president's message

Enerplus had another highly successful year in 2003. For the second year in a row, we ranked first in our peer group on a three-year average total return. We accomplished many of our goals and, in fact, exceeded our production target. I am proud to report the following summary of our 2003 successes:

 

HIGHLIGHTS:

  • 55.4% total return for our unitholders;
  • Increased distributions by 30% to $4.32 per unit;
  • Achieved a record level of production of 69,414 BOE per day even after successfully selling $73.2 million of non-core properties;
  • Drilled 294 net wells with a 98% success rate;
  • Acquired 28.1 MMBOE of reserves at a cost of $8.02 per BOE;
  • Maintained one of the longest reserve life indices in the sector at 13.3 years on a proved plus probable basis under the new NI 51-101 guidance;
  • Completed the internalization of the management contract for an all-in cost of $55.1 million, or less than two times the management fees that would otherwise have been paid in 2003;
  • Placed US$54 million of debt with a 10-year average term at a rate of 5.46%;
  • Achieved a top quartile, three-year average FD&A cost of $8.54 per BOE, inclusive of future development costs.

In 2003, we spent $157.7 million on our drilling and facility enhancement activities. We continued to capitalize on our expertise and opportunities in the areas of shallow natural gas development and waterflood optimization. We added 2,150 BOE per day of shallow gas production and approximately 2,000 BOE per day from our oil waterflood projects, net to Enerplus, based on initial production rates. We were also successful in bringing on over 2,400 BOE per day of production in the Foothills area of the Western Canadian Sedimentary Basin (“WCSB”). Through our joint venture relationships, we have gained access to a broader spectrum of technical skills and opportunities that have enhanced our success in the Foothills area.

 

FROM LEFT TO RIGHT Heather J. Culbert Senior Vice President, Corporate Services Garry A.Tanner Senior Vice President & Chief Operating Officer Eric P. Tremblay Senior Vice President, Capital Markets Robert J. Waters Senior Vice President & Chief Financial Officer Jo-Anne M. Caza Vice President, Investor Relations

 

In addition to our development activities, we spent $225.3 million in 2003 on acquisitions, adding to core properties, most notably for our acquisitions of PCC Energy Inc. and PCC Energy Corp. (collectively “PCC”). The acquisition of PCC increased our portfolio of natural gas properties including an interest in the 300 MMcf/day Hanlan Robb gas plant. Our total acquisitions together with our reserve revisions represented a replacement of 99% of our 2003 production at a cost of $11.60 per BOE on a proved plus probable basis. We also sold $73.2 million of non-core properties, further improving our portfolio of oil and natural gas assets.

In evaluating our 2003 reserves, our independent evaluators have applied the new more stringent criteria contained within National Instrument 51-101 (“NI 51-101”). The newly defined proved plus probable (“P+P”) categorization for oil and gas reserves equates reasonably to the previously referenced established reserves. Proved reserves, however, were evaluated on a more conservative basis and subsequently have been reduced. I am pleased to advise that we have been able to essentially maintain our level of P+P reserves when comparing to our prior year’s established reserve number. Equally important to note is that we have maintained a strong proved reserve life index (“RLI”) of 10.1 years and a proved plus probable RLI of 13.3 years. It is this reserve base and associated production profile that provides the underpinning to our ongoing distributions.

STEPPING FORWARD

 

Throughout 2003 and continuing into 2004, the acquisition market for oil and natural gas assets has become increasingly competitive. We are in competition with a growing number of trusts and emerging junior oil and gas companies. To mitigate this competition, our focus will be on larger sized acquisitions where we have a view to adding meaningful value to our asset base. We believe our investment strategies combined with our deal strength and disciplined portfolio approach will continue to result in successful acquisitions over the long term.

In January 2004, we completed the acquisition of Ice Energy Limited (“Ice Energy”), a junior oil and gas company focused on shallow gas exploration and development. This acquisition gives us a significant position in the developing shallow natural gas area of Shackleton, Saskatchewan. With Ice Energy, we have added approximately 2,300 BOE per day of production, 95% of which is natural gas, beginning in 2004. We have also identified approximately 250 drilling locations that we expect will increase our net production to 3,000 BOE per day in 2005.

In making the Ice Energy acquisition, we benefited from an initial equity investment in the company that improved our understanding of the assets, our assessment of their economic potential and our overall acquisition cost. We intend to continue our strategy of making highly selective equity investments in junior oil and gas exploration companies. This will enhance our ability to make acquisitions and further our technical knowledge on developing areas.

FROM LEFT TO RIGHT - Daryl W. Cook Vice President, Operations Ian C. Dundas Vice President & Director, Business Development Wayne T. Foch Vice President, Finance David A. McCoy General Counsel & Corporate Secretary Daniel M. Stevens Vice President, Development Services

 

Over the last few years, there has been increasing recognition of the potential for exploitation of natural gas from coal (“NGC”) in western Canada. We have been and will continue to test for NGC potential on a number of our properties. Through our recent acquisition of Ice Energy, we are also participating in our first commercial scale NGC project with an experienced NGC producer. We will pursue this opportunity diligently but recognize that it takes patience, persistence and knowledge to properly realize the value from this resource.

Progress is also continuing on the development of the Joslyn Creek lease (Oil Sands Lease # 24) in which we hold a 16% working interest. Currently, a steam assisted gravity drainage (“SAGD”) pilot project is underway on this lease with initial production expected in the second quarter of 2004. We expect to record reserves for this investment in 2004.

COMMODITY PRICES

Over the course of 2003, the increase in oil prices outpaced analysts’ forecasts. The West Texas Intermediate (“WTI”) crude oil reference price averaged US$31.04 per barrel for the year, representing a year-over-year increase of 19%. A number of factors influenced oil prices not the least of which were disruptions of supply, the decline of the US dollar against other currencies and an increase in demand, most notably out of China.

Countering this increase in the US dollar reference price was the rapid strengthening of the Canadian dollar. On an equivalent Canadian dollar basis, WTI increased only a modest 6%. The general consensus of price forecasters now seems to be that oil prices will continue at levels higher than the long-term historical averages.

 

Natural gas prices also remained strong throughout the year with NYMEX averaging US$5.54 per Mcf and the AECO reference price averaging CDN$6.70 per Mcf. Initial concerns over lower levels of natural gas in storage going into the heating season provided support for natural gas prices. However, as we have come through the heating season, the levels of natural gas in storage have returned to be in line with historical averages. Nevertheless, natural gas prices continue to be supported by concerns over declining supply and increasing demand resulting from a recovering U.S. economy.

 

In view of the potential for continued price volatility in both commodities, we plan to continue our price risk management program. We will be looking to increase the price levels of downside protection while retaining exposure to upside commodity price movement. We believe this will improve the stability of distributions to our unitholders and help protect the economics around our acquisition and development activities over the long run.

2004 OUTLOOK

As we move into 2004, the oil and gas industry in western Canada continues to benefit from robust cash flows. We also face a number of challenges emanating out of a maturing basin and high activity levels. These include smaller pool sizes for new discoveries and associated higher finding and development costs, increasing operating costs and a shortage of skilled labour.

We continue to develop our business processes and skill sets to improve our competitive advantage to meet these challenges:

  • We are conducting integrated field and operating cost reviews on our properties to improve our oil and natural gas recoveries and cost efficiencies;
  • We have hired additional skilled staff to improve on our pool depletion plans; and
  • We have more closely aligned our support services with our business units to improve the execution of our business plans.

Our business model, combined with our size, skills and processes, affords us an opportunity to take advantage of the challenges being faced. We expect to continue to grow our asset base of conventional oil and gas assets within the WCSB. At the same time, we will continue to look to broaden our energy asset base and be creative in our approach to developing business relationships.

 

In 2004, we plan to spend approximately $170 million on the further development of our asset base. This will include investing $38 million on shallow gas development, $27 million on crude oil waterflood development and up to $20 million on joint venture opportunities. Production volumes in 2004 are expected to be slightly lower than our 2003 annual average production at 68,300 BOE/day. However, this does not reflect any further acquisitions, other than Ice Energy, or divestments that we may make in 2004.

 

Based upon industry trends and activity levels, we are expecting an increase in operating and administrative costs compared to 2003. Our balance sheet remains strong and we expect to continue to make distributions to unitholders in the 75% to 90% range of our available funds flow. I recommend readers review our guidance provided for 2004 within the “Management’s Discussion and Analysis” section of this annual report for a more fulsome discussion on these and other relevant points.

Over the past few years, there has been an increasing level of scrutiny placed on organizations with respect to corporate governance. I thank all the members of our Board of Directors for their diligence and the demands on their time in ensuring that we continue to maintain a strong corporate governance structure and culture. Again, I encourage our readers to review our discussion on “Corporate Governance” in this annual report to assure themselves they can place confidence in these structures, management and our Board of Directors.

Finally, I thank all the members of our team at Enerplus. In addition to our success in 2003, I am very proud of the fact that we are able to report to our stakeholders that we operate at the highest level (Platinum) under the Canadian Association of Petroleum Producers (“CAPP”) Stewardship program. We have had zero lost time employee injuries in the conduct of our operations again this past year. I am also proud of the energy, resources and time our people have given to improve the quality of life in the communities where we live and operate.

Our focus has been and will continue to be on maximizing value for all of our stakeholders over the long-term. We thank you for investing in Enerplus and look forward to our continued success.

Gordon J. Kerr President & Chief Executive Officer