CALGARY, Alberta, May 10, 2018 (GLOBE NEWSWIRE) — GRANITE OIL CORP. (“Granite” or the “Company”) (TSX:GXO)(OTCQX:GXOCF) is pleased to provide an operational update and report its financial and operational results and for the three months ended March 31, 2018.
Granite has drilled and completed two wells to date in 2018. The first well was drilled on 200 meter offset spacing in the first quarter in its Pod 2 area and was recently followed by a well drilled on 400 meter spacing in its Pod 4 area in the second quarter. The first well in Pod 2 has been on for over three months, averaging approximately 300 bbl/d of oil over that time period and is currently flowing at 220 bbl/d. The second well was tested at an average rate of 620 bbl/d of oil and 250 mscf/d of gas over a 3.5 day flow test and at the end of the test was flowing at a rate of 1,100 bbl/d of oil and 420 mscf/d of reservoir gas at a wellhead pressure 70 psi. Both wells tested tighter frac spacing and increased sand density and have initially outperformed most of the Company’s best wells to date, validating the productivity of significant new areas of expansion within its gas injection EOR scheme. Consistent with a well drilled late in 2017, these wells mark a return to high-torque drilling results, similar to those achieved in 2015 and 2016.
Granite has taken a patient, results-based approach to the development of its large oil-in-place, early life-cycle Bakken oil pool by developing the most effective and efficient drilling strategy over a small test area of the pool first, so that it can then be applied to the remainder of the pool. At the same time, the Company continued to progressively expand out its highly effective gas injection EOR scheme to areas outside the test area in preparation for future drilling. After testing and evaluating 100 meter spacing over this small area in 2017, the Company suspended its drilling from August to December, and has since returned to 200 meter spacing in the expansion areas with exceptional results. In the last nine months, Granite has taken significant steps to optimize its scheme in this 100 meter spacing area, including shutting in production and prioritizing injection. The Company has successfully minimized the impact of the 100 meter spacing wells in this test area, shallowing declines and starting to recover reservoir pressure. Through this process the Company still achieved top-tier year-end 2017 reserve metrics in all categories, which were highlighted by a PDP recycle ratio of 3.3.
The Company is currently producing 2,500 bbl/d of oil with only three wells drilled in the last 10 months. The Company has a further 86 potential well locations on 200 meter spacing in its main pool area which provide years of go-forward development drilling. Granite is currently re-injecting all of its gas under the EOR scheme and is well positioned to take advantage of seasonally low gas prices with recent and planned well conversions set to re-pressurize key parts of its Bakken oil pool.
With a return to consistent historical drilling results and a prepared well inventory, the Company will re-evaluate its 2018 budget over the coming weeks with a view towards taking advantage of high netbacks associated with current oil prices while continuing to protect its balance sheet and dividend.
Western Canada Select (“WCS”) Price Differential Mitigation
Granite has historically been selling into a heavier oil pipeline system near its battery, getting a quality uptick to Western Canada Select pricing with its lighter oil. Though price differentials of WCS to West Texas Intermediate (“WTI”) have recently narrowed significantly compared to the first quarter, the Company has aggressively pursued a number of differential mitigation options to protect its go-forward pricing and balance sheet. These options have included blending its oil with a lighter quality crude oil to attain a higher price premium, as well as railing options direct to refineries in the United States. Recently the Company has received up to a net USD $5.25/bbl increase over WCS. The Company has recently committed to a one-month test contract to sell 20% of its oil production for the month of June directly to a U.S. refinery. The Company has a number of long term options with its battery located close to both major rail terminals and the U.S. border, and is well prepared to minimize the impacts of future WCS-WTI price differential swings go-forward.
Strategic Alternatives Update
On March 20, 2018, Granite announced the initiation of a process to review potential strategic alternatives and the engagement of Cormark Securities Inc. and National Bank Financial Inc. as financial advisors in respect of this process. Granite has not set a definitive schedule for the process and does not intend to provide updates or otherwise disclose developments with respect to the process until the Board has approved a definitive transaction or strategic alternative, or otherwise determines that disclosure is necessary or appropriate.
First Quarter, 2018
The first quarter of 2018 presented challenges for Granite, the biggest impacts being lower production levels resulting from slower development and mitigation of the results from the 100 meter spacing wells, as well as increased WCS-WTI price differentials. The gap between WTI and WCS widened significantly beginning in the latter part of 2017 and continued throughout the first three months of 2018, averaging a $25.00 USD discount to WTI in the first quarter of 2018. This differential had a significant impact on the Company’s funds flow. In addition, the Company had 1,300 bbl/d of oil hedged at an average price of $66.70 CAD during the first quarter, resulting in a realized hedging loss of approximately $1.4 million (approximately $7.19 per barrel).
Production during the first quarter averaged 2,205 boe/d (98% oil), largely due to the Company’s decision to suspend its development drilling program over the period of July to December 2017 to further evaluate wells drilled on 100 meter spacing during the first-half of 2017. During this time, the Company re-evaluated its go-forward development drilling strategy for the broader pool and also evaluated the efficiency of its gas injection EOR scheme based on base declines during a period without development drilling. As anticipated, this period of slowed development has resulted in a shallower corporate decline profile and the Company has returned to drilling new infill wells on 200 or 400meteroffset spacing.
The planned disposition of a minor property referred to in the Granite’s news release on December 18, 2017, was not completed and is currently included as part of the strategic alternatives review process resulting in a higher net debt position at March 31, 2018, than anticipated.
Given recent positive moves in crude oil prices and WCS-WTI price differentials, along with the strong drilling results achieved in 2018, Granite is optimistic about the second-half of 2018. As well, with numerous options to effectively minimize future increases in WCS-WTI price differentials, the Company is well-positioned to mitigate future price swings that may affect the broader Canadian crude market.
Annual Meeting of Shareholders
The annual meeting of Granite’s shareholders is presently scheduled to be held at 2:30 p.m. on Thursday, June 28, 2018. At this meeting, the shareholders will be asked to elect directors and appoint an auditor for the ensuing year. The three-year term during which awards may be granted under Granite’s share incentive plan expires on May 14, 2018. The Corporation has determined that no further grants will be made under the Share Incentive Plan and shareholders will not be asked to re-approve the Share Incentive Plan at a future meeting of shareholders.
FINANCIAL AND OPERATING HIGHLIGHTS
Three Months Ended March 31,
|(000s, except per share amounts)||($)||($)|
|Oil and natural gas revenues||10,675||14,451|
|Funds from operations (1)||2,711||6,560|
|Per share – basic||0.08||0.19|
|Per share – diluted (2)||0.08||0.19|
|Net income (loss)||(3,353||)||2,500|
|Per share – basic||(0.10||)||0.07|
|Per share – diluted (2)||(0.10||)||0.07|
|Capital expenditures (3)||3,461||4,791|
|Net debt (4)||42,949||33,359|
|Weighted average – basic||34,191||33,693|
|Weighted average – diluted||34,357||34,044|
|Natural gas (mcf/d)||289||730|
|Crude oil (bbls/d)||2,157||2,887|
|Average wellhead prices|
|Natural gas ($/mcf)||2.19||2.45|
|Crude oil and NGLs ($/bbl)||54.71||54.99|
|Combined average ($/boe) (6)||53.80||53.36|
|Operating netback ($/boe) (7)||20.12||27.79|
|Gross (net) wells drilled|
|Oil (#)||1 (1.0)||3 (3.0)|
|Total (#)||1 (1.0)||3 (3.0)|
|Average working interest (%)||100||100|
(1) Funds from operations and funds from operations per share are not recognized measures under International Financial Reporting Standards (IFRS). Refer to the commentary in the Reader Advisories under “Non-GAAP Measurements” for further discussion.
(2) The Company uses the weighted average common shares (basic) when there is a net loss for the period and the weighted average common shares (diluted) when there is net income in the period to calculate net income (loss) per share diluted. The Company uses the weighted average common shares (diluted) to calculate the funds from operations diluted.
(3) Total capital expenditures, excluding acquisitions and excluding non-cash transactions. Refer to commentary in the Q1 2018 Management’s Discussion and Analysis under “Capital Expenditures and Acquisitions” for further information.
(4) Net debt, which is calculated as current liabilities (excluding derivative financial instruments) and bank debt less current assets (excluding derivative financial instruments), is not a recognized measure under IFRS. Please refer to the Reader Advisories under “Non-GAAP Measurements” for further discussion.
(5) For a description of the boe conversion ratio, refer to the Reader Advisories under “BOE Presentation”.
(6) Combined average realized prices includes all oil, gas and NGL sales revenue, excluding other income.
(7) Operating netback, which is calculated by deducting royalties, operating expenses and transportation expenses from oil and gas revenue and adjusting for any realized hedging on financial instruments, is not a recognized measure under IFRS. Please refer to the Reader Advisories under “Non-GAAP Measurements” for further discussion.