We are an open-ended, unincorporated investment trust created under the laws of the Province of Alberta pursuant to the Trust Indenture. Our head and principal office is located at Suite 2200, 205 - 5th Avenue S.W., Calgary, Alberta, T2P 2V7. We were formed on July 24, 2003 and commenced operations on September 2, 2003 as a result of the completion of a plan of arrangement under the Business Corporations Act (Alberta) on September 2, 2003 involving us, Baytex, Crew, Baytex Acquisition Corp., Baytex ExchangeCo, Baytex Resources Ltd. and Baytex Exploration Ltd. Pursuant to the plan of arrangement, former holders of common shares of Baytex received common shares of Crew and Trust Units, or Exchangeable Shares or a combination thereof, in accordance with the elections made by such shareholders, and Baytex became a subsidiary of us.
We were established to, among other things:
·invest in shares of Baytex and acquire the common shares of Baytex and the Notes pursuant to the plan of arrangement which was completed on September 2, 2003;
·acquire the NPI under the NPI Agreement;
·acquire or invest in other securities of Baytex and in the securities of any other entity including, without limitation, bodies corporate, partnerships or trusts;
·dispose of any part of the property of the Trust, including, without limitation, any securities of Baytex;
·temporarily hold cash and investments for the purposes of paying the expenses and the liabilities of the Trust, making other permitted investments under the Trust Indenture, pay amounts payable by the Trust in connection with the redemption of any Trust Units, and make distributions to Unitholders; and
·pay costs, fees and expenses associated with the foregoing purposes or incidental thereto.
We are prohibited from acquiring any investment which (a) would result in the cost amount to us of all "foreign property" (as defined in the Tax Act) which is held by us to exceed the amount prescribed by applicable tax laws or (b) would result in us not being considered either a "unit trust" or a "mutual fund trust" for purposes of the Tax Act.
Our principal undertaking is to issue Trust Units and other securities and to acquire and hold net profits interests, royalties and other interests. Baytex and our operating subsidiaries carry on the business of acquiring and holding interests in oil and natural gas properties and assets related thereto. Cash flow from these properties is flowed from our operating subsidiaries to us by way of interest payments and principal repayments on the Notes and through NPI payments.
The Trustee may declare payable to Unitholders all or any part of our income. Currently the only income we receive is from the interest and principal payments received on the Notes and NPI payments. We make monthly cash distributions to Unitholders on our income, after expenses, if any, and any cash redemptions of Trust Units. Cash distributions are made on the 15th day (or if such date is not a business day, on the next business day) following the end of each calendar month to Unitholders of record on or about the last business day of each such calendar month. Our current distribution practice targets the use of between 50 to 60 percent of our available cash flow from operations for capital expenditures to fund both exploration and development expenditures and minor property acquisitions, but excludes major acquisitions.
Pursuant to various agreements with Baytex's lenders, we are restricted from making distributions to Unitholders where the distribution would or could have a material adverse effect on us or on our or our subsidiaries' ability to fulfill their obligations under Baytex's credit facilities or upon a material borrowing base shortfall or default.
Baytex's senior subordinated notes also contain certain limitations on maximum cumulative distributions. Restricted payments include the declaration or payment of any dividend or distribution to us and the payment of interest or principal on subordinated debt owed to us. Baytex is restricted from making any restricted payments, including distributions to us, if a default or event of default under the note indenture governing the senior subordinated notes has occurred and is continuing. If no such default or event of default has occurred and is continuing, Baytex may make a distribution to us provided at the time either (A) (i) its ratio of consolidated debt to consolidated cash flow from operations does not exceed 3 to 1, (ii) its fixed charge coverage ratio for the preceding four fiscal quarters is greater than 2.5 to 1 and (iii) the aggregate of all restricted payments declared or made after July 9, 2003 does not exceed the sum of 80 percent of the consolidated cash flow from operations accrued on a cumulative basis since July 9, 2003 plus the net cash proceeds received by us from the issuance of deeply subordinated intercompany debt or the receipt of capital contributions from the Trust plus net proceeds received by Baytex from the issuance of and upon conversion of debt and other securities or (B) the aggregate amount of all restricted payments declared or made after July 9, 2003 does not exceed the sum of permitted restricted payments not previously made plus US$30,000,000.
Baytex Energy Ltd.
Baytex Energy Ltd. is amalgamated under the Business Corporations Act (Alberta) and is actively engaged in the business of oil and natural gas exploitation, development, acquisition and production in Canada. We are the sole common shareholder of Baytex.
The head office of Baytex is located at Suite 2200, 205 – 5th Avenue S.W., Calgary, Alberta, T2P 2V7 and its registered office is located at Suite 1400, 350 – 7th Avenue S.W., Calgary, Alberta T2P 3N9.
We are a party to the NPI Agreement with Baytex pursuant to which we have the right to receive a NPI on petroleum and natural gas rights held by Baytex from time to time. Pursuant to the terms of the NPI Agreement, we are entitled to a payment from Baytex for each month equal to the amount by which 99 percent of the gross proceeds from the sale of production attributable to such property interests for such month exceed 99 percent of certain deductible costs for such period. Baytex is entitled to set off amounts reimbursable to it against NPI payments payable by Baytex. The term of the NPI Agreement is for so long as there are petroleum and natural gas rights to which the NPI applies.
History and Development
On September 2, 2003, we completed a plan of arrangement under the Business Corporations Act (Alberta) involving Baytex, Crew, Baytex Acquisition Corp., Baytex ExchangeCo, Baytex Resources Ltd., Baytex Exploration Ltd. and us pursuant to which former holders of common shares of Baytex received common shares of Crew and Trust Units or Exchangeable Shares, or a combination thereof, in accordance with the elections made by such shareholders, and Baytex became a subsidiary of us. Coincident with the plan of arrangement becoming effective, certain of Baytex's exploration assets were acquired by Crew, and the common shares of Crew were distributed to the former holders of Baytex common shares on the basis of one-third of a common share of Crew for each such share held.
On December 12, 2003, we completed a public offering of 6,500,000 Trust Units at a price of $10.00 per Trust Unit for gross proceeds of $65,000,000. The net proceeds of the offering were used to fund our ongoing capital expenditure and acquisition program.
On September 22, 2004, we completed the acquisition of a Calgary based private oil and gas company, for cash consideration of $109 million before adjustments. The acquisition was financed with Baytex's credit facilities and added approximately 3,000 boe/d of 65 percent gas weighted production. The assets acquired were located in two geographically focused areas of southern Alberta, Sedalia/Garden Plains and Turin/Parkland, and also included 110,000 net acres of undeveloped land. Production from this acquisition represented approximately 9.3 percent of our then existing production. Ninety-five percent of the production was from operated, high working interest properties with ownership and control of most key facilities and infrastructure within the operating areas. This acquisition added a significant inventory of drilling opportunities including low risk development and medium risk exploration to our light oil and natural gas portfolio. Opportunities also existed for re-entries, recompletions, tie-ins and workovers. Subsequent to the acquisition, the private company was amalgamated into Baytex.
On October 18, 2004, we implemented our DRIP which provides eligible Unitholders the advantage of accumulating additional Trust Units by reinvesting their cash distributions paid by us. The cash distributions are reinvested at our discretion, either by acquiring Trust Units issued from treasury at 95 percent of the "Average Market Price" (which is defined in the DRIP as the average trading price of the Trust Units on the Toronto Stock Exchange for the period commencing on the second business day after the distribution record date and ending on the second business day immediately prior to the distribution payment date, such period not to exceed 20 trading days) or by acquiring Trust Units at prevailing market rates. No commissions, service charges or brokerage fees are payable by participants in connection with Trust Units acquired under the DRIP. The DRIP is presently available to Canadian Unitholders only. Residents of the United States may not participate in the DRIP at this time.
On December 20, 2004, we completed a public offering of 3,600,000 Trust Units at a price of $12.80 per Trust Unit for gross proceeds of $46,080,000. The net proceeds of the offering were used to repay outstanding bank indebtedness.
On December 22, 2004, we completed the acquisition of certain strategic oil and natural gas interests in the West Stoddart area of northeast British Columbia for $90 million before adjustments. The assets acquired consisted of approximately 3,300 boe/d of primarily high netback liquids-rich natural gas production comprised of 10.0 MMcf/d of natural gas, 1,300 bbl/d of NGL and 330 bbl/d of light oil. Production from this acquisition represented approximately 9.6 percent of our then existing production. Production was mainly from three year-round access properties near Fort St. John, British Columbia (West Stoddart, North Cache and Cache Creek). The primary producing zones were the Doig, Halfway, Charlie Lake, Baldonnel and Cretaceous zones. The assets represented a new core area for us and were 100 percent operated with an average working interest of 91 percent. The acquisition also included an identified project inventory, including drilling, recompletions, fracture stimulation and well optimizations, and approximately 17,000 net acres of undeveloped land contiguous to the principal producing properties.
On June 6, 2005, we issued $100 million principal amount of Convertible Debentures for net proceeds of $95.8 million. The Convertible Debentures pay interest semi-annually and are convertible at the option of the holder at any time into fully paid Trust Units at a conversion price of $14.75 per Trust Unit. The Convertible Debentures mature on December 31, 2010 at which time they are due and payable. The net proceeds from the issue of the Convertible Debentures were used to reduce outstanding bank indebtedness.
On September 30, 2005, we completed the acquisition of certain heavy oil producing properties in the Celtic area in Saskatchewan for $69 million. The assets acquired consisted of 3,350 bbl/d of heavy oil (13º - 15º API) and 0.9 MMcf/d of natural gas. Production from this acquisition represented approximately 10 percent of our then existing production. The assets acquired also included approximately 7,500 net acres of undeveloped land. The Celtic properties are situated approximately 30 miles east of Lloydminster and are adjacent to our Tangleflags property. The expanded Celtic/Tangleflags operating region resulted in improved economies of scale and allowed for better control over costs. The acquisition included in excess of 100 opportunities for development drilling and recompletions for additional primary (cold) heavy oil production and natural gas production which added immediate low-cost development inventory. The acquisition also included 1,750 bbl/d of steam assisted gravity drainage ("SAGD") production. As part of this transaction, Baytex entered into a price-sharing arrangement and a net profits agreement for future SAGD development with the vendor with respect to the assets acquired.
On December 30, 2005, we sold the recently acquired SAGD assets in the Celtic area of Saskatchewan for $45.3 million. Production at that time from the SAGD assets was approximately 2,000 bbl/d of heavy oil.
During 2006, we did not complete any significant financings, acquisitions or dispositions.
On June 15, 2007, we completed a public offering of 7,000,000 subscription receipts (the "Sub Receipts") for gross proceeds of $149,450,000. Upon the June 26, 2007 closing of the property acquisition described below, the holders of the Sub Receipts received one Trust Unit in exchange for each Sub Receipt held. The net proceeds of this financing were used to partially fund the acquisition of properties at Pembina and Lindbergh described below.
On June 26, 2007, we completed the indirect acquisition of certain oil and gas producing properties in the Pembina and Lindbergh areas of Alberta for $238 million. These assets were producing approximately 4,500 boe/d of total production at the time of the acquisition. This production was comprised of 2,200 bbl/d of light oil and NGL and 8.0 MMcf/d of natural gas from the Pembina area, and 1,000 bbl/d of heavy oil from the Lindbergh area. The acquisition in the Pembina area allowed us to establish a new core area in the Nisku trend, offering greater exposure to high netback light oil and NGL targets. The assets included one of the strongest infrastructure positions in the area, which contributed to our high degree of operational control of the area, and 26,000 net acres of undeveloped land in the Pembina area. Lindbergh is a project that offers a large heavy oil resource in place that is amenable to primary (cold) production. Its shallow-depth and multiple zone character provide a low-cost source of recompletion and drilling inventory to maintain production rates. In addition to the primarily non-operated producing assets, we also acquired 11,000 net acres of 100% interest undeveloped land that may include opportunities for shallow natural gas development.
On June 4, 2008, we acquired all of the issued and outstanding shares of Burmis Energy Inc. ("Burmis") on the basis of 0.1525 of a Trust Unit for each Burmis common share. Approximately 6.38 million Trust Units were issued pursuant to this transaction, which was valued at approximately $180.5 million. Pursuant to this transaction, we acquired multi-zone, liquids-rich natural gas and light oil properties located in west central Alberta and approximately 110,300 net acres of undeveloped land. Production from the Burmis properties averaged 3,791 boe/d during the first quarter of 2008.
During the third quarter of 2008, we acquired a significant land position in a Bakken/Three Forks light oil resource play in the Williston Basin in northwest North Dakota from a private company. Upon making all deferred payments associated with the transaction, we will have acquired a 37.5% interest in 263,000 (98,600 net) acres, 94% of which are undeveloped. In addition, we acquired approximately 300 boe/d (95% oil) of production. The seller retained the remaining 62.5% interest in the project lands and production.
During the year ended December 31, 2008, we did not complete any acquisitions for which disclosure was required under Part 8 of National Instrument 51-102.
Natural gas and crude oil prices are volatile and subject to a number of external factors. Natural gas is a commodity primarily influenced by factors within North America. A tight supply-demand balance for natural gas causes significant elasticity in pricing, whereas higher than average storage levels tend to depress natural gas pricing. Drilling activity, weather, fuel switching and demand for electrical generation are all factors that affect the supply-demand balance. Changes to any of these or other factors create price volatility. Crude oil is influenced by the world economy, OPEC's ability to adjust supply to world demand and weather. For the first half of 2008, crude oil prices were kept high by political events causing disruptions in the supply of oil and concern over potential supply disruptions triggered by unrest in the Middle East and more recently has been impacted by weather and increased storage levels. Political events trigger large fluctuations in price levels. The Canadian/U.S. currency exchange rate also influences commodity prices received by Canadian producers as oil and natural gas production is ultimately priced in U.S. dollars. The Canadian dollar generally follows the trend in commodity prices. During 2007, the strengthening of the Canadian dollar somewhat mitigated the economic benefit of higher prices on Canadian oil and gas producers. However, in late 2008 the weakening of the Canadian dollar partially mitigated the effect of lower prices on Canadian oil and gas producers.
The impact on the oil and gas industry from commodity price volatility is significant. During period of high prices, producers generate sufficient cash flows to conduct active exploration programs without external capital. Increased commodity prices frequently translate into very busy periods for service suppliers triggering premium costs for their services. Purchasing land and properties similarly increase in price during these periods. During low commodity price periods, acquisition costs drop, as do internally generated funds to spend on exploration and development activities. With decreased demand, the prices charged by the various service suppliers also decline.
The efforts of energy trusts to replace annual production declines have been a factor resulting in high levels of competition for the acquisition of oil and natural gas properties and related assets. This increased competition has raised valuation parameters for corporate and asset acquisitions. Those trusts with opportunities to replace production economically through internal development drilling may be in a favourable position relative to those more exposed to replacing production through acquisitions.
Another trend currently affecting the oil and gas industry is the impact on capital markets caused by investor uncertainty in the North American economy. The capital market volatility in Canada has also been affected by uncertainties surrounding the economic impact that various environmental initiatives will have on the sector and, in more recent times, by the SIFT Rules.