Return on capital employed of 10% in 2017
Q4 condensate production of 63,700 bbls/d, up 47%; operating netback of $24.86 per boe
CALGARY, Alberta, March 14, 2018 (GLOBE NEWSWIRE) — Seven Generations (TSX:VII) achieved record funds from operations of $1.23 billion for 2017 and $404 million in the fourth quarter, up 66 percent and 84 percent respectively from the same periods of the prior year. Cash provided by operating activities also increased by 74 percent to $310 million in the fourth quarter of 2017, compared to the same 2016 period. The company delivered a return on capital employed of 10 percent and a cash return on invested capital of 18 percent in 2017. Condensate production averaged 63,700 bbls/d in the fourth quarter, up 47 percent, compared to the same period in 2016, and averaged 55,700 bbls/d in 2017, up 42 percent, compared to 2016. Total production averaged 197,300 boe/d in the fourth quarter and 175,000 boe/d in 2017.
“We delivered strong financial returns in 2017, demonstrating the profitability of being Canada’s largest producer of high-value condensate, the advantage of having diversified market access, and a low-supply cost business that generates industry-leading returns on capital,” said Marty Proctor, 7G’s President & Chief Executive Officer.
FOURTH QUARTER HIGHLIGHTS AND 2017 RESERVE HIGHLIGHTS
- Funds from operations of $403.8 million or $1.11 per share, an increase of 84 percent and 85 percent respectively compared to the same periods in 2016.
- Operating income of $129.3 million or 36 cents per share, an increase of 172 and 177 percent respectively compared to the same periods in 2016.
- Operating netback of $24.86 per boe, up 11 percent from the fourth quarter of 2016.
- Liquids production was 115,100 bbls/d, which included 63,700 bbls/d of condensate, up 50 and 47 percent respectively from the fourth quarter of 2016. With natural gas volumes of 493.4 MMcf/d, total production reached a quarterly record of 197,300 boe/d.
- Proved plus probable reserves increased 10 percent to 1.7 billion boe, as at December 31, 2017, including reserve bookings from 7G’s newly defined Nest 3 area. Proved plus probable finding, development and acquisition costs decreased by 13 percent to $10.13 per boe.
- Before tax net present value of estimated future net revenue from proved plus probable reserves, discounted at 10 percent (NPV10), increased by 20 percent to $12.0 billion. This increase occurred despite a significant reduction in the year-end 2017 reserve evaluator price deck of 6 percent for oil and 11 percent for natural gas. NPV10, less year-end net debt, increased by about 18 percent to $27.81 per share.
- Three-year average F&D costs were $8.37 per boe for proved plus probable reserves. This represents a recycle ratio of 2.7x based on the company’s three-year average operating netback.
OPERATIONAL AND FINANCIAL HIGHLIGHTS
|Three months ended
|2017||2016||% Change||2017||2016||% Change|
|Natural gas (MMcf/d)||493.4||334.0||48||435.5||291.0||50|
|Total Production (mboe/d)||197.3||132.3||49||175.0||117.8||49|
|Natural gas ($/Mcf)||3.75||4.15||(10||)||3.88||3.53||10|
|Realized hedging gains ($/boe)||0.38||0.48||(21||)||0.25||2.11||(88||)|
|Royalty expense ($/boe)||(1.18||)||(0.98)||20||(0.97||)||(0.16)||nm|
|Operating expenses ($/boe)||(5.69||)||(4.86)||17||(5.60||)||(4.22)||33|
|Transportation, processing and other ($/boe)||(6.30||)||(5.92)||6||(5.81||)||(5.53)||5|
|Operating netback ($/boe)(1)||24.86||22.39||11||22.43||21.12||6|
|G&A per boe ($/boe)||(0.65||)||(1.16)||(44||)||(0.72||)||(0.92)||(22||)|
|Finance expense and other ($/boe)||(1.96||)||(3.18)||(38||)||(2.48||)||(3.04)||(18||)|
|Corporate netback ($/boe)(1)||22.25||18.05||23||19.23||17.16||12|
|Operating income ($)(1)(5)||129.3||47.6||172||326.3||160.6||103|
|Per share – diluted ($)||0.36||0.13||177||0.90||0.50||80|
|Net income (loss) ($)(5)||83.6||(104.9)||nm||562.5||(26.2)||nm|
|Per share – diluted ($)(4)||0.23||(0.30)||nm||1.54||(0.09)||nm|
|Funds from operations ($)(1)(5)||403.8||219.7||84||1,228.3||740.0||66|
|Per share – diluted ($)||1.11||0.60||85||3.37||2.32||45|
|Cash provided by operating activities ($)(5)||310.3||178.7||74||1,154.3||644.6||79|
|Capital investments ($)(3)||322.3||283.6||14||1,651.4||978.0||69|
|Adjusted working capital ($)(1)||109.5||585.9||(81||)||109.5||585.9||(81||)|
|Available funding ($)(1)||1,467.4||1,626.7||(10||)||1,467.4||1,626.7||(10||)|
|Net debt ($)(1)||1,866.4||1,528.8||22||1,866.4||1,528.8||22|
|Debt outstanding ($)||1,956.4||2,111.9||(7||)||1,956.4||2,111.9||(7||)|
|Weighted average shares – basic(4)||354.7||347.2||2||353.3||299.8||18|
|Weighted average shares – diluted(4)||363.9||365.0||—||364.4||318.4||14|
- Certain comparative figures in the above table have been adjusted to conform to current period presentation. Operating netback, corporate netback, operating income, funds from operations, adjusted EBITDA, CROIC, ROCE, adjusting working capital, available funding and net debt are not defined under IFRS. See “Advisory and Guidance – non-IFRS financial measures” in Management’s Discussion and Analysis dated March 13, 2018, for the years ended December 31, 2017 and 2016, for important information about these measures.
- Represents the total of liquids and natural gas sales, net of royalties, gains (losses) on risk management contracts and other income.
- Excluding acquisitions and equity investments.
- Basic weighted average shares are used to calculate diluted per share amounts when the Company is in a loss position.
- For the year ended December 31, 2016, figures include $27.4 million ($20.0 million after tax) of prior-period royalty recoveries.
- Calculated based on 12-months trailing financial results as at the reporting dates.
Nest 1 – high intensity completions improve condensate production
Early results from Nest 1 test wells using 7G’s current completions design are encouraging, with a significant increase in condensate production. Initial 30-day condensate production rates for the wells ranged from 775 bbls/d to 1,350 bbls/d, for an average improvement of about 50 percent relative to the company’s Nest 1 type curve. This rate is comparable to 7G’s Nest 2 condensate type curve. The average well cost for the pad was $9.9 million, further demonstrating 7G’s emphasis on cost reductions with improved productivity. A spacing test in Nest 1 is also showing encouraging results with the potential to grow 7G’s core drilling inventory and enhance returns compared to historical well designs in Nest 1.
MARKET ACCESS UPDATE
7G’s realized condensate prices were $68.10 per barrel in the fourth quarter
With increased access to firm liquids transportation in 2017, 7G’s average realized condensate price was $68.10 per barrel, or about 97 percent of the Canadian dollar equivalent WTI benchmark price in the fourth quarter. Condensate and NGL sales generated approximately 72 percent of 7G’s revenues in 2017.
7G’s realized natural gas prices were 76 percent higher than Alberta prices in 2017
7G’s market access strategy continues to provide geographic market diversity and premium pricing in North American natural gas markets located away from the oversupplied Alberta market. 7G’s average realized price for natural gas in 2017 was $3.88 per Mcf compared to Alberta prices that averaged $2.20 per Mcf. About 76 percent of 7G’s natural gas sales go to the U.S. Midwest and the Gulf Coast. About 10 to 15 percent of the company’s natural gas production is expected to be sold into eastern Canada in 2018.
Tapping into the local petrochemical value chain
Beyond diversifying markets through pipelines to price-advantaged locations, 7G secured a new long-term agreement in the fourth quarter to supply propane to Inter Pipeline’s planned propane dehydrogenation and polypropylene Heartland Petrochemical Complex. This sales agreement will enable 7G to diversify its propane sales and capture stronger realized prices within the Alberta petrochemical value chain. The complex is expected to commence production in late 2021.
DRILLING AND COMPLETIONS
|Three months ended
|Nest Activity||2017||2016||% Change||2017||% Change||2017||2016||% Change|
|Horizontal wells rig released||20||12||67||15||33||88||50||76|
|Average measured depth (m)||5,278||5,696||(7||)||5,905||(11||)||5,742||5,712||1|
|Average horizontal length (m)||2,128||2,511||(15||)||2,756||(23||)||2,537||2,589||(2||)|
|Average drilling days per well||29||31||(6||)||33||(12||)||33||35||(6||)|
|Average drill cost per lateral metre ($)(2)||1,760||1,405||25||1,472||20||1,592||1,575||1|
|Average well cost ($ millions)(2)||3.6||3.5||3||4.0||(10||)||3.9||3.9||—|
|Average number of stages per well||39||37||5||45||(13||)||41||32||28|
|Average tonnes pumped per well||5,643||6,481||(13||)||6,425||(12||)||6,236||5,403||15|
|Average cost per tonne ($)(2)||1,107||971||14||1,134||(2||)||1,190||1,050||13|
|Average well cost ($ millions)(2)||6.2||6.3||(2||)||7.3||(15||)||7.3||5.7||28|
|Total D&C cost per well ($ millions)(2)||9.8||9.8||—||11.3||(13||)||11.2||9.6||17|
- The drilling and completion counts include only horizontal Montney wells in the Nest. The drilling counts and metrics exclude wells that are re-drilled or abandoned.
- Information provided is based on field estimates and are subject to change.
Drilling costs per well down 10 percent compared to third quarter
7G’s average drilling cost per well was $3.6 million in the fourth quarter of 2017, down from $4.0 million in the third quarter of 2017. 7G’s key drilling metric – dollars per lateral metre drilled – averaged $1,760 in the fourth quarter, up from the previous quarter due to shorter lateral lengths. By employing underbalanced drilling, 7G continued to reduce the average time it takes to drill a well. The company is implementing these efficiencies across its drilling program.
Completion costs per well down 15 percent compared to the third quarter
7G’s average completion cost per well was $6.2 million in the fourth quarter of 2017, down from $7.3 million in the third quarter of 2017. Cost improvements have largely been driven by continued improvements in equipment utilization.
The drilling and completion cost per well was $9.8 million in the fourth quarter of 2017, down from $11.3 million in the third quarter of 2017. This was largely attributable to drilling shorter laterals due to land restrictions and optimizing the number of hydraulic fracturing stages and sand tonnage, which varies from quarter to quarter. Seven Generations continues to pursue ways to drive down costs in both drilling and completions to maximize capital efficiencies. The company expects drilling and completions costs to average between $10 million and $10.5 million per well in 2018.
Operating expenses – plans underway for improvement
Fourth quarter operating expenses were $5.69 per boe, up five percent compared to the third quarter of 2017, largely due to higher workover expenses and a lower percentage of recycled water used in completion activity. The company will continue to execute its plan to lower operating costs to a range of $4.50 to $5.00 per boe in 2018 through the expanded use of water disposal wells, water handling infrastructure, water recycling, and an increased focus on managing all operating cost elements.
Active quarter for well activity
With an average of eight drilling rigs running in the fourth quarter, Seven Generations drilled 20 wells, completed 16 wells and brought 23 wells on production. Consistent with its development plan, 7G had 56 wells in various stages of construction between drilling, completion and tie-in at the end of the fourth quarter.
Initial Pembina Kakwa processing plant maintenance
Following unplanned service disruptions at the Pembina Kakwa River processing plant in 2017, Pembina and 7G conducted a preliminary facility assessment that included an independent engineering firm and technical experts from 7G and Pembina. Since late in the fourth quarter, the processing plant has operated at a high reliability rate, however throughput has still been constricted due to a partial blockage in the heat exchanger. 7G has largely been able to mitigate constraints by flowing excess gas to its wholly-owned facilities for processing.
A seven-day planned plant outage in the second quarter is expected to reduce the risk of future obstructions and improve processing rates for the remainder of 2018. The primary work during this outage will be to mitigate the partial blockage in the heat exchanger and accelerate annual turbine maintenance. As well, an ethane extraction compressor has been offline for the first quarter of 2018, which has reduced a portion of natural gas liquids recovery. Repairs for this compressor are also planned in April.
Additional assessments for plant upgrades will take place during the remainder of 2018 and include a detailed reliability and maintenance study and a performance test. Any findings from these tests resulting in additional modifications to improve plant reliability would likely be made in the first half of 2019. 7G’s production guidance factored in a greater proportion of downtime in 2018 than in previous years. Consequently, there is no change to the company’s 2018 production guidance.
New natural gas processing plant construction on time, on budget
Construction of 7G’s new natural gas processing plant at Gold Creek is on time and budget. With a capacity of 250 MMcf/d, this new plant will expand 7G’s processing capacity by about 50 percent to 760 MMcf/d in three plants, complemented by up to 250 MMcf/d of third-party processing, for a total of about 1 billion cubic feet per day of available processing capacity. The new plant, scheduled to start operations in the fourth quarter of 2018, will enable continued organic growth and increase the company’s degree of operational control in processing.
Seven Generations maintained a strong balance sheet with ample liquidity, ending the year with available funding of more than $1.4 billion, net debt of $1.9 billion, and a trailing 12-month debt to funds flow ratio of 1.5x. On an annualized basis, the company’s fourth quarter net debt to funds flow ratio was 1.2x. 7G plans to fund its 2018 capital program through a combination of funds from operations, cash on hand, and draws on its credit facility. Selling 7G’s diverse product mix, which includes large condensate volumes, into a variety of geographically distinct markets that have attractive prices increases ROCE and contributes to lowering the company’s debt ratios.
Debt refinancing reduces annual interest costs by $25 million
In the fourth quarter, 7G completed refinancing transactions repurchasing and redeeming all of its outstanding US$700 million of 8.25% senior unsecured notes due in 2020 and completing an issuance of US$700 million of 5.375% senior unsecured notes due in 2025. The refinancing will result in annual interest savings of about $25 million and extend the maturity of the notes by five years. The improved terms and costs provide 7G with greater financial flexibility, with 7G’s currently undrawn $1.4 billion credit facility maturing in 2021 and its earliest senior unsecured note maturity now occurring in 2023.
Managing market risk
Seven Generations uses financial risk management strategies to help reduce the volatility of commodity prices, currency and cash flow. Hedging price targets are established at levels that are expected to provide a threshold rate of return on capital investment based on a combination of benchmark oil and natural gas prices, projected well performance and capital efficiencies. 7G segregates its exposures into three separate risk management portfolios – liquids, natural gas and currency. 7G has typically used collar instruments to protect its liquids revenues. Current 2018 liquids hedging allows for price participation up to a level of approximately C$75 per barrel. To manage the price risk exposure within its diversified natural gas marketing portfolio, 7G employs a combination of location swaps, options and basis hedges in its risk management program. Additionally, a portion of 7G’s net US dollar exposures are hedged to lock in the Canadian dollar equivalent on its US dollar denominated revenue.
The company had the following risk management contracts in place at December 31, 2017:
|C$ WTI Collars||C$ WTI 3 Way Collars||US$ WTI Collars|
|2018||17,250||$61.20 – $77.32||12,000||$40.83/$56.25/$75.54||2,000||$52.25 – $57.30|
|2019||16,000||$58.91 – $75.94||7,500||$41.00/$56.33/$75.92||2,000||$52.25 – $57.30|
|2020||7,000||$57.50 – $71.61||1,500||$40.00/$55.00/$70.98||2,000||$52.25 – $57.30|
|Natural Gas||Foreign Exchange|
|AECO 7A Collars/Swaps||C$/US$ Swaps|
|2018||205,000||$2.88||60,000||$2.44 – $2.85||215.1||1.3100|
|2019||120,000||$2.85||60,000||$2.44 – $2.85||124.8||1.2907|
|2020||32,500||$2.74||10,000||$2.13 – $2.13||32.5||1.2683|
Consistent with the company’s Investor Day presentation in November 2017, production guidance for 2018 remains on track at 200,000 – 210,000 boe/d. The 2018 capital investment budget remains between $1.675 billion and $1.775 billion. Seven Generations expects production in the first half of 2018 to average 190,000 – 200,000 boe/d, with first quarter production to be the lowest 2018 quarterly level. As discussed during the company’s 2017 Investor Day presentation, a sawtooth production growth profile results from the batch development of multi-well pads, which have longer cycle times. This also results in quarterly variability in condensate-to-gas ratios. The 2018 forecast takes into account this development profile, and has higher production levels in the second half of the year.
There are many economic benefits from this type of development including drilling and completion cost efficiencies, integrated pad water management, pre-built surface facilities that are concurrently installed with development, reduced surface environmental impact, and minimized sub-surface well interactions. 7G believes that batched pad development is a significant contributor to the high return on capital the company is generating.
High-value condensate production drives netbacks, cash flow and returns
Condensate production continues to drive the strong netbacks and the resulting cash flow underpins 7G’s industry-leading returns. The use of high-intensity slickwater completions in 2017 generated higher-than-expected condensate-gas ratios, resulting in higher revenues and returns. Given the market dynamics of strong condensate prices that track US benchmark crude prices, and discounted natural gas prices due to broad oversupply and regional discounting, 7G continues to target liquids production and favours drilling high-impact condensate wells.
- 7G continued to efficiently grow and convert its large resource base into reserves, adding significantly more reserves than it produced, which builds the company’s well location inventory for continued strong production growth. 7G replaced 170 percent of production with proved developed producing (PDP) reserve additions, and 351 percent of production with proved plus probable (2P) reserve additions.
- 7G’s newly-defined Nest 3 area, located just to the south of its Nest 2 land, has 223.9 MMboe of 2P reserves. These reserve additions support 7G’s view that this region provides a low-cost supply that compares favourably with Nest 2 and Nest 1.
- 7G’s PDP increased by 27 percent, or 25 percent per share, to 211.1 MMboe. 7G also increased 2P reserves by 10 percent, or 9 percent per share, to 1,695 MMboe. This represents a three-year compound annual growth rate of 84 percent for PDP reserves and 29 percent for 2P reserves.
- 7G’s PDP F&D costs were $15.22/boe and 2P F&D costs were $10.15/boe.
- 7G’s PDP and 2P recycle ratios, based on full year 2017 operating netbacks, were 1.5x and 2.2x, respectively.
- 7G’s future development capital to trailing funds flow ratio decreased to 10.7x from 17.0x for PDP reserves. This exemplifies the company’s ability to fund its reserve development with expected funds flow.
|Finding, Development and Acquisition Costs|
|2017 ($/boe)||2017-2015 ($/boe)|
|Finding, Development & Acquisition (FD&A)(1)||15.17||8.61||10.13||19.64||12.70||9.86|
|Finding & Development (F&D)||15.22||8.64||10.15||14.54||9.86||8.37|
|FD&A Recycle Ratio(2)||1.5||2.6||2.2||1.1||1.8||2.3|
|F&D Recycle Ratio(2)||1.5||2.6||2.2||1.5||2.3||2.7|
|Reserve Replacement Ratio(3)||1.7||1.7||3.5||2.1||3.0||4.9|
(1) FD&A and F&D costs include the year-over-year change in future development capital to transfer reserves into production.
(2) Recycle Ratio is operating netback divided by F&D or FD&A costs per boe. Operating netback is determined as revenue less royalties, transportation costs, and operating costs.
(3) Reserves Replacement Ratio is total reserve additions (including acquisitions and divestitures) divided by annual production.
Reserves summary and additional detailed information
7G’s independent reserves evaluation, effective December 31, 2017, has been completed by McDaniel & Associates Consultants Ltd. (McDaniel).
For additional information regarding the independent reserves evaluation that was conducted by McDaniel as at December 31, 2017, please see the disclosure that is provided under the heading “Statement of Reserves Data” in the company’s Annual Information Form, dated March 13, 2018, which is available on the SEDAR website at www.sedar.com.
|Reserves Summary 2016 – 2017|
|Developed Producing plus Non-Producing||
|Total Proved plus Probable||11,988||9,996||20||1,694.92||1,534.65||10|
- Net present values of future net revenue before income taxes discounted at 10% per year based upon McDaniel’s forecast prices and costs.
- Figures may not add due to rounding.
|Reserves Reconciliation 2016 – 20171|
|Gross Proved||Gross Probable||Gross Proved plus Probable|
|December 31, 2016||825.11||709.54||1,534.65|
|Extensions and Improved Recovery||16.51||185.09||201.60|
|December 31, 2017||869.57||825.35||1,694.92|
- Figures may not add due to rounding.
In 2017, Seven Generations continued to demonstrate its commitment to a wide variety of community initiatives that involve collaboration with numerous industry partners, suppliers, service companies, contractors and community members.
“We are privileged to demonstrate our Code of Conduct commitment to serve our stakeholders. Building meaningful relationships and participating through volunteer efforts supports the needs and interests of our partners and our communities,” said Cindy Park, 7G’s Director, Community Engagement in Grande Prairie.
Susan Targett, Executive Vice-President, Corporate, retires
“After nearly 10 years of dedicated service, Susan Targett, Executive Vice-President, Corporate, retired from Seven Generations on February 28. Susan was a founder of Seven Generations and made many contributions to the success of the company, creating value and developing strong ties with our stakeholders. Susan was instrumental in assembling 7G’s top tier asset position in the heart of the Montney play. We wish Susan all the best in her future endeavours,” Proctor said.
As a result of her retirement, Susan Targett will no longer be a participant in the automatic securities disposition plan announced on February 12, 2018.
Derek Aylesworth joins Seven Generations as Chief Financial Officer
As previously announced, Derek Aylesworth will join Seven Generations on March 15, 2018 as Chief Financial Officer, responsible for the company’s finance, treasury, accounting, tax and capital markets functions.
Board of Directors update
As part of the Board of Directors’ renewal process, Pat Carlson has decided that he wishes to pursue independent business and philanthropic opportunities. Therefore, he will not be standing for re-election at this year’s annual meeting, May 3, 2018.
7G management will hold a conference call to discuss results and address investor questions today, March 14, 2018 at 9 a.m. MT (11 a.m. ET).
|Participant Dial-In Numbers|
|Toll Free:||(877) 390-7644|
|Conference Call ID:||6879566|
|Encore Dial In:||(855) 859-2056 or (404) 537-3406|
March 14 – 21, 2018
Seven Generations Energy
Seven Generations Energy is a low-supply cost, growth-oriented energy producer dedicated to stakeholder service, responsible development and generating strong returns from its liquids-rich Kakwa River Project in northwest Alberta. 7G’s corporate office is in Calgary, its operations headquarters is in Grande Prairie and its shares trade on the TSX under the symbol VII.
Further information on Seven Generations is available on the company’s website: www.7genergy.com, or by contacting:
Brian Newmarch, Vice President, Capital Markets
Alan Boras, Director, Communications & Stakeholder Relations
Seven Generations Energy Ltd.
Suite 4400, 525 – 8th Avenue SW
Calgary, AB T2P 1G1
Non-IFRS Financial Measures
This news release includes certain terms or performance measures commonly used in the oil and natural gas industry that are not defined under IFRS, including “operating netback”, “corporate netback”, “operating income”, “funds from operations”, “adjusted EBITDA”, “cash return on invested capital” or “CROIC”, “return on capital employed” or “ROCE”, “adjusted working capital”, “available funding” and “net debt”. The data presented is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. These non-IFRS measures should be read in conjunction with the company’s consolidated financial statements and the accompanying notes. Readers are cautioned that the non-IFRS measures do not have any standardized meaning and should not be used to make comparisons between the company and other companies without also taking into account any differences in the way the calculations were prepared.
For additional information about these measures, please see “Advisories and Guidance – Non-IFRS financial measures” in Management’s Discussion and Analysis dated March 13, 2018, for the years ended December 31, 2017 and 2016.