Pengrowth Energy Trust Announces Second Quarter 2009 Results

CALGARY, ALBERTA--(Marketwire - Aug. 6, 2009) - Pengrowth Corporation, administrator of Pengrowth Energy Trust (collectively "Pengrowth") (TSX:PGF.UN) (NYSE:PGH), is pleased to announce the interim unaudited operating and financial results for the three month period ended June 30, 2009. Cash flow from operating activities before working capital changes was approximately $160.1 million ($0.62 per trust unit) in the second quarter of 2009 as compared to $130.4 million ($0.51 per trust unit) in the first quarter and $272.7 million ($1.10 per trust unit) in the same period last year. The decrease in cash flow from operations from the same period last year is largely due to lower commodity prices, partly offset by higher production volumes and lower royalty expenses. Pengrowth recorded net income of $10.3 million ($0.04 per trust unit) for the second quarter of 2009 compared to a loss of $118.7 million ($0.48 per trust unit) in the same period last year. For both years, non-cash items, specifically unrealized losses on mark-to-market risk management contracts had a negative impact on net income, yet did not impact cash flow from operating activities. Distributions declared in the second quarter totalled $77.5 million versus $77.2 million during the first quarter and $168.2 million in the second quarter last year. Pengrowth reduced its distributions in the first quarter of 2009 to $0.10 per trust unit per month, to align with the global decline in commodity prices since the second quarter of 2008. During the second quarter, Pengrowth declared distributions of $0.30 per trust unit to its unitholders, which is 48 percent of cash flow from operating activities before working capital changes. Pengrowth's distributions have remained stable at $0.10 per trust unit per month for the past six months, up to and including the most recently announced August 17, 2009 distribution. Daily production was 82,171 boe per day, an increase of two percent when compared to both the first quarter's production of 80,284 boe per day and the second quarter of 2008's production of 80,895 boe per day. The increase was partially due to prior period adjustments, arising through the final stage of the integration process for assets previously acquired. In addition, volumes brought on stream from the development program together with a scheduled condensate lift at Sable Offshore Energy Project (SOEP) and minimal weather related issues throughout the quarter all aided in boosting production during the second quarter. At this time, Pengrowth is raising its guidance for annual production from 76,000 - 78,000 boe per day to 78,000 - 79,500 boe per day, excluding any impact from potential future acquisitions or dispositions. Development capital for the second quarter of 2009 totalled $40.1 million, with approximately 63 percent spent on drilling and completions. Pengrowth participated in drilling 10 gross wells (5.4 net) throughout the quarter, all of which were cased for production. Note regarding currency: all figures contained within this report are quoted in Canadian dollars unless otherwise indicated. Chairman's Message To our valued unitholders, I am pleased to present the unaudited quarterly operating and financial results for the three months ended June 30, 2009. Although positive sentiment has begun to be reflected in the global marketplace, lower commodity prices through the first half of 2009 compared to the same period of 2008 continued to have the most significant impact on earnings and operating cash flow throughout the second quarter. The second quarter results reflected a stabilization in crude oil prices in the U.S. $50 to $60 per barrel range, recovering from the lows in the U.S. $32 to $35 range reached during the first quarter. Natural gas price weakness continued during the quarter averaging U.S. $ 3.50 per mcf as compared with U.S. $4.89 per mcf in the first quarter of 2009. Pengrowth was able to offset the weak crude oil and natural gas prices somewhat through our price risk management program and solid daily production averaging 82,171 boe per day during the quarter. To summarize Pengrowth's second quarter results: Operating cash flow before working capital changes was $160.1 million (or $0.62 per trust unit), a 23 percent increase over the first quarter's operating cash flow of $130.4 million (or $0.51 per trust unit) and a 41 percent decrease when compared to $272.7 million (or $1.10 per trust unit) in the second quarter of 2008. Daily production increased two percent to 82,171 boe per day during the second quarter from the first quarter's level of 80,284 boe per day and also increased two percent from 2008's second quarter level of 80,895 boe per day. At this time, Pengrowth is raising its guidance for annual production from 76,000 - 78,000 boe per day to 78,000 - 79,500 boe per day. The increase in production of almost 2,000 boe per day is partially attributable to prior period adjustments, arising through the final stage of the integration process for assets previously aquired. In addition, volumes brought on stream from the development program together with a scheduled condensate lift at Sable Offshore Energy Project (SOEP) and minimal weather related issues throughout the quarter all aided in boosting production during the second quarter. Distributions declared remained stable during the second quarter totalling $77.5 million or $0.30 per trust unit as compared with $77.2 million or $0.30 per trust unit during the first quarter. When compared to the same period last year, distributions declared have declined by 54 percent from $168.2 million or $0.68 per trust unit declared during the second quarter of 2008. The reduction in distributions year-over-year is reflective of Pengrowth's conservative approach toward both distributions and capital spending based on our continued commitment to preserve our financial flexibility. Pengrowth's payout ratio (ratio of distributions declared over cash flow from operating activities before working capital changes) for the second quarter of 2009 was 48 percent and our total payout ratio when including capital expenditures totalled 76 percent during the quarter. This represents an operating surplus and the outlook is positive for the balance of the year. Fully funding our capital program and distributions from cash flow from operating activities continues to place Pengrowth in a position of considerable flexibility to pursue new acquisition and consolidation activities should the right opportunities present themselves. Beginning with the March 15, 2009 payment, Pengrowth has maintained our Cdn $0.10 per trust unit distribution level for six consecutive months up to and including the recently declared August 17, 2009 distribution. Pengrowth's board of directors will continue to prudently examine distributions on a monthly basis while considering overall oil and gas market conditions and capital spending requirements. While our planned capital spending may be lower in 2009 than 2008, the projects have been selected to provide the greatest economic value for the capital spent. Capital development expenditures were $40.1 million for the second quarter of 2009 as compared with $68.0 million during the first quarter. Pengrowth's development program has continued to deliver as expected with 63 percent of our capital development expenditures being spent on the drilling of 10 gross wells (5.4 net) throughout the quarter, all of which were cased for production and $0.6 million was spent on land acquisitions, adding 5,560 net acres. During the second quarter, we continued to selectively reallocate capital to high-grade projects where immediate cash flow and value creation could be realized. Capital reallocation of $23 million budgeted for other projects ($7 million from Lindbergh oil sands pilot project) was reallocated to our Carson Creek property, an area in which we have had considerable development success in recent months. Pengrowth acquired additional 3D seismic in the first quarter and plans to follow up with six horizontal wells during the remainder of the year. This area in the Carson pool had no production at the time of acquisition in 2006, yet following a drilling campaign of five vertical wells and one horizontal well production peaked at 1,500 boe per day. We plan to ramp up production for the remainder of the year and into the first quarter of 2010 pending success of the horizontal well drilling program which commenced in the second quarter. The Lindbergh oil sands property also continues to provide significant long term potential for Pengrowth and the progress being made on the pilot project remains important as commercial development is ready to move forward once commodity prices improve. In May, the Government of Alberta, through Alberta Energy's Innovative Energy Technologies Program (IETP) announced it would commit $3.54 million towards Pengrowth's carbon dioxide enhanced oil recovery pilot at our Judy Creek facility in central Alberta. This project is very helpful in evaluating and confirming the economic viability of recovering additional reserves from Pengrowth's proven long-life conventional oil pools. Over the quarter, Pengrowth continued to benefit from the stabilization in operating cash flow provided by our risk management strategy, especially as we continue to be challenged by depressed North American gas prices. In total, realized gains from our hedging strategy were $47.1 million in the quarter. Pengrowth realized a price of Cdn $73.26 per bbl on its light oil contracts during the second quarter as compared to the benchmark WTI (West Texas Intermediate) translated to Cdn $69.71 per bbl and realized a price of Cdn $4.78 per mcf(i) of natural gas, in comparison to the AECO spot benchmark of Cdn $3.47 per gj(i) and the NYMEX gas equivalent translated to Cdn $4.06 per mmbtu(i). For the remainder of the year, Pengrowth has hedged approximately 64 percent of our net liquids production at a price of Cdn $82.45 per bbl and 44 percent of our net natural gas production at an average price of Cdn $8.00 per mmbtu. In addition, for 2010, Pengrowth has approximately 12,500 bbl per day of crude oil production hedged at Cdn $82.09 per bbl and 16,600 mmbtu per day of natural gas production hedged at Cdn $8.64 per mmbtu. As the majority of our revenue is derived in U.S. dollars, the strengthening of the Canadian dollar in relation to the U.S. dollar has negatively impacted Pengrowth's revenue in Canadian dollar terms. The Canadian dollar/U.S. dollar exchange rate averaged 0.86 for the second quarter, closed at 0.86 on June 30, 2009 and has recently risen to the 0.92 U.S. level. The average price realized for Pengrowth's oil and gas sales of $44.74 per boe, after commodity risk management contracts, remained stable when compared to the first quarter's average realized price of $44.57 per boe, after risk management contracts. When compared to the second quarter of 2008's average realized price of $73.21, 2009's second quarter average realized price decreased 39 percent. The stabilization between the first two quarters of the year is reflective of Pengrowth's active risk management program, whereas the decrease from the second quarter of last year to the second quarter of this year can be attributed to the lower commodity price environment in 2009 versus 2008. Operating expenses in the second quarter of $11.84 per boe decreased 20 percent from $14.87 per boe in the first quarter as reductions in Alberta Power Pool prices resulted in lower operating expenses in the second quarter. Reductions in Alberta Power Pool prices resulted in a $7.8 million decrease in utility expenses over the quarter. At this time, due primarily to the lower utility pricing expected for the remainder of the year as well increased production guidance and ongoing cost reduction activities, Pengrowth is lowering our full year 2009 operating cost guidance from $14.45 per boe to $14.00 per boe. Cost savings will continue to be an important focus for Pengrowth given the current economic climate and depressed commodity prices. Pengrowth's operating netback increased to $26.28 per boe in the second quarter of 2009 compared with $23.87 in the first quarter and $42.15 in the same period last year. The decrease in operating costs during the second quarter was the primary contributor to the higher netback quarter-over-quarter. The decrease in netback year-over-year can mainly be attributed to the decline in global commodity prices offset slightly by lower utility pricing. Recent weeks have seen considerable positive sentiment in the financial markets as consumer confidence continues to rise, credit markets soften and global fiscal and monetary stimulus plans take hold. Pertinent to our industry, the fundamentals for crude oil also continue to strengthen with increasingly positive economic news. Since the first quarter, we have seen the leveling of crude prices from their lows in the mid $30 range to their current levels around the $70 mark. Although there is continued concern over depressed North American natural gas prices these too seem to have found a stabilized trading range between U.S. $3.25 to $4.00 per mcf and we see a number of positive signs moving forward. Rig activity has declined dramatically in North America over the last year and production decline will likely cut into storage volumes as the economy recovers. The Bank of Canada recently announced their belief that the Canadian economy will in fact grow through the next quarter and that Canada (and the rest of the world) are on the track toward economic recovery. Regardless of the differing beliefs on how swift a recovery may be, the popular opinion contends that we have found bottom and a definite revival of the financial markets is in the works. It is my belief that it is only a matter of time before a visible and firm recovery takes shape. At Pengrowth, we are poised and ready to embark on the emerging road to recovery and we remain focused toward the growth and value opportunities that lie ahead for the Trust and our unitholders. Thank you for your continued support and dedication through the first half of this year and I look forward to the potential continued recovery that is ahead of us for the remainder of 2009. Best regards, James S. Kinnear, Chairman and Chief Executive Officer August 6, 2009 /T/ Summary of Financial and Operating Results Three Months ended June 30 (thousands, except per unit amounts) 2009 2008 % Change ---------------------------------------------------------------------------- STATEMENT OF INCOME (LOSS) Oil and gas sales $ 335,634 $ 550,623 (39) Net income (loss) $ 10,272 $ (118,650) 109 Net income (loss) per trust unit $ 0.04 $ (0.48) 108 ---------------------------------------------------------------------------- CASH FLOWS Cash flows from operating activities $ 144,116 $ 267,874 (46) Cash flows from operating activities per trust unit $ 0.56 $ 1.08 (48) Distributions declared $ 77,526 $ 168,159 (54) Distributions declared per trust unit $ 0.30 $ 0.675 (56) Ratio of distributions declared over cash flows from operating activities 54% 63% (14) Capital expenditures $ 44,129 $ 83,060 (47) Capital expenditures per trust unit $ 0.17 $ 0.33 (48) Weighted average number of trust units outstanding 257,971 248,489 4 ---------------------------------------------------------------------------- BALANCE SHEET Working capital deficiency Property, plant and equipment Long term debt Trust unitholders' equity Trust unitholders' equity per trust unit Currency (U.S.$/Cdn$) (closing rate at period end) Number of trust units outstanding at period end ---------------------------------------------------------------------------- AVERAGE DAILY PRODUCTION Crude oil (barrels) 23,078 25,052 (8) Heavy oil (barrels) 7,822 8,242 (5) Natural gas (mcf) 247,604 234,028 6 Natural gas liquids (barrels) 10,004 8,596 16 Total production (boe) 82,171 80,895 2 TOTAL PRODUCTION (mboe) 7,478 7,361 2 ---------------------------------------------------------------------------- PRODUCTION PROFILE Crude oil 28% 31% Heavy oil 10% 10% Natural gas 50% 48% Natural gas liquids 12% 11% ---------------------------------------------------------------------------- AVERAGE REALIZED PRICES (after commodity risk management) Crude oil (per barrel) $ 73.26 $ 83.88 (13) Heavy oil (per barrel) $ 55.47 $ 100.34 (45) Natural gas (per mcf) $ 4.78 $ 9.40 (49) Natural gas liquids (per barrel) $ 36.68 $ 92.25 (60) Average realized price per boe $ 44.74 $ 73.21 (39) ---------------------------------------------------------------------------- Six Months ended June 30 (thousands, except per unit amounts) 2009 2008 % Change ---------------------------------------------------------------------------- STATEMENT OF INCOME (LOSS) Oil and gas sales $ 658,607 $ 1,008,229 (35) Net income (loss) $ (43,960) $ (175,233) 75 Net income (loss) per trust unit $ (0.17) $ (0.71) 76 ---------------------------------------------------------------------------- CASH FLOWS Cash flows from operating activities $ 238,502 $ 484,112 (51) Cash flows from operating activities per trust unit $ 0.93 $ 1.95 (52) Distributions declared $ 154,738 $ 335,393 (54) Distributions declared per trust unit $ 0.60 $ 1.350 (56) Ratio of distributions declared over cash flows from operating activities 65% 69% (6) Capital expenditures $ 117,189 $ 176,594 (34) Capital expenditures per trust unit $ 0.46 $ 0.71 (35) Weighted average number of trust units outstanding 257,352 247,873 4 ---------------------------------------------------------------------------- BALANCE SHEET Working capital deficiency $(191,223)(1) $ (460,191) (58) Property, plant and equipment $4,068,356 $ 4,199,258 (3) Long term debt $1,388,158 $ 1,243,674 12 Trust unitholders' equity $2,487,501 $ 2,284,095 9 Trust unitholders' equity per trust unit $ 9.63 $ 9.17 5 Currency (U.S.$/Cdn$) (closing rate at period end) 0.8598 0.9990 Number of trust units outstanding at period end 258,419 248,993 4 ---------------------------------------------------------------------------- AVERAGE DAILY PRODUCTION Crude oil (barrels) 23,250 25,077 (7) Heavy oil (barrels) 7,748 7,991 (3) Natural gas (mcf) 241,949 237,618 2 Natural gas liquids (barrels) 9,910 9,131 9 Total production (boe) 81,233 81,803 (1) TOTAL PRODUCTION (mboe) 14,703 14,888 (1) ---------------------------------------------------------------------------- PRODUCTION PROFILE Crude oil 29% 31% Heavy oil 10% 10% Natural gas 50% 48% Natural gas liquids 11% 11% ---------------------------------------------------------------------------- AVERAGE REALIZED PRICES (after commodity risk management) Crude oil (per barrel) $ 69.68 $ 81.63 (15) Heavy oil (per barrel) $ 45.05 $ 82.13 (45) Natural gas (per mcf) $ 5.37 $ 8.55 (37) Natural gas liquids (per barrel) $ 36.16 $ 78.86 (54) Average realized price per boe $ 44.66 $ 66.68 (33) ---------------------------------------------------------------------------- (1) Includes $174.1 million current portion of long term debt. Trust Unit Trading Information Three Months ended Six Months ended (thousands, except per June 30 June 30 trust unit amounts) 2009 2008 2009 2008 TRUST UNIT TRADING PGH (NYSE) High $ 9.00 U.S. $ 21.90 U.S. $ 10.11 U.S. $ 21.90 U.S. Low $ 5.30 U.S. $ 18.86 U.S. $ 4.51 U.S. $ 13.67 U.S. Close $ 7.90 U.S. $ 20.11 U.S. $ 7.90 U.S. $ 20.11 U.S. Value $205,813 U.S. $392,743 U.S. $401,655 U.S. $650,299 U.S. Volume 27,305 19,425 55,843 33,718 PGF.UN (TSX) High $ 9.81 $ 21.56 $ 12.33 $ 21.56 Low $ 6.71 $ 19.17 $ 5.84 $ 14.16 Close $ 9.18 $ 20.50 $ 9.18 $ 20.50 Value $233,826 $569,706 $486,439 $1,127,595 Volume 26,934 28,004 57,499 58,759 /T/ The following discussion of financial results should be read in conjunction with the unaudited consolidated Financial Statements for six months ended June 30, 2009 of Pengrowth Energy Trust and is based on information available to August 6, 2009. Frequently Recurring Terms For the purposes of this discussion, we use certain frequently recurring terms as follows: the "Trust" refers to Pengrowth Energy Trust, the "Corporation" refers to Pengrowth Corporation, "Pengrowth" refers to the Trust and its subsidiaries and the Corporation on a consolidated basis and the "Manager" refers to Pengrowth Management Limited. Pengrowth uses the following frequently recurring industry terms in this discussion: "bbls" refers to barrels, "boe" refers to barrels of oil equivalent, "mboe" refers to a thousand barrels of oil equivalent, "mcf" refers to thousand cubic feet, "gj" refers to gigajoule and "mmbtu" refers to million British thermal units. Advisory Regarding Forward-Looking Statements This discussion contains forward-looking statements within the meaning of securities laws, including the "safe harbour" provisions of Canadian securities legislation and the United States Private Securities Litigation Reform Act of 1995. Forward-looking information is often, but not always, identified by the use of words such as "anticipate", "believe", "expect", "plan", "intend", "forecast", "target", "project", "guidance" "may", "will", "should", "could", "estimate", "predict" or similar words suggesting future outcomes or language suggesting an outlook. Forward-looking statements in this discussion include, but are not limited to, statements with respect to: reserves, 2009 production, production additions from Pengrowth's 2009 development program, royalty obligations, 2009 operating expenses, future income taxes, goodwill, asset retirement obligations, taxability of distributions, remediation and abandonment expenses, capital expenditures, general and administration expenses, and proceeds from the disposal of properties. Statements relating to "reserves" are forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the reserves described exist in the quantities predicted or estimated and can profitably be produced in the future. Forward-looking statements and information are based on Pengrowth's current beliefs as well as assumptions made by, and information currently available to, Pengrowth concerning anticipated financial performance, business prospects, strategies, regulatory developments, future oil and natural gas commodity prices and differentials between light, medium and heavy oil prices, future oil and natural gas production levels, future exchange rates, the proceeds of anticipated divestitures, the amount of future cash distributions paid by Pengrowth, the cost of expanding our property holdings, our ability to obtain equipment in a timely manner to carry out development activities, our ability to market our oil and natural gas successfully to current and new customers, the impact of increasing competition, our ability to obtain financing on acceptable terms and our ability to add production and reserves through our development and exploitation activities. Although management considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations and anticipations, estimates and intentions expressed in such forward-looking statements. These factors include, but are not limited to: the volatility of oil and gas prices; production and development costs and capital expenditures; the imprecision of reserve estimates and estimates of recoverable quantities of oil, natural gas and liquids; Pengrowth's ability to replace and expand oil and gas reserves; environmental claims and liabilities; incorrect assessments of value when making acquisitions; increases in debt service charges; the loss of key personnel; the marketability of production; defaults by third party operators; unforeseen title defects; fluctuations in foreign currency and exchange rates; inadequate insurance coverage; compliance with environmental laws and regulations; changes in tax and royalty laws; the failure to qualify as a mutual fund trust; and Pengrowth's ability to access external sources of debt and equity capital. Further information regarding these factors may be found under the heading "Business Risks" herein and under "Risk Factors" in Pengrowth's most recent Annual Information Form (AIF), and in Pengrowth's most recent consolidated financial statements, management information circular, quarterly reports, material change reports and news releases. Copies of the Trust's Canadian public filings are available on SEDAR at www.sedar.com. The Trust's U.S. public filings, including the Trust's most recent annual report form 40-F as supplemented by its filings on form 6-K, are available at www.sec.gov. Pengrowth cautions that the foregoing list of factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Pengrowth, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. Furthermore, the forward-looking statements contained in this discussion are made as of the date of this discussion and Pengrowth does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, except as required by law. The forward-looking statements in this document are provided for the limited purpose of enabling current and potential investors to evaluate an investment in Pengrowth. Readers are cautioned that such statements may not be appropriate, and should not be used for other purposes. The forward-looking statements contained in this discussion are expressly qualified by this cautionary statement. Critical Accounting Estimates The financial statements are prepared in accordance with Canadian Generally Accepted Accounting Principles (GAAP). Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period ended. The amounts recorded for depletion, depreciation and amortization of injectants, the provision for asset retirement obligations, unit based compensation, goodwill and future taxes are based on estimates. The ceiling test calculation is based on estimates of proved reserves, production rates, oil and natural gas prices, future costs and other relevant assumptions. The amounts recorded for the fair value of risk management contracts and the unrealized gains or losses on the change in fair value are based on estimates. These estimates can change significantly from period to period. As required by National Instrument 51-101 (NI 51-101) Standards of Disclosure for Oil and Gas Activities, Pengrowth uses independent qualified reserve evaluators in the preparation of the annual reserve evaluations. By their nature, these estimates are subject to measurement uncertainty and changes in these estimates may impact the consolidated financial statements of future periods. The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended. Certain of these estimates may change from period to period resulting in a material impact on Pengrowth's results of operations, financial position, and change in financial position. Non-GAAP Financial Measures This discussion refers to certain financial measures that are not determined in accordance with GAAP in Canada or the United States. These measures do not have standardized meanings and may not be comparable to similar measures presented by other trusts or corporations. Measures such as operating netbacks do not have standardized meanings prescribed by GAAP. Distributions can be compared to cash flow from operating activities in order to determine the amount, if any, of distributions financed through debt or short term borrowing. The current level of capital expenditures funded through retained cash, as compared to debt or equity, can also be determined when it is compared to the difference in cash flow from operating activities and distributions paid in the financing section of the Statement of Cash Flows. Management monitors Pengrowth's capital structure using non-GAAP financial metrics. The two metrics are Total Debt to the trailing twelve months Earnings Before Interest, Taxes, Depletion, Depreciation, Amortization, Accretion, and other non-cash items (EBITDA) and Total Debt to Total Capitalization. Total Debt is the sum of working capital, long term debt and convertible debentures as shown on the balance sheet, and Total Capitalization is the sum of Total Debt and Unitholder's equity. Management believes that targeting prudent ratios of these measures are reasonable given the size of Pengrowth, its capital management objectives, growth strategy, uncertainty of oil and gas commodity prices and additional margin required from the debt covenants. If the ratio of Total Debt to trailing EBITDA reaches or exceeds certain levels, management would consider steps to reduce the ratio of Total Debt to trailing EBITDA. If the ratio of Total Debt to Total Capitalization reaches or exceeds certain levels, Pengrowth management would consider steps to improve the ratio while considering our debt financial covenant limits. Non-GAAP Operational Measures The reserves and production in this discussion refer to Company Interest reserves or production that is Pengrowth's working interest share of production or reserves prior to the deduction of royalties plus the interest in production or reserves at the wellhead. Company interest is more fully described in Pengrowth's AIF. When converting natural gas to equivalent barrels of oil within this discussion, Pengrowth uses the industry standard of six thousand cubic feet to one barrel of oil equivalent. Barrels of oil equivalent may be misleading, particularly if used in isolation; a conversion ratio of six mcf of natural gas to one boe is based on an energy equivalency conversion primarily and does not represent a value equivalency at the wellhead. Production volumes, revenues and reserves are reported on a company interest gross basis (before royalties) in accordance with Canadian practice. Currency All amounts are stated in Canadian dollars unless otherwise specified. OVERVIEW Pengrowth generated cash flow from operating activities of $144.1 million during the second quarter of 2009, a 53 percent increase from the first quarter of 2009. Contributing to the increase were higher production volumes, higher realized prices for oil and natural gas liquids (NGL), lower operating expenses and a reduction in non-cash operating working capital. Lower commodity prices in the current year was the major contributor to a 51 percent decrease in operating cash flow and a 33 percent decrease in the operating netback comparing the first half of 2009 to the same period of 2008. Similarly, the 46 percent decrease in operating cash flows from the second quarter of 2008 to the second quarter of 2009 was primarily due to commodity prices retreating from 2008's record high oil prices and very strong natural gas prices. /T/ Three months ended Six months ended ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, Mar 31, June 30, June 30, June 30, 2009 2009 2008 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Production (boe/d) 82,171 80,284 80,895 81,233 81,803 Netback ($/boe)(1) 26.28 23.87 42.15 25.10 37.84 Cash flows from operating activities ($000's) 144,116 94,386 267,874 238,502 484,112 Net income (loss) ($000's) 10,272 (54,232)(118,650) (43,960)(175,233) Included in net income: Unrealized loss on commodity risk management ($000's) (115,400) (12,616)(352,628)(128,016)(518,355) Unrealized foreign exchange gain (loss) on foreign denominated debt ($000's) 79,835 (39,160) 4,735 40,675 (20,420) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1) Prior period restated to conform to presentation in the current period. /T/ Comparing second quarter 2009 to the first quarter of 2009, Pengrowth recorded net income of $10.3 million compared to a net loss of $54.2 million in the first quarter of 2009 and a net loss of $118.7 million in the second quarter of 2008. Included in the net income (loss) are unrealized losses on mark-to-market commodity risk management contracts which result from the change in fair value of the contracts between periods. In the second quarter of 2009, an unrealized loss of $115.4 million before taxes ($82.5 million after tax) was recorded compared to an unrealized loss of $12.6 million before tax ($9.0 million after tax) in the first quarter of 2009 and an unrealized loss of $352.6 million before tax ($247.3 million after tax) in the second quarter of 2008. While the strengthening of the Canadian dollar relative to the U.S. dollar during the quarter had a negative impact on cash flow as lower revenue was received, the stronger dollar resulted in unrealized foreign exchange gains on foreign denominated debt of $79.8 million before tax ($79.8 million after tax) in the second quarter of 2009 compared to a loss of $39.2 million before tax ($39.2 million after tax) in the first quarter of 2009 and a gain of $4.7 million before tax ($4.1 million after tax) for the second quarter of 2008. During the first half of 2009, the net loss was approximately $44 million, a decrease of 75 percent compared to the first half of 2008.This decrease is primarily due to reduced unrealized commodity risk management losses in the current year, partly offset by lower price-driven revenue as discussed above. The commodity risk management activities, which are utilized to partially secure returns from significant acquisitions and provide a level of stability to the Trust's cash flow from operating activities, has from time to time limited the Trust's ability to fully realize higher commodity prices. The commodity risk management activity did offset a portion of the Trust's exposure to the reduced natural gas prices through the second quarter and first half of 2009. RESULTS OF OPERATIONS This discussion contains the results of Pengrowth Energy Trust and its subsidiaries. Production Average daily production increased approximately two percent in the second quarter of 2009 compared to the first quarter of 2009. Second quarter 2009 production volumes benefited from prior period volumes which are mainly from prior year acquisitions, reduced solvent injection at Judy Creek, two minor acquisitions in the first quarter and results from development activity. Offsetting the production increases were scheduled and unscheduled maintenance shutdowns at Dunvegan and SOEP, respectively. In comparison to the second quarter of 2008, average daily production increased two percent as a result of the items noted above and the Accrete Energy Inc ("Accrete") acquisition completed September 30, 2008, partly offset by operational issues at SOEP. Daily production in the first half of 2009 decreased slightly compared to the same period of 2008 mainly due to the previously mentioned operational issues at SOEP, weather related issues experienced early in 2009 and natural decline, partly offset by the favorable items noted above. At this time, Pengrowth is raising its 2009 full year average production guidance from 76,000 and 78,000 boe per day to between 78,000 and 79,500 boe per day. This estimate excludes the impact from any potential future acquisitions and dispositions. /T/ Daily Production Three months ended ---------------------------------------------------------------------------- June 30, % of Mar 31, % of June 30, % of 2009 total 2009 total 2008 total ---------------------------------------------------------------------------- Light crude oil(bbls) 23,078 28 23,424 29 25,052 31 Heavy oil(bbls) 7,822 10 7,672 10 8,242 10 Natural gas(mcfs) 247,604 50 236,232 49 234,028 48 Natural gas liquids(bbls) 10,004 12 9,815 12 8,596 11 ---------------------------------------------------------------------------- Total boe per day 82,171 80,284 80,895 ---------------------------------------------------------------------------- Six months ended ---------------------------------------------------------------------------- June 30, % of June 30, % of 2009 total 2008 total ---------------------------------------------------------------------------- Light crude oil(bbls) 23,250 29 25,077 31 Heavy oil(bbls) 7,748 10 7,991 10 Natural gas(mcfs) 241,949 50 237,618 48 Natural gas liquids(bbls) 9,910 11 9,131 11 ---------------------------------------------------------------------------- Total boe per day 81,233 81,803 ---------------------------------------------------------------------------- /T/ Light crude oil production volumes decreased approximately one percent in the second quarter of 2009 compared to the first quarter of 2009 primarily a result of turnaround activity at Nipisi and natural declines. Production volumes decreased approximately eight percent comparing the second quarter of 2009 to the same period of 2008 and approximately seven percent for the first half of 2009 compared to the same period of 2008. The decreases are primarily attributable to the previously mentioned turnaround work, first quarter operational issues at Judy Creek and natural declines. Heavy oil production increased approximately two percent compared to the first quarter of 2009. The increase in the second quarter was a result of the completion of downhole repair work at Tangleflags. The decrease in production comparing the second quarter of 2009 and first half of 2009 to the same periods of 2008 is attributable to maintenance activities at Tangleflags and natural declines offset by strong performance of the East Bodo polymer flood pilot. Natural gas production increased five percent from the first quarter of 2009. The increase in the second quarter is attributable to prior period volumes from previous acquisitions (approximately 1,000 boe per day) being recorded in the current quarter. Other factors contributing to the increase in the second quarter include improved uptime at Quirk Creek, additional volumes as a result of the gas development program and the production from properties purchased in the first quarter. Partially offsetting the increases were operational issues at SOEP, turnaround activities at Dunvegan and natural declines. Production volumes increased six percent comparing the second quarter of 2009 to the same period of 2008 and approximately two percent for the first half of 2009 compared to the same period of 2008. These increases are a result of the prior period volumes recorded in the current quarter, additional volumes from the gas development program, particularly at Carson Creek and Monogram, volumes from the minor acquisitions in the first quarter, the Accrete acquisition and uptime at Olds in the current period as the maintenance shutdown in 2008 was not repeated in the current year. These increases to production were partially offset by the previously mentioned operational issues at SOEP, current year turnaround activity and natural declines. NGL production increased two percent in the second quarter of 2009 compared to the first quarter of 2009 primarily due to the condensate lift at SOEP compared to the absence of a condensate lift in the first quarter of 2009 and prior period volumes being booked at Harmattan for ethane recoveries (approximately 500 bbls per day average for the second quarter). Second quarter 2009 production increased approximately 16 percent compared to second quarter 2008 and nine percent in the first six months of 2009 compared to the same period of 2008. These increases are attributable to the prior period ethane recoveries at Harmattan and higher sales at Judy Creek as a result of lower solvent injection in the second quarter of 2009, partially offset by decreased number of condensate lifts at SOEP in the current period and natural decline. Pricing and Commodity Risk Management Pengrowth's realizations are influenced by the benchmark prices; realized gains from commodity risk management activities have partially muted the effects of lower natural gas prices. As part of its risk management strategy, Pengrowth uses forward price swaps to manage its exposure to commodity price fluctuations to provide a measure of stability to monthly cash distributions and to partially secure returns on significant new acquisitions. As of June 30, 2009, Pengrowth has crude oil contracts for the remainder of 2009, 2010 and 2011 for 15,500 bbls per day, 12,500 bbls per day and 500 bbls per day respectively. Also as of June 30, 2009, Pengrowth has natural gas contracts for the remainder of 2009 and 2010 for approximately 75,000 mcf per day and approximately 16,600 mcf per day, respectively. Each Cdn $1 per barrel change in future oil prices would result in approximately Cdn $7.6 million pre-tax change in the value of the crude contracts. Similarly, each Cdn $0.25 per mcf change in future natural gas prices would result in approximately Cdn $4.9 million pre-tax change in the value of the natural gas contracts. The changes in the fair value of the forward contracts directly affects reported net income as the unrealized amounts recorded in the income statement during the period. The effect on cash flows will be recognized separately only upon realization of the contracts, which could vary significantly from the unrealized amount recorded due to timing and prices when each contract is settled. However, if each contract were to settle at the contract price in effect at June 30, 2009, future revenue and cash flow would be increased by the $36.7 million unrealized commodity risk management asset that has been recorded to June 30, 2009. The $36.7 million asset is composed of an asset of $46.3 million relating to contracts expiring in 2009 and a liability of $9.6 million relating to contracts expiring in 2010 and 2011. Pengrowth has fixed the Canadian dollar exchange rate at the same time that it swaps any U.S. dollar denominated commodity in order to protect against changes in the foreign exchange rate. Pengrowth has not designated any outstanding commodity contracts as hedges for accounting purposes and therefore records these contracts on the balance sheet at their fair value and recognize changes in fair value on the income statement as unrealized commodity risk management gains or losses. There will continue to be volatility in earnings to the extent that the fair value of commodity contracts fluctuate however, these non-cash amounts do not impact Pengrowth's operating cash flows. Realized commodity risk management gains or losses are recorded in oil and gas sales on the income statement and impacts cash flows at that time. /T/ Average Realized Prices Three months ended Six months ended ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- June 30, Mar 31, June 30, June 30, June 30, (Cdn$) 2009 2009 2008 2009 2008 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Light crude oil (per bbl) 64.50 48.06 119.96 56.25 106.84 after realized commodity risk management 73.26 66.12 83.88 69.68 81.63 Heavy oil (per bbl) 55.47 34.31 100.34 45.05 82.13 Natural gas (per mcf) 3.51 5.31 10.05 4.38 8.77 after realized commodity risk management 4.78 6.00 9.40 5.37 8.55 Natural gas liquids (per bbl) 36.68 35.62 92.25 36.16 78.86 ---------------------------------------------------------------------------- Total per boe 38.44 37.27 86.26 37.87 75.04 after realized commodity risk management 44.74 44.57 73.21 44.66 66.68 ---------------------------------------------------------------------------- Benchmark prices WTI oil (U.S.$ per bbl) 59.62 43.08 123.98 51.35 110.94 AECO spot gas (Cdn$ per gj) 3.47 5.34 8.86 4.40 7.81 NYMEX gas (U.S.$ per mmbtu) 3.50 4.89 10.93 4.19 9.48 Currency (U.S.$/Cdn$) 0.86 0.80 0.99 0.83 0.99 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- /T/ Lower commodity prices through the first half of 2009 compared to the same period of 2008 had the most significant impact to earnings and operating cash flow. /T/ Commodity Risk Management Gains (Losses) Three months ended Six months ended ---------------------------------------------------------------------------- June 30, Mar 31, June 30, June 30, June 30, (Realized) 2009 2009 2008 2009 2008 ---------------------------------------------------------------------------- Light crude oil ($ millions) 18.4 38.1 (82.2) 56.5 (115.0) Light crude oil ($ per bbl) 8.76 18.06 (36.08) 13.43 (25.21) Natural gas ($ millions) 28.7 14.7 (13.8) 43.4 (9.4) Natural gas ($ per mcf) 1.27 0.69 (0.65) 0.99 (0.22) ---------------------------------------------------------------------------- Combined ($ millions) 47.1 52.8 (96.0) 99.9 (124.4) Combined ($ per boe) 6.30 7.30 (13.06) 6.79 (8.36) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Unrealized ---------------------------------------------------------------------------- Total unrealized risk management assets (liabilities) at period end ($ millions) 36.7 152.1 (603.6) 36.7 (603.6) Less: Unrealized risk management assets (liabilities) at beginning of period ($ millions) 152.1 164.7 (250.9) 164.7 (85.2) ---------------------------------------------------------------------------- Unrealized (loss) gain on risk management contracts (115.4) (12.6) (352.6) (128.0) (518.4) ---------------------------------------------------------------------------- /T/ During the first and second quarters of 2009, natural gas prices continued to decline while oil prices increased, however both commodity prices remained lower than prices established in the commodity risk management contracts resulting in realized commodity risk management gains. These gains are included in oil and gas sales in the income statement. As the commodity risk management contracts settle, the effect on cash flows will vary due to timing, prices and the volume under contract. This variance is evidenced by comparing the commodity risk management gains positively impacting cash flow in the second quarter of $47 million and through the first half of 2009 of $100 million, while the second quarter and first half of 2008 experienced losses of $96 million and $124 million respectively, which negatively impacted cash flow. /T/ Oil and Gas Sales - Contribution Analysis The following table includes the impact of realized commodity risk management activity. ($ millions) Three months ended ---------------------------------------------------------------------------- June 30, % of Mar 31, % of June 30, % of Sales Revenue 2009 total 2009 total 2008 total ---------------------------------------------------------------------------- Light crude oil 153.8 46 139.4 43 191.2 35 Natural gas 107.8 32 127.5 40 200.3 36 Natural gas liquids 33.4 10 31.5 10 72.2 13 Heavy oil 39.5 12 23.7 7 75.3 14 Brokered sales/sulphur 1.1 - 0.9 - 11.6 2 ---------------------------------------------------------------------------- Total oil and gas sales 335.6 323.0 550.6 ---------------------------------------------------------------------------- ($ millions) Six months ended ---------------------------------------------------------------------------- June 30, % of June 30, % of Sales Revenue 2009 total 2008 total ---------------------------------------------------------------------------- Light cru