Stable Distributions in 2002
Acquisition Market for Oil and Gas Assets
Despite weak commodity prices early in 2002, it was a seller’s Managing our business in a volatile price environment is market for oil and gas assets throughout the year. Not only challenging, particularly when providing stable, predictable were prices higher than the Trust was prepared to pay, distributions is an objective of the Trust. The Trust reviews many of the assets available and acquired by others were, distributions on a quarterly basis and may adjust distributions in our view, of relatively low quality and/or had a short reserve to reflect current commodity prices. Through our price risk life index (RLI). ARC’s strategy did not waiver from that which management program (hedging) and the flexibility built into has resulted in superior returns since inception for our our distribution policy, the Trust maintained cash distributions unitholders; we opportunistically acquire high quality at $0.13 per unit for revenue earned each month during properties that complement our existing asset base or will add 2002. This was achieved while withholding two per cent of our a new core area to support future growth. We completed cash flow to fund future abandonment liabilities and 16 per cent $119 million of high netback acquisitions net of dispositions to partially fund our capital program. In 2002, approximately 55 at an average cost of $9.18/boe for per cent of the Trust’s oil and natural established reserves with an average gas liquids production was hedged at THE TRUST HAS RLI of 10 years. The majority of the an average price of US$24.15/bbl; 40 assets acquired were in existing core per cent of our natural gas production DELIVERED AMONG areas such as Ante Creek and was hedged at an average price of Medicine River. ARC’s total corporate $4.11/mcf. THE MOST STABLE RLI at December 31, 2002 increased By the end of January 2003, ARC AND CONSISTENT slightly to 11.8 years. had hedged approximately 50 per ARC’s 2002 acquisitions compared cent of its total 2003 oil production DISTRIBUTIONS IN favorably to the royalty trust sector at an average price of US$26.98/bbl. THE SECTOR. where transactions totaling approxiThe highest quarterly hedge price is mately $3.0 billion at an average US$27.77/bbl in the first quarter and reported cost of $9.76/boe for the lowest quarterly hedge price is established reserves and an average RLI of 7.9 years were US$26.20 in the fourth quarter, based on current commodity completed. While ARC maintained its RLI, many of our sector prices. On the gas side, our strategy is to maintain maximum peers completed acquisitions that resulted in reductions to exposure to market prices during the winter months when we their RLIs. Complementing our acquisition program was an could experience price spikes due to low inventory levels and $88.3 million capital expenditure program that focused on the lock in attractive prices during the spring, summer and fall development of our existing asset base. In total, we replaced when we typically see price weakness. For the first quarter, 145 per cent of our production at an average cost of ARC has a $4.22/mcf fixed price contract on four per cent of $9.27/boe for established reserves. We expect this to once its gas production and has not limited the upside on the again place the Trust in the top quartile for finding, remainder. For the second through the fourth quarters of 2003, development and acquisition costs in both the royalty trust ARC has hedged approximately 38 per cent of natural gas sector and the overall oil and gas industry. production at an average price of $5.44/mcf. Cumulative distributions through to the end of 2002 (including the December 2002 distribution paid in January 2003) totaled $10.64 per unit, which represents 106 per cent of our July 1996 initial public offering price of $10.00 per unit. The total return to unitholders for 2002 was 11.7 per cent and total returns since inception have averaged 13.4 per cent per year. Other trusts may have delivered higher total returns than ARC during 2002, but few have performed better over the longterm. We believe long-term, consistent and superior returns are the true measure of success in the trust sector and in this regard we have few equals. Throughout every phase of commodity price cycles, the Trust has delivered among the most stable and consistent distributions in the sector.
Looking forward to 2003, the strong commodity price environment experienced during the first quarter should result in a continued seller’s market for assets. With strong cash flow, there may be fewer dispositions by companies needing to improve the strength of their balance sheet. The continued growth of the royalty trust sector and the declining average RLI will result in strong competition for assets as the sector tries to maintain itself. We will continue with our strategy to seek high quality assets outside of the broad competitive acquisition market, including non-traditional assets, to complement our existing asset base.