The Company will file later this morning its audited consolidated financial statements for the years ended December 31, 2012 and 2011 and related management’s discussion and analysis (“MD&A”) on the SEDAR website (www.sedar.com) and Chinook’s website (www.chinookenergyinc.com) Operational and financial highlights for the three months and year ended December 31, 2012 are noted below and should be read in conjunction with the audited consolidated financial statements and related MD&A.
2012 highlighted the strength of Chinook’s Tunisian operations and the advantages of exposure to international oil pricing along with a focus on improving the quality of its Canadian assets with a strategic acquisition, development of oil properties, and non-core dispositions.
Q4 2012 Highlights
2012 Financial and Operating Results
Production in 2012 averaged 12,184 boed, down 16% from 2011. A significant component of the decreased production was the sale of approximately 1,600 boed of production from non-core assets that sourced $106.3 million in proceeds. Cash flow in 2012 was 7% lower at $79 million from $85 million in 2011 despite the effect of a 38% drop in year-over-year Canadian natural gas prices from $3.59/mcf to $2.24/mcf as this effect was mainly offset by the increased Tunisian production volumes sold at a premium Brent oil price (relative to WTI pricing). Dispositions in 2012 were completed at an average valuation of $66,400 per flowing barrel of oil equivalent, which represents above average transaction metrics and further strengthened the balance sheet, allowing the Company to complete a strategic $30 million acquisition in its core Canadian area at Grande Prairie. Capital expenditures in 2012 totaled $80 million (excluding acquisitions) and were funded entirely from cash flow with the balance from proceeds of dispositions. Increased financial strength is evidenced when comparing the Company’s year-end net debt of $72 million as a multiple of trailing annual cash flow. The Company has reduced its debt to cash flow ratio by 44% to 0.9 times in 2012 from 1.6 times in 2011 (based on $135 million in 2011 year end net debt). Chinook is improving its financial liquidity with a newly established reserve-based 364-day revolving syndicated Canadian credit facility of $115 million, and on March 15, 2013, Chinook signed a USD$75 million revolving international reserve-based credit facility for a term of five years with an international bank. The initial availability on the international credit facility is USD$46.5 million and is intended to be used to further develop the Company’s Tunisian assets. These new credit facilities provide Chinook with ample capacity to finance its operations and pursue additional domestic and international opportunities in 2013.
During 2012, approximately 2,025 boed or 17% of Chinook’s production was from its Tunisian assets, with 91% being oil volumes sold at premium Brent pricing (relative to WTI pricing) at an average price of $110.56/barrel and 9% of volumes from natural gas which received an average price of $15.53/mcf. Tunisia contributed approximately $59 million or 57% of the $104 million of net operating revenue with an operating netback of $81.84/boe and attracted 46% of the $110 million capital program (64%, excluding the Canadian property acquisition). Canadian operations provided 10,159 boed or 83% of the Company’s 2012 production, generated 43% of the $104 million of net operating revenue and consumed 54% of the 2012 capital program (36%, excluding the Canadian property acquisition).
The average corporate netback per barrel of oil equivalent in 2012 increased 10% to $20 per barrel of oil equivalent from $18.15 per barrel of oil equivalent in 2011. In the fourth quarter, as natural gas prices improved to $3.09/mcf, the corporate netback improved to $27.20 per barrel of oil equivalent, a 50% improvement from fourth quarter 2011 of $18.10 per barrel of oil equivalent.
Set forth below is certain financial and operational information for the three months and years ended December 31, 2012 and 2011.
| Three months ended December 31 | Year ended December 31 | |||||||||||
| 2012 | 2011 | 2012 | 2011 | |||||||||
| OPERATIONS | ||||||||||||
| Production | ||||||||||||
| Oil (bbl/d) | 4,035 | 4,206 | 3,642 | 3,736 | ||||||||
| Natural gas liquids (bbl/d) | 1,003 | 1,591 | 1,117 | 1,488 | ||||||||
| Natural gas (mcf/d) | 39,585 | 55,927 | 44,548 | 56,262 | ||||||||
| Average daily production (boe/d) | 11,636 | 15,119 | 12,184 | 14,602 | ||||||||
| Sales Prices | ||||||||||||
| Average oil price ($/bbl) | $ | 97.72 | $ | 97.11 | $ | 96.61 | $ | 92.96 | ||||
| Average natural gas liquids price ($/bbl) | $ | 57.71 | $ | 71.23 | $ | 60.26 | $ | 65.98 | ||||
| Average natural gas price ($/mcf) | $ | 3.39 | $ | 3.31 | $ | 2.55 | $ | 3.75 | ||||
| Corporate Netbacks (1) | ||||||||||||
| Average commodity pricing ($/boe) | $ | 51.30 | $ | 47.00 | $ | 43.58 | $ | 44.84 | ||||
| Royalties ($/boe) | $ | (0.64 | ) | $ | (6.03 | ) | $ | (2.70 | ) | $ | (6.72 | ) |
| Net production expenses ($/boe) (1) | $ | (18.98 | ) | $ | (17.75 | ) | $ | (17.46 | ) | $ | (17.13 | ) |
| Cash G&A ($/boe) (1) | $ | (4.48 | ) | $ | (5.13 | ) | $ | (3.42 | ) | $ | (2.84 | ) |
| Corporate netbacks ($/boe) (1) | $ | 27.20 | $ | 18.10 | $ | 20.00 | $ | 18.15 | ||||
| Wells Drilled (net) | ||||||||||||
| Oil | 2.96 | 6.12 | 8.09 | 19.11 | ||||||||
| Gas | – | 1.02 | 1.00 | 7.73 | ||||||||
| Dry | – | – | 0.96 | – | ||||||||
| Total wells drilled (net) | 2.96 | 7.14 | 10.05 | 26.84 | ||||||||
| FINANCIAL ($ thousands, except per share amounts) | |||||||||||||
| Petroleum and natural gas revenue, net of royalties | $ | 55,303 | $ | 57,274 | $ | 181,802 | $ | 202,762 | |||||
| Cash flow (1) | $ | 28,757 | $ | 23,950 | $ | 78,696 | $ | 85,004 | |||||
| Per share – basic and diluted ($/share) | $ | 0.13 | $ | 0.11 | $ | 0.37 | $ | 0.40 | |||||
| Net loss | $ | (36,708 | ) | $ | (58,077 | ) | $ | (91,028 | ) | $ | (63,752 | ) | |
| Per share – basic and diluted ($/share) | $ | (0.17 | ) | $ | (0.27 | ) | $ | (0.42 | ) | $ | (0.30 | ) | |
| Capital expenditures and business combinations | $ | 50,456 | $ | 26,343 | $ | 109,657 | $ | 119,701 | |||||
| Net debt (1) | $ | 72,383 | $ | 134,900 | $ | 72,383 | $ | 134,900 | |||||
| Total assets | $ | 622,476 | $ | 745,403 | $ | 622,476 | $ | 745,403 | |||||
| Common Shares (thousands) | |||||||||||||
| Weighted average during period | |||||||||||||
| – basic and diluted | 214,188 | 214,188 | 214,188 | 214,188 | |||||||||
| Outstanding at period end | 214,188 | 214,188 | 214,188 | 214,188 | |||||||||
(1) Cash flow, net debt, corporate netback, net production expense and cash G&A are not IFRS measures. These terms do not have any standardized meanings as prescribed by IFRS and, therefore, may not be comparable with the calculations of similar measures presented by other companies. See headings entitled “Cash Flow from Operations”, “Net Debt”, “Corporate Netback”, “Net Production Expense” and “Cash G&A” in the reader advisory section for further information on such terms.
Operations Update
Canada
Successful oil discoveries early in 2012 from the Montney at Kaybob and the Dunvegan at Wapiti and Karr prompted the Company to expand its capital program in these areas through 2012 and into 2013. Chinook participated in the drilling of 11 (4.74 net) wells in 2012 with an additional 3 (1.5 net) wells being drilled through year end. The Company has successfully completed 2 (0.75 net) Montney horizontal wells at Kaybob and has equipped both wells for production through third party facilities with production anticipated to commence in April 2013. Initial gross production on these wells is estimated to be 500 barrels of oil per day and 1.5 million cubic feet of natural gas per day per well. There are 2 (0.75 net) additional wells planned for 2013, an additional six locations on lands with a 37.5% working interest and six to eight locations on lands with a 75% working interest. The Company drilled 6 (2.25 net) horizontal Dunvegan wells at Karr and Wapiti in its Grande Prairie core area. Average expected initial production rates for the Dunvegan wells at Karr are 250 boed (80% oil and liquids) and 200 boed at Wapiti (50% oil and liquids). Chinook has identified 45 additional Dunvegan locations on Company lands.
In December, Chinook completed the acquisition of two Dunvegan properties in its Grande Prairie core area. The key attributes of the acquisition was large oil in-place reserves with low recovery to date and over 30 horizontal locations identified on operated high-working interest lands. The Company has drilled 3 (1.5 net) horizontal Dunvegan wells on the acquired properties since closing which have been brought on production in the first quarter of 2013 at initial gross production rates of 75-100 barrels of oil per day per well. There are 3 (3.0 net) additional horizontal Dunvegan oil wells budgeted for 2013. In addition to the producing properties, the acquisition included six additional sections of undeveloped lands offsetting an existing producing pool which has seen a five-fold increase in production rates from vertical to horizontal wells from 40 barrels of oil per day in existing vertical wells to 200 barrels of oil per day in horizontals. The acquired properties are also believed to have significant waterflood potential which will be modeled in 2013 and, if warranted, implemented in 2014.
Chinook continued disposing of non-core assets in 2012 with proceeds from dispositions of $106.3 million for 1,600 barrels of oil equivalent per day of production. The disposition of non-core assets is expected to continue through 2013 with approximately $25 million of proceeds expected through April 2013. Proceeds from dispositions will continue to strengthen Chinook’s balance sheet and enable the Company to accelerate and advance the opportunities referenced above as well as pursue additional strategic acquisitions in its core Grande Prairie area.
Tunisia
In Tunisia, the Company was successful in a significant and technically complex operation with the drilling of four horizontal wells with multi-stage fracture completions on its producing Bir Ben Tartar concession (“BBT Concession”). These wells were the first ever multi-stage fracture stimulated wells in Tunisia and the largest ever performed on the African continent. As follow up to this success, the Company plans to drill an additional six wells, at least four of which will be horizontals, on the BBT Concession in 2013 along with the construction of a centralized oil battery and associated water handling facility. This facility will support higher production volumes and lower operating costs. In addition to Chinook’s continued development of the BBT Concession, the Company plans to drill an exploration well approximately 25 kilometres away at El Bell, on the Sud Remada permit, targeting the same Ordovician interval on a seismically defined prospect similar in size to that on the BBT Concession. Subject to crew availability, the Company also plans to shoot a 250 km2 3-D seismic survey on the southern portion of its Sud Remada permit which currently has limited coverage with older vintage 2-D seismic data.
FEED (front end engineering and design) work on Chinook’s offshore Cosmos development project continued through 2012. Due to critical component availability and cost escalation, the Company has been unable to secure several key components of the initial Cosmos A block development within the pre-FEED cost estimate and is currently favouring a strategy to further appraise the satellites and near field undrilled structures in an effort to increase the estimated resource and improve the economics of the project. The Company plans to shoot a 3-D survey later in 2013 and intends to drill the first well early in 2014. One of the more promising satellites has a well penetration that shows excellent reservoir quality and hydrocarbon pay on logs in the same Birsa sands as the Cosmos A block. On March 19, 2013, SVI Barbados, a wholly- owned subsidiary of Chinook, and its partner, New Zealand Oil & Gas (“NZOG”) entered into an agreement pursuant to which each of SVI Barbados and NZOG acknowledged that it had given a negative final investment decision and which amends the original farmout agreement so that, if SVI Barbados and NZOG cannot agree on an alternative appraisal program for the Cosmos Concession by April 18, 2013, NZOG’s right to complete its earning and acquisition of an interest in the Cosmos Concession will terminate. Negotiations are presently underway with the concession partners, NZOG and ETAP, to define the program for the balance of 2013.
Tunisia remains a country in political and social transition that has been underpinned by an escalating level of politically stoked violence with elections planned for late 2013 or early 2014. Public demonstrations have been common in larger cities and local demonstrations have occurred near the Company’s operations. Chinook remains proactive in its dialogue with local groups which, to date, have been labour related discussions and have been resolved by Chinook’s in-country management. The Company’s activity and investment in the country has not been viewed negatively, rather, the reaction by local stakeholders is a byproduct of Chinook’s increased activity and the desire by many for employment and training in an area of the country that experiences a lower standard of living than those living in the larger urban centres. Safety of all stakeholders is Chinook’s main priority and, with ongoing support available from the local National Guard, the Company has to date experienced no production downtime at its BBT Concession and operational delays have been limited to several occurrences each lasting no longer than 48 hours. Chinook will, however, continue to put in place security protocols in an effort to ensure the wellbeing of its staff and contractors.
Outlook
For 2013, Chinook’s budgeted production is 9,500-10,200 barrels of oil equivalent per day comprised of approximately 39% oil, 7% natural gas liquids and 54% natural gas. Cash flow is expected to be $95-$100 million on capital expenditures of $102-$107 million with approximately 60% invested in Tunisia and 40% in Canada. Year end net debt is expected to be reduced to $60-$65 million on combined credit facilities of $161.5 million.
In Canada, the Company intends to improve its asset quality with non-strategic asset sales throughout 2013. The disposition of non-core assets as a means to maintaining a strong balance sheet and increasing the per barrel profitability of the Company’s core Canadian assets will be a continued priority for the Company. A cash flow based capital expenditure program focused on Dunvegan and Montney oil locations opportunities in the Peace River Arch is in place and being executed. Chinook continues to focus on improving its Canadian operating and general and administrative cost structure which has resulted in various process changes and cost saving initiatives, the impact of which should be fully recognized in 2013.
In Tunisia, the Company intends to continue with the accelerated development and increase of the oil production from the BBT Concession along with shooting 3-D seismic and further exploration drilling on its one million acre Sud Remada permit.
Chinook exited 2012 stronger than the year began, notwithstanding the volatility affecting the Company’s domestic assets due to falling commodity prices and the political uncertainty surrounding its international assets. Chinook’s balance sheet is strong, its domestic assets continue to improve in quality and profitability and its Tunisian development continues to provide significant cash flow to the Company with many near term catalysts for growth planned to be tested in 2013.
Departure of Director
Due to the corporate governance policies of Chinook’s major shareholder, Mr. John Brussa has decided not to stand for re-election in 2013 and leave the Chinook Board of Directors effective immediately. John has been a valuable contributor to Chinook and its predecessor, Storm Ventures International Inc., and on behalf of the Chinook Board we thank him for his significant efforts and contributions on behalf of all shareholders.
About Chinook Energy Inc.
Chinook is a Calgary-based public oil and gas exploration and development company that combines high quality natural gas-weighted assets in Western Canada with an exciting high growth oil business onshore and offshore Tunisia in North Africa.
In the interest of providing shareholders and potential investors with information regarding Chinook, including management’s assessment of the future plans and operations of Chinook, certain statements contained in this news release constitute forward-looking statements or information (collectively “forward-looking statements”) within the meaning of applicable securities legislation. Forward-looking statements are typically identified by words such as “anticipate”, “continue”, “estimate”, “expect”, “forecast”, “may”, “will”, “project”, “could”, “plan”, “intend”, “should”, “believe”, “outlook”, “potential”, “target” and similar words suggesting future events or future performance. In addition, 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 exist in the quantities predicted or estimated and can be profitably produced in the future. In particular, this news release contains, without limitation, forward-looking statements pertaining to: expectations of future plans regarding further Canadian non-core asset dispositions; the volume and product mix of Chinook’s oil and natural gas production on certain newly drilled wells, and the anticipated production volumes therefrom; the use of funds from Chinook’s international credit facility; the number of wells budgeted for drilling at certain of the Company’s core areas (including Kaybob, Grande Prairie and Tunisia) as well as plans to make expenditures on other infrastructure projects in such areas; waterflood plans in the Company’s Grand Prairie core area; plans for shooting seismic and other appraisal plans on the Company’s prospects in Tunisia; future results from operations and operating metrics; and future development, exploration, acquisition and development activities (including drilling plans) and the timing thereof and related production expectations; expectations regarding future development on the Cosmos Concession and NZOG’s retention of a working interest therein; as well as management’s future expectations regarding production, cash flow, capital expenditures, net debt and credit facilities set out under the heading “Outlook”.
With respect to the forward-looking statements contained in this news release, Chinook has made assumptions regarding, among other things: that Chinook will continue to conduct its operations in a manner consistent with past operations, the ability of Chinook to continue to operate in Tunisia with limited logistical security and operational issues, future capital expenditure levels, future oil and natural gas prices, future oil and natural gas production levels, Chinook’s ability to obtain equipment in a timely manner to carry out development activities, the impact of increasing competition, the ability of Chinook to add production and reserves through development and exploitation activities, the results of seismic and other appraisal activities (including waterflood modeling and seismic data gathering); certain commodity price and other cost assumptions, the results of negotiations and the plans of the Company’s partners in certain of its areas, including in Tunisia; the continued availability of adequate debt and equity financing and cash flow to fund its planned expenditures. Although Chinook believes that the expectations reflected in the forward-looking statements contained in this news release, and the assumptions on which such forward-looking statements are made, are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned not to place undue reliance on forward-looking statements included in this news release, as there can be no assurance that the plans, intentions or expectations upon which the forward-looking statements are based will occur. By their nature, forward- looking statements involve numerous assumptions, known and unknown risks and uncertainties that contribute to the possibility that predictions, forecasts, projections and other forward-looking statements will not occur, which may cause Chinook’s actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements.
These risks and uncertainties include, without limitation, political and security risk associated with Chinook’s Tunisian operations, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve and resource estimates, the continued impact of shut-in production, environmental risks, competition from other producers, inability to retain drilling rigs and other services, capital expenditure costs, including drilling, completion and facilities costs, unexpected decline rates in wells, delays in projects and/or operations resulting from surface conditions, wells not performing as expected, delays resulting from or inability to obtain the required regulatory approvals and ability to access sufficient capital from internal and external sources. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Readers are cautioned that the forgoing list of factors is not exhaustive. Additional information on these and other factors that could effect Chinook’s operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) and at Chinook’s website (www.chinookenergyinc.com). Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and Chinook does not undertake any obligation to update publicly or to revise any of the forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
Barrels of Oil Equivalent
Barrels of oil equivalent (boe) is calculated using the conversion factor of 6 mcf (thousand cubic feet) of natural gas being equivalent to one barrel of oil. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl (barrel) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
Corporate Netback
The reader is also cautioned that this news release contains the term corporate netback, which is not a recognized measure under IFRS and is calculated as a period’s sales of petroleum and natural gas, net of royalties less net production and operating expenses as divided by the period’s sales volumes and cash G&A. Management uses this measure to assist them in understanding Chinook’s profitability relative to current commodity prices and it provides an analysis tool to benchmark changes in operational performance against prior periods and to peers on a comparable basis. Readers are cautioned, however, that this measure should not be construed as an alternative to other terms such as net income determined in accordance with IFRS as a measure of performance. Chinook’s method of calculating this measure may differ from other companies, and accordingly, they may not be comparable to measures used by other companies.
Cash G&A
The reader is also cautioned that this news release contained the term cash G&A, which is not a recognized measure under IFRS and is calculated as G&A less stock-based compensation and the amortization of the deferred lease liability.
Cash Flow from Operations
The reader is also cautioned that this news release contains the term cash flow from operations, which is not a recognized measure under IFRS and is calculated from cash flow from continuing operations adjusted for changes in non-cash working capital. Management believes that cash flow is a key measure to assess the ability of Chinook to finance capital expenditures and debt repayments. Readers are cautioned, however, that this measure should not be construed as an alternative to other terms such as cash flow from operating activities, net income or other measures of financial performance calculated in accordance with IFRS. Chinook’s method of calculating this measure may differ from other companies, and accordingly, they may not be comparable to measures used by other companies.
Net Debt
The reader is also cautioned that this news release contains the term net debt, which is not a recognized measure under IFRS and is calculated as bank debt adjusted for working capital excluding mark-to-market derivative contracts. Working capital excluding mark-to-market derivative contracts is calculated as current assets less current liabilities both of which exclude derivative contracts and current liabilities excludes the current portion of debt. Management uses net debt to assist them in understanding Chinook’s liquidity at specific points in time. Mark-to-market derivative contracts are excluded from working capital, in addition to net debt, as management intends to hold each contract through to maturity of the contract’s term as opposed to liquidating each contract’s fair value or less.
Future Oriented Financial Information
This news release, in particular the information in respect of anticipated cash flows, may contain Future Oriented Financial Information (“FOFI”) within the meaning of applicable securities laws. The FOFI has been prepared by management of the Company to provide an outlook of the Company’s activities and results and may not be appropriate for other purposes. The FOFI has been prepared based on a number of assumptions including the assumptions discussed under the heading “Forward-Looking Statements” and assumptions with respect to production rates and commodity prices. The actual results of operations of the Company and the resulting financial results may vary from the amounts set forth herein, and such variation may be material. The Company and its management believe that the FOFI has been prepared on a reasonable basis, reflecting management’s best estimates and judgments.
Analogous Information
In this news release, Chinook has provided certain information on the production profile and estimates of increased productivity rates on properties adjacent to the Company’s newly acquired Dunvegan properties which is “analogous information” as defined by applicable securities laws. This analogous information is derived from publicly available information sources which the Company believes are predominantly independent in nature. Some of this data may not have been prepared by qualified reserves evaluators or auditors and the preparation of any estimates may not be in strict accordance with Canadian Oil & Gas Evaluation Handbook. Regardless, estimates by engineering and geotechnical practitioners may vary and the differences may be significant. Chinook believes that the provision of this analogous information is relevant to Chinook’s activities and forecasting, given its property ownership in the area; however, readers are cautioned that there is no certainty that the forecasts provided herein based on analogous information will be accurate.
Chinook Energy Inc.
Walter Vrataric
President
(403) 261-6883
Chinook Energy Inc.
L. Geoff Barlow
Vice-President, Finance and Chief Financial Officer
(403) 261-6883
www.chinookenergyinc.com