CALGARY, ALBERTA–(Marketwired – Jan. 24, 2017) – Cardinal Energy Ltd. (“Cardinal” or the “Company”) (TSX:CJ) announced today that its Board of Directors has approved a $100 million capital expenditure budget for 2017 that focuses on balance sheet strength, maintaining a significant and sustainable dividend and development of all of our three core areas.
The 2017 capital budget is designed to achieve significant growth in funds flow per share, and maintaining the Company’s annualized dividend at $0.42/share. Capital expenditures will be funded by reinvesting cash flow and the consideration for a proposed acquisition described below.
Development capital expenditures are anticipated to include drilling 18 (16.2 net) horizontal oil wells, and combined with production from the acquisition, is expected to deliver annual average production of between 16,800 – 17,300 boe/d in 2017. Cardinal expects to have a total payout ratio of 95% based on funds flow of $92 million and a simple payout ratio of 33%. Funds flow before risk management is expected to be $116 million. Cardinal 2017 forecast annual average production represents an increase of between 15% and 18% over 2016 annual production guidance of 14,600 boe/d.
Management has taken a conservative approach in forecasting production from the new wells at Mitsue and expects that with drilling success that we could exceed our forecast.
Cardinal has entered into an agreement to acquire certain assets that fall within our North (Mitsue) operating area. The assets are light oil focused and are expected to produce an average of 1,000 boe/d in 2017. Cardinal estimates that the assets have 3.4 million barrels of oil equivalent total proved plus probable (“2P”) reserves ($12.05 per boe). The acquisition is expected to increase Cardinal’s light oil drilling inventory.
The acquisition will be fully funded through the issuance of approximately 4 million common shares of Cardinal and a cash payment of $4 million, for a total purchase price of $41 million, subject to customary adjustments. The cash portion of the purchase price is expected to be funded through existing working capital and Cardinal does not expect to assume or incur any additional debt in conjunction with the acquisition.
This acquisition is consistent with Cardinal’s strategy of acquiring light oil focused properties and increasing the overall light oil weighting of its production mix. The 2017 budget includes the base production from this acquisition and production from the drilling of two light oil development wells on the properties to be acquired pursuant to the acquisition. The acquisition is subject to customary closing conditions including the Toronto Stock Exchange and is expected to close in the first quarter of 2017.
2017 Capital Budget
With the recent improvements of commodity prices, the focus of our 2017 budget is to switch from the maintenance scenario of 2015 and 2016 to one in which we begin to further develop and grow each of our three core operating areas. Management continues to focus on building a long term business based on value creation while maintaining balance sheet strength and our top quartile production decline rate of less than 15%.
Cardinal’s monthly dividend is currently set at $0.035 per share which we expect to maintain throughout 2017 given the current outlook for oil and natural gas pricing and taking into account our hedge positions. Our dividend is reviewed quarterly by our Board of Directors and is dependent on current commodity prices and overall economic conditions and is currently yielding approximately 4.5% per share.
The major components of the 2017 capital budget of $100 million include $41 million for the acquisition; $16 million for facilities and pipelines, $32.7 million for the drilling of 18 wells as well as to spend $4 million on environmental and reclamation initiatives.
South Area (Bantry)
Cardinal expects to spend $24 million, or 24% of our capital budget, in the Bantry area of Alberta. We continue to see above expected performance on our Glauconite drilling and have budgeted to drill 9 Glauc horizontal oil wells in 2017. We continue to evaluate other Mannville opportunities in the area and work to optimize the waterfloods on our existing properties.
Central Area (Wainwright)
Wainwright and Chauvin in eastern Alberta are our lowest decline properties and require minimal capital expenditures. These properties generate significant funds flow which we are able to re-invest in other areas of the Company and provide funding for our dividend. We expect to spend $8.5 million, or 8.5% of our capital budget, in this area in 2017. Approximately 50% of the capital expenditures in this area will be to proactively replace aging large diameter pipelines. Cardinal expects to drill 2 wells in this area targeting Waseca channels and we expect to expand our drilling inventory in the area.
North Area (Mitsue)
Our North producing area includes production to be acquired in the announced acquisition and in addition to the acquisition will see $23 million, or 23% of the 2017 budget. This will include the planned drilling of 7 horizontal development wells targeting light oil. As part of our Mitsue acquisition in late 2015, we recognized the need to replace an aging natural gas plant and downsize it with equipment that is more suitable for the current throughput.
We have commenced an initial horizontal well drilling program in Mitsue, targeting three different exploitation concepts in the Gilwood Sand. Our first well in the program was spud in late 2016 and recently rig released for production testing. Results from this program are expected to be released at the end of the first quarter. Success in any or all of the exploitation drilling is expected to set up a considerable light oil drilling inventory for Cardinal in this area.
Cardinal employs various forms of hedging as part of our overall strategy to protect cash flows and lock in individual project economics. We hedge crude oil, natural gas, power and the US/Canadian exchange rates. We currently have 6,375 bbl/d of our 2017 oil production hedged at a minimum average price of $65.66/bbl (CAD), and 6,000 GJ/d of natural gas at a minimum average price of $2.50/GJ.
Cardinal’s year end 2016 net bank debt is estimated to be $68 million. Our current syndicated banking facility has a $150 million credit facility. Our borrowing base was set by our lenders at $250 million at our most recent banking review.
In addition to our bank facility, we have $50 million of convertible debentures outstanding. The debentures mature on December 31, 2020 and are convertible into common shares of Cardinal at $10.50 per common share.
Royalties and Operating Costs
Operating costs are expected to average $19.75 – $20.25 per boe in 2017. On a per boe basis, costs are expected to be similar to 2016 as increased production offsets the effects of service industry cost inflation, the effects of the carbon tax and wage increases.
Royalties are expected to average 14% in 2017, a slight increase from Cardinal’s 2016 rate due to increased drilling and an increase in crown royalties due to the increase in oil prices.
General and Administrative Costs
G&A expenses are expected to be within a range of $2.10 to $2.30 per boe in 2017. Cardinal proactively reduced salaries in 2015 instead of reducing staff as commodity prices deteriorated. These salary reductions were reversed in January of 2017.
Cardinal expects to have a total payout ratio in 2017 of 95% with funds flow of $92 million based on an average oil price of $55/bbl WTI, a natural gas price of $3/mcf AECO and an US/CAD exchange rate of 0.74. Funds flow is expected to fully fund our development capital expenditure program and dividend. Cardinal also employs a no discount DRIP and SDP program as part of its dividend that reduces the overall cash payout of our dividends with participation rates between 4% and 10% in 2016.
Cardinal is well positioned with a strong balance sheet to fund an increase in its 2017 capital budget. The oil and gas business in Canada is dynamic and Cardinal believes it has the ability and funding capability to react quickly to opportunities as they may arise.
Cardinal has budgeted $4 million for environmental and reclamation expenditures in 2017. Our post acquisition Liability Management Rating (“LMR”) ratio is expected to be 1.98 at the end of Q1 2017 without taking into account any budgeted expenditures described herein. We expect to achieve an LMR ratio of 2 or higher in 2017. Cardinal has been focused on being a responsible operator and continues a program of abandoning and reclaiming suspended wells. We continue to exceed requirements set out by the Alberta Energy Regulator. We have committed significant resources in this year’s budget to replace aging infrastructure and will continue to proactively maintain our assets in the future.
Cardinal’s guidance for 2017 (assuming the completion of the acquisition) is set forth below:
|Oil and NGLs (bbl/d)||13,900 – 14,300|
|Natural Gas (mcf/d)||17,400 – 18,000|
|Total (boe/d)||16,800 – 17,300|
|Operating||$19.75 – $20.25|
|G&A||$2.10 – $2.30|
|Funds flow (1)||$92,000|
|Development capital expenditures (1)||$58,000|
|Weighted average shares basic||78,293|
|Weighted average shares diluted (3)||82,493|
|(1) See Non-GAAP measures.|
|(2) The value of the share consideration is based on the three-day volume weighted average closing price of the common shares of Cardinal prior to entering into of the acquisition agreement.|
|(3) Excluding convertible debentures.|