CALGARY, Alberta, Dec. 12, 2017 (GLOBE NEWSWIRE) — Cardinal Energy Ltd. (TSX:CJ) (“Cardinal” or the “Company”) announced today that its Board of Directors has approved a capital expenditure budget for 2018 that focuses on maintaining a sustainable dividend and development of our existing asset base.
The 2018 capital budget is designed to achieve significant growth in adjusted funds flow per share and maintaining the Company’s annualized dividend at $0.42/share. Cardinal would also like to confirm that a dividend of $0.035 per common share will be paid on January 15, 2018 to shareholders of record on December 29, 2017. The Board of Directors of Cardinal has declared the dividend payable in cash. This dividend has been designated as an “eligible dividend” for Canadian income tax purposes.
2018 Capital Budget
Cardinal’s 2018 budget is expected to produce pre-hedging adjusted funds flow of $132 million, assuming a royalty rate of 15.8%, an oil price of $55/bbl, US/Cdn exchange rate of 0.78 and a $1.75/mcf AECO natural gas price. After taking into account Cardinal’s current commodity hedging exposure, adjusted funds flow is expected to be approximately $125 million.
Our base capital program will consist of drilling 13.5 oil wells ($18 million), well optimization and production enhancement projects ($20 million) and facilities and pipelines ($17.5 million) for a total base budget of $55.5 million. This base capital program results in cash flow net of development capital expenditures of $69.5 million.
The free cash flow of $69.5 million will be used to fund the dividend and to fund the cash portion of future acquisitions within Cardinal’s existing asset base. All acquisitions done in 2018 will be funded with excess operating adjusted funds flow and Cardinal will not incur additional debt for these acquisitions.
Cardinal’s total payout ratio, which represents the capital program plus its dividend, is expected to be 84% prior to any acquisitions.
Production is expected to average 21,000 to 21,500 boe/d for 2018 with capital spending weighted to the first 6 months of 2018 and production growth is expected to occur in the fourth quarter of 2018.
Acquisitions are a part of Cardinal’s business model and our acquisition strategy for 2018 will be to consolidate properties and working interests within existing properties in our core operating areas.
Under this strategy we have signed a Purchase and Sale Agreement (“PSA”) to acquire an additional 10% working interest in our operated Midale Unit for $22.5 million (the “Acquisition”). The Acquisition which is expected to close on January 2, 2018, will be funded through the payment of $11.25 million in cash and the issuance of 2,314,815 Cardinal common shares. The Acquisition is subject to customary closing conditions including the Toronto Stock Exchange approval.
Based on the current netback in the Midale Unit the Acquisition has an asset recycle ratio in excess of 3x with the reserve additions of $9.50 per barrel. The Acquisition of this additional working interest in this long life low decline oil property will increase our working interest in the Midale Unit to 78%.
Our North area is comprised of the Mitsue, Grande Prairie and House Mountain properties. Approximately 37% of the capital expenditure budget is allocated to this area and includes the planned drilling of 6.5 net horizontal Elmworth Dunvegan wells targeting light oil. The ongoing capital project to downsize and replace much of the aging facilities in the Mitsue property will be completed before the end of the second quarter 2018. These multi-year projects were designed to reduce operating costs and better suit the infrastructure to current production volumes.
Cardinal expects to spend 17% of our capital expenditure budget, in the Bantry area of Alberta. We expect to drill six net Glauc horizontal oil wells in 2018. The Company continues to evaluate other Mannville opportunities in the area and along with an increased focus on well reactivations and optimization projects.
Wainwright and Chauvin in eastern Alberta continue to be low decline properties and require minimal capital expenditures. These properties generate significant operating income which we are able to re-invest in other areas of the Company and provide funding for our dividend. We expect to spend 9% of our capital expenditure budget in this area in 2018. A large portion of the capital expenditures in this area will be to proactively replace aging large diameter pipelines.
Midale in south east Saskatchewan is our lowest decline property, aided by the enhanced recovery in the form of CO2 and water injection. There has been no decline on the property since we acquired it in June of this year with no capital spending by Cardinal on the property. Including the Acquisition purchase price we expect to spend 37% of our total 2018 capital expenditures in this area. In 2018 the intent is to manage declines and incline production through workovers and increased CO2 injection while building a plan for long term development. The budget includes 1 gross (0.78 net) drill in the second half of the year.
Cardinal has budgeted $4.8 million for abandonments and reclamations in 2018. This includes $3 million to fulfill our 2018 inactive well (D-13) requirements as well as some pro-active initiatives to reduce future abandonment and reclamation requirements.
Cardinal has taken an aggressive approach to managing its obligations since the Company’s inception. We try to stay ahead of our spending requirement, to that effect we anticipate being able to reduce a portion of 2019 inactive well requirements (which is estimated at $3.6 million) prior to the start of 2019.
Cardinal employs various forms of hedging as part of our overall strategy to protect adjusted funds flows and lock in individual project economics. We hedge crude oil and natural gas prices, power and US/Canadian exchange rates. We currently have 8,500 bbl/d of our 2018 oil production hedged at a minimum average price of $66/bbl (CAD), and 5,333 GJ/d of natural gas at a minimum average price of $2.50/GJ.
Cardinal has continued to evolve into a sustainable oil company. Our product mix (87% oil/13% natural gas) is expected to be 50/50 light oil versus medium oil at year end 2018. As we embark on the development of our Midale, House Mountain and Grande Prairie Dunvegan properties our light oil exposure, along with out netbacks, are expected to continue to increase. Our focus in 2018 will be on improving our netbacks, setting up long term cost reduction projects and beginning the development of our large light oil drilling inventory.
The Mitsue Facility downsizing was a large multi-year capital project that we will be able to complete in the first half of 2018. Upon completion our facilities will not require substantial capital investment for the foreseeable future allowing for additional funds to be allocated towards debt reduction, dividends or growth.
With oil trading at its highest levels since mid-2015, we expect to be in an environment where our assets and business model begin to stand out. Cardinal’s peer leading low decline rate of approximately 10% allows Cardinal to sustain its production base and dividend and produce 2-3% growth in Q4 2018 versus Q4 2017 with limited drilling (13.3 net wells) activity.
Cardinal expects to finalize additional royalty and fee title asset sales in Q1 2018. All proceeds from these sales will be used to reduce our net bank debt from the 2018 budgeted ratio of 1.8x net bank debt to annualized adjusted funds flow to our goal of 1x net bank debt to annualized adjusted funds flow.