CALGARY, ALBERTA–(Marketwired – March 29, 2016) – Rock Energy Inc. (TSX:RE) (“Rock” or the “Company”) is pleased to report its financial and operating results for the year and three months ended December 31, 2015.
Rock has filed its Annual Information Form (AIF), which includes Rock’s reserves data and other oil and natural gas information for the year ended December 31, 2015. The AIF includes annual disclosure regarding reserves data and other oil and gas information as mandated by National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities of the Canadian Securities Administrators. Copies of Rock’s audited financial statements and related management’s discussion and analysis and AIF for the year ended December 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.
|Year Ended December 31,||2015||2014|
|Crude oil and natural gas revenue (‘000)||$61,109||$132,314|
|Funds from operations (‘000) (1)||$32,175||$66,163|
|Per share – basic||$0.70||$1.65|
|Net loss (‘000)||($4,517)||($17,203)|
|Per share – basic||($0.10)||($0.43)|
|Total net capital expenditures (‘000) (2)||$37,749||$118,873|
|As at December 31,||2015||2014|
|Net debt (‘000) (1)||$59,577||$69,032|
|Common shares outstanding||47,519,245||40,444,997|
|Year Ended December 31,||2015||2014|
|Average daily production|
|Crude oil and natural gas liquids (bbls/d)||3,969||4,764|
|Natural gas (mcf/d)||801||1,363|
|Barrels of oil equivalent (boe/d)||4,103||4,991|
|Average product prices|
|Crude oil and natural gas liquids ($/bbl)||$41.56||$74.53|
|Natural gas ($/mcf)||$3.05||$4.98|
|Operating netback ($/boe) (2)||$21.07||$38.95|
|(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.|
|(3)||Operating netback exclude realized hedging gains of $4.53 per boe for the year ended December 31, 2015 (2014 – hedging losses of $0.03 per boe).|
LETTER TO THE SHAREHOLDERS
Welcome to this year’s Report to Shareholders from Rock Energy Inc.
The year 2015 turned out to be a very challenging year for our industry as we adjusted our activities to accommodate the deterioration in commodity prices. At Rock, we focused on our cost structures, the development of our assets to add reserves, and not necessarily to increase production.
During the year we were able to increase our proven plus probable reserve base by 37%, replacing 400% of our production while only spending $38 million. I am very proud of our team, who achieved these accomplishments in a very difficult price environment.
Regarding our cost structures, we were able to reduce the capital costs to drill a Viking well at Onward by 30%. We also took some difficult steps to reduce our general and administrative costs. All of these actions enhance the ability of your Company to sustain itself in this challenging environment.
As we announced on December 15, 2015 we decided to examine strategic alternatives for the purpose of preserving and enhancing shareholder value. That process is ongoing; however, it is the Company’s intention not to disclose developments with respect to the strategic review process until the Board of Directors has approved a specific transaction or otherwise determines that disclosure is necessary or appropriate.
Sincerely, and on behalf of the Board of Directors:
Allen J. Bey, President and Chief Executive Officer
REPORT TO SHAREHOLDERS
The last year has been a very challenging year for our industry as we managed our business in response to the falling commodity prices. At Rock we focused on our cost structure instead of production growth. Our total corporate annual production for the year was 4,103 boe/d. During 2015, Rock’s funds from operations per share were $0.70 and in the fourth quarter were $0.16.
Rock spent $37.7 million in total net capital expenditures in 2015, to replace over 400% of our production and grow our proven plus probable reserve base by 37%. Our finding, development and acquisition (“FD&A”) costs (including revisions, acquisitions and dispositions, and changes in future development capital) were $17.04/boe for the year generating a recycle ratio of 1.2. During the year the Company was quite focused on our core growth assets of Mantario/Laporte and Onward while at the same time continued divesting of non-core assets in the greater Lloydminster area. The base decline rate of our asset base is now less than 20%.
During 2015, our focus at Mantario/Laporte was to initiate the injection of polymer at our Enhanced Oil Recovery (“EOR”) project to maximize the recovery factor, arrest declines and trigger the reduced royalty program offered by the Saskatchewan government. The production from this asset averaged approximately 2,300-2,400 boed after accommodating the conversion of 15 producers to injectors.
While we were completing the implementation of the EOR scheme at Mantario/Laporte, we were continuing to prove up the Viking light oil play at Onward and focusing on ways to reduce our capital costs to drill, complete and bring a new well on stream. During the year we were able to bring the total DCE&T cost down from $1.1 million to $775 thousand. This 30% reduction in capital costs is very important to improving the economic returns and payouts of these investments.
Effective March 29, 2016 Rock executed credit facility agreements with its current senior lender, and a third party subordinated lender for a combined total of $60 million.
Rock’s 2015 Operating Accomplishments
2015 Drilling Results
During the fourth quarter of 2015 the Company drilled a total of 5 (5.0 net) wells at Mantario/Laporte to confirm the extension of the main pool to the North West and complete drainage patterns in the main pool.
For the full year of 2015 the Company drilled a total of 26 (26.0 net) wells including 16 (16.0 net) Onward Viking Horizontal wells, 8 (8.0 net) Mantario/Laporte oil wells and 2 (2.0 net) dry and abandoned wells for an average success rate of 92%.
Rock spent $22.1 million at Mantario/Laporte in 2015 to drill 8 (8.0 net) oil wells, convert 15 producing wells to injectors, commission the processing and injection facilities and initiate the EOR water/chemical injection in March, 2015. During the fourth quarter the Company was able to confirm the extension of the main pool to the North West, and increase the overall size of the pool to 44.1 million barrels of Original Oil in Place (OOIP). Based on the performance to date of the polymer injection program and well response, GLJ has recognized an increased recovery factor (in the Proved plus Probable reserve category) from 20% at 2014 year-end to 25% at December 31, 2015. With this increase in pool size and recovery factor, the Proved plus Probable reserves for the Polymer flood increased from 5.7 million boe to 7.8 million boe (a 39% increase), and the value has increased from $116 million to $119 million from year-end 2014 to December 31, 2015 despite the 41% reduction in the oil price forecast. During 2015 Rock was able to add reserves at Mantario/Laporte at an FD&A cost of $3.57/boe.
During 2015, Rock spent $15.5 million at Onward on the Viking program to drill 16 (16.0 net) oil wells. This activity was focused on defining the extent of the play to the northwest and demonstrating the cost reductions.
Due to the ongoing success of the Onward Viking development, GLJ has been able to book a total of 169 Total Proved plus Probable undeveloped drilling locations of the over 600 previously unbooked locations management has identified. This compares to a total of 55 Proved plus Probable undeveloped locations at the end of 2014. Viking Proved plus Probable Reserves increased by over 100% from 3.2 million boe to 6.5 million boe from December 31, 2014 to December 31, 2015, and the reserve value has increased from $58 million to $77 million over the same period. During 2015 Rock was able to add light oil reserves at Onward at an FD&A cost of $26.00/boe.
2015 Reserves Summary
Rock’s total proved plus probable reserves are 17.1 million boe (over 98% crude oil and natural gas liquids), up 37% compared to 12.5 million boe last year. Total proved reserves now make up 67% of the proved plus probable category as they have increased to 11.4 million boe from 8.7 million boe. The Company replaced over 400% of its production during the year and increasing the reserve life index to 14.1 years on a Proven plus Probable basis. The Company is now focused into three main assets (in two core areas), two of which Rock has discovered and developed, representing 99% of its value. FD&A costs corporately averaged $17.04 per proved plus probable boe generating a recycle ratio of 1.2.
Though the price forecast for WTI adopted by GLJ has fallen by 41% in 2016, our proved plus probable reserve value held constant at approximately $219 million. Rock’s net asset value (BTAX 10%, proved plus probable) as of December 31, 2015 was $3.67 per basic share assuming an undeveloped land value of $15.9 million, and year-end net debt of $60.0 million.
Further information respecting Rock’s year-end reserves is contained in its AIF, which has been filed on the SEDAR website at www.sedar.com and may also be obtained on Rock’s website at www.rockenergy.ca.
Rock generated funds from operations of $32.2 million ($0.70 per basic share, $0.68 per fully diluted share) in 2015, compared to $66.2 million ($1.65 per basic share) in 2014, a decrease of 51%. For the fourth quarter of 2015, the Company generated funds from operations of $7.7 million ($0.16 per basic share) compared to $9.8 million ($0.21 per basic share) in the third quarter of 2015. Realized prices averaged $35.13/boe during the fourth quarter of 2015, compared to $40.80/boe during the year and $72.63/boe for 2014.
During 2015, operating costs averaged $16.73/boe compared to $15.81/boe the year before as the Company began to incur incremental costs associated with the EOR project. Offsetting these additional operating costs is the significant reduction in royalties, as 2015 experienced an average royalty cost of $3.00/boe compared to $17.87/boe in 2014. The Company’s G&A costs in 2015 were up to $3.21/boe, compared to $2.44/boe in 2014.
Rock generated a net loss of $4.5 million ($0.10 per basic and fully diluted share) in 2015, compared to a net loss of $17.2 million ($0.43 per basic share) in 2014. This loss was essentially generated by accelerated depletion and impairment on certain non-core natural gas properties, and the sale of the non-core assets.
Rock incurred total net capital expenditures of $37.7 million in 2015 of which $22.1 million was focused on Mantario/Laporte, and $15.5 million was spent on the Viking play at Onward. Year-end net debt was $59.6 million resulting in a net debt to fourth quarter annualized funds from operations ratio of 1.9.
2016 Area Activity Update
To date in 2016, Rock has responded to the continued erosion in commodity prices and curtailed capital spending to only invest in projects deemed essential to preserve asset integrity. The Company has completed two oil wells in the Mantario/Laporte pool (that were drilled in 2015), drilled and completed another oil well at Mantario/Laporte and completed one polymer injector conversion.
The Company estimates Q1 2016 production to be 2,800 – 3,000 boed including 550 – 600 boed from the Onward Viking pool and 1,800 – 2,000 boed from the Mantario/Laporte pool.
During the last eighteen months crude oil prices have experienced a very significant decline as global supply has exceeded demand and inventories have grown. Industry has responded with cuts to capital spending programs, and production growth plans. It is believed that once the supply response is evident, the supply/demand balance will be restored, and the oil prices will move up from their current levels as many oil drilling opportunities are not viable at these price levels. Until that happens, Rock is focused on maintaining our balance sheet, reducing our cost structures, and preserving the integrity of our assets.
Outlook and 2016 Guidance
Given the current level of crude oil prices, Rock reduced its capital budget for 2016 from the previously announced level of $20 million (November 12, 2015) to a “cash flow” budget. The Company will monitor cash flow on a monthly basis to ensure discretionary capital spending does not increase existing net debt levels.
On December 15, 2015 Rock announced that it had initiated a full public process to identify and examine strategic alternatives for the purpose of preserving and enhancing shareholder value. Such strategic alternatives may include, but are not limited to, a corporate sale, merger or other business combination, the sale of all or a material portion of Rock’s assets, a reorganization, recapitalization or restructuring of Rock or any combination of the foregoing.
It is the Company’s intention not to disclose developments with respect to the strategic review process until the board of directors has approved a specific transaction or otherwise determines that disclosure is necessary or appropriate. Rock cautions that there are no assurances or guarantees that the process will result in a transaction and that, if a transaction is undertaken, no assurances or guarantees may be given with respect to the type, terms or timing of such a transaction. In addition, the results of this process may impact the ability of the Company to continue to successfully manage its credit facility agreements and its ability to continue future operations. Additional equity, debt arrangements and/or operating developments may be needed to meet the Company’s business objectives. There are no guarantees that such additional capital funding will be available when needed.
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.