HIGHLIGHTS & OUTLOOK

2021 First Quarter Highlights

Quarterly funds flow was a record high mainly as a result of production growth and a significant improvement in the natural gas price which was $4.62 per Mcf (82% increase from last year).  The natural gas price benefitted from higher pricing in all markets with Chicago daily pricing seeing the largest increase as a result of extreme cold experienced across North America in February.

  • Production was 25,910 Boe per day, an 8% increase year over year and unchanged from the previous quarter. This was consistent with guidance for an average of 25,000 to 27,000 Boe per day.
  • Liquids production (condensate plus NGL) totaled 5,157 barrels per day which was 20% of total production and 30% of total revenue. Notably, NGL production increased 38% from last year largely as a result of higher recoveries realized at the Nig Creek Gas Plant which started operations in February 2020.
  • During the quarter, three horizontal wells were completed at Umbach with two wells starting production in late March that are averaging approximately 7.4 MMcf per day raw over the last 20 days (rates were restricted for most of April due to downtime at the facility).
  • Revenue net of transportation was $26.64 per Boe, an 87% increase from last year as a result of higher commodity prices. Higher natural gas prices at all sales points was the largest contributor to higher revenue.
  • Production, general and administrative, and interest and finance costs totaled $5.95 per Boe, a year-over-year reduction of 12%. This was mainly driven by lower production costs resulting from the start-up of the Nig Creek Gas Plant in February 2020 which reduced third-party processing fees.
  • Realized hedging loss was $5.3 million, or $2.25 per Boe, and resulted from the continuing recovery in commodity prices since mid-2020.
  • Funds flow was a record $36.5 million, or $0.30 per share, an increase of 116% from last year. This was largely the result of higher production, higher commodity prices and lower production costs which were partially offset by the $5.3 million hedging loss and by abandonment and reclamation costs totaling $0.6 million.
  • Net income was $11.1 million, or $0.09 per share, and was reduced by non-cash charges including $8.7 million for an unrealized hedging loss (change in the mark-to-market valuation of future hedging contracts) and $4.1 million for deferred income tax expense.
  • Cash return on capital employed (CROCE) was 15% and return on capital employed (ROCE) was 2%. ROCE includes the effect of non-cash hedging gains or losses which can make it less meaningful as a way to measure return on capital.
  • Capital investment was $24.9 million (versus guidance for $25 million). At Fireweed, $12.4 million net was invested to drill three horizontal wells (1.5 net), build 19 kilometres of pipeline, and for equipment deposits for the facility.  At Umbach, $12.5 million was invested which included the completion and tie-in of a three-well pad.
  • Total debt including working capital deficiency was $120 million which is a reduction of $12 million from the previous quarter and represents 0.8X annualized quarterly funds flow.
  • Commodity price hedges for the remainder of 2021 protect revenue on approximately 47% of current production. At quarter end, the financial liability for future hedging contracts totaled $17 million.
  • Carbon taxes paid to the BC government, which are included in production costs, totaled $1.4 million (direct and indirect), a decrease of $0.3 million from last year as a result of the start-up of the Nig Creek Gas Plant which has a lower emissions intensity versus alternative third-party gas processing plants.

Production in the second quarter of 2021 is forecast to average 25,000 to 27,000 Boe per day (production to date in the quarter has averaged approximately 26,000 Boe per day).  Capital investment in the quarter is forecast to be $14 million which includes $5 million for the inlet compressor at the Nig Creek Gas Plant plus $7 million ($3.5 million net) for equipment deposits for the Fireweed facility.

Updated guidance for 2021 is provided below.  Forecast pricing was updated to reflect actual prices to date with prices for the remainder of the year being unchanged from previous guidance except for the WTI price which was increased to US$55 per barrel from US$50.

2021 Guidance
Previous

March 2, 2021

Current

May 12, 2021

Cdn$/US$ exchange rate 0.79 0.79
Chicago daily natural gas – US$/Mmbtu(1) $3.50 $3.50
AECO daily natural gas – Cdn$/GJ(1) $2.60 $2.60
BC Station 2 daily natural gas – Cdn$/GJ $2.55 $2.55
WTI – US$/Bbl $51 $57
Edmonton condensate diff – US$/Bbl ($2.25) ($1.30)
Est transportation cost – $/Boe $4.50 – $4.75 $4.50 – $4.75
Est revenue net of transport (excl hedges) – $/Boe $19.50 – $20.50 $20.50 – $21.50
Est royalty rate (% revenue net transportation) 8% – 9% 8% – 9%
Est production cost – $/Boe $4.00 – $4.50 $4.00 – $4.50
Est mid-point field operating netback – $/Boe(2) $14.05 $14.95
Est realized hedging gains or (losses) – $ million ($10.0 – $12.0) ($15.0 – $17.0)
Est cash G&A – $ million $6.0 – $7.0 $6.0 – $7.0
Est interest expense – $ million $6.0 – $7.0 $6.0 – $7.0
Est capital investment (excluding A&D) – $ million $85 – $90 $85 – $90
Forecast fourth quarter Boe/d

Forecast fourth quarter liquids Bbls/d

30,000 – 32,000

6,800 – 7,300

30,000 – 32,000

6,800 – 7,300

Forecast annual Boe/d

Forecast annual liquids Bbls/d

26,000 – 28,000

5,600 – 6,000

26,000 – 28,000

5,600 – 6,000

Est annual funds flow – $ million(3) $109 – $120 $112 – $122
Horizontal wells drilled – gross

Horizontal wells completed – gross

Horizontal wells starting production – gross

11 – 12 (8.5 – 9.5 net)

11 – 12 (10.5 – 11.5 net)

14 – 15 (11.5 – 12.5 net)

11 – 12 (9.0 – 9.5 net)

13 (11.5 net)

14 – 15 (11.5 – 12.5 net)

  • Approximately 50% of natural gas sales are at the daily or spot price and 50% at the monthly index price.
  • Based on the mid-point for each of revenue net of transportation, royalty rate and production costs.
  • Based on the range for forecast annual production and using the mid-points for the estimated field operating netback, estimated cash G&A, estimated hedging gain or loss and estimated interest expense. 
2021 Guidance History
  Chicago

Daily

(US$/Mmbtu)

BC Station 2

Daily

(Cdn$/GJ)

WTI

(US$/Bbl)

Capital Investment

($ million)

Forecast

Annual

Funds Flow

($ million)

Forecast Annual

Production

(Boe/d)

Nov 10, 2020 $2.65 $2.50 $40 $85 – $90 $90 – $99 26,000 – 28,000
Mar 2, 2021 $3.50 $2.55 $51 $85 – $90 $109 – $120 26,000 – 28,000
May 12, 2021 $3.50 $2.55 $57 $85 – $90 $112 – $122 26,000 – 28,000
2021 Investment and Activity by Area
Capital Investment

($million)

% for Infrastructure Net Wells

Drilled

Net Wells

Completed

Net Wells

Starting Production

Fireweed $30 – $35 58% 2.0 – 2.5 1.5 2.5
Nig Creek $28 25% 4.0 4.0 3.0 – 4.0
Umbach $27 3.0 6.0 6.0
Total $85 – $90

‘Free cash flow’ in 2021 is estimated to be approximately $83 million using the mid-point for estimated annual funds flow and based on investment to maintain production of approximately $33 million to drill, complete and tie-in 6.0 net wells.  ‘Free cash flow’ is being directed to development at Fireweed, growth from Nig Creek and debt reduction.  As always, capital investment will remain flexible and may be adjusted up or down depending on commodity prices.

Transportation costs are expected to decline in 2021 given that natural gas sales into Canadian markets where pipeline tariffs are lower will increase to 54% of total sales from 38% in 2020.  The natural gas sales split in 2021 is expected to be 46% at Chicago, 36% at BC Station 2, 11% at AECO and 7% at Alliance ATP.  The marketing strategy for natural gas continues to be based on diversifying physical sales to mitigate the effect of regional price differences that are difficult to predict in terms of timing and duration.

Development at Fireweed continues to progress with the majority of large diameter gathering and sales pipelines having been constructed while initial equipment deliveries to the site will start in July.  First production of approximately 2,500 Boe per day net remains on track for the fourth quarter of 2021.

The focus of the business plan is on growing asset value and funds flow per share and, in 2021, this will come from:

  • Filling the Nig Creek Gas Plant which reduces production cost and increases the proportion of liquids;
  • Advancing Fireweed development where condensate is forecast to be a higher proportion of production; and
  • Reducing debt which increases future financial flexibility to pursue acquisitions, accelerate organic growth or return capital to shareholders.

With the material improvement in commodity prices over the last six months, an increase to capital investment in the second half of 2021 is currently being evaluated.   Additional activity would be focused on increasing asset value and accessing underutilized facility capacity which is expected to result in attractive rates of return at current forward strip commodity prices.  A number of opportunities are being reviewed including step-out wells at Umbach that would test the mid and/or lower Montney and accelerating development at Fireweed to fill the facility sooner.  Production guidance for 2021 is not expected to change as any incremental wells would start producing in late 2021 or early 2022.  Further details will be provided when second quarter results are released on August 11, 2021 with any increase to capital investment being contingent on continued strength in commodity prices and achieving minimum debt reduction of $10 to $15 million in 2021 relative to year end 2020.

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