M ESSAG E TO U N ITHOLDE RS
CO2 flood and was acquired with that future potential as a primary consideration. It is important to note that ARC did not include any value for CO2 upside potential in the acquisition economics for these properties. The acquisition metrics were based on the production currently associated with these fields and any future upside associated with enhanced recovery techniques will be a direct uplift to ARC. The implementation of a CO2 flood and an associated increase in production from Pembina and Redwater will take time – perhaps three to five years or longer; however, ARC has always been a long-term thinker regarding its assets and these projects are expected to play a significant role in our future.
Risk Management We have always believed that protecting the stability of our distributions is very important. ARC began executing a new hedging strategy in late 2004 that primarily focused on the purchase of puts to minimize ARC’s downside on a portion of its production, while providing full participation in price increases. Through this strategy, ARC’s hedging cost will be no higher than the premium paid for these transactions, which is known when it enters into the contracts. ARC believes that this strategy is like buying insurance – it protects a portion of ARC’s production from any unexpected downside that could materialize over the course of a year due to world events beyond its control, but leaves that production open to the full upside in the event of material upward price spikes. Though ARC did collapse most of its fixed hedge contracts in late 2004, it still had a few contracts in place that were capped transactions at a fixed price considerably below 2005 prices and as a result ARC incurred cash hedging losses of $87.6 million. These large losses are behind ARC as it carries on with its current hedging strategy, which allows ARC to participate in price upside on its production. The one exception to this strategy is a three-way collar transaction which will remain in effect through 2009 on 5,000 boe per day of production associated with the NPCU and Redwater 6
acquisitions that limits ARC’s full participation in price increases to US$90 but provides downside protection at US$55.00. The average cost of this price protection over the life of the contract is US$0.91 per barrel. This was done to protect the projected returns from this acquisition as the acquired production carries materially higher operating costs than our base production and we believe that it is important to protect the price and hence our returns over the next four years.
In Memoriam I acknowledge with much regret and sadness that ARC lost an important member of its Board of Directors in 2005. Mr. John Beddome passed away on May 10, 2005. He was a member of ARC’s Board since inception and contributed his wealth of knowledge and experience in the oil and gas industry to ARC and the community at large. His contribution to ARC’s Board will be missed.
New Board Member ARC is pleased to have added Mr. Herb Pinder to its Board of Directors effective January 1, 2006. Mr. Pinder brings an extensive business background to ARC covering several industries and a broad knowledge of corporate governance gained through his experience as a director on various public company boards over the last 20 years. Mr. Pinder holds a Bachelor of Arts degree from the University of Saskatchewan, an LL.B from the University of Manitoba and an MBA from Harvard University Graduate School of Business. Currently, Mr. Pinder is the President of the Goal Group, a private equity management firm located in Saskatoon, Saskatchewan. I know Mr. Pinder will make a strong contribution to ARC and I look forward to working closely with him in the future.