NuVista Energy Ltd.: Second Quarter Interim Report

CALGARY, ALBERTA--(Marketwire - Aug. 13, 2009) - NuVista Energy Ltd. (TSX:NVA) is pleased to announce its financial and operating results for the three and six months ended June 30, 2009, as follows:

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Corporate Highlights
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Three months Six months
ended June 30, % ended June 30, %
2009 2008 Change 2009 2008 Change
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Financial
($ thousands, except
per share)
Production revenue 78,092 161,712 (52) 169,821 258,760 (34)
Funds from operations
(1) 41,779 89,582 (53) 98,442 143,016 (31)
Per share - basic 0.53 1.14 (54) 1.24 2.05 (40)
Per share - diluted 0.53 1.11 (52) 1.24 2.02 (39)
Net earnings (loss) (7,312) 2,905 (352) (4,680) 10,054 (147)
Per share - basic (0.09) 0.04 (325) (0.06) 0.14 (143)
Per share - diluted (0.09) 0.04 (325) (0.06) 0.14 (143)
Total assets 1,429,854 1,356,172 5
Long-term debt, net
of working capital 350,580 365,282 (4)
Long-term debt, net
of adjusted working
capital (1) 351,451 338,900 4
Shareholders' equity 812,128 728,591 11
Total capital
expenditures 8,318 16,213 (49) 89,546 67,114 33
Corporate acquisition
(non-cash) - - - - 594,944 -
Weighted average common
shares outstanding
(thousands):
Basic 79,209 78,830 - 79,187 69,754 14
Diluted 79,209 80,368 (1) 79,187 70,753 12

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Operating
(boe conversion -
6:1 basis)
Production
Natural gas (mmcf/d) 109.6 113.0 (3) 110.9 99.2 12
Natural gas liquids
(bbls/d) 3,247 2,609 24 3,138 1,857 69
Oil (bbls/d) 4,269 4,714 (9) 4,358 4,349 -
Total oil equivalent
(boe/d) 25,777 26,153 (1) 25,974 22,746 14
Product prices (2)
Natural gas ($/mcf) 4.52 9.44 (52) 5.53 8.74 (37)
Natural gas liquids
($/bbl) 32.00 81.88 (61) 35.46 80.65 (56)
Oil ($/bbl) 64.14 91.82 (30) 59.66 84.95 (30)
Operating expenses
Natural gas and
natural gas liquids
($/mcfe) 1.05 1.16 (9) 1.11 1.15 (3)
Oil ($/bbl) 15.69 13.76 14 16.31 12.34 32
Total oil equivalent
($/boe) 7.84 8.19 (4) 8.27 7.95 4
General and
administrative
expenses ($/boe) 1.61 1.52 6 1.43 1.40 2
Funds from operations
netback ($/boe) (1) 17.81 37.64 (53) 20.95 34.56 (39)

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NOTES:

(1) Funds from operations, funds from operations per share, funds from
operations netback and adjusted working capital are not defined by GAAP
in Canada and are referred to as non-GAAP measures. Funds from
operations are based on cash flow from operating activities as per the
statement of cash flows before changes in non-cash working capital and
asset retirement expenditures. Funds from operations per share is
calculated based on the weighted average number of common shares
outstanding consistent with the calculation of net earnings (loss) per
share. Funds from operations netback equals the total of revenues
including realized commodity derivative gains/losses less royalties,
transportation, general and administrative, restricted stock units,
interest expenses and cash taxes calculated on a boe basis. Adjusted
working capital excludes the current portions of the commodity
derivative asset or liability and the future income tax asset or
liability. Total boe is calculated by multiplying the daily production
by the number of days in the period. For more details on non-GAAP
measures, refer to "Management's Discussion and Analysis" section of
this press release.
(2) Product prices include realized gains/losses on commodity derivatives.

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MESSAGE TO SHAREHOLDERS

NuVista Energy Ltd. ("NuVista") is pleased to report to its shareholders the financial and operating results for the three and six months ended June 30, 2009. During the second quarter of 2009, natural gas prices declined significantly as continued weakness in the North American economy reduced demand for natural gas and supply from United States production remained relatively strong. We responded to lower natural gas prices by taking a disciplined approach to our capital program, focusing on financial flexibility and completing a strategic property acquisition. We believe that we have positioned NuVista to create significant shareholder value when natural gas prices recover by taking this time to build our drilling inventory and make strategic and timely acquisitions.

During the second quarter of 2009, we achieved average production of 25,777 boe/d, approximately 600 boe/d less than expected due to unscheduled third party plant outages but only slightly lower than production of 26,175 boe/d in the first quarter of 2009. Lower natural gas prices had an impact on second quarter funds from operations; however, this decline was partially mitigated by $9.2 million of gains realized from our financial and physical sale price risk management program. During the second quarter, exploration and development capital expenditures were $10.7 million as we focused on debt reduction following the $54 million property acquisition in January 2009 and responded to lower natural gas prices.

Significant highlights for NuVista in the second quarter:

- Implemented an $8.3 million exploration and development capital program that was primarily directed toward our Oyen core area in order to maximize the benefit of Alberta royalty drilling credits. In addition, our drilling program benefited from lower drilling and completion costs resulting from reduced industry activity levels. During the second quarter, we participated in 13 (11.8 net) wells with a 77% success factor;

- Entered into an agreement to purchase strategic properties located in the Martin Creek area of British Columbia and in Northwest Alberta for cash consideration of approximately $174 million. This acquisition closed on July 27, 2009;

- Entered into agreements to issue 9.0 million subscription receipts for gross proceeds of $99 million in order to fund a significant portion of the acquisition with equity. The subscription receipt offerings closed on July 7, 2009 and on July 27, 2009 the subscription receipts were exchanged into common shares and the proceeds of the offerings were released from escrow; and

- Maintained financial flexibility by reducing net debt to approximately $334 million (after adjusting for the $18 million deposit relating to the recent property acquisition) from a peak net debt level of approximately $390 million following the property acquisition in January 2009.

Looking forward to the remainder of 2009, we will be focused on prudently managing NuVista's business plan during a period of low natural gas prices, integrating the recent property acquisition and continuing with our core capital program focused on evaluating plays with potential for significant development in 2010 and beyond.

Prudently Manage our Business Plan

We will continue to prudently manage NuVista's business during this period of low natural gas prices. We will continue to invest capital on strategic projects and pursue acquisition opportunities available in this environment, while maintaining our financial flexibility. We believe natural gas prices will increase as supply and demand fundamentals adjust but the timing of this increase is uncertain. During the first half of 2009, we managed our capital program in a disciplined manner spending less than cash flow on our drilling program and achieving our debt reduction targets. Our recent property acquisition was financed with a significant amount of equity in order to maintain our financial flexibility and during the second half of 2009, we will spend less than cash flow on our drilling program in order to further reduce debt levels following this latest acquisition. Our drilling program for the remainder of the year will be focused on evaluating resource gas plays with potential for follow-up drilling, lease expiries and competitive drainage situations. In response to low natural gas prices, NuVista plans to shut-in approximately 400 boe/d of high operating costs natural gas production in August and will consider shutting-in additional natural gas production if prices decline further. In addition, TCPL has notified us of pipeline constraints in our Northwest Alberta core area that are anticipated to continue until the first quarter of 2010 that will result in shut-in production of approximately 500 boe/d.

Integrate our Recent Property Acquisition

With the closing of the recent property acquisition on July 27, 2009, we will integrate these new properties into our business with a focus on optimizing production, reducing operating costs, building an inventory of drilling locations and evaluating small complementary acquisition opportunities. This acquisition was strategic and creates a new core area characterized by longer life reserves which lowers our overall corporate production decline rate and adds over 140,000 net undeveloped acres. These properties were acquired at attractive valuation metrics and are accretive to NuVista's production and reserves per share. These properties also will provide opportunities for continued growth over the long-term and they have significant leverage to rising natural gas prices. We have identified over 30 drilling opportunities on the acquired lands. These drilling opportunities are expected to be economically robust and generate favourable rates of return even in a low natural gas price environment and we are planning a nine well winter drilling program.

Evaluate Plays for Development in 2010

During the second half of 2009, our capital program will be focused on drilling the remaining nine wells in our Oyen core area drilling program and implementing horizontal drilling and multi-stage facing technology on several tight gas projects. With the extension of the Alberta royalty drilling credit into 2011, we have reallocated our capital program with less emphasis on the Oyen core area for the remainder of the year and prioritized plays with larger resource potential. During the second half of 2009, a horizontal Montney well will be drilled in our Fir/Kaybob core area where we have 10 vertical Montney producing wells on seven and one-half sections of land. This project may ultimately result in 5 to 10 additional horizontal Montney wells, beginning in 2010. In our Wapiti core area, we plan to investigate the thicker tight gas charged lower Dunvegan sands by drilling one horizontal well and we will follow up on the success of vertical wells in the upper Dunvegan zones by drilling two additional vertical wells. Also in our Wapiti core area, we plan to complete one additional vertical well in the Montney formation and monitor production from another vertical well brought on during the second quarter, and monitor drilling and completion results for horizontal Montney wells drilled by other companies in the greater Wapiti area. Both the Dunvegan and Montney plays, if successful, possess the size and scope to dramatically impact NuVista's capital program and financial results over the next five years.

Through challenging and at times difficult industry conditions, we continue to maintain a disciplined approach to our business. We will continue to employ an "acquire and develop" business model focused on reserves per share and production per share growth while maintaining our balance sheet strength. Due to low commodity prices and an uncertain economic environment, prudent financial management requires a responsive and flexible capital program in 2009 while continuing to plan for our future. For the remainder of 2009, we will continue to closely manage capital spending levels and focus on maintaining financial flexibility. We pride ourselves on being able to make business decisions based on timely and accurate data and this approach will continue to enable us to adapt to rapidly changing economic and market conditions.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's discussion and analysis ("MD&A") of financial conditions and results of operations should be read in conjunction with NuVista's audited consolidated financial statements for the three and six months ended June 30, 2009 and the audited consolidated financial statements for the year ended December 31, 2008. The following MD&A of financial condition and results of operations was prepared at and is dated August 13, 2009. Our audited consolidated financial statements, Annual Report, Annual Information Form and other disclosure documents for 2008 are available through our filings on SEDAR at www.sedar.com or can be obtained from our website at www.nuvistaenergy.com.

Basis of presentation - The financial data presented below has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and the measurement currency is the Canadian dollar. For the purpose of calculating unit costs, natural gas is converted to a barrel of oil equivalent ("boe") using six thousand cubic feet of natural gas equal to one barrel of oil, unless otherwise stated. In certain circumstances natural gas liquid volumes have been converted to thousand cubic feet equivalent ("mcfe") on the basis of one barrel of natural gas liquids to six thousand cubic feet. Boe's and mcfe's may be misleading, particularly if used in isolation. A conversion ratio of one barrel to six thousand cubic feet of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Forward-looking statements - Certain information set forth in this document contain forward-looking statements, including management's assessment of NuVista's future plans and operations, forecast production and growth and production and reserves, drilling plans and results, NuVista's planned capital budget, targeted debt level, the timing, allocation and efficiency of NuVista's capital program and the results therefrom, forecast funds from operations and targeted operating costs, benefits from the Alberta Government's announcement of royalty incentives, expectations regarding the payment of future taxes, expectations regarding future commodity prices, netbacks and industry conditions which are provided to allow investors to better understand our business. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond NuVista's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the lack of availability of qualified personnel or management and services, stock market volatility, changes in environmental regulations, tax laws and royalties and the ability to access sufficient capital from internal sources and bank and equity markets. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. NuVista's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements, or if any of them do so, what benefits that NuVista will derive therefrom. NuVista disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Non-GAAP measurements - Within MD&A, references are made to terms commonly used in the oil and natural gas industry. Management uses funds from operations to analyze operating performance and leverage. Funds from operations as presented, does not have any standardized meaning prescribed by Canadian GAAP and therefore it may not be comparable with the calculation of similar measures for other entities. Funds from operations as presented is not intended to represent operating cash flow or operating profits for the period nor should it be viewed as an alternative to cash flow from operating activities, per the statement of cash flows, net earnings (loss) or other measures of financial performance calculated in accordance with Canadian GAAP. All references to funds from operations throughout this report are based on cash flow from operating activities before changes in non-cash working capital and asset retirement expenditures. Funds from operations per share is calculated based on the weighted average number of common shares outstanding consistent with the calculation of net earnings (loss) per share. Funds from operations netbacks equal total revenue including realized commodity derivative gains/losses less royalties, transportation, operating costs, general and administrative, restricted stock unit, interest expense and cash taxes. Management also uses field netbacks to analyze operating performance and adjusted working capital to analyze leverage. Field netbacks and adjusted working capital as presented, do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures for other entities. Field netbacks equal the total of revenue including realized commodity derivative gains/losses less royalties, transportation and operating costs. Adjusted working capital equals working capital excluding the current portion of the commodity derivative asset or liability and the future income tax asset or liability. Total boe is calculated by multiplying the daily production by the number of days in the period.

A reconciliation of funds from operations is presented in the following table:

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Three months ended Six months ended
June 30, June 30,
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($ thousands) 2009 2008 2009 2008
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Cash provided by operating activities 39,516 67,453 97,940 102,619
Add back:
Asset retirement expenditures 614 483 1,189 537
Change in non-cash working capital 1,649 21,646 (687) 39,860
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Funds from operations 41,779 89,582 98,442 143,016
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Plan of arrangement with Rider Resources Ltd. - On March 4, 2008, NuVista closed a business combination with Rider Resources Ltd. ("Rider" or the "Rider Acquisition") and a private placement financing with the Ontario Teachers' Pension Plan Board ("OTPP"). The Rider Acquisition resulted in the combination of NuVista and Rider, pursuant to which all of the issued and outstanding Rider shares were exchanged for common shares of NuVista. Rider shareholders received, for each Rider share held, 0.3540 of a NuVista share. The results of operations from the Rider assets have been included effective March 4, 2008.

Operating activities - During the second quarter of 2009, NuVista participated in 13 (11.8 net) wells, all of which were operated wells, with an average working interest of 91%. Of these wells, 12 were drilled in the Oyen core area and one in the West Central Saskatchewan core area. The success rate of 77% in this drilling program resulted in nine natural gas wells, one oil well and three dry holes. For the six months ended June 30, 2009, NuVista drilled 23 (17.4 net) wells resulting in 13 natural gas wells, five oil wells and five dry holes. NuVista has approximately 15 wells planned for the third quarter, primarily in our Oyen, Wapiti and Pembina core areas.

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Production

Three months ended June 30,
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2009 2008 % Change
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Natural gas (mcf/d) 109,564 112,979 (3)
Liquids (bbls/d) 3,247 2,609 24
Oil (bbls/d) 4,269 4,714 (9)
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Total oil equivalent (boe/d) 25,777 26,153 (1)
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Six months ended June 30,
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2009 2008 % Change
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Natural gas (mcf/d) 110,870 99,238 12
Liquids (bbls/d) 3,138 1,857 69
Oil (bbls/d) 4,358 4,349 -
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Total oil equivalent (boe/d) 25,974 22,746 14
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For the three months ended June 30, 2009, NuVista's average production was 25,777 boe/d, comprised of 109.6 mmcf/d of natural gas, 3,247 bbls/d of associated natural gas liquids ("liquids") and 4,269 bbls/d of oil, This is a 1% decrease compared to the same period in 2008 and a 2% decrease compared to the three months ended March 31, 2009. The slight decrease in NuVista's production during the three months ended June 30, 2009 was primarily due to unscheduled downtime experienced at third-party gas processing plants primarily in the Wapiti and Pembina core areas.

NuVista's production for the six months ended June 30, 2009 averaged 25,974 boe/d comprised of 110.9 mmcf/d of natural gas, 3,138 bbls/d of liquids and 4,358 bbls/d of oil, which represents a 14% increase over the same period in 2008. Production increases for the six month period compared to the same period in 2008 are primarily due to the full inclusion of six months of Rider properties in 2009 compared to four months in 2008.

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Revenues

Three months ended June 30,
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($ thousands, except per
unit amounts) 2009 2008 % Change
----------------- ----------------- --------------
Natural gas $ $/mcf $ $/mcf $ $/mcf
Production revenue 45,059 4.52 98,050 9.54 (54) (53)
Realized gain (loss) on
commodity derivatives (2) - (1,026) (0.10) (100) (100)
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Total 45,057 4.52 97,024 9.44 (54) (52)
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Liquids $ $/bbl $ $/bbl $ $/bbl
Production revenue 9,457 32.00 19,440 81.88 (51) (61)
Realized gain (loss) on
commodity derivatives - - - - - -
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Total 9,457 32.00 19,440 81.88 (51) (61)
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Oil $ $/bbl $ $/bbl $ $/bbl
Production revenue 23,576 60.69 44,222 103.09 (47) (41)
Realized gain (loss) on
commodity derivatives 1,341 3.45 (4,835) (11.27) 128 131
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Total 24,917 64.14 39,387 91.82 (37) (30)
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Six months ended June 30,
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($ thousands, except per
unit amounts) 2009 2008 % Change
----------------- ----------------- --------------

Natural gas $ $/mcf $ $/mcf $ $/mcf
Production revenue 109,613 5.46 158,894 8.80 (31) (38)
Realized gain (loss) on
commodity derivatives 1,421 0.07 (1,026) (0.06) 238 217
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Total 111,034 5.53 157,868 8.74 (30) (37)
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Liquids $ $/bbl $ $/bbl $ $/bbl
Production revenue 20,141 35.46 27,256 80.65 (26) (56)
Realized gain (loss) on
commodity derivatives - - - - - -
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Total 20,141 35.46 27,256 80.65 (26) (56)
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Oil $ $/bbl $ $/bbl $ $/bbl
Production revenue 40,067 50.80 72,610 91.73 (45) (45)
Realized gain (loss) on
commodity derivatives 6,986 8.86 (5,368) (6.78) 230 231
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Total 47,053 59.66 67,242 84.95 (30) (30)
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For the three months ended June 30, 2009, revenues including realized commodity derivative gains and losses, were $79.4 million, a 49% decrease from $155.9 million for the same period in 2008. The decrease in revenues for the three months ended June 30, 2009 compared to the same period of 2008 is primarily due to the significant decrease in realized prices for all products. Revenues were comprised of $45.1 million of natural gas revenue, $9.5 million of liquids revenue, and $24.9 million of oil revenue. The decrease in average realized commodity prices is comprised of a 52% decrease in the natural gas price to $4.52/mcf from $9.44/mcf, a 61% decrease in the liquids price to $32.00/bbl from $81.88/bbl and a decrease of 30% in the oil price to $64.14/bbl from $91.82/bbl.

For the six months ended June 30, 2009, revenues including realized commodity derivative gains and losses were $178.2 million, a 29% decrease from $252.4 million, for the same period in 2008. The decrease in revenues for the first six months of 2009 compared to the same period of 2008 is primarily due to the decline in commodity prices offset by the 14% increase in production. These revenues were comprised of $111.0 million of natural gas revenue, $47.1 million of oil revenue, and $20.1 million of liquids revenue. The decrease in average realized commodity prices is comprised of a 37% decrease in the natural gas price to $5.53/mcf from $8.74/mcf, a 30% decrease in the oil price to $59.66/bbl from $84.95/bbl, and a decrease of 56% in the liquids price to $35.46/bbl from $80.65/bbl.

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Commodity price risk management

Three months ended June 30,
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2009 2008
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Realized Unrealized Total Realized Unrealized Total
Gain Gain Gain Gain Gain Gain
($ thousands) (Loss) (Loss) (Loss) (Loss) (Loss) (Loss)
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Natural gas (2) - (2) (1,026) (5,826) (6,852)
Oil 1,341 (7,478) (6,137) (4,835) (34,205) (39,040)
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Total gain
(loss) 1,339 (7,478) (6,139) (5,861) (40,031) (45,892)
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Six months ended June 30,
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2009 2008
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Realized Unrealized Total Realized Unrealized Total
Gain Gain Gain Gain Gain Gain
($ thousands) (Loss) (Loss) (Loss) (Loss) (Loss) (Loss)
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Natural gas 1,421 (1,094) 327 (1,026) (9,710) (10,736)
Oil 6,986 (14,226) (7,240) (5,368) (40,065) (45,433)
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Total gain
(loss) 8,407 (15,320) (6,913) (6,394) (49,775) (56,169)
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As part of our financial risk management strategy, NuVista has adopted a disciplined commodity price risk management program. The purpose of this program is to reduce volatility in our financial results, protect acquisition economics and stabilize cash flow against the unpredictable commodity price environment. NuVista's Board of Directors has approved a price risk management limit of up to 60% of forecast production, net of royalties, using fixed price, put option and costless collar contracts. To achieve NuVista's price risk management objectives, we enter into both commodity derivative and physical sale contracts. For the three months ended June 30, 2009, the commodity derivative price risk management program resulted in a loss of $6.1 million consisting of realized gains of $1.3 million on natural gas and oil hedges and a $7.5 million unrealized loss on crude oil hedges. For the six months ended June 30, 2009, the commodity derivative price risk management program resulted in a loss of $6.9 million consisting of rea