Our operational and financial highlights for the three months ended March 31, 2018 are noted below and should be read in conjunction with our condensed consolidated financial statements for the three months ended March 31, 2018 and 2017 and our related management’s discussion and analysis which have been posted on the SEDAR website (www.sedar.com) and our website (www.chinookenergyinc.com).
First Quarter of 2018 Financial and Operating Highlights
|Three months ended March 31||2018||2017|
|Natural gas liquids (boe/d)||468||482|
|Natural gas (mcf/d)||13,806||18,022|
|Crude oil (bbl/d)||19||29|
|Average daily production (boe/d) (1)||2,788||3,514|
|Average natural gas liquids price ($/boe)||$||58.35||$||51.39|
|Average natural gas price ($/mcf)||$||2.64||$||2.71|
|Average oil price ($/bbl)||$||68.34||$||60.32|
|Average commodity pricing ($/boe)||$||23.35||$||21.42|
|Royalty (expense) recovery ($/boe)||$||(0.17||)||$||0.20|
|Realized (loss) gain on commodity price contracts ($/boe)||$||(1.18||)||$||1.38|
|Net production expense ($/boe) (2)||$||(14.84||)||$||(11.27||)|
|Operating Netback ($/boe) (1) (2)||$||7.16||$||11.73|
|Wells Drilled (net)|
|Exploration wells drilled (net)||2.00||–|
|Three months ended March 31||2018||2017|
|FINANCIAL ($ thousands, except per share amounts)|
|Petroleum & natural gas revenues, net of royalties||$||5,815||$||6,838|
|Adjusted funds flow (2)||$||471||$||2,036|
|Per share – basic and diluted ($/share)||$||–||$||0.01|
|Net (loss) income||$||(2,098||)||$||10,422|
|Per share – basic and diluted ($/share)||$||(0.01||)||$||0.05|
|Net (debt) surplus (2)||$||(3,961||)||$||25,622|
|Common Shares (thousands)|
|Weighted average during period|
|Outstanding at period end||223,565||216,443|
- Amounts may not be additive due to rounding.
- Adjusted funds flow, adjusted funds flow per share, net (debt) surplus, operating netback, and net production expense are non-GAAP measures. These terms do not have any standardized meanings as prescribed by IFRS and, therefore, may not be comparable with the calculations of similar measures presented by other companies. See headings entitled “Adjusted Funds Flow”, “Net (Debt) Surplus”, “Operational Netback” and “Net Production Expense” in the Reader Advisory below for further information on such terms.
Highlights for the three months ended March 31, 2018
- During the first quarter of 2018 (“first quarter”), we drilled two (2.0 net) vertical exploratory wells in the Birley/Umbach area for $2.1 million. These wells further delineated 19 undrilled contiguous sections of 100% owned Montney rights which are located three kilometres north of our main Montney land block and eight kilometres from the nearest well drilled into the Montney. The reservoir quality throughout the entire 235 metre thick Montney zone was evaluated with these wells.
- We secured two sections of Montney mineral rights (included in the 19 sections discussed above) to reinforce our land position adjacent to the two (2.0 net) aforementioned exploratory Birley/Umbach vertical wells.
- During the first quarter, we entered into a commodity price contract to fix the Chicago City Gate index price of 6,000 mmbtu/d of natural gas at US$2.68/mmbtu from February 1, 2018 to March 31, 2019.
- Our average realized price during the first quarter increased 79% from the $13.02 boe/d reported during the fourth quarter. This significant increase was due to higher benchmark pricing but most notably higher Station 2 pricing which increased 218% through the winter season.
- Our realized NGL price increased 12% during the first quarter compared to the $51.87/boe realized price reported during the fourth quarter. This increase was due to an increase in the Canadian light sweet oil benchmark.
- Our realized natural gas price increased 167% during the first quarter compared to the $0.99/mcf realized price reported during the fourth quarter due to the aforementioned higher Station 2 benchmark pricing.
- With the easing of third party pipeline restrictions, our total production was approximately 5,400 boe/d during April.
First Quarter 2018 Financial Results
Our production during the first quarter averaged 2,788 boe/d, a decrease of approximately 20% from the same quarter of 2017. This production decrease was primarily due to an unforeseen pipeline integrity issue on Enbridge’s Oak 16” gathering line (the “Oak Pipeline”) which restricted our Birley/Umbach and Martin Creek production starting in November 2017 and through to early April 2017 when a temporary pipeline was put in place. With this third party restriction eased, our total production was approximately 5,400 boe/d during April. We achieved these volumes because of the fourth quarter’s commissioning of our Birley facility expansion from 25 mmcf/d to 50 mmcf/d of raw natural gas. We are currently producing from 12 of 13 (10.29 net) of our Birley/Umbach horizontal wells.
For the first quarter, our operating netback decreased almost 40% to $7.16/boe compared to the same quarter of 2017. This decrease was caused by the effect of the third party volume restriction on our reported net production expense and a realized loss on our commodity price contract. However, our first quarter operating netback increased 25% from the fourth quarter of 2017 as a result of a 79% increase in our realized price due to higher benchmark pricing but most notably higher Station 2 pricing which increased 218% through the winter season. This increase in our first quarter operating netback compared to fourth quarter of 2017 was despite an increase in net production expense per boe resulting primarily from the aforementioned production volume restriction as well as reporting a realized loss on our commodity price contracts compared to a gain for the fourth quarter of 2017.
For the first quarter, our adjusted funds flow of $0.5 million decreased compared to $2.0 million during the same quarter of 2017, for the same reasons that resulted in the decrease in our operating netback. Despite these factors, our first quarter adjusted funds flow is the seventh consecutive quarter we have reported positive adjusted funds flow which corresponds to when we started our transition to a Montney focused play.
For the first quarter, we realized lower G&A expenses implemented throughout 2017 including lower staffing costs due to reductions in headcount, a lower number of directors, reduced employee benefits and reduced information system costs. Also, during the first quarter we reduced our headcount by 25% and suspended an employee benefit program. We estimate this will result in additional G&A cost savings of approximately $1.0 million per year.
For the first quarter, we reported a net loss of $2.1 million compared to net income of $10.4 million during the same quarter of 2017. This decrease resulted from the absence during the first quarter, but as reported in the comparative quarter, of the $10.9 million gain on property dispositions and a $1.7 million gain from commodity price contracts. This decrease also reflects the first quarter’s lower netback, restricted volumes and higher severance costs.
First Quarter 2018 Operational Results
During the first quarter, we drilled two (2.0 net) vertical exploratory wells in the Birley/Umbach area for $2.1 million. These wells further delineated 19 undrilled contiguous sections of 100% owned Montney rights (located three kilometres north of our main Montney land block and eight kilometres from the nearest well drilled into the Montney), as we evaluated the pay thickness and reservoir quality throughout the entire 235 metre thick Montney zone. These vertical wells were funded by the proceeds from our December 2017 flow-through share issuance. These 19 sections of Montney mineral rights north of our main Montney land block include the two sections we secured during the first quarter to reinforce our land position adjacent to the two (2.0 net) aforementioned exploratory Birley/Umbach vertical wells.
We believe that our capital program during the last few years which saw us drill and complete 13 (11.23 net) wells on our Birley/Umbach property as well as our on-time completion of our Birley facility expansion to 50 mmcf/d puts us in an excellent position to accelerate activity when commodity prices recover. We have confirmed the resources are there, now our objective will be to extract them efficiently and profitably. To that effect, although we are encouraged about the results of our exploitation program in 2017 and additional delineation work during the first quarter, we remain cautious on making further capital expenditures until such time as commodity prices improve to a more constructive level. Our capital program for the balance of 2018 will be minimal and continuously reviewed by our management and board of directors with adjustments made in response to changing market conditions.
We continue to prudently manage our production volumes and will continue to monitor commodity prices throughout the year and shut-in production where warranted.
We also believe that consolidation is required and would increase efficiencies among producers and streamline operations. We will continue to pursue opportunities that have the potential to generate additional value to our shareholders.
About Chinook Energy Inc.
Chinook is a Calgary-based public oil and natural gas exploration and development company which is focused on realizing per share growth from its large contiguous Montney liquids-rich natural gas position at Birley/Umbach, British Columbia.