CALGARY, March 6, 2018 /CNW/ – Cona Resources Ltd. (“Cona” or the “Company”) (TSX: CONA) announces its operating and financial results for the three months and year ended December 31, 2017 and revised guidance for 2018 reflecting recent asset dispositions and continued weakness in Canadian heavy oil prices.
Cona’s financial statements, management’s discussion and analysis (“MD&A”) and annual information form (“AIF”) for the year ended December 31, 2017, as well as the news release dated February 21, 2018 announcing our 2017 year-end reserves information, are available on our website at www.conaresources.com and on SEDAR at www.sedar.com.
FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended |
Year ended |
|||||
($000s, except per share figures and unless otherwise noted) |
December |
September 30, 2017 |
December |
December |
December |
|
Financial |
||||||
Oil and natural gas sales |
99,104 |
84,839 |
94,072 |
368,084 |
308,754 |
|
Funds from operations(1) |
27,882 |
25,347 |
40,179 |
89,869 |
134,980 |
|
Per share – diluted |
0.27 |
0.25 |
0.32 |
0.86 |
1.11 |
|
Net loss |
(108,295) |
(6,440) |
(120,531) |
(86,996) |
(196,213) |
|
Per share – basic |
(1.07) |
(0.05) |
(0.99) |
(0.85) |
(1.66) |
|
Per share – diluted |
(1.07) |
(0.05) |
(0.99) |
(0.85) |
(1.66) |
|
Net debt(1) |
332,958 |
344,273 |
252,348 |
332,958 |
252,348 |
|
Dividends declared |
– |
2,020 |
12,229 |
14,590 |
54,397 |
|
Per share |
– |
0.02 |
0.10 |
0.14 |
0.46 |
|
Capital expenditures |
15,446 |
7,782 |
14,889 |
57,932 |
51,445 |
|
Dispositions |
– |
1,488 |
73,266 |
1,698 |
72,954 |
|
Weighted average shares outstanding (000s) |
||||||
Basic |
101,006 |
101,006 |
121,914 |
102,951 |
117,955 |
|
Diluted |
102,575 |
101,006 |
126,484 |
105,037 |
121,792 |
|
Shares outstanding at period end (000s) |
101,006 |
101,006 |
123,506 |
101,006 |
123,506 |
|
Operating |
||||||
Average daily production |
||||||
Heavy oil (bbl/d) |
16,556 |
17,297 |
17,524 |
16,953 |
17,476 |
|
Light oil & NGL (bbl/d) |
– |
– |
399 |
– |
538 |
|
Natural gas (mcf/d) |
1,099 |
1,854 |
2,146 |
1,520 |
2,358 |
|
Total (boe/d) |
16,739 |
17,606 |
18,281 |
17,206 |
18,407 |
|
Three months ended |
Year ended |
|||||
December |
September |
December |
December |
December |
||
Average realized price |
||||||
Heavy oil ($/bbl)(2) |
50.38 |
45.70 |
43.16 |
46.68 |
35.27 |
|
Light oil & NGL ($/bbl) |
– |
– |
55.03 |
– |
46.16 |
|
Oil & NGL ($/bbl) |
50.38 |
45.70 |
43.42 |
46.68 |
35.59 |
|
Natural gas ($/mcf) |
2.95 |
1.85 |
2.97 |
2.50 |
2.01 |
|
Combined ($/boe) |
50.03 |
45.08 |
42.93 |
46.22 |
35.09 |
|
Netbacks ($/boe) |
||||||
Average realized price(2) |
50.03 |
45.08 |
42.93 |
46.22 |
35.09 |
|
Royalties |
(5.18) |
(4.53) |
(4.58) |
(4.86) |
(3.69) |
|
Production and operating expenses |
(17.55) |
(17.36) |
(15.42) |
(17.37) |
(15.91) |
|
Transportation expenses |
(2.16) |
(1.97) |
(1.97) |
(2.14) |
(1.82) |
|
Operating netback(1) |
25.14 |
21.22 |
20.96 |
21.85 |
13.67 |
|
Realized gains (losses) on financial derivative contracts |
(2.34) |
0.83 |
8.84 |
(0.62) |
13.97 |
|
General and administrative expenses(3) |
(2.14) |
(1.90) |
(2.76) |
(2.82) |
(3.22) |
|
Cash finance costs |
(3.43) |
(3.50) |
(3.96) |
(3.89) |
(4.30) |
|
Other |
0.40 |
(0.74) |
0.52 |
(0.20) |
0.05 |
|
Funds from operations(1) |
17.63 |
15.91 |
23.60 |
14.32 |
20.17 |
Notes: |
|
(1) |
“Funds from operations”, “net debt” and “operating netback” do not have any standardized meaning prescribed by International Financial Reporting Standards. See “Non-IFRS Measures”. |
(2) |
Average realized oil prices are net of blending expenses and include the impact of physical delivery contracts (when applicable). |
(3) |
General and administrative expenses for 2017 includes $4.4 million ($4.0 million of termination payments and $0.4 million of other costs) or $0.69/boe related to the change of control that occurred in May 2017. |
MESSAGE TO SHAREHOLDERS
The Cona team demonstrated the true potential of the Company’s asset base through 2017 as we achieved essentially flat year-over-year production, after adjusting for the dispositions in the fourth quarter of 2016, while re-investing only 64% of our funds from operations. We achieved very competitive finding, development and acquisition (“FD&A”) measures leading to strong recycle ratios of over six times on a proved plus probable basis, based on our 2017 operating netback. We are pleased to deliver strong results in a period of challenging commodity prices.
As we begin 2018, we face a number of headwinds. In November 2017, the Keystone Pipeline System was taken out of service for 12 days resulting in limited take-away capacity for oil volumes from Western Canada. The over-supply of oil volumes resulted in a spike in the spot WTI to Western Canada Select (WCS) differential that reached as high as US$30/bbl. While we are encouraged by recent movement in the forward curves suggesting the WTI/WCS differential will improve later in 2018, Cona is proactively providing 2018 guidance that reflects how the Company will navigate a sustained, wider WTI/WCS differential. We have executed our first quarter 2018 capital program as planned, but have reduced our capital expenditure outlook for 2018 to $44.5 million from $61.5 million with a corresponding estimated production impact of 450 boe/d across the year. With the nature of Cona’s asset base and capital program, the Company is well positioned to execute quickly on the projects consistent with the initial budget should the WTI/WCS differential continue to improve. Subsequent to year-end, Cona completed two non-core asset sales and one asset exchange as part of our asset disposition program. These transactions reduced our forecast for 2018 average daily production by approximately 650 boe/d with minimal impact on funds from operations.
FOURTH QUARTER & ANNUAL 2017 HIGHLIGHTS
- Annual 2017 production of 17,206 boe/d (99% oil) resulted in annual production per share increasing by 8% over 2016.
- Production per share in the fourth quarter of 2017 increased by 13% as compared to the same period in 2016. Average fourth quarter production of 16,739 boe/d was impacted by severe winds and unusually wet weather early in the quarter. December volumes recovered to an average of 17,060 boe/d, on target for the month.
- Funds from operations were $27.9 million ($0.27 per common share) for the fourth quarter of 2017 and $89.9 million ($0.86 per common share) for 2017.
- Capital expenditures for 2017 totalled $57.9 million, which included the drilling of 70 (67.0 net) wells. Development in 2017 was focused primarily in the Cactus Lake and Winter areas.
- 2017 FD&A costs were favorable for an oil weighted asset base at $3.54 per boe for proved plus probable (“2P”) reserves, $7.01 per boe for proved (“1P”) reserves and $6.58 per boe for proved developed producing (“PDP”) reserves, including future development capital.
- Strong 2017 FD&A costs resulted in favorable recycle ratios of over three times for PDP and 1P reserves and over six times for 2P reserves, based on a 2017 operating netback of $21.85 per boe.
- General and administrative expenses for 2017, excluding the change of control costs of $4.4 million, were $2.13/boe, down 34% from 2016.
- Operating netbacks for the fourth quarter of 2017 of $25.14 per boe continue to be strong despite relatively weak commodity prices and widening heavy oil differentials.
- In 2017, Cactus Lake, Court and Winter achieved a combined field operating income of $129.9 million and free cash flow of $76.8 million. Combined production for these three properties grew by 4% in 2017 compared to 2016.
- Net debt at December 31, 2017 of $333.0 million decreased by $11.3 million as compared to September 30, 2017. Cona has a $325.0 million credit facility with over 40% undrawn at year-end.
- During the third quarter of 2017, Cona purchased all of its outstanding US$269.7 million senior unsecured notes. The purchase was financed with our existing credit facility, a new $160.0 million second lien term loan and cash on hand, resulting in all of our debt denominated in Canadian dollars. Historically, fluctuations in the CAD/USD exchange rate triggered significant foreign currency gains and losses which contributed to volatility in earnings. Additionally, Cona’s current debt structure provides the flexibility to adjust borrowing levels, whereas the senior notes did not.
OPERATIONS REVIEW
All of Cona’s producing properties are located in southwest Saskatchewan. Approximately 90% of Cona’s production is under natural water drive, waterflood, polymer flood or steam assisted gravity drainage (“SAGD”), which supports our best-in-class base corporate decline rate of approximately 12%. Over 78% of the Company’s fourth quarter 2017 production was from three fields: Cactus Lake, Winter and Court.
Cactus Lake
Cactus Lake is Cona’s largest field by production and reserves. Cona operates and has a 100% working interest in the property, which produces from the Basal Mannville and Bakken formations.
Cactus Lake fourth quarter and annual 2017 production averaged 8,483 boe/d and 8,596 boe/d, respectively. As a result of the debottlenecking operation completed in May 2017, Cona increased injection rates to the highest historical levels and oil production is responding favorably.
Results from 37 wells drilled in 2017 are in line with management’s expectations. Base decline rates (excluding production from new wells drilled in the last 12 months) are at or near zero in this field due to favorable waterflood and polymer flood response.
Impressive operating performance underpins the strong economics achieved at Cactus Lake. For the year ended December 31, 2017, when WTI averaged US$50.95/bbl, Cactus Lake generated $94.5 million of net operating income. During the same period, we invested $31.6 million of capital into the field, including drilling and polymer powder, resulting in $62.9 million of field level free cash flow.
Court
Cona operates and has a 100% working interest in the Court property, which produces largely from the Bakken formation. Fourth quarter and annual 2017 production at Court averaged 1,584 boe/d and 1,698 boe/d, respectively. Year-over-year production declined less than 10% with only $1.0 million of capital invested and no wells drilled in 2017.
For the year ended December 31, 2017 when WTI averaged US$50.95/bbl, Court generated $11.6 million of net operating income. During the same period, we invested $1.0 million of capital into the field, resulting in $10.6 million of field level free cash flow.
Winter
The Winter property produces from the Basal Mannville Cummings formation. The asset exchange, announced on February 21, 2018, increased our working interest in the Cona-operated Winter property to 100% from an average of 71%.
In 2017, Cona began transitioning to longer horizontal wells with lateral lengths of over 600 meters. While these wells cost an incremental 5% as compared to the shorter lateral horizontal wells drilled previously, the overall economics are expected to exceed the incremental cost.
Fourth quarter and annual 2017 production at Winter averaged 3,010 boe/d and 3,095 boe/d, respectively. Cona drilled 32 (29.0 net) wells during 2017.
Wells Drilled
The following table summarizes the drilling program for the year ended December 31, 2017:
Field |
Gross |
Net |
|||
Cactus Lake |
37 |
37.0 |
|||
Winter(1) |
32 |
29.0 |
|||
Other |
1 |
1.0 |
|||
Total |
70 |
67.0 |
|||
Note: |
|||||
(1) There were 2.0 net service wells drilled at Winter during 2017. |
ASSET DISPOSITION PROGRAM
Cona announced an asset disposition program in January 2018. The response has been positive with a number of parties currently engaged in the evaluation of the assets being marketed. To date, Cona has successfully closed two asset dispositions and one asset exchange for aggregate net proceeds of approximately $10.0 million. As a result of these transactions, Cona now holds a 100% working interest in substantially all of our properties. The non-core properties disposed had cost structures higher than our corporate average and reduce estimated 2018 production by 650 boe/d with minimal impact on funds from operations.
RISK MANAGEMENT
Cona’s risk management strategy includes physical delivery, financial derivative and foreign exchange contracts that is designed to protect realized prices on crude oil volumes. A summary of Cona’s current hedge position is provided in the table below.
(C$)(1,2) |
2018 |
2019 |
|
WTI |
|||
Hedged volumes (bbl/d) |
8,000 |
2,000 |
|
Average price ($/bbl) |
65.24 |
65.00 |
|
Notes: |
|
(1) |
Contracts denominated in US dollars have been converted to Canadian dollars at CAD/USD daily exchange rate for March 6, 2018. |
(2) |
The prices and volumes in this table represent averages for several contracts over the respective periods presented. The average price of a group of contracts is for indicative purposes only and does not have the same settlement profile as the individual contract. Details of the risk management contracts are disclosed in the notes to the Company’s consolidated financial statements for the years ended December 31, 2017 and 2016. |
During the year ended December 31, 2017, Cona realized $3.9 million in losses on financial derivative contracts. Losses on financial derivative contracts were due to narrower than hedged WTI/WCS differentials, partially offset by gains realized on WTI contracts due to actual oil prices that were lower than hedged prices.
GUIDANCE(1)
The table and discussion below provides a comparison of Cona’s operational guidance and actual results for the year ended December 31, 2017, as well as a summary of Cona’s prior and revised operational guidance for the year ended December 31, 2018.
2017 |
2018 |
|||||
Guidance(2)(3) |
Actual |
Variance |
Prior |
Revised |
||
Production (boe/d) |
17,400 |
17,206 |
(1) |
17,400 |
16,300 |
|
Pricing |
||||||
WTI (US$/bbl) |
49.60 |
50.95 |
3 |
53.50 |
60.00 |
|
WTI/WCS differential (US$/bbl) |
11.75 |
11.98 |
2 |
13.75 |
21.50 |
|
CAD/USD exchange rate |
1.298 |
1.298 |
– |
1.280 |
1.265 |
|
WCS ($/bbl) |
49.12 |
50.54 |
3 |
50.88 |
48.70 |
|
AECO ($/mcf) |
2.60 |
2.16 |
(17) |
2.00 |
1.30 |
|
Average realized price ($/boe) |
45.18 |
46.22 |
2 |
46.84 |
42.25 |
|
Expenses |
||||||
Average royalty rate (%) |
12 |
11 |
(8) |
13 |
13 |
|
Operating ($/boe) |
16.50 |
17.37 |
5 |
17.65 |
17.65 |
|
Transportation ($/boe) |
2.20 |
2.14 |
(3) |
2.15 |
2.05 |
|
General & administrative ($/boe)(3) |
2.04 |
2.13 |
4 |
2.15 |
2.20 |
|
Finance and other ($/boe)(3) |
4.06 |
4.09 |
2 |
3.85 |
4.55 |
|
Change of control costs ($/boe)(4) |
0.70 |
0.69 |
(1) |
– |
– |
|
Funds from operations ($ millions)(5,6) |
||||||
Excluding hedging |
94 |
94 |
– |
97 |
63 |
|
Including hedging |
94 |
90 |
(4) |
82 |
32 |
|
Funds from operations per boe ($/boe)(5,6) |
||||||
Excluding hedging |
14.85 |
14.94 |
1 |
15.20 |
10.70 |
|
Including hedging |
14.90 |
14.32 |
(4) |
12.90 |
5.45 |
|
Capital expenditures ($ millions) |
60 |
58 |
(3) |
61.5 |
44.5 |
Notes: |
|
(1) |
The guidance provided is based on a number of material assumptions and factors set out below and under the heading “Forward-Looking Statements”. This financial outlook is included to provide readers with an understanding of the Company’s operations for 2018. Readers are cautioned that the information may not be appropriate for other purposes. The actual results of Cona’s operations for the corresponding period will vary from the financial outlook and such variations may be material. See “Forward-Looking Statements” for a discussion of the risks that could cause actual results to vary. This summary has been approved by management as of the date of this news release. |
(2) |
The 2017 guidance was provided in a news release dated August 14, 2017 and the prior 2018 guidance was provided in a news release dated November 14, 2017. The news releases are available on Cona’s website at www.conaresources.com or on SEDAR at www.sedar.com. |
(3) |
Average realized prices are calculated based on oil and natural gas sales net of blending expenses. |
(4) |
Includes termination payments of $4.0 million and other costs of $0.4 million related to the change of control. |
(5) |
Includes costs related to the change of control (see Note 4). |
(6) |
“Funds from operations” and “funds from operations per boe” are non-IFRS Measures. See discussion under the heading “Non-IFRS Measures”. |
2018 Guidance
Cona has revised guidance for 2018 to reflect asset dispositions and an operational plan in the event that the recent weakness in Canadian heavy oil prices is sustained.
Our revised guidance for 2018, based on a WTI price of US$60.00/bbl and WTI/WCS differential of US$21.50/bbl, includes production of 16,300 boe/d and funds from operations of $32.0 million ($63.0 million excluding hedging) or $0.32 per common share ($0.62 per common share excluding hedging).
Capital expenditures are forecast to be $44.5 million in 2018, which includes the drilling of 31 gross wells. During the first quarter of 2018, Cona drilled the majority of the wells planned for 2018 including 15 wells at Cactus Lake, 11 wells at Winter and five wells at Court.
Cona’s revised 2018 guidance is largely focused on the Company’s inventory of enhanced oil recovery projects supported by infill drilling that improves overall recovery factors. The capital breakdown is summarized as follows:
Capital |
Well Count |
|||
EOR development and infill drilling |
31.6 |
15 |
||
Other drilling |
11.7 |
16 |
||
Corporate and other |
1.2 |
– |
||
Total |
44.5 |
31 |
Cona operates and controls virtually all of our development program, which provides flexibility in our capital expenditures. We will continue to review and evaluate our capital spending program in light of commodity prices and align spending with the appropriate economic returns.
Conference Call – March 7, 2018 9:00am MT (11:00am ET) |
Cona will host a conference call tomorrow, March 7, 2018, starting at 9:00am MT (11:00am ET), to review the Company’s fourth quarter and year-end 2017 results. Participants can access the conference call by dialing (403) 532-5601 or toll-free (US & Canada) 1 (855) 353-9183 and entering the passcode 98589.
A recording of the conference call will be available until March 21, 2018 and can be accessed by dialing 1 (855) 201-2300 and entering the conference number 1226446 and passcode 98589. The replay will be available approximately one hour following completion of the call. The conference call recording will also be available on Cona’s website at www.conaresources.com. |