DBRS Confirms Bonavista Energy Trust at STA-5 (middle)

Dominion Bond Rating Service (“DBRS”) has confirmed the stability rating of Bonavista Energy Trust (“Bonavista” or the “Trust”) at STA-5 (middle), reflecting strong performance in 2004 operating as a trust. Per unit reserves increased 29%, while per unit production remained fairly stable in 2004. While this positive performance is partly attributable to use of some debt to finance acquisitions, it still compares well relative to most of its peers, which typically have experienced significant per unit declines. Notwithstanding the shorter than average proved reserve life index (RLI) of 7.5 years, Bonavista replaced 414% of total production, including an impressive 81% replaced internally. This is positive considering the sector is operating in a mature basin where trusts face significant challenges to replace production internally. In addition, Bonavista has a large undeveloped land base, representing over two years of drilling inventory and development opportunities, reducing the need for acquisitions in the near term. The Trust operates over 85% of its properties with an average 80% working interest, allowing capital, development, and cost controls. Although increasing, operating costs at Cdn$8.30 per barrel of oil equivalent (boe) (including transportation) remain among the lowest in the sector. Bonavista’s management policy allows up to 60% of net volumes to be hedged, providing some cash flow stability. Currently, the Trust has approximately 30% of its net production hedged for 2005.

Limitations for the Trust include higher debt levels (debt-to-capitalization at 30% at June 30, 2005), which remains aggressive in a strong commodity price environment, and is higher than most DBRS-rated peers. However, the Trust’s lower payout ratio, 60% annualized at June 30, 2005 (excluding exchangeable shares), provides some support for the higher balance sheet leverage. The Trust has a significant portion of exchangeable shares outstanding that are ultimately exchanged into units, and the payout ratio would increase to approximately 73% had distributions been paid to these shares. Typical of peer performance, reserve replacement costs are rising, reflective of market conditions due to strong commodity prices. However, a replacement cost of Cdn$14.48/boe of proved reserves in 2004 compares well to the peer average of over Cdn$19.00/boe. Similar to most of its peers, potential growth would mainly come from acquisitions.

Cash flow is expected to fully fund distributions and the Cdn$230 million planned capital program in 2005. Notwithstanding its strong performance thus far, DBRS expects the Trust will face similar challenges as its peers in maintaining per unit performance.