Rock has filed its Annual Information Form (AIF), which includes Rock’s reserves data and other oil and natural gas information for the year ended December 31, 2012. The AIF includes annual disclosure regarding reserves data and other oil and gas information as mandated by National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities of the Canadian Securities Administrators. Copies of Rock’s audited financial statements and related management’s discussion and analysis and AIF for the year ended December 31, 2012 have been filed on the SEDAR website at www.sedar.com and may be obtained on Rock’s website at www.rockenergy.ca.
Rock is a Calgary-based crude oil exploration, development and production company.
CORPORATE SUMMARY
| FINANCIAL | Year ended December 31, 2012 |
Year ended December 31, 2011 |
Three Months ended December 31, 2012 | Three Months ended December 31, 2011 | ||||||||||||
| Crude oil and natural gas revenue ($000) | $ | 46,567 | $ | 64,289 | $ | 12,802 | $ | 17,100 | ||||||||
| Funds from operations ($000) (1) | $ | 13,592 | $ | 20,524 | $ | 3,160 | $ | 8,063 | ||||||||
| Per share – basic | $ | 0.35 | $ | 0.56 | $ | 0.08 | $ | 0.21 | ||||||||
| – diluted | $ | 0.35 | $ | 0.55 | $ | 0.08 | $ | 0.21 | ||||||||
| Net income (loss) ($000) | $ | (12,210 | ) | $ | (6,919 | ) | $ | (6,348 | ) | $ | (4,992 | ) | ||||
| Per share – basic | $ | (0.31 | ) | $ | (0.19 | ) | $ | (0.16 | ) | $ | (0.05 | ) | ||||
| – diluted | $ | (0.31 | ) | $ | (0.19 | ) | $ | (0.16 | ) | $ | (0.05 | ) | ||||
| Capital expenditures ($000) | $ | 31,377 | $ | 61,864 | $ | 8,676 | $ | 5,720 | ||||||||
| As at December 31, 2012 |
As at December 31, 2011 |
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| Working capital deficiency including bank debt and excluding derivative contracts ($000) | $ | 3,072 | $ | 31,028 | ||||||||||||
| Common shares outstanding (000) | 39,102 | 38,786 | ||||||||||||||
| Options outstanding (000) | 2,738 | 2,531 | ||||||||||||||
| OPERATIONS | Year ended December 31, 2012 |
Year ended December 31, 2011 |
Three Months ended December 31, 2012 | Three Months ended December 31, 2011 | ||||||||||||
| Average daily production | ||||||||||||||||
| Crude oil and natural gas liquids (bbls/d) | 1,836 | 2,294 | 2,194 | 2,184 | ||||||||||||
| Natural gas (mcf/d) | 3,246 | 5,026 | 2,904 | 5,108 | ||||||||||||
| Total (boe/d) | 2,377 | 3,132 | 2,678 | 3,035 | ||||||||||||
| Average product prices | ||||||||||||||||
| Crude oil and natural gas liquids (Cdn$/bbl) | $ | 64.81 | $ | 68.52 | $ | 58.86 | $ | 77.86 | ||||||||
| Natural gas (Cdn$/mcf) | $ | 2.54 | $ | 3.77 | $ | 3.43 | $ | 3.12 | ||||||||
| Combined average (Cdn$/boe) | $ | 53.53 | $ | 56.24 | $ | 51.96 | $ | 61.23 | ||||||||
| Field netback (Cdn$/boe) (1) | $ | 18.33 | $ | 22.81 | $ | 29.38 | $ | 29.38 | ||||||||
(1) Funds from operations, funds from operations per share and field netback are not terms prescribed by International Financial Reporting Standards (IFRS) or the previous Canadian generally accepted accounting principles (Canadian GAAP), and so are considered non-GAAP measures. Funds from operations represents cash generated from operating activities before changes in non-cash working capital and decommissioning expenditures. Rock considers funds from operations a key measure as it demonstrates the Company’s ability to generate the cash necessary to fund future growth through capital investment. Funds from operations per share is calculated using the same share basis which is used in the determination of net income (loss) per share. Field netback is calculated as crude oil and natural gas revenues after deducting royalties, operating costs and transportation costs, resulting in an approximation of initial cash margin in the field on crude oil and natural gas production. Rock’s use of these non-IFRS measurements may not be comparable with the calculation of similar measures for other companies.
Introduction
I am pleased to report that in a year Rock has made real progress on many fronts – a remarkable turnaround from a year ago. Our total corporate production currently exceeds 3,000 boepd led by strong drilling results at our new discovery at Mantario. We have also developed a significant inventory of drill locations on our heavy oil properties.
Twelve months ago Rock completed the sale of its natural gas assets at Elmworth, was producing approximately 2,000 boe per day, and had no debt with $14 million of cash in the bank. The Company had RE-set the stage for its growth and future. We had a solid foundation of assets, cash flow and a strong balance sheet, but we needed to RE-focus and RE-start the Company. Our discovery well at Mantario was producing 80 barrels of oil per day but we had not yet completed the acquisition of the land or seismic needed to completely understand the extent of the pool. We were encouraged by the initial drilling results in the area, but many questions remained regarding the future of the pool. At Onward we were making good progress on a water flood scheme in our north pool and while we could identify the reserve additions, we realized it would take time for production rates to respond to the water injection. At Lloydminster we were focused on reducing operating costs and implementing the early stages of two high volume lift projects.
With our assets and balance sheet in place, we turned our attention to RE-energize the team. We made a number of staff changes and other key additions, brought on a new CFO, VP Exploration and a Manager of Engineering.
Operationally, we have an ambitious year ahead of us. At Mantario we have developed a producing property that is currently producing in excess of 1,800 boepd and has become our flagship property for reserve growth and production additions. At Onward, the water flood is in operation, we are optimizing production, capturing the reserves we identified, and continuing to explore in an area where we have infrastructure. At Lloydminster, we will be completing the installation of high volume lift facilities, and have expanded our drilling inventory to over 60 locations. All of this demonstrates our commitment to building a suite of assets that will provide our shareholders with a strong, predictable base of cash flow.
Rock’s 2012 Operating Accomplishments
After adjusting for the disposition of the Elmworth assets, the Company expanded its total proved reserves by 16% to 5.8 million boe from 5.0 million boe at year-end 2011. Our total proved plus probable reserves at year-end 2012 increased 10% to 8.9 million boe from 8.1 million boe at the end of 2011. In 2012, Rock delivered average daily production of 2,377 boepd; during the fourth quarter production averaged 2,678 boepd. Currently the Company is producing over 3,000 boe per day with an 85% oil weighting
At Mantario, we assembled a land position on our main pool that exceeds 27 sections, and shot over 70 square kilometres of 3D seismic. During the year we drilled 15 wells in Mantario, resulting in 13 oil wells and two D&A wells. Rock spent a total of $17.5 million at Mantario in 2012 ($12 million drilling, $2.5 million land, $3 million seismic). The activity in this area generated one-year F&D costs of $17.24/bbl (including future development capital) compared to last year’s field netback price of $31.40/bbl. We anticipate that the finding costs will come down going forward with limited spending on land and seismic, and recognition of additional reserves by the Company’s independent engineering evaluator.
At Onward, we completed the drilling of 2 heavy oil wells, 1 oil well, and 3 water injection wells. In addition we pipeline-connected the water flood area producers and expanded our central facility to accommodate increased fluid volumes. In total Rock invested over $8 million at Onward during 2012.
2012 Drilling Results
Rock drilled and cased 17 (17.0 net) oil wells, three (3.0 net) water injection wells and three (3.0 net) dry and abandoned wells.
Reserves and Net Asset Value
Due to the sale of the Elmworth property Rock’s total Company proved plus probable reserves decreased by 59% year-over-year to 8.9 million boe at year-end 2012. However, on a proforma basis (adjusting for the effect of the sale) total proved plus probable reserves increased by 7% to 8.9 million boe from 8.1 million boe, generating an RLI of 8.8 years (using December average production rates). All-in finding, development and acquisition costs (including changes in future development capital) averaged $13.05 per proved plus probable boe, and $20.25 per total proved boe. On a proforma basis (adjusting for the effect of the sale) and excluding reserve revisions, Rock generated a one year finding and development cost of $21.09 per proved plus probable boe, and $25.72 per total proved boe. It is important to note that this reserve report recognizes 2.2 million boe of proved plus probable reserves at Mantario. Since year-end 2012 the Company has drilled an additional 14 wells to further confirm the potential of this property.
The year-end 2012 reserve report by GLJ Petroleum Consultants Ltd., using its January 1, 2013 price forecast, indicates a value of $133.3 million for Rock’s proved plus probable reserves (net present value discounted at 10%, before tax).
The company’s net asset value is calculated as $3.83 per basic share, assuming debt at year-end of $3.1 million, 90,039 net acres of land valued at $19.7 million and 39.1 million basic shares outstanding.
Further information respecting Rock’s year-end reserves is contained in its AIF, as described above.
Financial Results
Rock generated funds from operations of $13.6 million ($0.35 per basic share) in 2012, compared to $20.5 million ($0.56 per basic share) in 2011. For the fourth quarter of 2012, the Company generated funds from operations of $3.2 million ($0.08 per basic share) compared to $3.7 million ($0.09 per basic share) in the third quarter of 2012. Funds from operations for the fourth quarter were impacted by increased price differentials (W.T.I vs. Western Canada Select) during December and November. Realized prices averaged $51.96/boe during the quarter compared to $53.53/boe during the year. Operating costs decreased during the quarter as lower cost production from Mantario began to grow (averaging $23.80 per boe compared to $25.69 from the prior quarter and $24.21 per boe for the full year of 2012).
The Company had a net loss of $12.2 million ($0.31 per basic share) in 2012 compared to a net loss of $6.9 million ($0.19 per basic share) in 2011. Effective January 1, 2011, the Company has transitioned to International Financial Reporting Standards (IFRS). This has resulted in the regular assessment of potential asset impairment losses by operating area, as well as recording gains or losses on asset sales. The significant reduction in natural gas prices throughout 2012 contributed to an impairment loss on Rock’s natural gas assets at Elmworth and Saxon of $9.9 million.
The Company incurred net capital expenditures of $31.4 million in 2012 of which $17.5 million was focused on Mantario. Total year-end net debt was $3.1 million against available bank lines of $45 million.
2013 Area Activity Update
To date in 2013 Rock has drilled 17 (16.0 net) wells as part of its planned 28 (27.0 net) well program for this year.
Rock drilled 14 (14.0 net) oil wells at Mantario. One well was drilled to test an exploration lead in the northwest portion of the land block and failed to encounter the primary basal Mannville zone. It did however encounter 6 m of pay in the Success zone and was production tested at 15 bbls of oil per day. This zone is currently being studied to determine if a horizontal development strategy can be used to exploit the resource. The other 13 wells were drilled in the main pool. The focus of this early activity was to confirm the seismic interpretation and delineate the extent of the pool. With this information the company is now focused on developing a complete exploitation strategy that would likely include approximately 30 follow-up 20 acre locations and the implementation of a water/polymer flood in 2014. Production from this pool currently exceeds 1,800 bopd. Due to spring break up, we are forecasting a disruption to production (reduced by up to 800 bopd). We will be constructing all weather roads once conditions permit.
In addition to the drilling activity at Mantario, Rock acquired 320 net acres of undeveloped land directly offsetting its water flood project at Onward and drilled two (1.0 net) wells on the newly acquired land. These two successful oil wells are currently being tied-in to our processing facilities and should be producing by the end of March.
Rock drilled an exploration well at Gardenhead in SW Saskatchewan commencing in December 2012, with operations completed early in the first quarter. The well was unsuccessful, and has been abandoned.
Commodity Prices
During the recent few quarters we have seen a significant widening of the price differential between light and heavy oil measured by the West Texas Intermediate and Western Canada Select differential. The primary cause of this widening has been attributed to the supply/demand imbalance driven by the increase in supply and temporary reduction in demand created by refinery maintenance (i.e. BP Whiting) and pipeline maintenance. It is our view that these structural changes in demand will be rectified in the coming quarters and the differential will narrow significantly as demand for heavy oil begins to outstrip supply. Some of the projects Rock is watching that will trigger this narrowing include the start-up of the BP Whiting refinery, the resumption of the Enbridge pipeline following the maintenance program, the start-up of the Keystone Gulf Coast pipeline, the second Seaway pipeline expansion, the start-up of the Enbridge Flanagan pipeline and eventually the start-up of the Keystone XL pipeline. All of these projects will act to allow Canadian heavy crude oil to access more markets, including the U.S. Gulf coast.
These changes in the marketplace will take some time. Consequently, in order to minimize risk due to price fluctuations, Rock is actively hedging a portion of our production. We currently have 500 bbls/d hedged at WCS CDN$73.08/bbl until the September 30, 2013. We also transport up to 1,000 bbls per day by rail. Rock has been shipping its heavy oil by rail for over two years in order to bypass pipeline bottlenecks and achieve premium pricing.
Outlook and 2013 Guidance
During 2012, Rock took the steps needed to transition itself from a company with a foundation of heavy oil production and a natural gas resource play requiring significant capital, to one entirely focused on oil plays in the Plains and Southwest Saskatchewan regions. These are oil-prone areas where the Company has expertise, plays are generally accessible year-round, well costs are within Rock’s financial capability, third-party processing infrastructure is not required and Rock can apply proven production practices to improve recovery factors. To prosper in Central Alberta and Saskatchewan, a company like Rock needs to focus on projects within its means and that generate early significant cash flow – in this price environment, these are oil targets – that it can then re-invest to continue to grow the production and cash flow, re-investing it into exploration and development of resource plays that are scalable and repeatable.
Rock’s 2013 preliminary capital budget of $30 million is expected to provide 22% growth in average daily oil production. The capital program includes an anticipated $13 million focused on the our oil program at Mantario in Southwest Saskatchewan and an anticipated $2 million for water flood initiatives associated with the completion of our Onward asset. In addition, $6 million will target optimizing the Company’s heritage heavy oil assets, including the installation of up to two high volume lift projects and the drilling of 4-6 oil wells. Rock has allocated $9 million (30%) to exploration initiatives including land, seismic, and drilling, and has a number of exciting exploration prospects which will be tested in the coming months. The Company has chosen not to revise its guidance at this time as we want to ensure the performance of the wells drilled in the first quarter before providing a forecast for the remainder of the year.
As Rock approaches the second quarter of 2013, the Company is excited about the team we have assembled, the assets we have discovered and developed, and the prospects that will allow us to develop a significant growth profile. We are focused on building a suite of assets that will continue to provide our shareholders with a solid, long-life, predictable base of cash flow.
Advisory Regarding Forward-Looking Information and Statements
This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words “will”, “expects”, “believe”, “plans”, “potential” and similar expressions are intended to identify forward-looking statements or information. More particularly and without limitation, this press release contains forward looking statements and information concerning: 2012 average production; anticipated production rates from the Onward waterflood program; and Rock’s drilling plans on its crude oil properties.
Statements relating to “reserves” are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future.
The forward-looking statements and information in this press release are based on certain key expectations and assumptions made by Rock, including prevailing commodity prices and exchange rates; applicable royalty rates and tax laws; future well production rates; reserve and resource volumes; the performance of existing wells; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services; and the receipt, in a timely manner, of regulatory and other required approvals. Although Rock believes that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward-looking statements and information because Rock can give no assurance that they will prove to be correct. There is no certainty that Rock will achieve commercially viable production from its undeveloped lands and prospects.
Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the oil and natural gas industry in general, such as: operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to reserves, production, costs and expenses; health, safety and environmental risks; commodity price and exchange rate fluctuations; marketing and transportation of petroleum and natural gas and loss of markets; environmental risks; competition; incorrect assessment of the value of acquisitions; failure to realize the anticipated benefits of acquisitions; ability to access sufficient capital from internal and external sources; stock market volatility; and changes in legislation, including but not limited to tax laws, royalty rates and environmental regulations.
Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the operations or financial results of Rock are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com). The forward-looking statements and information contained in this press release are made as of the date hereof and Rock undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
Rock Energy Inc.
Allen J. Bey
President and CEO
403-218-4380
Rock Energy Inc.
Todd Hirtle
Vice President Finance and CFO
403-218-4380
www.rockenergy.ca