CALGARY, Dec. 17, 2014 /CNW/ – Legacy Oil + Gas Inc. (“Legacy” or the “Company”) is pleased to announce its capital and operating budget and associated production guidance for 2015. In the current environment of low oil prices, the Company is focusing on capital preservation and maintaining liquidity under reduced cash flows by reducing discretionary spending and high grading opportunities. The budget sustains production and accomplishes the strategic objective of progressing and accelerating the Company’s numerous waterflood opportunities, while emphasizing flexibility to increase or decrease investments as the pricing environment dictates. The Company plans to spend less than cash flow in 2015. The capital program will continue to be monitored as the pricing environment dictates and further opportunities to reduce capital are currently being evaluated.
The combination of disciplined capital spending and increased emphasis on waterfloods will lead to a reduction in the Company’s corporate average decline rate from 32 percent to 27 percent by the end of 2015. The Company has the ability to achieve these sustainability improvements due to the high quality of its investment inventory, which continues to provide attractive rates of return despite the current challenging oil price environment, as well as the low decline nature of its Turner Valley field and the initial impact of its waterflood projects.
The Company has focused its 2015 budget on high graded opportunities and emphasizing cost reductions in its drilling and completion activities. This emphasis, combined with Legacy’s high netback production, results in strong investment returns in the current environment. The large majority of drilling capital in the budget has been allocated to Legacy’s highly economic Midale play in southeast Saskatchewan and the Rundle Formation at Turner Valley.
2015 CAPITAL BUDGET
Legacy expects to spend $238 million, which is less than anticipated cash flow that would be generated at pricing of US$65 per barrel WTI and a 0.85 CDN/US dollar exchange rate throughout 2015. This level represents a 40 percent reduction in organic capital spending year over year. Legacy’s capital program will be focused on light oil development, with the majority of capital (87 percent) directed to drilling, completions, equipping and waterfloods. Legacy is planning to drill 94 gross (79.4 net) wells in 2015 targeting high quality light oil. In addition to drilling, the Company is planning capital expenditures on expansion of the successful pilot waterfloods at Frys, Heward, Pierson, Steelman and Taylorton, as well as implementation of pilot waterfloods at Openshaw, Pinto and Star Valley.
The capital spending is distributed as follows: drilling, completions and tie‐ins – $196 million; waterfloods – $11 million; facilities – $29 million; and land, seismic and other – $2 million. The majority of the capital spending will be allocated to the Company’s major plays: Taylorton/Pinto – $100 million (42 percent), Turner Valley – $26 million (11 percent), Steelman – $37 million (15 percent), and Manor/Wordsworth – $18 million (8 percent).
The Company is planning to balance capital between the first half and second half of 2015, spending less than cash flow in each half of the year, currently assuming US$65 per barrel WTI. If oil prices do not improve early in 2015, Legacy will defer or cancel capital investments as necessary to spend cash flow, while generating acceptable returns on investment.
Legacy anticipates a 2015 average production rate of 24,500 Boe per day, representing growth of 6 percent over 2014 average production guidance. Production targets include the tie-in of significant associated natural gas and NGL volumes at the Company’s successful Midale play. Legacy expects to exit 2015 at approximately the same rate as the 2014 exit rate excluding production from the Elmworth asset. The Company continues to pursue the sale of Elmworth as soon as practicable in 2015.
The operational parameters used in the budget are as follows:
- Average Production – 24,500 Boe per day (85 percent light oil and NGL)
- Exit Production – 27,300 Boe per day (85 percent light oil and NGL)
- Average Crude Quality – 39° API
- Royalty Rate – 14.5 percent
- Operating Costs – $13.75 per Boe
- Transportation Costs – $3.10 per Boe
- G&A (expensed) – $2.50 per Boe
- Common Shares Outstanding (basic, weighted average) – 199.3 million
With lower WTI oil prices, the Company anticipates crude oil price differentials to remain volatile but to narrow slightly from 2014 levels. Cash flow sensitivity to changes in oil price is 2.1 percent per US$1.00 per barrel change in WTI oil price.
BANK LINE AND TERM DEBT
Legacy has total current borrowing capacity of approximately $1.025 billion, comprised of $225 million of term debt and $800 million of bank line. The term debt does not mature until late 2017, is unsecured, has minimal covenants and is not reserve based.
The bank line was recently reviewed and increased by $100 million as a result of Legacy’s high netback, long reserve life light oil production and solid proved developed producing reserves. The line is routinely reviewed semi-annually and the next regularly scheduled review is planned for April 2015. The bank syndicate was recently expanded to a well-diversified group of 10 banks.
Bank line determinations are a function of net present value of proved developed producing reserves using the lender’s price deck and applied risk factor. The Company has run sensitivities on its borrowing base value and stress tested its balance sheet and continues to expect to be within debt covenants down to oil prices averaging US$55 per barrel WTI over a continuous 12 month period.
Based on industry research and analysis, over the past 40 years world oil prices have generally averaged at or near the worldwide cost of reserves replacement, which is currently estimated at approximately US$90 per barrel WTI. Legacy expects oil prices to eventually return to these levels. However, due to its top decile operating netbacks and high quality inventory, Legacy is prepared to operate in an extended period of lower and volatile prices, preserving capital in anticipation of an eventual return to historical average prices.
Through its 2015 budget cycle, Legacy has identified, evaluated and ranked capital projects totaling in excess of $640 million. This depth of highly economic inventory provides excellent flexibility to cost effectively expand the 2015 capital budget when commodity prices recover. However, in the current price environment, the Company is prepared to make additional spending cuts if there is further deterioration in oil prices.
Legacy has always aggressively pursued cost savings and is working closely with all its service providers and suppliers. To date the Company has already reduced drilling day rates by up to 12 percent over the first quarter of 2014. The Company is targeting and expecting additional savings in all areas of the business.
The Company is using the current lower oil price environment as an opportunity to enhance sustainability through disciplined growth and waterflood expansion that results in lower corporate decline rates and reduced maintenance capital requirements. With more than 2,000 net undrilled light oil development locations identified, the 2015 budget represents only approximately 4 percent of this high quality development drilling inventory, leaving Legacy in a better position to capitalize on its inventory and will add optionality within its business model to surface shareholder value.
Legacy is a uniquely positioned, technically driven intermediate oil and natural gas company with a proven management team committed to aggressive, cost-effective growth of light oil reserves and production in large hydrocarbon in-place assets and resource plays. Legacy’s common shares trade on the TSX under the symbol LEG.
FORWARD LOOKING STATEMENTS: This press release contains forward-looking statements. More particularly, this press release contains statements concerning: (i) Legacy’s plan to spend less than cash flow in 2015, (ii) anticipated reductions in the Company’s corporate decline rate in 2015; (iii) the amount of planned capital expenditures for 2015, (iv) the breakdown of planned capital expenditures by type and area, (v) planned drilling, development and waterflood activities, (vi) the anticipated 2015 average and exit rates of production, (vii) the expectation that the Company will be in compliance with its debt covenants in the pricing scenario set out in the press release, (viii) anticipated oil price differentials and anticipated long term recovery in oil prices, and (ix) anticipated cost savings from the Company’s service providers.
The forward-looking statements contained in this press release are based on certain key expectations and assumptions made by Legacy, including the parameters specifically set out in the press release and expectations and assumptions concerning: (i) prevailing commodity prices, (ii) the success of future drilling, development and waterflood activities, (iii) the performance of existing wells, facilities and waterflood projects, (iv) the performance of new wells, facilities and waterflood projects, (v) the timely receipt of required regulatory approvals, (vi) prevailing weather conditions, oil price differentials, royalty regimes and exchange rates and (vii) the availability of capital, labour and services.
Although Legacy believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Legacy can give no assurance that they will prove to be correct. Since forward-looking statements 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. Most importantly, all of the forward-looking statements are highly dependent on prevailing commodity prices and significant fluctuations in prevailing commodity prices may impact anticipated cash flows, capital expenditures, production and compliance with debt covenants. Other factors and risks include, but are not limited to, risks associated with the oil and gas industry in general (e.g., 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 production, costs and expenses; and health, safety and environmental risks), uncertainty as to the availability of capital, labour and services, exchange rate fluctuations, fluctuations in oil price differentials, unexpected adverse weather conditions and changes to existing laws and regulations. Certain of these risks are set out in more detail in Legacy’s Annual Information Form which has been filed on SEDAR and can be accessed at www.sedar.com.
The forward-looking statements contained in this press release are made as of the date hereof and Legacy 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.
Non-IFRS Measure – This press release contains the term “cash flow”, which does not have a standardized meaning prescribed by International Financial Reporting Standards (“IFRS”) and therefore may not be comparable with the calculation of similar measures by other companies. Legacy uses cash flow to analyze financial and operating performance. Cash flow should not be viewed as an alternative to cash flow from operating activities, net earnings or other measures of financial performance calculated in accordance with IFRS. Cash flow is calculated as cash flow from operating activities less changes in non-cash working capital.
MEANING OF BOE: When used in this press release, Boe means a barrel of oil equivalent on the basis of 1 Boe to 6 thousand cubic feet of natural gas. Boe/d means a barrel of oil equivalent per day. Boe may be misleading, particularly if used in isolation. A Boe conversion rate of 1 Boe: 6 Mcf 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 of oil compared to natural gas based on currently prevailing prices is significantly different than the energy equivalency ratio of 1 Boe : 6 Mcf, utilizing a conversion ratio of 1 Boe : 6 Mcf may be misleading as an indication of value.
SOURCE Legacy Oil + Gas Inc.
For further information: Trent J. Yanko, P.Eng., President + CEO, Legacy Oil + Gas Inc., 4400, Eight Avenue Place, 525 – 8th Avenue S.W., Calgary, AB T2P 1G1, Telephone: 403.441.2300, Fax: 403.441.2017; Matt Janisch, P.Eng., Vice-President, Finance + CFO, Legacy Oil + Gas Inc., 4400, Eight Avenue Place, 525 – 8th Avenue S.W., Calgary, AB T2P 1G1, Telephone: 403.441.2300, Fax: 403.441.2017