CALGARY, ALBERTA--(Marketwire - Nov. 28, 2012) -
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Parallel Energy Trust (TSX:PLT.UN) ("Parallel" or the "Trust") today announced its capital expenditure plans and production forecast for 2013, a change to its distribution level and a change in senior management.
Capital Expenditure Plans
Parallel is announcing a capital expenditure budget of $14.5 million for 2013 with production forecasted to average between 7,200 and 7,400 boe/day for the year. The Trust's exit production rate for 2013 is forecasted to be between 7,300 and 7,400 boe/day. The main assumptions underlying this forecast are as follows:
-- one rig operating in the Carson and Sneed areas throughout 2013; -- 23 gross wells drilled, of which all are forecasted to be single laterals or lateral sidetracks; -- average drilling cost of approximately $475,000 per well; -- 30 day initial production rates to average 30 boe/day gross per well; and, -- drilling metrics of approximately $16,000 per flowing boe/day (based on the 30 day initial production rate).
In addition, Parallel may participate in up to three gross wells (0.6 net wells) in a Mississippian Lime play located in Oklahoma. The Trust recently purchased a 20% interest in the prospect comprising 650 net acres, which currently has no production.
Cash Flow Forecast
In addition to the Trust's production forecasts, the other assumptions underlying the 2013 cash flow forecast include:
-- the annual production mix to average 25% condensate, 36% NGLs and 39% natural gas (revenue mix to average 81% condensate and NGLs, and 19% natural gas for the year); -- operating costs of approximately $6.00 per boe; -- royalty rates and processing fees consistent with 2012; -- general and administrative expense of approximately $3.00 per boe; -- exchange rate of $1.00 Canadian dollar to the U.S. dollar; and, -- commodity price hedges in place (as detailed in this press release).
Based on the above assumptions and the current forward strip commodity prices for 2012 of US$90.00 per bbl WTI, US$4.00 NYMEX natural gas price and an average NGL price of 45% of WTI, and utilizing the low end of the production guidance, cash flow is forecasted to be $49 million for 2013.
Production Decline Rates
The existing production in the Carson and Sneed fields continues to exhibit a base decline rate of approximately 8% per annum. This low decline rate, relative to most other conventional and non-conventional production in North America, makes these properties ideal for a distribution paying trust. The low decline rate also requires much less capital to maintain production levels compared to other conventional North American assets which tend to have decline rates in the range of 30% to 40% or higher.
Parallel's low decline rate also provides a greater cushion to sustain distributions during periods of low commodity prices as the Trust's production does not fall as quickly if capital expenditures are reduced. Furthermore, an asset with a low decline rate provides more debt capacity for the same level of production or cash flow than an asset with a higher decline rate since the borrowing base of the asset does not decline as quickly. Therefore, the borrowing capacity of Parallel's assets can be higher, in terms of a debt to cash flow ratio, than an asset with a higher decline rate.
Bank Debt
Parallel has a bank facility with a limit of US$175 million which was reconfirmed by the Trust's Lenders at the end of October 2012. The facility is currently drawn at approximately US$150 million. The Trust previously stated its strategy was to maintain a debt to cash flow ratio of 1 to 1.5 times, although the ratio could be exceeded to finance an acquisition. The Trust has determined that in view of the low decline rates it has experienced in its operating areas, a more appropriate measurement is its debt to borrowing base ratio. The Trust currently has a debt to borrowing base ratio of approximately 85% and believes that a debt to borrowing base ratio of 75% represents a conservative level of bank debt for an entity such as Parallel that is not spending a large amount of capital relative to cash flow.
The Trust has targeted to reduce its bank debt by $10 million in 2013 and reduce bank debt to below 75% of its borrowing base within two years. The Trust plans to reduce bank debt from excess cash flow over capital expenditures and distributions and through selective use of the Trust's DRIP programs. The Trust currently has a distribution reinvestment program and Premium DRIP(TM) program.
The Trust also has $63 million of convertible debentures due on June 30, 2017. Given that the convertible debentures do not have to be refinanced for another 4.5 years, and there are no financial covenants attached to the debentures, the Trust does not currently include the convertible debentures with its bank debt when determining the appropriate level of debt. However, the Trust recognizes that it will require the financial flexibility to refinance the debentures, if required, at maturity. Therefore, the Trust plans to continue to reduce its bank debt with the goal that its total level of bank debt plus convertible debentures will be less than the borrowing base of the bank facility by the time the debentures need to be refinanced or redeemed.
Commodity Price Hedging
As previously announced, Parallel has commodity hedges in place for an average of 2,100 boe/day for the calendar year 2013 as follows:
Crude Oil - 1,300 bbls/day average for the year at an average floor price of US$95.74 and an average ceiling price of US$99.13.
Natural Gas Liquids (Butane) - 433 bbls/day average for the year at an average forward price of US$62.37/bbl.
Natural Gas - 2,000 mmbtu/day average for the year at an average forward price of US$3.23 per mmbtu.
Utilizing the base case forecast for 2013 and current forward strip prices, current hedges represent approximately 40% of net production and 60% of net revenue for 2013. The Trust may hedge additional volumes up to 70% of net revenue for 2013. The Trust currently has minimal hedges for 2014, but plans to add to the 2014 hedge position in the future.
Operations Update
As previously announced, the Carson field returned to full production at the end of October 2012. Since that time, Parallel's production has averaged approximately 7,300 boe/day based on field data. Parallel is planning to drill seven wells in the fourth quarter of 2012 in the Carson field. All four wells that have been completed and tied-in since October 1, 2012 have exceeded expectations in terms of initial production rates.
Management believes that the initiatives it has undertaken in 2012 to improve production reliability, including the securing of alternate processing capacity, have begun to show positive results. Further improvement of the Trust's production reliability will remain a key goal in 2013.
Distribution Level
The Trust has continued to monitor commodity prices throughout 2012. While prices for commodities have recovered from the low levels experienced in the second and early third quarter of 2012, prices remain far below the level which prevailed at the time of the Trust's initial public offering. During the second quarter of 2011, the first operating quarter for the Trust, the average realized price for Parallel's production (prior to hedging gains) was US$53.23 per boe, as compared to US$38.37 per boe in the Trust's most recent quarter, a decline of nearly 30%. As a result of this decline in commodity prices, the Trust's all-in payout ratio for 2012 has averaged over 100% of cash flow.
The Trust does not view the current distribution as sustainable at current and forward commodity prices without substantial use of the distribution reinvestment programs. The Trust believes that continued use of the distribution reinvestment programs at the levels previously used is overly dilutive to unitholders that do not participate in the regular distribution reinvestment program.
The Trust has determined that it is in the best long term interests of the Trust and its unitholders to reduce the all-in payout ratio to less than 100% of cash flow, based on a reasonable range of commodity price forecasts. Given the current level of commodity prices, the
Trust will be reducing its monthly distribution to $0.05 per unit per month beginning with the distribution being announced in December. This level of distribution provides for a basic payout ratio of approximately 65% and an all-in payout ratio of approximately 95% at the low end of the Trust's production guidance for 2013, utilizing current forward strip prices. The Trust believes that this distribution level results in a sustainable model as it will allow the Trust to reduce bank debt while maintaining production levels.
Change in Senior Management
Parallel is also announcing the retirement, effective January 1, 2013, of Dennis Feuchuk as President and CEO. Mr. Feuchuk will be replaced on an interim basis by Richard Alexander, who has been a director of the Trust since its inception.
Mr. Alexander will act as the President and CEO until such time as a successor to Mr. Feuchuk is chosen. The Board is hopeful that the position will be filled by the end of the first quarter of 2013.
"I want to thank Dennis for his contributions to the Trust since its formation," said Henry Sykes, Executive Chairman of the Trust. "Dennis was instrumental in completing the acquisition of the balance of the interests in the Sneed and Carson operating areas in 2012, and in the subsequent establishment of the Trust as an operating entity. Since we took over operatorship of our assets, Dennis has made great strides in improving the operating reliability of the Trust, to the long term benefit of our unitholders. We are very pleased that Dennis will be available to the Trust as needed in the future, and we sincerely wish him well in his future endeavours."
ABOUT PARALLEL ENERGY TRUST
Parallel's objectives are to create stable, consistent returns for investors through the acquisition and development of conventional oil and natural gas reserves and production with unexploited low risk potential in certain regions of the United States, and to pay out a portion of available cash to holders of trust units on a monthly basis. The trust units of Parallel are listed on the Toronto Stock Exchange ("TSX") under the symbol "PLT.UN" and the debentures are listed on the TSX under the symbol "PLT.DB".
Parallel is a "mutual fund trust" under the Income Tax Act (Canada) (the "Tax Act"). The Trust will not be a "SIFT trust" (as defined in the Tax Act), provided that the Trust complies at all times with its investment restriction which precludes the Trust from holding any "non-portfolio property" (as defined in the Tax Act). Further information relating to Parallel is set out in Parallel's annual information form dated March 21, 2012, which may be obtained on the SEDAR website at
www.sedar.com under Parallel's profile.
ADVISORIES
Forward-Looking Information