DBRS Rates NAL Oil & Gas Trust at STA-6 (high)

Dominion Bond Rating Service (“DBRS”) has today assigned a stability rating to NAL Oil & Gas Trust (“NAL” or the “Trust”) as indicated above.

Strengths for the Trust include one of the lowest production costs in the sector. At Cdn$8.89/boe (including transportation), production expense compares well to a peer average of Cdn$9.91/boe. In addition, the unique management structure provides cost synergies with respect to acquisitions, as well as shared access to a larger technical operating team than what the Trust’s smaller size would normally dictate. A balanced production mix of 57% liquids/43% natural gas provides cash flow diversity relative to peers that may have production weighted toward one commodity. NAL’s netbacks are generally higher than its peers given the high realized prices, due to its predominantly light sweet production and lower operating expenses. As a result, the recycle ratio at 1.95 based on proved reserves compares well to the 1.7 average of DBRS-rated peers.

The acquisition of 70% of Addison Energy Inc. (“Addison”) (30% to The Manufacturers Life Insurance Company) in February 2005 has changed the financial profile from above industry average to below average, despite adding substantially to NAL’s scale of operations. Challenges include the rising balance sheet leverage, which at 35%, is high relative to the 20%-25% range for most of its peers. This was mainly due to the 43% debt financing used in the Cdn$385 million Addison acquisition. Adjusted debt-to-cash flow of 1.34 times is high in a strong commodity price environment. However, management has indicated its focus to reduce debt in the near term is in line with a targeted debt-to-cash flow of 1.0 times to 1.1 times. Due to a higher than average payout target of 70%-80%, free cash flow after distributions and working capital has not been sufficient to fully fund the capital program, thus requiring some external financing. The Addison acquisition added 7,700 barrels of oil equivalent per day (boe/d) of light oil and gas production in Southern Alberta (56% of current total production and 80% of proved reserves). Based on production and reserves, acquisition metrics of Cdn$50,000/boe flowing production, and Cdn$17.47/boe proved reserves are high but in line with recent transactions. Notwithstanding the high price, the transaction is accretive to both per unit production and reserves. The Addison assets are located near existing core operations and include coalbed methane development opportunities. While improved to 7.3 years as a result of the Addison acquisition, proved reserve life index is still below the average of approximately eight years for peers rated by DBRS.

Strong price expectations for 2005/2006 offer strong cash flow support and the financial profile should improve over time.