract 163, ODetermining the Variability to be Considered in Applying
AcG-15O, which addresses how an enterprise should determine the variability to
be considered in applying AcG-15, OConsolidation of Variable Interest
EntitiesO. The adoption of this standard has not affected the current or
comparative period balances on the consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
As at As at
March 31 December 31
(Unaudited) ($ thousands) 2007 2006
- ------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash 5,493 3,139
Accounts Receivable 104,447 110,039
Inventory 28,950 21,761
Prepaid Expense 9,252 12,443
Current Portion of Risk Management (note 12) 2,986 7,601
151,128 154,983
- ------------------------------------------------------------------------------------------------------
Property, Plant and Equipment (note 2) 1,755,136 1,606,966
Risk Management (note 12) 4,165 18,707
Deferred Charges (note 1) - 13,503
1,759,301 1,639,176
- ------------------------------------------------------------------------------------------------------
1,910,429 1,794,159
======================================================================================================
Liabilities
Current Liabilities
Accounts Payable and Accrued Liabilities 203,852 158,501
Current Portion of Lease Obligations (note 4) 1,958 1,958
Current Portion of Option Premium Liability (note 5) 27,548 24,966
233,358 185,425
- ------------------------------------------------------------------------------------------------------
Long-term Liabilities
Long-term Debt (note 3) 635,183 601,385
Lease Obligations (note 4) 57,854 57,480
Option Premium Liability (note 5) 55,205 64,309
Asset Retirement Obligation (note 6) 21,111 20,773
Future Income Tax (note 11) 84,512 73,113
853,865 817,060
- ------------------------------------------------------------------------------------------------------
1,087,223 1,002,485
Shareholders' Equity
Share Capital (note 8) 555,757 554,233
Contributed Surplus (note 10) 12,009 12,890
Retained Earnings 255,440 224,551
823,206 791,674
- ------------------------------------------------------------------------------------------------------
1,910,429 1,794,159
======================================================================================================
Commitments and Contingencies (note 14)
See Accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Three Months Ended March 31 (Unaudited)
($ thousands, except amounts per share) 2007 2006
- -----------------------------------------------------------------------------------------------------
Revenues 304,289 207,760
Less Purchased Feedstocks and Transportation 125,049 68,512
179,240 139,248
- -----------------------------------------------------------------------------------------------------
Expenses
Royalties 1,192 640
Operating 70,278 63,930
Research, Business Development and Other (note 14) 18,318 6,022
General and Administrative 6,466 8,941
Insurance 3,990 2,664
Interest (note 7) 8,947 13,029
Accretion on Asset Retirement Obligation (note 6) 338 155
Depreciation, Depletion and Amortization 13,050 10,546
122,579 105,927
- -----------------------------------------------------------------------------------------------------
Earnings Before Other Income (Expense) and Income Taxes 56,661 33,321
Other Income (Expense)
Foreign Exchange Gain (Loss) 5,778 (370)
Risk Management Loss (note 12) (19,037) (67,724)
- -----------------------------------------------------------------------------------------------------
Earnings (Loss) Before Income Taxes 43,402 (34,773)
Income Tax Expense (Recovery) (note 11) 11,768 (9,940)
- -----------------------------------------------------------------------------------------------------
Net Earnings (Loss) 31,634 (24,833)
Retained Earnings at Beginning of Period 224,551 161,181
Settlement of Performance Share Unit Plan (note 10) (745) -
- -----------------------------------------------------------------------------------------------------
Retained Earnings at End of Period 255,440 136,348
=====================================================================================================
Net Earnings (Loss) Per Share (note 9)
Basic 0.20 (0.15)
Diluted 0.19 (0.15)
=====================================================================================================
See Accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31 (Unaudited) ($ thousands) 2007 2006
- ------------------------------------------------------------------------------------------------------
Cash Provided By (Used In)
Cash From Operating Activities
Net Earnings (Loss) 31,634 (24,833)
Non-cash Items:
Stock-based Compensation (note 10) 2,088 5,049
Accretion on Asset Retirement Obligation (note 6) 338 155
Depreciation, Depletion and Amortization 13,050 10,546
Amortization of Financing Charges (note 3) 736 -
Interest Expense on Option Premium Liability (note 5) 650 952
Unrealized Loss on Risk Management (note 12) 19,157 67,724
Unrealized Foreign Exchange (Gain) Loss (note 3 and 5) (6,315) 636
Future Income Tax Expense (Recovery) (note 11) 11,751 (10,383)
Cash Items:
Cash Settlement of Option Premium Liability (note 5) (6,292) -
Cash Settlement of Performance Share Unit Plan (note 10) (3,806) (2,076)
- ------------------------------------------------------------------------------------------------------
62,991 47,770
Decrease in Non-cash Working Capital (note 13) 15,427 13,368
78,418 61,138
- ------------------------------------------------------------------------------------------------------
Cash From (Used In) Financing Activities
Issue of Share Capital (note 8) 1,264 2,581
Issue (Repayment) of Long-term Debt, Net 52,000 (41,000)
Repayment of Obligations Under Capital Lease (335) (336)
52,929 (38,755)
- ------------------------------------------------------------------------------------------------------
Cash Invested
Capital Expenditures (160,511) (35,331)
Decrease in Non-cash Working Capital (note 13) 31,518 23,104
(128,993) (12,227)
- ------------------------------------------------------------------------------------------------------
Increase in Cash 2,354 10,156
Cash at Beginning of Period 3,139 5,590
- ------------------------------------------------------------------------------------------------------
Cash at End of Period 5,493 15,746
======================================================================================================
See Accompanying Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Tabular amounts in $ thousands, except for share amounts)
The interim consolidated financial statements include the accounts of Western
Oil Sands Inc. and its subsidiaries (the OCorporationO), 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 audited consolidated financial
statements for the year ended December 31, 2006, except as described in Note
1(b). 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, 2006.
Note 1. Changes in Accounting Policies
- -------------------------------------------------------------------------------
a) Stock-based Compensation for Employees Eligible to Retire Before the
Vesting Date
For the year ended December31, 2006, the Corporation retroactively adopted
Emerging Issues Committee Abstract 162 (OEIC-162O). EIC-162 required the
Corporation to recognize stock-based compensation expense for awards granted to
employees eligible for retirement under stock-based compensation plans that
contain provisions that allow an employee to continue vesting in an award in
accordance with the stated vesting terms after the employee has retired.
Accordingly, stock-based compensation expense for the three month period ended
March 31, 2006 was increased by $3.2 million, included in general and
administrative expense, representing the additional compensation expense
recognized for employees eligible for retirement during the vesting period.
b) Financial Instruments
On January 1, 2007, the Corporation adopted the CICA Handbook sections 3855
OFinancial Instruments - Recognition and Measurement,O 3862 OFinancial
Instruments - Disclosures,O 3863 OFinancial Instruments - Presentation,O 3865
OHedges,O 1530 OComprehensive Income,O and 3251 OEquity.O Other than the effect
on Deferred Charges as described under Financial Instruments below, the
adoption of the financial instruments standards has not affected the current or
comparative period balances on the consolidated financial statements as all
financial instruments identified have been fair valued.
Financial Instruments
Section 3855 requires that all financial assets be classified as
held-for-trading, available-for-sale, held-to-maturity, or loans and
receivables and that all financial liabilities must be classified as
held-for-trading or other. Financial assets and financial liabilities
classified as held-for-trading are measured at fair value with changes in those
fair values recognized in earnings. Financial assets held-to-maturity, loans
and receivables, and other financial liabilities are measured at amortized cost
using the effective interest method of amortization. Available-for-sale
financial assets are measured at fair value with unrealized gains and losses,
including changes in foreign exchange rates, being recognized in other
comprehensive income. Investments in equity instruments classified as
available-for-sale that do not have a quoted market price in an active market
are measured at cost.
Derivative instruments are always carried at fair value and reported as
assets where they have a positive fair value and as liabilities where they have
a negative fair value. Derivatives may be embedded in other financial
instruments. Under the new Financial Instrument standards, derivatives embedded
in other financial instruments are valued as separate derivatives when their
economic characteristics and risks are not clearly and closely related to those
of the host contract; the terms of the embedded derivative are the same as
those of a free standing derivative; and the combined contract is not held for
trading. When an entity is unable to measure the fair value of the embedded
derivative separately, the combined contract is treated as a financial asset or
liability that is held-for-trading and measured at fair value with changes
therein recognized in the earnings.
The fair value of a financial instrument on initial recognition is
normally the transaction price, i.e. the fair value of the consideration given
or received. Subsequent to initial recognition, fair values are based on quoted
market prices where available from active markets, otherwise fair values are
estimated based upon market prices at reporting date for other similar assets
or liabilities with similar terms and conditions, or by discounting future
payments of interest and principal at estimated interest rates that would be
available to the Corporation at the reporting date.
Transaction costs are expensed as incurred for financial instruments
classified or designated as held-for-trading. Transaction costs related to
other financial instruments are generally capitalized and are then amortized
over the expected life of the instrument using the effective interest method.
Accordingly, the Deferred Charges balance of $13.5 million, consisting of
transaction costs relating to the Senior Secured Notes, was reclassified
against Long-term Debt effective January 1, 2007 under prospective application.
For the three month period ended March 31, 2007, $0.7 million of these costs
were included in interest expense under the effective interest method.
Hedges
Section 3865 replaces the guidance formerly in Section 1650, OForeign Currency
TranslationO and Accounting Guideline 13, OHedging RelationshipsO by specifying
how hedge accounting is applied and what disclosures are necessary when it is
applied. The Corporation does not have any derivative instruments that have
been designated as hedges.
Comprehensive Income
Section 1530 establishes new standards for reporting the display of
comprehensive income, consisting of Net Income and Other Comprehensive Income
(OOCIO). OCI is the change in equity (net assets) of an enterprise during a
reporting period from transactions and other events from non-owner sources and
excludes those resulting from investments by owners and distributions to
owners. The Corporation had no such transactions and events which would require
the disclosure of OCI for the three month period ended March 31, 2007. Any
changes in these items would be presented in a consolidated statement of
comprehensive income.
Equity
Section 3251 replaces Section 3250, OSurplusO and establishes standards for the
presentation of equity and changes in equity during a reporting period,
including changes in Accumulated Other Comprehensive Income (OAccumulated
OCIO). Any cumulative changes in OCI would be included in Accumulated OCI and
be presented as a new category of Shareholder's Equity on the consolidated
balance sheets.
c) Accounting Changes On January 1, 2007, the Corporation adopted CICA
Handbook Section 1506, OAccounting ChangesO, which revises and replaces former
Section 1506, OAccounting ChangesO. The Section establishes criteria for
changing accounting policies, together with the accounting treatment and
disclosure of changes in accounting policies and estimates, and correction of
errors.
d) Determining the Variability to be Considered in Applying AcG-15 On January
1, 2007, the Corporation prospectively adopted the Emerging Issues Committee
issued Abstract 163, ODetermining the Variability to be Considered in Applying
AcG-15O, which addresses how an enterprise should determine the variability to
be considered in applying AcG-15, OConsolidation of Variable Interest
EntitiesO. The adoption of this standard has not affected the current or
comparative period balances on the consolidated financial statements.
Note 2. Property, Plant and Equipment
- -------------------------------------------------------------------------------
March 31, 2007 Cost Accum. DD&A* Net
- -------------------------------------------------------------------------------
Athabasca Oil Sands Project
Producing Assets 1,431,238 (167,334) 1,263,904
Capital Leases 52,705 (6,372) 46,333
Asset Retirement Obligation 18,246 (1,309) 16,937
Expansion 339,957 - 339,957
- -------------------------------------------------------------------------------
1,842,146 (175,015) 1,667,131
In-Situ Projects 47,535 - 47,535
Kurdistan Exploration Project 32,246 - 32,246
Corporate 15,925 (7,701) 8,224
- -------------------------------------------------------------------------------
1,937,852 (182,716) 1,755,136
===============================================================================
December 31, 2006 Cost Accum. DD&A* Net
- -------------------------------------------------------------------------------
Athabasca Oil Sands Project
Producing Assets 1,414,560 (155,226) 1,259,334
Capital Leases 52,705 (5,914) 46,791
Asset Retirement Obligation 18,246 (1,145) 17,101
Expansion 225,599 - 225,599
- -------------------------------------------------------------------------------
1,711,110 (162,285) 1,548,825
In-Situ Projects 25,842 - 25,842
Kurdistan Exploration Project 23,954 - 23,954
Corporate 15,726 (7,381) 8,345
- -------------------------------------------------------------------------------
1,776,632 (169,666) 1,606,966
===============================================================================
* Accumulated Depreciation, Depletion and Amortization
At March 31, 2007, costs not currently subject to depreciation, depletion and
amortization included $340.0 million relating to the Athabasca Oil Sands
Project (OAOSPO) Expansion as it has not been substantially completed and
commercial production has not yet commenced. During the three month period
ended March 31, 2007, the Corporation capitalized $5.6 million in interest
costs relating to this Expansion. As at March 31, 2007, a total of $8.4 million
of interest costs has been capitalized relating to this Expansion.
All costs included in the Kurdistan Exploration Project and the In-Situ
Projects are excluded from depletion as they represent costs related to
properties incurred in cost centres that are considered to be in the
pre-production stage. Currently, there are no proved reserves in these cost
centres. All costs, net of any associated revenues, in these cost centres have
been capitalized.
Note 3. Long-term Debt
- -------------------------------------------------------------------------------------
March 31, 2007 December 31, 2006
- -------------------------------------------------------------------------------------
Senior Secured Notes
US$450 Million - 8.375%, Due May 1, 2012 506,183 524,385
Revolving Credit Facility 129,000 77,000
- -------------------------------------------------------------------------------------
635,183 601,385
=====================================================================================
The Corporation's US dollar denominated Senior Secured Notes (the ONotesO) are
translated into Canadian dollars at the period end exchange rate. As at March
31, 2007, US$11.6 million of unamortized transactions costs are netted against
the Notes. During the three month period ended March 31, 2007, transaction
costs of $0.7 million have been recognized as interest expense under the
effective interest method.
For the three month period ended March 31, 2007, the unrealized foreign
exchange gain arising on the Notes was $5.4 million (March 31, 2006 - $0.5
million). As at March 31, 2007, a total of $189.9 million of unrealized foreign
exchange gains had been recognized from the inception of the Notes,
approximately $92 million of which has been capitalized as the unrealized gains
were recognized prior to commercial operations.
Note 4. Lease Obligations
- -------------------------------------------------------------------------------
March 31, 2007 December 31, 2006
- -------------------------------------------------------------------------------
Obligations Under Capital Lease 48,594 48,928
Operating Lease Guarantee Obligation 11,218 10,510
- -------------------------------------------------------------------------------
59,812 59,438
Less: Current Portion 1,958 1,958
- -------------------------------------------------------------------------------
57,854 57,480
===============================================================================
The Obligations Under Capital Lease relates to the Corporation's share of
capital costs for the hydrogen-manufacturing unit within the AOSP. Repayments
of the principal obligation are $1.3 million per year and are scheduled to
remain at that level until fully repaid.
The Operating Lease Guarantee Obligation relates to the Mobile Equipment
Leases. 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 leases. Accordingly, the Corporation recognized, 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 month period ended March 31,
2007, no payments were made in regard to this obligation (March 31, 2006 - $0.2
million).
Note 5. Option Premium Liability
- -------------------------------------------------------------------------------
The Corporation deferred payment and receipt of the premiums associated with
the options described in Note 12(a) until the settlement of the option
contracts between 2007 and 2009. During the three month period ended March31,
2007, $6.3 million was paid in respect to the settlement of the option
contracts maturing during the period (March31, 2006 - nil). The remaining total
net premiums payable by the Corporation are US$16.5 million for the remainder
of 2007, US$32.4million for 2008 and US$27.8 million for 2009.
On the dates that the option contracts were entered into, a net liability was
recognized on the consolidated balance sheet at the estimated present value of
the net premiums payable. Subsequent to the inception dates of the option
contracts, interest expense is recognized, with a corresponding increase to the
liability, at annual rates ranging from 4.25% to 4.50%. Interest expense
recognized for the three month period ended March 31, 2007 was $0.7 million
(March 31, 2006 - $1.0 million). The option premium liability is denominated in
US dollars and is translated into Canadian dollars at the period end exchange
rate. The unrealized foreign exchange gain arising on the option premium
liability for the three month period ended March31, 2007 was $0.9 million
(March 31, 2007 - $0.1 million unrealized foreign exchange loss).
The following table presents the reconciliation of the net Option Premium
Liability:
Three Months Ended March 31 2007 2006
- -------------------------------------------------------------------------------
Option Premium Liability at Beginning of Period 89,275 85,416
Interest Expense 650 952
Unrealized Foreign Exchange (Gain) Loss (880) 96
Settlement of Option Premium Liability (6,292) -
- -------------------------------------------------------------------------------
Option Premium Liability at End of Period 82,753 86,464
Less: Current Portion 27,548 6,065
- -------------------------------------------------------------------------------
55,205 80,399
===============================================================================
Note 6. Asset Retirement Obligation
- -------------------------------------------------------------------------------
The Corporation, in association with its 20 per cent working interest in the
AOSP, is responsible for its share of future dismantlement and site restoration
costs in the mining, extracting and upgrading activities. The following table
presents the reconciliation of the Asset Retirement Obligation:
Three Months Ended March 31 2007 2006
- -------------------------------------------------------------------------------
Asset Retirement Obligation at Beginning of Period 20,773 9,094
Accretion on Asset Retirement Obligation 338 155
- -------------------------------------------------------------------------------
Asset Retirement Obligation at End of Period 21,111 9,249
===============================================================================
The AOSP's Upgrader has retirement obligations for which fair value cannot be
reasonably determined because the asset currently has an indeterminate life.
The asset retirement obligation for these assets will be recorded in the first
period in which the lives of the assets are determinable. The Corporation
currently does not have asset retirement obligations associated with In-Situ
Projects or the Kurdistan Exploration Project as these projects are in the
early stages of development.
Note 7. Interest Expense
- -------------------------------------------------------------------------------
Three Months Ended March 31 2007 2006
- -------------------------------------------------------------------------------
Interest on Long-term Debt (1) 13,302 11,331
Interest on Obligations Under Capital Lease 616 746
Interest on Option Premium Liability 650 952
- -------------------------------------------------------------------------------
Total Financing Charges 14,568 13,029
Less: Capitalized Interest for AOSP Expansion 5,621 -
- -------------------------------------------------------------------------------
Interest Expense 8,947 13,029
===============================================================================
(1) Interest on Long-term Debt includes amortization of transaction costs of
$0.7 million (March 31, 2006 - nil).
Cash interest paid for the three month period ended March 31, 2007 was $2.3
million (March 31, 2006 - $1.3 million). Cash interest received for the three
month period ended March 31, 2007 was $0.1 million (March 31, 2006 - $0.1
million).
Note 8. Share Capital
- -------------------------------------------------------------------------------
Issued and Outstanding
Number of
Shares Amount
- -------------------------------------------------------------------------------
Common Shares
Balance at December 31, 2006 161,378,399 554,233
Issued on Exercise of Employee Stock Options 190,556 1,264
Exercise of Stock Options Previously Recognized - 260
- -------------------------------------------------------------------------------
Total Share Capital at March 31, 2007 161,568,955 555,757
- -------------------------------------------------------------------------------
Outstanding
Stock Options 3,495,868
- -------------------------------------------------------------------------------
Diluted Shares at March 31, 2007 165,064,823
===============================================================================
Note 9. Net Earnings Per Share
- -------------------------------------------------------------------------------
Basic weighted average number of common shares for the three month period ended
March 31, 2007 was 161,493,276 (March 31, 2006 - 160,568,322). Diluted weighted
average number of shares for the three month period ended March 31, 2007 was
163,155,850. Due to a loss for the three month period ended March 31, 2006, no
incremental shares were included in the diluted earnings per weighted average
number because the effect would have been anti-dilutive.
Note 10. Stock-based Compensation
- -------------------------------------------------------------------------------
a) Stock Option Plan Under the Corporation's Stock Option Plan, 83,860
options were granted during the three month period ended March 31, 2007 at an
average exercise price of $33.72 per share (March 31, 2006 - 787,540 options at
an average exercise price of $33.62 per share). 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 2007 2006
- -------------------------------------------------------------------------------
Granted 83,860 787,540
Weighted-average Fair Value $11.66 $16.00
Risk Free Interest Rate 4.00 - 4.06% 4.11%
Expected Life (In Years) 4 - 6 6
Expected Volatility 34 - 35% 43%
Dividend Per Share - -
===============================================================================
b) Performance Share Unit Plan Under the Performance Share Unit Plan
(OPSUPO), 116,700 PSUs were granted during the three month period ending March
31, 2007 (March 31, 2006 - 122,645 PSUs). The weighted average grant-date fair
value was $33.69 using the Monte-Carlo Simulation pricing model (March 31, 2006
- - $33.41). During the three month period ended March 31, 2007, 109,557 units
vested (March 31, 2006 - 63,111) and the required common shares were acquired
and distributed to the PSUP unit holders. The common shares were acquired from
the secondary market for $3.8 million, at an average price of $34.74 per share.
The Corporation had previously recognized compensation of $2.7 million, with
the excess of the amount paid of $1.1 million ($0.7 million net of tax) charged
to retained earnings. During 2006, common shares were acquired from the
secondary market for $2.1 million, at an average price of $32.89 per share. The
following table presents the reconciliation of the number of Performance Share
Units:
Three Months Ended March 31 2007 2006
- -------------------------------------------------------------------------------
Outstanding at Beginning of Period 237,670 160,128
Granted 116,700 122,645
Exercised (109,557) (63,111)
Forfeited (1,380) (160)
- -------------------------------------------------------------------------------
Outstanding at End of Period 243,433 219,502
===============================================================================
c) Deferred Share Unit Plan Under the Deferred Share Unit Plan (ODSUPO), for
the three month period ended March31, 2007, $0.3 million (March 31, 2006 - $0.1
million) in compensation expense was recorded in General and Administrative
Expenses. No Deferred Share Units (ODSUO) were redeemed for cash or shares of
the Corporation for the three month period ended March 31, 2007 (March 31, 2006
- - nil). The Corporation had 27,207 DSUs outstanding at March 31, 2007 (March
31, 2006 - 5,462). As at March 31, 2007, the Corporation had $0.9 million
recorded in Accounts Payable and Accrued Liabilities associated with the DSUP.
d) Stock-based Compensation For the three month period ended March 31, 2007,
the Corporation recognized $2.1 million (March 31, 2006 - $5.0 million) in
compensation expense related to stock-based compensation. For the three month
period ended March 31, 2007, the compensation expense was comprised of $1.3
million (March 31, 2006 - $4.0 million) in respect to the Corporation's stock
option plan and $0.8 million (March 31, 2006 - $1.0 million) in respect to the
Corporation's Performance Share Unit Plan.
e) Contributed Surplus The following table presents the reconciliation of
Contributed Surplus:
Three Months Ended March 31 2007 2006
- -------------------------------------------------------------------------------
Contributed Surplus at Beginning of Period 12,890 3,474
Stock-based Compensation Expense 2,088 5,049
Settlement of Performance Share Unit Plan (2,709) (2,076)
Exercise of Stock Options Previously Recognized (260) (414)
- -------------------------------------------------------------------------------
Contributed Surplus at End of Period 12,009 6,033
===============================================================================
Note 11. Income Tax
- -------------------------------------------------------------------------------
Three Months Ended March 31 2007 2006
- -------------------------------------------------------------------------------
Current Income Tax Expense 17 443
Future Income Tax Expense (Recovery) 11,751 (10,383)
- -------------------------------------------------------------------------------
Income Tax Expense (Recovery) 11,768 (9,940)
===============================================================================
The future income tax liability consists of:
March 31, 2007 December 31, 2006
- -----------------------------------------------------------------------------------------------
Future Income Tax Assets
Unrealized Loss on Risk Management 23,282 19,375
Net Losses Carried Forward 2,908 2,908
Impairment of Long-lived Assets 686 686
Share Issue Costs 407 510
Future Income Tax Liabilities
Capital Assets in Excess of Tax Values (94,463) (79,824)
Unrealized Foreign Exchange Gain and Debt Issue Cost (17,332) (16,768)
- -----------------------------------------------------------------------------------------------
Net Future Income Tax Liability (84,512) (73,113)
===============================================================================================
The following table reconciles income taxes calculated at the Canadian
statutory rate of 32.12% (March 31, 2006 - 35.62%) with actual income taxes:
Three Months Ended March 31 2007 2006
- -------------------------------------------------------------------------------
Net Earnings Before Income Taxes 43,402 (34,773)
- -------------------------------------------------------------------------------
Income Tax Expense at Statutory Rate 13,941 (12,386)
Effect of Tax Rate Changes and Timing of Use (1,026) 665
Non-taxable Portion of Foreign Exchange (Gain) Loss (1,018) 101
Non-deductible Expenses 76 196
Resource Allowance - (23)
Stock-based Compensation (200) 1,064
Provision to Actual (22) -
Large Corporations Tax Expense - 443
- -------------------------------------------------------------------------------
Income Tax Expense (Recovery) 11,751 (9,940)
===============================================================================
Note 12. Financial Instruments and Risk Management
- -------------------------------------------------------------------------------
The Corporation's financial instruments that are included in the Consolidated
Balance Sheet are comprised of cash and cash equivalents, accounts receivable,
risk management activities, accounts payables and accrued liabilities, option
premium liability and long-term borrowings.
a) Commodity-pricing Agreements
The Corporation has entered into various commodity-pricing agreements designed
to mitigate the exposure to the volatility of crude oil prices in US dollars,
thereby providing greater certainty of future cash flow from the sale of the
Corporation's synthetic crude oil products. This risk management strategy is
intended to protect the Corporation's base and future capital programs and
ensure the funding of debt obligations. These commodity-pricing agreements are
accounted for under fair value accounting as they did not qualify or have not
been designated as hedges for accounting purposes.
The Corporation has put options at strike prices ranging from US$50.00 to
US$55.00 per barrel, averaging US$52.42 per barrel for the three year period
beginning January 1, 2007. The premiums for the purchased put options were
partially offset through the sale of call options at strike prices ranging from
US$90.00 to US$95.00 per barrel, averaging US$92.41 per barrel for the three
year period beginning January 1, 2007, resulting in a net premium liability.
Payment of the net premium liability is deferred until the settlement of the
option contracts between 2007 and 2009.
As at March 31, 2007, the Corporation had the following put and call options
outstanding:
2007 2008 2009
- -------------------------------------------------------------------------------
Barrels Per Day
Put Options Purchased 20,000 20,000 20,000
Call Options Sold 10,000 15,000 15,000
US$ Per Barrel
Average Put Strike Price US$52.50 US$54.25 US$50.50
Average Call Strike Price US$92.50 US$94.25 US$90.50
===============================================================================
The fair value of the option contracts was recognized on the consolidated
balance sheet on the dates they were entered into. The counterparties to these
put and call options have investment grade credit ratings, thereby partially
mitigating the credit risk associated with these financial instruments. The
following table presents the reconciliation of the Risk Management Asset:
Three Months Ended March 31 2007 2006
- -------------------------------------------------------------------------------
Risk Management Asset at Beginning of Period 26,308 98,426
Unrealized Loss on Risk Management (19,157) (67,724)
- -------------------------------------------------------------------------------
Risk Management Asset at End of Period 7,151 30,702
Less: Current Portion 2,986 1,933
- -------------------------------------------------------------------------------
4,165 28,769
===============================================================================
The following table presents the net losses from risk management activities:
Three Months Ended March 31 2007 2006
- -------------------------------------------------------------------------------
Realized Gain on Risk Management 120 -
Unrealized Loss on Risk Management (19,157) (67,724)
- -------------------------------------------------------------------------------
Risk Management Loss (19,037) (67,724)
===============================================================================
b) Fair Values of Financial Assets and Liabilities
The fair values of financial instruments that are included in the Consolidated
Balance Sheets, other than long-term borrowings, approximate their carrying
amount due to the relatively short period to maturity of these instruments or
have interest rates that approximate their fair value.
March 31, 2007 December 31, 2006
- ----------------------------------------------------------------------------------------------------
Balance Sheet Balance Sheet
Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------------------
Floating Rate Debt
Revolving Credit 129,000 129,000 77,000 77,000
Lease Obligation 57,854 57,854 57,480 57,480
Fixed Rate Debt
US Senior Secured Notes 506,183 564,981 524,385 584,034
- ----------------------------------------------------------------------------------------------------
Long-term Borrowings 693,037 751,835 658,865 718,514
====================================================================================================
Note 13. Changes in Non-cash Working Capital
- -------------------------------------------------------------------------------
Three Months Ended March 31
Source/(Use) 2007 2006
- -------------------------------------------------------------------------------
Operating Activities
Accounts Receivable 5,592 25,685
Inventory (7,189) (10,899)
Prepaid Expense 3,191 669
Accounts Payable and Accrued Liabilities 13,833 (2,087)
- -------------------------------------------------------------------------------
15,427 13,368
- -------------------------------------------------------------------------------
Investing Activities
Accounts Payable and Accrued Liabilities 31,518 23,104
===============================================================================
Note 14. Commitments and Contingencies
- -------------------------------------------------------------------------------
a) Commitments
The Corporation, through WesternZagros Limited ("WesternZagros"), a
wholly-owned subsidiary of the Corporation, received confirmation on March 2,
2007 that its Exploration and Production Sharing Agreement ("EPSA") had been
ratified by the Kurdistan Regional Government ("KRG") and confirmed by His
Excellency Nerchivan Barzani, Prime Minister of Iraqi Kurdistan. As part of the
ratification process, WesternZagros worked with the KRG to finalize its EPSA
area boundary and other key terms in line with draft petroleum legislation. The
final EPSA area encompasses 2,120 square kilometers (approximately 524,000
acres) and holds a number of high potential prospects. The EPSA provides for
the exploration of conventional oil and gas in the Federal Region of Kurdistan
in northern Iraq and a work program.
b) Contingencies
During the three month period ended March 31, 2007, a judgment was issued
against the Joint Venture Owners and Albian Sands Energy in respect of a
contractual matter. While the final amount under the judgment has not yet been
settled or paid, the Corporation has recognized $5.8 million as its 20% share
in OResearch, Business Development and OtherO of the Consolidated Statement of
Operations. The Corporation is considering whether it will appeal this
decision. Other than this judgment, the Corporation believes that any
liabilities that might arise pertaining to similar matters would not have a
material effect on its consolidated financial position.
CORPORATE INFORMATION
Officers
JAMES C. HOUCK
President and Chief Executive Officer
JOANNE L. ALEXANDER
Vice President and General Counsel
DAVID A. DYCK
Senior Vice President, Finance and Chief Financial Officer
STEVE D. L. REYNISH
Executive Vice President and Chief Operating Officer
Senior Management
JOHN FRANGOS
President, Western Oil Development Inc.
M. SIMON HATFIELD
Vice President and Managing Director, Oil & Gas
JACK D. JENKINS
Vice President, Corporate Planning & Human Resources
GERRY LUFT
Vice President, Downstream
RAY MORLEY
Vice President, Business Development
GRAIG RITCHIE
Vice President, Oil Sands
Directors
GUY J. TURCOTTE
Chairman of the Board,
Western Oil Sands Inc.
Calgary, Alberta
GEOFFREY A. CUMMING
Lead Director
Vice Chairman,
Gardiner Group Capital Limited
Toronto, Ontario
Deputy Chairman,
Emerald Capital Limited
Auckland, New Zealand
DAVID J. BOONE
President and Director,
Escavar Energy
Calgary, Alberta
FRED J. DYMENT
Independent Businessman
Calgary, Alberta
JAMES C. HOUCK
President and Chief Executive Officer,
Western Oil Sands Inc.
Calgary, Alberta
OYVIND HUSHOVD
Corporate Director
Kristiansand, Norway
JOHN W. LILL
Executive Vice President and
Chief Operating Officer,
Dynatec Corporation
Richmond Hill, Ontario
RANDALL OLIPHANT
Chairman and Chief Executive Officer,
Rockcliff Group Limited
Toronto, Ontario
ROBERT G. PUCHNIAK
Executive Vice President and
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 - 2nd Avenue S.W.
Calgary, Alberta T2P 5E9
Phone: (403) 233-1700
Fax: (403) 234-9156
Website
www.westernoilsands.com
Auditors
PRICEWATERHOUSECOOPERS LLP
Calgary, Alberta
Legal Counsel
MACLEOD DIXON LLP
Calgary, Alberta
PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP
Washington, D.C., USA
Independent Evaluators
GLJ PETROLEUM CONSULTANTS LTD.
Calgary, Alberta
NORWEST CORPORATION
Calgary, Alberta
Registrar and Transfer Agent
VALIANT TRUST COMPANY
Calgary, Alberta
Stock Exchange Listing
THE TORONTO STOCK EXCHANGE
Trading Symbol: WTO
Code of Conduct
Western's Code of Conduct is available on our website in the Governance
section.