Seven Generations Energy Ltd. Announces Third Quarter 2014 Results

November 12, 2014 9:49 PM

CALGARY, Nov. 12, 2014 /CNW/ – Seven Generations Energy Ltd. (“7G” or the “Company”) (TSX: VII) is pleased to report its third quarter 2014 operating and financial results.

Highlights

Third quarter production averaged a record 35,820 boe/d, an increase of 406% from the third quarter of 2013 and a 49% increase over the second quarter of 2014, with a September 2014 average production rate of 39,690 boe/d (59% liquids).
The third quarter of 2014 established a record funds from operations for the quarter of $106.3 million or $0.48 per share on a diluted basis. On a per share basis, this is a 1,500% increase over the third quarter of 2013, and a 55% increase over the second quarter of 2014.
The Company has the financial capacity to execute its 2015 business plan:
- On September 15, 2014, the Company and its lending syndicate agreed to an amendment to the senior secured revolving credit arrangement that increased the borrowing capacity from $150.0 million to $480.0 million and extended the maturity date of the credit facility to September 2017.
- At September 30, 2014 the Company’s adjusted working capital was $67.7 million.
- Subsequent to the third quarter of 2014, 7G completed an initial public offering of common shares with net proceeds to the Company of approximately $882 million. As a result of the offering, the Company has access to liquidity in excess of $1.4 billion.
During the third quarter of 2014 independent evaluator, McDaniel & Associates Consultants Ltd., updated the Company’s Total Best Estimate Contingent Resources to 728 million barrels gross (637 million barrels net) oil equivalent (“MMboe”) and Total Best Estimate Prospective Resources to 1,096 MMboe gross (986 MMboe net). The corresponding before tax net present values, using a discount rate of ten percent per annum, are $4.6 billion for Total Best Estimate Contingent Resources and $4.2 billion for Total Best Estimate Prospective Resources.

Corporate Update

As a result of significant increases in production volumes, revenue increased 599% in the third quarter of 2014 versus the same period last year, and 35% over the second quarter of 2014.
7G achieved operating netbacks of $35.79 per boe in the third quarter of 2014, a 56% increase over the third quarter of 2013 and a 10% decrease relative to the second quarter of 2014 due to a weaker commodity price environment in the third quarter of 2014.
During the third quarter of 2014, 7G increased its contracted volumes of condensate and other natural gas liquids (NGLs) with Pembina Pipeline Corporation and its affiliates on Pembina’s Peace Pipeline Phase III Expansion by 91% to 40,695 bbl/d. This service is set to commence upon the completion of Pembina’s Phase III Expansion expected in late 2016 to mid 2017. 7G has also increased its contracted volumes at Pembina’s fractionation expansion project (RFS3) near Fort Saskatchewan by 143% to 8,806 bbl/d.
Net capital investments for the quarter totaled $328.4 million with approximately 72% invested on drilling and completions and 28% on facilities and well equipment.
- The Company increased its active drilling rig count to ten rigs during the quarter from seven rigs at the beginning of the year.
- During the third quarter of 2014, 7G rig-released ten wells with an average horizontal lateral length of approximately 2,838 meters and completed ten wells with an average of 32.8 stages and 3,796 tonnes of proppant per well.

		Three months ended September 30			Nine months ended September 30
		2014	2013	% Change	2014	2013	% Change

OPERATIONAL
Total land holdings⁽¹⁾
	Gross acres	367,520	275,680	33	367,520	275,680	33
	Net acres	358,238	268,537	33	358,238	268,537	33
Undeveloped land holdings⁽¹⁾
	Gross acres	290,236	223,196	30	290,236	223,196	30
	Net acres	284,442	219,245	30	284,442	219,245	30

Rig count⁽¹⁾		10	5	100	10	5	100

Production
	Oil and NGL (bbl/d)	20,869	3,253	542	15,527	4,904	217
	Natural gas (MMcf/d)	89.7	23.0	290	67.3	19.5	245
	Total (boe/d)	35,820	7,084	406	26,739	6,505	311
	Liquids ratio	58%	46%	26	58%	50%	16

Product prices ⁽²⁾
	Oil and NGL ($/bbl)	66.33	60.52	10	70.16	57.09	23
	Natural gas ($/Mcf)	4.62	2.64	75	5.14	3.38	52

Operating expense ($/boe)		4.32	6.91	(38)	4.83	6.86	(30)

Transportation expense ($/boe)		3.89	3.82	2	4.65	4.03	15

Operating netback ($/boe) ^{(3) (4)}		35.79	23.00	56	37.74	25.99	45

General and administrative expenses ($/boe) ⁽⁵⁾		1.35	3.08	(56)	1.76	3.42	(49)

FINANCIAL ($000s, except for per share amounts)
	Revenue	165,501	23,692	599	391,828	68,681	471
	Funds from operations⁽⁴⁾	106,294	4,780	2,124	226,430	27,159	734
	Funds from operations per share – diluted⁽⁶⁾	0.48	0.03	1,500	1.02	0.16	538

	Net income (loss)	30,482	(955)	3,292	75,572	(8,533)	986
	Net income (loss) per share – diluted⁽⁶⁾	0.14	(0.01)	1,500	0.34	(0.05)	780

	Capital investments, net of dispositions	328,423	142,185	131	740,596	396,090	87

	Weighted average shares outstanding – diluted ⁽⁶⁾	222,151	173,237	28	222,098	172,328	29

	Adjusted working capital ⁽⁴⁾⁽⁷⁾	67,700	129,586	(48)	67,700	129,586	(48)

	Senior notes ⁽⁸⁾	784,000	412,120	90	784,000	412,120	90

(1)	As of September 30
(2)	Prices exclude realized gains and losses on risk management contracts.
(3)	Operating netback is calculated on a per-boe basis and is defined as revenue (including realized hedging gains and losses plus third party income) less royalties, operating expenses and transportation costs.
(4)	Operating netback, funds from operations and adjusted working capital do not have any standardized meaning prescribed by International Financial Reporting Standards (IFRS) and, therefore, may not be comparable with the calculation of similar measures presented by other entities. Please refer to the Non-IFRS Financial Measures section of this press release for additional information.
(5)	Excludes interest and financing charges.
(6)	On September 8, 2014, the Company amended its articles of incorporation to divide the issued and outstanding Class A Common Shares on a two-for-one basis. The share split has been reflected in the condensed interim statements on a retroactive basis. Only dilutive stock options and performance warrants have been included.
(7)	Adjusted working capital excludes unrealized risk management contracts and deferred credits.
(8)	Senior notes as reported represent US$700.0 million principal converted to Canadian dollars at the closing exchange rate for the period end.

Outlook

7G expects 2014 average production to meet previous estimates of 27,000 – 30,000 boe/d.
The Company previously announced that 2014 capital investments were estimated to total $1.038 billion. Presently, 2014 capital is expected to be $1.067 billion. The difference is primarily due to higher than expected costs for well completions partly as a result of drilling longer than expected laterals and logistical challenges associated with the supply of nitrogen and other resources required for fracture treatments. The previously announced dedicated frac spread and systematic improvements in our stimulation technique are expected to improve the Company’s capital efficiency going forward.
In the third quarter of 2014, the Board of Directors approved a 2015 capital budget of $1.6 billion which is designed to generate average annual production in 2015 of 55,000 to 60,000 boe/d. The 2015 capital budget includes discretionary capital for delineation drilling and facility project pre-investment, equating to approximately 15% of the total capital budget. In the event that commodity prices remain low into 2015, the discretionary projects could be deferred to preserve the Company’s strong balance sheet.
7G plans on increasing the active rig count to 15 drilling rigs during the first half of 2015.
Construction of the Karr 7-11 to Lator condensate pipeline and the Lator to Pembina pipeline was mechanically complete in third quarter of 2014. Commissioning and start-up is expected in the fourth quarter.
Field construction of the 25,000 bbl/d stabilizer project at the Karr 7-11 battery commenced during the third quarter. The project is estimated to be mechanically complete in the fourth quarter of 2014 with commissioning anticipated in early 2015.
Procurement and engineering for the Lator 2 gas plant expansion continued throughout the third quarter. Construction kickoff is planned for the first quarter of 2015, subject to regulatory approvals, and start-up is expected by the fourth quarter of 2015. 7G anticipates that the Lator 2 gas plant expansion will increase the Company’s natural gas processing capacity to 250 MMcf/d by December 2015, consistent with its marketing commitments.

SELECTED QUARTERLY INFORMATION
		Q3 2014	Q2 2014	Q1 2014	YTD 2014
FINANCIAL ($ thousands, except per share amounts)
Oil and natural gas liquids revenues		127,343	93,742	76,338	297,423
Natural gas revenues		38,158	29,254	26,993	94,405
Total revenues		165,501	122,996	103,331	391,828
Realized hedging loss		(148)	(6,873)	(5,405)	(12,426)
Processing and third party income		571	243	285	1,099
Interest and other income		512	782	626	1,920
Royalties		(20,925)	(9,434)	(5,386)	(35,745)
Operating expenses		(14,245)	(9,659)	(11,391)	(35,295)
Transportation expenses		(12,814)	(9,940)	(11,220)	(33,974)
General and administrative expense		(4,457)	(5,233)	(3,175)	(12,865)
Interest expense		(16,037)	(16,262)	(13,746)	(46,045)
Foreign exchange		8,367	(618)	223	7,972
Other		(31)	(30)	22	(39)
Funds from operations ⁽¹⁾		106,294	65,972	54,164	226,430
	Per share – basic ⁽²⁾	0.55	0.35	0.29	1.19
	Per share –diluted ⁽²⁾	0.48	0.31	0.25	1.02
Net income		30,482	43,926	1,164	75,572
	Per share – basic ⁽²⁾	0.16	0.23	0.01	0.40
	Per share – diluted ⁽²⁾	0.14	0.20	0.01	0.34
Capital investments, net of dispositions
	Land	1,408	28,137	1,519	31,064
	Drilling and completions	234,879	155,284	124,294	514,457
	Facilities and equipment	90,447	34,172	65,806	190,425
	Other	1,689	1,531	1,430	4,650
	Total capital investments	328,423	219,124	193,049	740,596
Adjusted working capital ⁽¹⁾		67,700	277,222	424,581	67,700
Senior notes ⁽³⁾		784,000	746,900	773,850	784,000

OPERATING
Average daily production
	Oil and natural gas liquids (bbls/d)	20,869	14,005	11,608	15,527
	Natural gas (MMcf/d)	89.7	60.0	51.7	67.3
	Total (boe/d)	35,820	23,999	20,231	26,739

Realized prices
	Oil and natural gas liquids ($/bbl)	66.33	73.55	73.07	70.16
	Natural gas ($/mcf)	4.62	5.36	5.80	5.14

(1)	See “Non-IFRS Financial Measures”
(2)	On September 8, 2014, the Company amended its articles of incorporation to divide the issued and outstanding Class A Common Voting Shares on a two-for-one basis. The share split has been reflected in the condensed interim statements for the three and nine months ended September 30, 2014 and on a retroactive basis.
(3)	Senior notes as reported represent US$ principal converted to Canadian dollars at the closing exchange rate for the period.

SELECTED QUARTERLY INFORMATION – continued
		Q4 2013	Q3 2013	Q2 2013	Q1 2013	YE 2013
FINANCIAL ($ thousands, except per share amounts)
Oil and natural gas liquids revenues		39,900	18,110	15,745	16,817	90,572
Natural gas revenues		10,921	5,582	7,039	5,388	28,930
Total revenues		50,821	23,692	22,784	22,205	119,502
Realized hedging gain		49	17	53	160	279
Processing and third party income		356	501	347	407	1,611
Interest and other income		272	506	274	233	1,285
Royalties		(3,188)	(2,227)	(318)	(2,120)	(7,853)
Operating expenses		(8,425)	(4,502)	(4,168)	(3,520)	(20,615)
Transportation expenses		(5,623)	(2,486)	(2,529)	(2,141)	(12,779)
General and administrative expense		(2,052)	(2,006)	(2,175)	(1,884)	(8,117)
Interest expense		(8,970)	(8,691)	(5,051)	(194)	(22,906)
Foreign exchange		(133)	(24)	6	10	(141)
Other		7	–	–	–	7
Funds from operations ⁽¹⁾		23,114	4,780	9,223	13,156	50,273
	Per share – basic ⁽²⁾	0.14	0.03	0.06	0.08	0.30
	Per share – diluted ⁽²⁾	0.12	0.03	0.05	0.08	0.27
Net income (loss)		(5,625)	(955)	(8,454)	876	(14,158)
	Per share – basic ⁽²⁾	(0.03)	(0.01)	(0.05)	0.01	(0.08)
	Per share – diluted ⁽²⁾	(0.03)	(0.01)	(0.05)	0.01	(0.08)
Capital investments, net of dispositions
	Land	2,925	8,991	35,875	13,507	61,298
	Drilling and completions	129,231	102,314	44,697	45,568	321,810
	Facilities and equipment	44,717	29,707	39,806	72,464	186,694
	Other	1,365	1,173	1,058	930	4,526
	Total capital investments	178,238	142,185	121,436	132,469	574,328
Adjusted working capital ⁽¹⁾		214,877	129,586	268,137	(23,559)	214,877
Senior notes ⁽³⁾		425,440	412,120	420,720	–	425,440

OPERATING
Average daily production
	Oil and natural gas liquids (bbls/d)	6,771	3,253	2,994	3,509	4,139
	Natural gas (MMcf/d)	28.9	23.0	19.1	16.4	21.9
	Total (boe/d)	11,585	7,084	6,182	6,240	7,786

Realized prices
	Oil and natural gas liquids ($/bbl)	64.05	60.52	57.78	53.25	59.96
	Natural gas ($/mcf)	4.11	2.64	4.04	3.65	3.62

(1)	See “Non-IFRS Financial Measures”
(2)	On September 8, 2014, the Company amended its articles of incorporation to divide the issued and outstanding Class A Common Voting Shares on a two-for-one basis. The share split has been reflected in the condensed interim statements for the three and nine months ended September 30, 2014 and on a retroactive basis.
(3)	Senior notes as reported represent US$ principal converted to Canadian dollars at the closing exchange rate for the period.

SELECTED QUARTERLY INFORMATION – continued
		Q4 2012	Q3 2012	Q2 2012	Q1 2012	YE 2012
FINANCIAL ($ thousands, except per share amounts)
Oil and natural gas liquids revenues		10,994	11,308	9,269	7,047	38,618
Natural gas revenues		5,820	4,636	3,707	2,844	17,007
Total revenues		16,814	15,944	12,976	9,891	55,625
Realized hedging gain		224	520	655	404	1,803
Processing and third party income		405	485	575	568	2,033
Interest and other income		433	431	223	93	1,180
Royalties		(2,922)	(959)	(859)	(793)	(5,533)
Operating expenses		(3,233)	(2,227)	(2,204)	(2,101)	(9,765)
Transportation expenses		(641)	(625)	(503)	(400)	(2,169)
General and administrative expense		(1,808)	(1,491)	(1,324)	(1,304)	(5,927)
Interest expense		(50)	(51)	(117)	(49)	(267)
Foreign exchange		–	–	–	–	–
Other		(618)	–	–	–	(618)
Funds from operations ⁽¹⁾		8,604	12,027	9,422	6,309	36,362
	Per share – basic ⁽²⁾	0.05	0.07	0.07	0.05	0.25
	Per share – diluted ⁽²⁾	0.05	0.07	0.07	0.05	0.24
Net loss		(379)	(247)	(875)	(1,073)	(2,574)
	Per share – basic ⁽²⁾	–	–	(0.01)	(0.01)	(0.02)
	Per share – diluted ⁽²⁾	–	–	(0.01)	(0.01)	(0.02)
Capital investments, net of dispositions
	Land	16,775	21,461	10,916	10,584	59,736
	Drilling and completions	43,007	25,545	13,169	21,196	102,917
	Facilities and equipment	42,346	14,331	3,496	10,033	70,206
	Other	669	477	522	442	2,110
	Total capital investments	102,797	61,814	28,103	42,255	234,969
Adjusted working capital ⁽¹⁾		95,089	189,336	195,286	16,605	95,089
Senior notes ⁽³⁾		–	–	–	–	–

OPERATING
Average daily production
	Oil and natural gas liquids (bbls/d)	1,439	1,528	1,355	912	1,309
	Natural gas (MMcf/d)	17.3	19.4	18.9	13.3	17.2
	Total (boe/d)	4,316	4,763	4,512	3,123	4,180

Realized prices
	Oil and natural gas liquids ($/bbl)	83.07	80.44	75.19	84.90	80.59
	Natural gas ($/mcf)	3.66	2.60	2.15	2.36	2.70

(1)	See “Non-IFRS Financial Measures”
(2)	On September 8, 2014, the Company amended its articles of incorporation to divide the issued and outstanding Class A Common Voting Shares on a two-for-one basis. The share split has been reflected in the condensed interim statements for the three and nine months ended September 30, 2014 and on a retroactive basis.
(3)	Senior notes as reported represent US$ principal converted to Canadian dollars at the closing exchange rate for the period.

Conference Call

7G will host a conference call on Thursday, November 13, 2014 at 9AM MST (11AM EST) to discuss third quarter results and address investor questions. To participate please dial 416-623-0333 or toll free in North America 1-855-353-9183 and enter access code 36248#. A replay will be made available after the call and can be accessed by dialing 1-855-201-2300 and entering conference reference number 1168291# followed by participant access code 36248#.

Non-IFRS Financial Measures

In this press release, the Company uses the terms “funds from operations”, “operating netback” and “adjusted working capital”. These terms do not have any standardized meaning prescribed by International Financial Reporting Standards (IFRS) and, therefore, may not be comparable with the calculation of similar measures presented by other entities.

“Funds from operations” is a financial measure not presented in accordance with IFRS and is equal to cash flow from operating activities, the most directly comparable financial measure presented in accordance with IFRS, adjusted for changes in non-cash operating working capital and decommissioning expenditures. The Company has presented funds from operations because it uses funds from operations as an integral part of its internal reporting to measure its performance. Funds from operations is considered an important indicator of the operational strength of the Company’s business. Funds from operations is a measure of the cash flow generated by the Company’s activities and eliminates the effect of changes in non-cash working capital, which is included in cash flow from operating activities. Funds from operations is not intended to be a performance measure that should be regarded as an alternative to, or more meaningful than, either net income as an indicator of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, funds from operations is not intended to represent funds available for dividends, reinvestment or other discretionary uses.

The following table presents a reconciliation of the non-IFRS financial measure of funds from operations to the IFRS financial measure of cash flow from operating activities.

	Three months ended Sept 30		Nine months ended June 30
	2014	2013	2014	2013
	($000)		($000)
Cash flow from operating activities	118,070	14,666	221,242	41,131
Decommissioning expenditures	–	–	206	–
Changes in non-cash operating working capital	(11,776)	(9,886)	4,982	(13,972)
Funds from operations	106,294	4,780	226,430	27,159

“Operating netback” is calculated on a per boe basis and is determined by deducting royalties, operating and transportation expenses from petroleum and natural gas revenue and, except where otherwise indicated, after adjusting for hedging gains or losses and processing and third party income. Operating netback is utilized by the Company to better analyze the operating performance of its petroleum and natural gas assets against prior periods.

“Adjusted working capital” is calculated as current assets less current liabilities as they appear on the balance sheets, and excludes current unrealized risk management contracts and deferred credits.

The following table presents a calculation of adjusted working capital as presented in this press release.

	As at Sept 30
	2014	2013
	($000)
Total current assets	286,738	239,699
Total current liabilities	(204,634)	(110,781)
Current risk management contracts	(14,527)	668
Current deferred credits	123	–
Adjusted working capital	67,700	129,586

[expand title=”Advisories & Contact”]Advisories

Any “financial outlook” or “future oriented financial information’ in this press release, as defined by applicable securities legislation, has been approved by management of the Company. Such financial outlook or future oriented financial information is provided for the purpose of providing information about management’s current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes.

Certain statements contained in this press release constitute “forward-looking statements” within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934 and “forward looking information” for the purposes of Canadian securities regulation. Any statements included in this press release that address activities, events or developments that the Company “expects,” “believes,” “plans,” “projects,” “estimates” or “anticipates” will or may occur in the future are forward-looking statements. Statements relating to “reserves” and “resources” are also deemed to be forward looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves and resources described exist in the quantities predicted or estimated and that the reserves and resources can be profitably produced in the future. Actual reserve and resource values may be greater than or less than the estimates provided herein. Actual results may differ materially due to a variety of important factors. Among other items, such factors might include: planned and unplanned capital expenditures; changes in general economic conditions; uncertainties in reserve, resource and production estimates; unanticipated recovery or production problems; weather-related interference with business operations; the effects of delays in completion of, or shut-ins of, natural gas and liquids gathering systems, pipelines and processing facilities; potential costs associated with complying with new or modified regulations; oil and natural gas prices and competition; the impact of derivative positions; production expense estimates; cash flow and cash flow estimates; drilling and operating risks; the Company’s ability to replace oil and gas reserves; volatility in the financial and credit markets or in oil and natural gas prices; effects of regulation by governmental agencies including changes in environmental regulations, tax laws and royalties. Except as required by law, the Company undertakes no obligation to update forward-looking information if circumstances or management’s estimates or opinions should change. Do not place undue reliance on forward-looking information. Additional factors are disclosed in the Company’s Supplemented PREP Prospectus dated October 29, 2014 under the headings “Forward-Looking Statements” and “Risk Factors”.

Seven Generations has adopted the standard of 6 Mcf:1 bbl when converting natural gas to oil equivalent. Boe 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. Given the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6 Mcf: 1 bbl, utilizing a conversion ratio at 6 Mcf: 1 bbl may be misleading as an indication of value.

Unless otherwise noted, “$” refers to Canadian dollars.

About Seven Generations

Seven Generations Energy Ltd. is an independent petroleum company focused on the acquisition, development and value optimization of high quality tight and shale hydrocarbon resource plays. Presently, the Company has a single focus area, the Kakwa River Project, a large-scale, tight, liquids-rich natural gas property located in the Kakwa area of northwest Alberta. 7G has a corporate headquarters in Calgary, Alberta and an operations headquarters in Grande Prairie, Alberta. Seven Generations shares are traded on the Toronto Stock Exchange under the symbol VII.

SOURCE Seven Generations Energy Ltd.

For further information: Brian Newmarch, Manager Investor Relations or Chris Law, Vice President Corporate Planning, Phone: 403-718-0700, Email: investors@7genergy.com[/expand]

Seven Generations Energy Ltd. Announces Third Quarter 2014 Results

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