CALGARY, ALBERTA–(Marketwired – Jan. 28, 2015) – Edge Resources Inc. (“Edge” or the “Company”) (TSX VENTURE:EDE)(AIM:EDG) is pleased to announce that it has completed its 100% owned and operated water and natural gas handling facility and 6,000 meters of natural gas and water pipelines in Eye Hill East (the “Facility”). Additionally, the Company wishes to provide a financial and operational commentary, within the context of current market conditions.
Eye Hill Facility
In Eye Hill, the Company has drilled a water disposal well and constructed a 6,000 meter network of natural gas and water gathering pipelines, which transport produced water to a central water disposal facility and natural gas to a sales meter. The Facility will allow the Company to (i) drastically reduce the cost of trucking and disposing of produced water, (ii) produce, capture and sell associated natural gas from the existing and future Eye Hill wells and (iii) fully optimize the producing wells, which have been producing at reduced rates since they were drilled.
The completion of the Facility is expected to add at least $1.1 million in cash flow in the first year, which is expected to increase in the future with additional drilling.
Altogether, these benefits are expected to see the capital invested in the Facility payout in approximately one year, with an estimated five-year IRR of 127% and NPV(10%) of over $11 million, without considering any of the benefits of additional drilling at Eye Hill. More importantly, the economic benefits are independent of the oil price, as they affect operating costs as opposed to the product price.
The corrosion-resistant pipeline for the Facility was designed and completed using Core Liner, a new pre-lined steel technology from Core Linepipe Inc. Core Liner utilizes an innovative mechanical joining system called ClickWeld, which entirely replaces the traditional welding and x-raying processes. The combination of Core Liner and ClickWeld allowed the pipeline to be installed in approximately 50% of the time and at more than a 30% cost discount to traditional methods.
Monty McNeil, Edge’s Vice President of Operations, commented, “We chose Core Linepipe’s new technology not just because of the significant time and cost savings but also because of the long-term integrity benefits. In this environment when pipelines are coming under increased public and regulatory scrutiny, we wanted a system that we wouldn’t have to even think about for generations. The new Core Liner and ClickWeld technologies provided that solution at a discount to what we would have had to pay for older technologies. Given the benefits, we would not hesitate to use this technology on any pipelines we construct in the future.”
The water injection well was drilled in the middle of the Eye Hill pool and was expected to be able to dispose of approximately 1,000 barrels of water per day (“bwpd”); however, because of management’s innovative approach to the drilling of the well, the actual injection rate achieved was 2,500 bwpd – without requiring any stimulation, which could be performed in the future to improve on the already exceptional rate. The benefits of the higher- than-expected injection rate are twofold: (i) the higher capacity means the Company can significantly delay the capital expenditure on additional facilities that may have been required to handle larger volumes in the future and (ii) in the near-term, the additional capacity could be used to dispose of 3rd party water and generate an additional revenue stream for the Company.
The Facility is expected to improve near-term cash flow and significantly improve the economics of future drilling programs in Eye Hill. Comparative estimates of Eye Hill single well economics are provided below:
| US$90 WTI, Pre-Facility | US$90 WTI, WITH new Facility | US$50 WTI, WITH new Facility | |||
| Capital to drill, complete, equip and tie-into the Facility | $650,000 (not tied into facility) |
$700,000 (tied into new Facility) |
$700,000 (tied into new Facility) |
||
| Total Fixed and Variable Operating | ~$40,000 per month | ~$29,000 per month | ~$27,000 per month | ||
| Cost (including royalties) | |||||
| Capital Payback Period | 7 months | 5 months | 13 months | ||
| 5-year NPV (10%) | $1,300,000 | $2,200,000 | $518,000 | ||
| 5-year IRR | 147% | 206% | 64% |
Macroeconomic View and Outlook
Management and the Board of Edge have agreed to take a conservative view with regards to capital expenditure over the next 6 months due to unexpectedly high volatility in world oil prices.
Prices have dropped from US$105 WTI per barrel in June 2014 to below US$48 WTI per barrel in January 2015, despite data that shows a relatively balanced supply/demand environment. The IEA estimates world oil consumption will reach record levels of 93.3 million barrels per day in 2015 and will still grow by 900,000 barrels per day over 2014 consumption.
OPEC supply is near maximum capacity at 30 million barrels per day and several sources note that excess global supply is estimated to be less than 2 million barrels per day. Furthermore, the significant US production growth from unconventional assets such as the Eagleford, Permian and Bakken basins is often quoted as requiring US$75 WTI per barrel to make economic returns and wells drilled in these basins often have very high capital costs and exceptionally high initial decline rates. Reports of declining rig counts and reduced capital programs imply that operators are already reducing their pursuit of additional reserves and production in these – and almost all other – basins around the world.
With this backdrop of growing demand and expected future weakening supply the Company is hopeful for a price recovery and more price stability in 2015; however, with a conservative mindset in hand, the Company is planning for an extended low-priced and destabilized environment. The Board and management of Edge will aggressively protect its balance sheet and take steps to become more efficient operators, which should result in a stronger and leaner Company in the near and long term.
Operational and Financial Update
Given the macroeconomic view, it is obvious that any previously published guidance is no longer in-line with expectations. The unavoidable truth is that revenues and projected cash flows for the majority of the world’s E&P companies will decrease if world oil prices remain at current levels, which may lead to lower reserve values; and thus, lower lending values across the industry.
Early indications from conventional E&P lenders indicate that lending values may generally decrease by 30- 50%. However, given the significant unused room in Edge’s current facility, the Company does not anticipate that it will be facing a shortfall or be required to cover an overextended line of credit. The Company’s credit facilities are not subject to review until July 2015 but several encouraging conversations have taken place with Edge’s lenders whom have expressed their continued support for the Company and its strategy.
With the benefits of lower operational costs associated with the Facility, Edge expects that Eye Hill’s break-even operating profit price is equivalent to US$30 WTI per barrel. Company-wide estimates demonstrate that Edge should be able to maintain positive cash flow from operations at or above approximately US$32 WTI per barrel.
Below is a more detailed breakdown of the key metrics monitored by the Company:
Production: Current production is approximately 650 boe/day (65% oil), with an additional 100 boe/day temporarily shut-in, which the Company can restart at any time. Eye Hill production has increased 51% compared to this time last year, without additional drilling, partially reflecting the Cold Heavy Oil Production with Sand (“CHOPS”) production regime, whereby production typically increases in the first year, as opposed to production declines typically seen in unconventional, high-decline wells. Natural gas production from Gilby is experiencing its usual year-on-year decrease, due to natural declines.
Revenue: The decline in US$WTI prices has been partially offset by (i) a significantly weaker Canadian dollar and (ii) much improved heavy oil differentials but, as expected, the Company’s revenues are trending lower. A year-on-year comparison for the month of January 2014/2015 shows that although US$WTI has fallen by over US$47 per barrel, Edge’s “wellhead price” (the CDN$ per barrel price received for its oil) has only fallen by CDN$34 per barrel. Additionally, the near-term (February and March) forward contracts for the heavy oil differential and the US$ to CDN$ exchange rate are both improving, in favor of Canadian heavy oil producers.
Expenses: In the first of half Edge’s financial year (ended September 30, 2014), the Company achieved a 9% decrease in G&A expenses. The trend has continued and is expected to be augmented by additional cost cutting measures such as head-count reductions, salary reductions and vendor/supplier cost reductions. In Gilby, the Company recently made some piping modifications, which allowed it to remove a large compressor and associated equipment, resulting in cost savings of more than $200,000 per year. Also included in “expenses” are government production royalties, which are calculated partially based on oil prices; and so, royalty expenses are also expected to decrease with the oil price decrease.
Cash Flow: Current cash flow is expected to be lower than the previously reported quarter due to revenues decreasing faster than expenses. However, Edge will benefit from higher production, a lower Canadian versus US dollar, an improved heavy oil differential, lower G&A, lower operating costs and lower royalties. The Company will continue to focus its efforts on all opportunities to enhance cash flow.
Brad Nichol, President & CEO of Edge, commented, “Our industry is facing an enormously challenging macroeconomic environment but we started making the right moves months ago; and thus, we are in a better position than most to capitalize on opportunities that coincide with all major macroeconomic events such as this. I’m referring to our expectation of seeing quality assets coming to the market in stressed situations and we hope to take advantage of those situations as best we can. As demonstrated in the table above, our Eye Hill asset has great economics at $90/bbl, $70/bbl and even $50/bbl, and we will continue to pursue the growth of that asset. However, this is the market in which strong companies should look to acquire heavily discounted assets versus drilling up their inventory.” Nichol added, “The colossal decrease in world oil prices will hurt all oil and gas companies. Those that are prepared for the outcomes, as we believe Edge is, should benefit enormously and emerge from this downturn bigger, stronger and more efficient than ever before.”
Additional information may also be available at www.edgeres.com or www.sedar.com.
About Edge Resources Inc.
Edge Resources is focused on developing a balanced portfolio of oil and natural gas assets from properties in Alberta and Saskatchewan, Canada. Management has consistently focused on:
The management team’s very high drilling success rate is based on the safe, efficient deployment of capital and a proven ability to efficiently execute in shallow formations, which gives Edge Resources a sustainable, low- cost, competitive advantage.
[expand title=”Advisories & Contact”]
In accordance with National Instrument 51‐101 ‐Standards of Disclosure for Oil and Gas Activities (“NI 51‐101”), the Company’s oil, natural gas and natural gas liquids (“NGL”) reserves were evaluated by an independent engineering firm, AJM Deloitte as at March 31, 2014. Gross reserves included in this release are Edge’s working interest reserves before royalty burdens. Complete NI 51-101 reserves disclosure will be included in Edge’s annual NI 51-101 filings which will be filed prior to July 31, 2014 and made available at www.sedar.com. The Company’s aggregate proved and probable reserves are reported in barrels of oil equivalent (boe). Boe may be misleading, particularly if used in isolation. A boe conversion ratio for natural gas of 6 Mcf: 1 boe has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not necessarily represent a value equivalency at the wellhead. As the value ratio between natural gas and crude oil based on the current prices of natural gas and crude oil 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.
The term “bopd” means “barrels of oil per day.” The term “boepd” means “barrels of oil equivalent per day.”
Unaudited Financial Information
Certain financial and operating information included in this press release for the year ended March 31, 2014, such as capital expenditures, production, F&D costs and FD&A costs are based on unaudited financial results, and are subject to the same limitations as discussed under “Forward-Looking Information”. These estimated amounts may change upon the completion of audited financial statements for the year- ended March 31, 2014 and changes could be material.
Forward-Looking Statements
This news release includes certain information, with management’s assessment of Edge’s future plans and operations, and contains forward-looking statements which may include some or all of the following: (i) anticipated production rates; (ii) expected results of capital programs; (iii) expected timelines for production optimization; (iv) net debt levels; (v) anticipated operating costs; and (vi) expected capital projects and associated spending; which are provided to allow investors to better understand the Company’s business. By their nature, forward-looking statements are subject to numerous risks and uncertainties; some of which are beyond Edge’s control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, changes in environmental tax and royalty legislation, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility and ability to access sufficient capital from internal and external sources, and other risks and uncertainties described under the heading ‘Risk Factors’ and elsewhere in the Company’s Management Discussion and Analysis and other documents filed with Canadian provincial securities authorities and are available to the public at www.sedar.com. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. The principal assumptions Edge has made includes security of land interests; drilling cost stability; finance and debt markets continuing to be receptive to financing the Company, the ability of the Company to monetize non-core assets and industry standard rates of geologic and operational success. Actual results could differ materially from those expressed in, or implied by, these forward-looking statements. Edge disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. For more information on the Company, Investors should review the Company’s registered filings which are available at www.sedar.com.
This news release shall not constitute an offer to sell or the solicitation of any offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. The securities offered have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or applicable exemption from the registration requirements of the U.S. Securities Act and applicable state securities laws.
Trading in the securities of Edge Resources Inc. should be considered highly speculative. Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
Edge Resources Inc.
Brad Nichol
President & CEO
+1 (403) 767 9905
Edge Resources Inc.
Ward Kondas
wkondas@edgeres.com
+1 (778) 918-8384
www.edgeres.com
[/expand]