Copies of Rock’s audited financial statements and related management’s discussion and analysis for the three months ended March 31, 2015 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.
|Three months ended March 31,||2015||2014|
|Crude oil and natural gas revenue (‘000)||$||17,466||$||32,442|
|Funds from operations (‘000) (1)||$||6,128||$||15,314|
|Net Income (‘000)||$||(4,178||)||$||(17,301||)|
|Total net capital expenditures (‘000) (2)||$||14,353||$||22,888|
|As at March 31,||2015||2014|
|Net debt (‘000) (1)||$||63,154||$||25,607|
|Common shares outstanding||46,971,997||39,535,330|
|Three months ended March 31,||2015||2014|
|Average daily production|
|Crude oil and natural gas liquids bbls/d)||5,011||4,620|
|Natural gas (mcf/d)||864||1,673|
|Barrels of oil equivalent (boe/d)||5,155||4,899|
|Average product prices|
|Crude oil and natural gas liquids ($/bbl)||$||38.22||$||75.75|
|Natural gas ($/mcf)||$||2.96||$||6.28|
|Operating netback ($/boe) (2)||$||16.70||$||39.64|
|(1)||Funds from operations and net debt are considered additional-GAAP measures; Refer to the “Additional-GAAP Measures” section at the end of this MD&A.|
|(2)||Operating netback and total net capital expenditures are considered Non-GAAP measures; Refer to the “Non-GAAP Measures” section at the end of this MD&A.|
LETTER TO THE SHAREHOLDERS
Welcome to the first shareholders report for 2015.
This last quarter has been a wild ride for our industry as we navigated through major swings in the price we receive for our oil. WTI started the quarter at $55.00 US/bbl, dropped toward $40.00 US/bbl and recently recovered back into the $60.00 US/bbl range. The leadership team here at Rock responded to this volatility by protecting our balance sheet, something we see as of critical importance. Early in the year we cut our capital program and raised some equity so that our net debt to funds from operations ratio could be forecasted back in line with targeted levels by the fourth quarter, at 1.0 times.
Despite the pricing challenges we were able to get the Mantario/Laporte project substantially completed! We now have polymer being injected into the reservoir and the reduced royalty rate is in effect. This is paramount to meeting the needs of our reservoir (pressure maintenance) and achieving strong cash flow in this low price environment.
As we look forward, we are encouraged by the fundamentals around the oil price recovery. The team has been able to find ways to drill our wells cheaper, and at current pricing we can begin drilling again and generate reasonable project economic returns.
During the second half of the year we will turn our focus to the Viking play at Onward, Saskatchewan. This asset is currently underdeveloped and is expected to become a significant part of our future. All of our planned capital spending for 2015 is in Saskatchewan, and over 95% of our production comes from that province.
Our Annual General Meeting is scheduled for 10:00 am, May 13, 2015 at the Le Germain Hotel in Calgary, and I encourage you all to attend. We will give a brief presentation of the Company, and show you how the EOR project at Mantario/Laporte is coming along.
Sincerely, and on behalf of the Board of Directors:
Allen J. Bey, President and Chief Executive Officer
REPORT TO SHAREHOLDERS
During the first quarter of 2015 Rock was able to substantially complete the construction of the enhanced oil recovery (“EOR”) project at Mantario/Laporte and begin the injection of polymer while maintaining the integrity of its balance sheet.
The quarter was highlighted by the following specific accomplishments:
- Drilled 6 (6.0 net) oil wells with 100% casing success including 3 (3.0 net) Mantario infill locations in the main pool and 3 (3.0 net) horizontal Viking oil wells at Onward;
- Averaged 5,155 boe per day (97% crude oil and liquids) of production representing a 5% increase from a year ago;
- Completed the construction of the EOR facility at Mantario/Laporte;
- Initiated polymer injection in March, qualifying for the reduced EOR royalty regime offered by the Saskatchewan government effective March 1, 2015;
- Completed a bought deal financing in March, for gross proceeds of $15.1 MM;
- Spent a total of $14.4 million on the capital expenditure program;
- Generated funds from operations for the quarter of $6.1 million ($0.14/ basic share);
Rock’s realized price in the first quarter of 2015 was $37.65 per boe compared to $60.09 per boe in the fourth quarter of 2014 and $73.59 for the same period a year ago. The decrease in price realization is primarily attributed to a significant decrease in WTI pricing as it fell to $48.63 US/bbl during the quarter from $73.15 in the fourth quarter of 2014 and $98.68 US/bbl a year ago. This drop in WTI prices was somewhat offset by a reduction in the US/CAD exchange rate and a significant narrowing in the heavy oil (WTI-WCS) price differential. The current WTI-WCS differential is trading around $8.00 US/bbl – $10.00 US/bbl which is at the low end of Rock’s long term view of a sustainable range ($10.00 US/bbl – $15.00 US/bbl).
Operating costs increased during the quarter to $17.34 per boe compared to $16.31 per boe in the fourth quarter of 2014 as the polymer injection and handling costs are beginning to impact operations at Mantario/Laporte. Rock expects our operating costs going forward to continue to increase slightly ($18.00/boe-$19.00/boe) as the full effect of the EOR program is established.
Rock generated an operating netback of $16.70 per boe in the first quarter of 2015 compared to $28.63 per boe in the fourth quarter of 2014, as field netbacks were negatively impacted by reduced product pricing. Though operating costs were higher on a per boe produced basis in the quarter, royalties were significantly lower at $3.61/boe during the quarter compared to $15.15/boe in the fourth quarter of 2014.
Total net capital expenditures for the first quarter of 2015 were $14.4 million, including $6.2 million for the drilling program, $10.0 million for facilities, $1.2 million for land, seismic, asset dispositions and capitalized G&A, offset by a $3.0 million Saskatchewan Petroleum Research Incentive (“SPRI”) grant from the Saskatchewan government for research expenditures completed in 2014.
On March 4, 2015, Rock closed a bought deal financing for total gross proceeds of $15.1 million, issuing a total of 6.44 million common shares at a price of $2.35 per share. At the end of the first quarter Rocks total net debt was $63.2 million which is 2.6 times the first quarter funds from operations annualized.
Rock’s daily production for the first quarter of 2015 averaged 5,155 boe/d (97% oil and liquids). Currently the Company is producing approximately 4,300 – 4,500 boe/d as we complete the startup of the EOR program at Mantario/Laporte and deal with delays from spring break up.
During the first quarter of 2015 Rock spent $12.0 million at Mantario/Laporte to complete the drilling program and the construction of the EOR facilities. This program is largely complete, and polymer injection began in March 2015. The Company qualified for the reduced EOR royalty rate of 1% effective March 1, 2015. Production from the pool is currently averaging approximately 2,500-3,000 boepd as the polymer begins to re-pressurize the reservoir. The Company expects production to stabilize in the 3,000 boepd range in the next few months.
Onward, Saskatchewan Viking
During the first quarter of 2015, the Company drilled an additional 3 (3.0 net) horizontal oil wells in to the Viking Formation at Onward. Production rates for these wells continue to improve as we refine drilling and completion techniques. When compared to the results from the original wells, the most recent completions are generating initial production rates 35% higher on average. This is very encouraging as higher initial production rates significantly improve the net present value, and overall economics of these drilling opportunities.
Rock continues to add to our land position in this area and now has over 47 net sections. Our drilling activity to date has demonstrated that the gas-oil contact is located further to the north-west than originally anticipated, thus expanding the potential size of this pool to approximately 40 sections net to the Company. If fully developed at 21 wells per section, this play could generate up to 800 drilling locations and 28 million boe of recoverable reserves.
Total production from the Viking has increased considerably in the last year and averaged 1,390 bopd during the first quarter of 2015. The Company has not completed a new well since January 2015, and as such, Viking production is currently averaging 900-1,000 bopd from the 49 wells of the 52 wells drilled (3 wells have been drilled, but not yet completed).
We have completed a review of the cost to drill new wells into the Viking play and have bids from our service suppliers that would deliver a well at approximately $850k – $900k. When this lower well cost is used in an economic review of the project, and assuming current strip pricing, the drilling opportunities generate an IRR of approximately 25% and a payout of approximately 2.5 years. These projects meet reasonable economic hurdles, and achieve the strategic goal of building our Viking production in this underdeveloped asset. To protect the rates of return on this capital investment, we have entered into hedges on 1,000 bbls/d of light oil for the second half of 2015, and 500 bbls/d for all of 2016.
Onward, Saskatchewan Mannville
During the fourth quarter of 2014, Rock completed a 3D seismic shoot on 30 sections of land in the Onward area to follow up on a Mannville discovery. At the present time this seismic data is being interpreted but has already generated a number of exciting exploration leads that could be pursued in the second half of 2015.
Mr. Ken Severs has decided not to stand for re-election to our Board of Directors. Mr. Severs joined the Board of Rock in 2010 and was the Chair of the Reserves committee. We wish to thank Ken for his many years of service with the Company, and his invaluable contribution to our progress.
Outlook and 2015 Guidance
Given the progress made in capital cost reductions, the current level of crude oil prices and the number of economically attractive projects, Rock’s Board of Directors has approved a $15 million increase to the capital program. The increase in capital will be focused on further de-risking the play and building a strong Viking production base at Onward. With this expanded capital program the Company is now forecasting to exit the year producing approximately 5,000 boepd during the fourth quarter, generating funds from operations of $42 million for the year and have year-end net debt of $53 million (0.9 times forecast fourth quarter funds from operations annualized).
During the first quarter the Company completed the essential projects related to the Mantario/Laporte EOR scheme so that reservoir pressure can be maintained. This will ensure the maximum recovery factor, lowest decline rate, and the receipt of the EOR royalty incentive. Polymer injection began in March and the Company qualified for the 1% royalty rate effective March 1, 2015.
As we move into the second half of the year we are moving our focus to the under-developed Viking asset at Onward. Lower capital costs in conjunction with current strip pricing will generate reasonable economic returns and allow the Company to begin expanding the production base. However, we will be vigilant to guard our balance sheet, have added hedges to lock in a portion of pricing, and will be focused on exiting the year with a one times debt to funds from operations ratio.
The expanded capital program of $40 million will generate average production for the year of 4,700 – 5,000 boepd, and increases our forecast fourth quarter production rate from 4,200 boepd to approximately 5,000 boepd. Assuming WTI averages $61.00 US/bbl for the remainder of the year ($58.00 WTI US$/bbl for Q2, $60.00 WTI US$/bbl for Q3 and $65.00 WTI US/bbl for Q4), the WTI – WCS differential averages $13.33 US/bbl, and the exchange rate averages 1.20 CDN/US$ the Company forecasts funds from operations of approximately $42 million ($0.91/share) and year-end net debt of $53 million (0.9 times forecast fourth quarter funds from operations annualized).
The first quarter of 2015 was a challenging period for our industry as WTI dipped toward $40.00 US/bbl, and averaged less than $50.00 US/bbl. Today the commodity price appears to be improving, and certain market signals point to a steady recovery for the remainder of the year. Rock has been proactive in guarding its balance sheet by reducing the capital program and raising equity early in the year. Strategically, Rock’s 2015 business plan is directed at activities that confirm proof of concept, capture new opportunities and preserve our existing inventory. This disciplined approach is targeted to maintain a financially flexible organization with a long term view to value creation. Today we can begin to grow again so long as we are careful and focused on managing costs to generate acceptable rates of returns from our projects.
For further information please visit Rock’s website at www.rockenergy.ca.
Production volumes and reserves are commonly expressed on a barrel of oil equivalent (“boe”) basis. All conversions in this report are derived by converting natural gas to crude oil in the ratio of six thousand cubic feet (“mcf”) of natural gas to one barrel (“bbl”) of crude oil. Certain financial values are presented on a boe basis and such measurements may not be consistent with those used by other companies. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of six mcf to one boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
This document, including the accompanying financial statements also contain the terms “operating netback” and “total net capital expenditures” which do not have any standardized meaning prescribed by GAAP and may not be comparable with the calculation of similar measures for other entities and should not be considered an alternative to or more meaningful than the prescribed GAAP measure. Management believes these measures are helpful supplementary measures of financial performance and provide users with information that is commonly used by other oil and gas companies.
Operating netback has been calculated as oil and natural gas revenues, less royalties and production and operating expenses. Management believes this is a measure of operational profitability before administrative and other financing costs. Cash netbacks are calculated as operating netbacks less general and administrative expenses before share based compensation, and interest financing costs. Readers are cautioned that these measures should not be considered an alternative to, or more meaningful than, “net loss and comprehensive loss” as determined in accordance with GAAP as a measure of the Company’s performance.
Total net capital expenditures has been calculated to include the cash impacts of capital expenditures and property dispositions, as well as non-cash capital adjustments related to the Company’s decommissioning liability and share based compensation costs. Management believes that this provides supplemental information on the total capital spending for the period.
Funds from operations
This document, including the accompanying financial statements, contain the term “funds from operations” which does not have any standardized meaning prescribed by GAAP and should not be considered an alternative to, or more meaningful than, “cash flow from operating activities” as determined in accordance with GAAP as a measure of the Company’s performance. Funds from operations or funds from operations per share may not be comparable with the calculation of similar measures for other entities. Funds from operations as used in this report represent cash from operating activities before changes in non-cash working capital and decommissioning expenditures. See “Funds from operations” section for details of this calculation. Management believes that funds from operations represent both an indicator of the Company’s performance and a funding source for ongoing operations.
Other additional GAAP measures
This document, including the accompanying financial statements also contain the terms “adjusted working capital deficiency” and “net debt” which do not have any standardized meaning prescribed by GAAP and may not be comparable with the calculation of similar measures for other entities.
Working capital is defined as the difference between current assets and current liabilities. Working capital (deficiency) is the term used when the difference between current assets and current liabilities is a negative number which is quite common in the oil and gas industry. Adjusted working capital, and adjusted working capital deficiency have been calculated excluding the unrealized gains on commodity price contracts from current assets and the unrealized losses on commodity price contracts and bank debt from current liabilities. Adjusted working capital and adjusted working capital (deficiency) represent operating liquidity available to the business and are included in the definition of the additional GAAP term “net debt”.
Net debt has been calculated as bank debt plus adjusted working capital or adjusted working capital (deficiency). Net debt is used to calculate the debt-to-annualized-funds from operations ratio. Management believes these measures are useful supplementary measures of the total amount of current and long-term debt. Total capitalization is calculated as net debt plus shareholders’ equity. Management believes this measure is a useful supplementary measure of the Company’s managed capital.
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.
The forward-looking statements and information in this press release are based on certain key expectations and assumptions made by Rock, including the timing of regulatory approvals, 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.
|bcf||billion cubic feet||mboe||thousand barrels of oil equivalent|
|boe||barrels of oil equivalent||mboe/day||thousand barrels of oil equivalent per day|
|bps||basis points||mcf||thousand cubic feet|
|CDOR||Certificate of Deposit Offered Rate||mmcf||million cubic feet|
|hectare||1 hectare is equal to 2.47 acres||mmboe||million barrels of oil equivalent|
|km||kilometre||NGL||natural gas liquids|
|WTI||West Texas Intermediate|
|WCS||Western Canadian Select|
Rock Energy Inc.
Allen J. Bey
President and Chief Executive Officer
Rock Energy Inc.
Vice President Finance and Chief Financial Officer