Despite 1999 production revenue increases of 51% and cash flowincreases of 43%, Calgary-based Canadian 88 took a sharp hit to itsbottom line by a natural gas forward sales contract, which resultedin the company posting a loss of $6.5 million ($0.06 per share).The company had reported earnings of $1.8 million ($0.02 per share)in 1998.

Stating the obvious, Canadian 88 president and CEO Joe PritchettIII said Wednesday that “clearly, deliverability is a priority forour company.” He said the goal for his company this year will be tosell some non-core assets and punch up the bottom line with ainflux of cash until it gets through the problems created by thesales contract.

The company has a $65 million capital budget for 2000 andintends to fund the program through cash flow and divestment ofnon-core assets. Approximately 75% of the planned capital will bedirected toward low-risk exploitation and production optimizationtargets, with the balance spent on exploration projects. Pritchettpredicted that the company would be back on its feet, cash-flowwise, by October 2000.

“Our strategy will be toward risk management,” Pritchett said.”Risk management is going to become a very hot priority forCanadian 88. An undisciplined hedge can kill you.”

If the natural gas forward sales contract not been in place,Canadian 88 estimated that its cash flow would have beenapproximately $53 million ($0.50 per share), compared to thereported $31.8 million ($0.30).

At close of business Tuesday, Pritchett said that the companywas up $2.6 million, which will protect the company’s cash flow.But he was clearly disappointed that the forward sales contract hadimpacted Canadian 88’s current cash flow.

“Had this hedge not been on, as we speak it’s a $50 millionimpact on cash flow at current prices,” he said.

Asked if the oil and gas independent would ever use a forwardsales contract again, Pritchett responded that a “prudent hedgestrategy is prudent business.” He said that the company mightconsider forward sales contracts in the future, but that it willlook at “the value of the hedge.” He said the forward salescontract that hurt cash flow this year was not a prudent decision.

“Capital is a precious commodity,” Pritchett said. “We plan tolive through our current cash flow until we get through this hedgein October 2000.”

In 1999, production revenue increased 51% to $105 million,compared to $69.5 million in 1999, and cash flow from operationsincreased 43% to $31.8 million ($0.30) in 1999 compared to $22million ($0.23 per share) in 1998.

Pritchett only joined Canadian 88 a month ago. He had beenexecutive vice president of Houston’s Duke Energy Hydrocarbons LLC andjoined Canadian 88 in April when the two companies entered into anagreement whereby Duke Energy made a strategic investment in Canadian88. Under the alliance, Duke Energy assumed marketing of Canadian 88’snatural gas production and expects to optimize the value of Canadian88’s gathering and processing assets (see NGI, March 21).

Duke Energy acquired 25 million common shares of Canadian 88 ata price of $2 per share, and holds about 19% of the common stock ofthe company. As part of the agreement, Pritchett resigned his postas executive vice president at Duke Energy and joined Canadian 88as president and CEO.

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