CALGARY, ALBERTA–(Marketwired – May 9, 2013) – Sure Energy Inc. (“Sure Energy” or the “Company”) (SHR.TO) today announced its financial and operating results for the quarter ended March 31, 2013.
During the first quarter of 2013, Sure Energy accomplished the following:
- Secured all approvals and permits to modify its battery and add water disposal at its Hatton property in southwest Saskatchewan.
- Was granted Good Production Practice and Concurrent Production status on two of its three wells at Hatton.
- Completed 3D seismic at Hatton.
- Purchased an additional 27.4 percent working interest in Sakwatemau Gething Unit.
|Three Months Ended March 31,|
|($000 except share and per share amounts)|
|Petroleum and Natural Gas Revenues||5,074||6,861|
|Funds Flow from Operations (1)||1,960||3,225|
|Per Share, Basic and Diluted||0.03||0.05|
|Per Share, Basic and Diluted||(0.02||)||(0.01||)|
|Common Shares Outstanding|
|Fully Diluted with Performance Rights and Warrants||71,966,464||71,702,464|
|Weighted Average Common Shares Outstanding|
|Basic and Diluted||60,580,630||60,575,472|
|Three Months Ended March 31,|
|Natural Gas (Mcf/d)||2,817||3,059|
|Heavy Oil (bbls/d)||104||59|
|% Oil and NGL’s||57||61|
|Average Selling Price|
|Natural Gas ($/Mcf)||3.13||2.19|
|Heavy Oil ($/bbl)||61.81||75.00|
|Operating Netback ($/BOE) (1)||25.30||32.59|
|Funds Flow Netback ($/BOE) (1)||20.09||27.31|
|(1)||Please refer to Management’s Discussion and Analysis for a definition of Non-GAAP measures.|
Expenditures for the period were as follows:
|Three Months Ended March 31,|
|Capital Program Summary||2013||2012|
|Geological and geophysical||316||21|
|Recompletions and workovers||239||702|
|Production equipment and facilities||716||1,706|
|Asset acquisition (disposition)||357||(38||)|
Areas of Activity
Sure Energy produced 362 BOE/d (87 percent liquids) from its main core area at Redwater in the first quarter of 2013. The producing zone in the area is the Viking formation which is at approximately 700 metres depth. The Viking is a regionally extensive oil bearing shoreline sequence in the Redwater area. It produces poorly when drilled vertically but exhibits attractive production rates and economics when drilled horizontally and fracture stimulated. More than 400 horizontal wells have been drilled into the fairway in the past four years. Sure Energy began drilling in the area in the Fall of 2010 and has 26 (17 net) oil wells on the trend. The Company realized $48.48/BOE netback from the area in the quarter, generating $1.6 million net operating income. The high quality 36° API oil produced in the area sells at an Edmonton Mixed Sweet Blend price. The property realized an oil price of $83.53/Bbl for the quarter which combined with a gas price of $3.38/Mcf netted the Company $75.56/BOE. Operating costs were $16.55/BOE which is up temporarily from the typical $14 – $15/BOE due to additional costs associated with winter operations.
Sure Energy owns 15,885 net acres of land on the fairway with an average working interest of 91 percent. This equates to 26 net sections of land, less than 25 percent of which (6 net sections) is currently developed. The Company’s reserves engineers recognize 33 gross (24.0 net) drilling locations (a combination of single leg multi-frac horizontals and multi-leg open hole horizontals) containing proven undeveloped reserves adjacent or proximal to current producing wells. An internal engineering study of the 400 wells on the trend indicates that single leg open-hole fracture stimulated wells (“packers plus” style) will ultimately recover the most oil per horizontal metre. By drilling solely this type of well the Company’s low risk drilling inventory would increase to 69 (58.0 net) single leg horizontal locations. This type of well costs approximately $1.4 million to put on stream.
Hatton (SW Saskatchewan)
The Company produced 104 BOE/d from its Hatton property in the first quarter of 2013. Historic high heavy oil differentials in January and February lead to low operating netbacks so accelerating production made little economic sense. Hatton produces heavy oil (12.9° API) with high watercuts (80%) from a lower Mannville sandstone reservoir. The water is essential to the drive mechanism. Operating costs associated with trucking and disposing of the produced water are high. Consequently the Company has drilled a water disposal well at its battery site, and will modify the battery to include water disposal, oil treating and gas conservation. These modifications will reduce operating costs of $20 to $40 per barrel to $8 to $10 per barrel which will significantly add to the operating netback. In the first quarter the Company secured all the necessary regulatory approvals and permits to complete the battery modification. The equipment has been ordered and the battery is scheduled to be running at full capacity towards the end of the second quarter. Also in the quarter the Company was granted Concurrent Production and GPP (Good Production Practice) for two of the wells meaning the Company can produce the wells at optimal rates without having to regulate them to meet maximum rate limitations. The reservoir produces a small amount of gas which is currently used as fuel gas to heat the heavy oil production and sales tanks and will be used at the facility when it is completed.
The Company commissioned a third party engineering study in the first quarter to model the Hatton reservoir and its projected production and depletion profile. The study also calculated the original oil in place, projected ultimate recoveries, recommended optimal drilling density and well type and provided pressure maintenance guidelines. The study suggested that the pool should be drilled horizontally and therefore the Company has programmed a horizontal development well for the third quarter after the battery is completed.
The Company has proprietary 3D seismic over the pool. It gives an accurate picture of the main pool but also indentifies the potential for a pool extension plus three satellite pools. The Company will evaluate one of these satellite pools with a vertical well in 2013. The Company also purchased 768 hectares of additional 100 percent working interest land at Hatton at land sales in the first quarter and early in the second quarter. Sure Energy now owns 22 sections of land at 100 percent working interest in the area.
Sure Energy produced 104 BOE/d from Queensdale in the first quarter of 2013. This is below the production capacity of the area because of continuing production problems with one of the wells. This is a mature fully developed project with water disposal and gas tie-in at the battery site. The property is shut-in annually from approximately April 1 – May 15 because of road bans.
The Company has proprietary 3D seismic that covers the current pool and Sure Energy’s additional 100 percent lands. The Company has identified the potential for a pool of similar size to the existing pool using the 3D and adjacent well data. This prospect can be evaluated by a single vertical exploration well which would cost approximately $0.5 million.
The Company produced 149 BOE/d at Virginia Hills in the first quarter. During the quarter Sure Energy purchased a 27.4 percent working interest in the Sakwatemau Gething Unit in the area, and early in the second quarter of 2013 commenced the blowdown of the Unit. This Unit has assigned gross proven plus probable developed reserves of 1.0 BCF of gas and 49.9 thousand barrels of oil and liquids in the Company’s December 31, 2012 Reserves Report. The Company now owns 91.0 percent working interest in the Unit. The Company established a position in the area in early 2011 to evaluate the potential of the regional Viking which is analogous to and on depositional strike with the Company’s Redwater assets. The regional Viking at Virginia Hills is oil bearing but has never been exploited horizontally. At 1,500 meters depth the horizontal wells will cost approximately $2.5 to $2.8 million. The Company owns 9.5 sections of approximately 50 percent working interest land and three sections of 100 percent land in the core area of the play.
The Company produced 364 BOE/d in the quarter from its properties in the Peace River Arch, Southern Plains (Chinook), Tweedie and West Central Alberta. This production includes 1.9 MMcf/d of gas, 27 barrels per day of natural gas liquids and 18 barrels of oil per day.
Production for the period by major property is as follows:
|Three Months Ended March 31, 2013|
Cashflow was abnormally low in the first quarter mainly because of high operating costs primarily related to winter operations and trucking and disposing of water at Hatton. The Company projects corporate operating and transportation costs to decrease from the $2.04 million spent in the first quarter of 2013 to approximately $1.7 million for the following three quarters. This is primarily the influence of adding water disposal at the Hatton property. Production volumes were also artificially low at Hatton in the first quarter because the third vertical well in the project was not brought on to production until the second quarter. This was partially because the Company had to wait for certain regulatory approvals and partially because it made little sense to rush the process because of historically high heavy oil differentials in the first quarter. The three wells drilled into the project are currently on stream but their production will not be fully optimized until the Hatton facilities are completed late in the second quarter in order to optimize netbacks. Once the facilities have been constructed at Hatton the Company will drill a horizontal development well which will add additional low cost production and a vertical stepout well which will add additional reserves and drilling locations if successful.
The Company has an extensive inventory of low risk locations at Redwater and an inventory of at least twelve exploration locations. These include light oil projects at Viewhill and Queensdale in southeast Saskatchewan, Virginia Hills, Karr and Gordondale, gas projects in the Viking and Dunvegan at Virginia Hills, at Gordondale and at Siphon on the Peace River Arch and three heavy oil locations close to Hatton in southwest Saskatchewan.
The Company projects that production volumes will remain essentially flat through to the end of the second quarter and will increase in the third and fourth quarters because of production added at Hatton. The Company will spend cashflow in the year and it should be noted that about 25 percent of the cashflow will be spent on seismic and facilities in Hatton. In future years a higher percentage of the cashflow will be directed to drill wells.
Sure Energy’s bank credit facility was adjusted from $40 million to $32 million consisting of a $25 million revolving operating demand loan and a $7 million development demand loan. The Company currently has $18 million drawn on the revolving operating demand loan and will utilize a portion of the development demand loan to drill the horizontal well at Hatton.
The Company is also initiating a program to evaluate and reduce its non-capital cost structure.
Sure Energy management uses and reports certain non-GAAP measures in the evaluation of operating and financial performance. These measures do not have any standardized meanings prescribed by GAAP and therefore may not be comparable with the calculation of similar measures for other companies. Funds flow from operations, operating netbacks, cash flow netbacks, net debt and working capital are metrics used to compare Sure Energy with its peers.
Funds flow from operations is used by the Company to analyze operating performance, leverage and liquidity. Readers should refer to the “CAPITALIZATION, FINANCIAL RESOURCES AND LIQUIDITY” section of the MD&A for a reconciliation of funds flow from operations.
Sure Energy uses the terms operating netbacks and cash flow netbacks to evaluate operational performance of the Company. Operating netback, which is calculated as average unit sales price less royalties, transportation costs and operating expenses and cash flow netback, which further deducts administrative and interest expense and current income tax represents the cash margin for every barrel of oil equivalent sold. Readers should refer to the “Netbacks” section of the MD&A for the calculations of operating netbacks and cash flow netbacks.
Net debt and working capital, which is current assets less debt and current liabilities, is used to assess efficiency and financial strength. Readers should refer to the “CAPITALIZATION, FINANCIAL RESOURCES AND LIQUIDITY” section of the MD&A for a reconciliation of net debt and working capital.
Use of BOEs
In this press release the calculation of barrels of oil equivalent (BOE) is calculated at a conversion rate of 6,000 cubic feet (Mcf) of natural gas for one barrel (bbl) of oil based on an energy equivalency conversion method. BOEs may be misleading particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Certain statements contained in this press release constitute forward-looking information. These statements relate to future events or Sure Energy’s future performance. The use of any of the words “could”, “expect”, “believe”, “will”, “projected”, “estimated” and similar expressions and statements relating to matters that are not historical facts are intended to identify forward-looking information and are based on Sure Energy’s current belief or assumptions as to the outcome and timing of such future events. Actual future results may differ materially. In particular, the statements with respect to the Company’s estimate of reduced operating costs following modifications to the battery at Hatton; expected timing for the battery at Hatton to be running at full capacity; the scheduled horizontal development well at Hatton; the intention to drill a vertical well in one of the satellite pools at Hatton; and statements pertaining to expected decreased operating costs for the remainder of the year; the timing for completion of the Hatton facilities; drilling intentions at Hatton; expected production volumes for the remainder of the year; expected percentage of cash flow to be spent on seismic and facilities at Hatton; and expectation to use greater percentage of cash flow to drill wells in future years in the section “Outlook” are forward looking information. Sure Energy’s Annual Information Form and other documents filed with securities regulatory authorities (accessible through the SEDAR website www.sedar.com) describe the risks, material assumptions and other factors that could influence actual results and which are incorporated herein by reference. Sure disclaims any intention or obligation to publicly update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as may be expressly required by applicable securities laws.