MESSAGE TO SHAREHOLDERS
2012 was an exciting year for Delphi as the Company initiated its development of the East Bigstone Montney project and began the transition to a condensate-rich natural gas resource based growth platform, mitigating an ongoing challenging natural gas pricing environment.
Year in Review
During 2012, Delphi made significant progress in advancing its condensate-rich Montney play at East Bigstone. Since commissioning its 100 percent owned compression and dehydration facility in May 2012, the Company averaged approximately 1,200 boe/d (30 percent or 68 barrels per million cubic feet ("bbls/mmcf") NGL's) from the three Montney horizontal wells drilled during the year. Condensate represented 62 percent of the total NGL production. Subsequent to year end, Delphi has drilled an additional three Montney wells, two of which have already been completed and are now on production. Current production over the past 14 days from the five wells now on production has averaged approximately 3,850 boe/d (37 percent or 95 bbls/mmcf NGL's). The optimization of the Company's drilling and completions techniques resulting in significantly enhanced production performance will have a positive impact on the play economics and overall corporate performance.
In December 2012, Delphi also increased its exposure in its Bigstone Montney area with an industry farm-in agreement to earn up to a 75 percent working interest in 35 sections of Montney and Nordegg petroleum and natural gas ("PNG") rights. Upon full earning, the Company will grow its land position by nearly 60 percent from 41.7 net sections to approximately 66.2 net sections. The farm-in nearly doubles the East Bigstone low-risk development drilling inventory in the proven upper and middle Montney formations.
The total capital program in 2012 was $83.9 million with approximately 75 percent of the expenditures directed to the Montney development project at Bigstone drilling four gross (3.75 net) wells and constructing the required facility and major gathering system infrastructure. The Company directed approximately $24.3 million or 29 percent of its capital expenditures to new facility and pipeline construction. In total the Company drilled seven gross (6.5 net) wells, including one net well that was drilled in the fourth quarter of 2012 but not completed. This compares to 30 gross (23.8 net) wells drilled in 2011. Strategic non-core asset disposition proceeds of $34.7 million were utilized to partially fund the capital program resulting in net capital expenditures in 2012 of $49.2 million.
Production during the fourth quarter 2012 of 7,229 boe/d and full year 2012 production of 8,276 boe/d were negatively impacted by the property dispositions during the year. Disposition production volumes totalled approximately 667 boe/d (54 percent light oil).
Financial results in 2012 were also affected by lower commodity prices, particularly lower natural gas prices, with Canadian benchmark natural gas prices decreasing 34 percent to average $2.39 per million cubic feet in 2012. Funds from operations decreased 52 percent to $32.3 million for 2012 as a result of a seven percent decline in average production and a 27 percent reduction in the realized sales price per boe as compared to 2011.
Petroleum and natural gas reserve additions from the capital program increased the Company's reserve life index to 14.2 years. Total proved plus probable reserves increased in 2012 by seven percent to 43.0 million boe.
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