Copies of Rock’s audited financial statements and related management’s discussion and analysis for the three months ended March 31, 2016 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,||2016||2015|
|Crude oil and natural gas revenue (‘000)||$||5,087||$||17,466|
|Funds from operations (‘000) (1)||$||2,103||$||6,158|
|Net loss (‘000)||$||(5,354||)||$||(4,178||)|
|Total net capital expenditures (‘000) (2)||$||785||$||14,353|
|As at March 31,||2016||2015|
|Net debt (‘000) (1)||$||58,382||$||63,154|
|Common shares outstanding||47,519,245||46,971,997|
|Three months ended March 31,||2016||2015|
|Average daily production|
|Crude oil and natural gas liquids (bbls/d)||2,775||5,011|
|Natural gas (mcf/d)||706||864|
|Barrels of oil equivalent (boe/d)||2,893||5,155|
|Average product prices|
|Crude oil and natural gas liquids ($/bbl)||$||19.98||$||38.22|
|Natural gas ($/mcf)||$||1.57||$||2.96|
|Operating netback ($/boe) (2)(3)||$||1.01||$||16.70|
|(1)||Funds from operations and net debt are considered key financial metrics; Refer to the “Key Financial Metrics” section at the end of this MD&A for definitions.|
|(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 $13.87 per boe for the three months ended March 31, 2016. As at March 31, 2015 the Company did not have any commodity price contracts outstanding.|
LETTER TO THE SHAREHOLDERS
Welcome to the first shareholders report for 2016.
The first quarter has been extremely difficult for our industry as the price for WTI dropped toward $25.00 US/bbl in January and averaged only $34.00 US/bbl for the quarter. With this significant deterioration in prices, we reduced our capital spending to only essential projects to preserve the integrity of our assets.
The Company elected to have the production rates from our assets fall, and not complete the workovers that would normally maintain production levels. This preserved cash, preserved reserves, and allowed for the acceleration of pressure support at the Laporte EOR project.
As we announced on December 15, 2015 we decided to explore 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
During the first quarter of 2016 Rock focused on maintaining its balance sheet and capital spending was limited to essential activities to preserve the value of the asset base.
The quarter was highlighted by the following specific accomplishments:
- Drilled 1 (1.0 net) oil well with 100% casing success at Mantario infill;
- Averaged 2,893 boe per day (96% crude oil and liquids);
- Total net capital expenditures of $0.8 million;
- Generated funds from operations for the quarter of $2.1 million ($0.04/ basic share); and
- Negotiated banking agreements with our existing senior lender, and a new subordinated lender for a total combined facility of $60 million.
Rock’s realized price in the first quarter of 2016 was $19.33 per boe compared to $35.13 per boe in the fourth quarter of 2015 and $37.65 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 $34.00 US/bbl during the quarter from $42.18 in the fourth quarter of 2015 and $48.63 US/bbl a year ago. This drop in WTI prices was partially offset by a reduction in the US/CAD exchange rate.
Operating costs increased during the quarter to $17.42 per boe compared to $16.32 per boe in the fourth quarter of 2015.
Rock generated an operating netback of $1.01 per boe in the first quarter of 2016 compared to $17.63 per boe in the fourth quarter of 2015, as operating netbacks were negatively impacted by reduced product pricing. Though operating costs were higher on a per boe produced basis in the quarter, royalties were slightly lower at $1.08/boe compared to $1.18/boe in the fourth quarter of 2015.
Total net capital expenditures for the first quarter of 2016 were $0.8 million, including $0.8 million for the drilling program and facilities, $0.5 million for land and capitalized G&A, offset by a $0.5 million of AFE accrual reversals from expenditures completed in 2015.
Rock’s daily production for the first quarter of 2015 averaged 2,893 boed (96% oil and liquids) including approximately 540 boed from the Onward Viking pool and approximately 1,800 boed from the Mantario/Laporte pool.
During the first quarter of 2016 Rock drilled and completed one oil well at Mantario/Laporte as well as completed and equipped two oil wells (that were drilled in 2015). The Company also completed one additional polymer injector conversion. Rock elected to delay workovers to repair pump failures, during the first quarter due to low oil prices. In addition workover operations were adversely affected by break up (road bans). Due to these reasons production levels from the pool fell below 1,500 boepd during the months of March and April. Since that time, Rock has been able to move on to the shut in wells and begin to restore production. Production from the pool is currently averaging approximately 1,700 – 1,800 boed, and the Company expects production to stabilize in the 1,800 – 2,000 boed range in the next few months as the remaining repairs are completed.
Though production from the pool was adversely affected in recent months due to the lack of maintenance spending, it has allowed the Company to increase its reservoir voidage replacement and re-pressurize the pool. Moving forward the pool will require the drilling of 4-6 in-fill wells over the next year to maintain and build the production levels.
The Company was successful in the April 8, 2016 land sale in acquiring an additional two sections of land directly to the west of our main pool. This has added an additional exploration target along the same trend as the main Laporte pool.
Onward, Saskatchewan Viking
During the first quarter, Rock elected to allow 8.7 sections of freehold land to expire as these lands were not economic to develop at forecast prices for the foreseeable future. Rock continues to have over 35 net sections of land in this area that management believes are prospective for economic oil production. If fully developed at 16 wells per section, this play could generate over 500 drilling locations and 16 million boe of recoverable reserves. Production from the Viking is expected to average 450 boed during the second quarter of 2016.
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.