Our operational and financial highlights for the three months and year ended December 31, 2018 are noted below and should be read in conjunction with our consolidated financial statements for the years ended December 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).
Fourth Quarter and 2018 Financial and Operating Highlights
|Three months ended
|Natural gas liquids (boe/d)||405||551||565||470|
|Natural gas (mcf/d)||14,641||19,240||18,806||17,602|
|Crude oil (bbl/d)||12||21||19||22|
|Average daily production (boe/d) (1)||2,856||3,779||3,719||3,425|
|Average natural gas liquids price ($/boe)||$||43.56||$||51.87||$||59.87||$||47.89|
|Average natural gas price ($/mcf)||$||2.60||$||0.99||$||1.91||$||1.95|
|Average oil price ($/bbl)||$||54.13||$||76.96||$||69.15||$||62.27|
|Operating Netback (2)|
|Average commodity pricing ($/boe)||$||19.72||$||13.02||$||19.11||$||16.97|
|Royalty (expense) recovery ($/boe)||$||(0.14||)||$||(0.08||)||$||(0.08||)||$||0.05|
|Realized (loss) gain on commodity price contracts ($/boe)||$||(2.59||)||$||3.83||$||(0.72||)||$||3.02|
|Net production expense ($/boe) (2)||$||(14.01||)||$||(11.06||)||$||(11.63||)||$||(11.57||)|
|Operating Netback ($/boe) (1) (2)||$||2.98||$||5.71||$||6.68||$||8.47|
|Exploratory wells (net)||–||–||2.00||–|
|Natural gas wells (net)||–||–||–||3.63|
|Three months ended
|FINANCIAL ($ thousands, except per share amounts)|
|Petroleum & natural gas revenues, net of royalties||$||5,146||$||4,499||$||25,837||$||21,271|
|Cash (outflow) inflow from operating activities||$||(378||)||$||2,635||$||255||$||6,118|
|Adjusted funds (outflow) flow (2)||$||(413||)||$||1,100||$||4,179||$||4,978|
|Per share – basic and diluted ($/share)||$||–||$||0.01||$||0.02||$||0.02|
|Per share – basic and diluted ($/share)||$||(0.09||)||$||(0.10||)||$||(0.12||)||$||(0.08||)|
|Net debt (2)||$||1,994||$||711||$||1,994||$||711|
|Common Shares (thousands)|
|Weighted average during period|
|– basic & diluted||223,605||218,517||223,594||217,174|
|Outstanding at period end||223,605||223,565||223,605||223,565|
- Amounts may not be additive due to rounding.
- Adjusted funds flow (outflow), adjusted funds flow (outflow) per share, net debt, 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 (Outflow)”, “Net Debt”, “Operational Netback” and “Net Production Expense” in the Reader Advisory below for further information on such terms.
- 2018 corporate production increased by 9%, or 294 boe/d, compared to 2017 despite significant third party production restrictions and no capital investment during 2018.
- 2018 adjusted funds flow of $4.2 million resulted from higher than expected average commodity pricing for much of the year, somewhat offsetting the aforementioned production restrictions.
- We drilled and completed two (2.0 net) vertical exploratory wells in the Birley/Umbach area for $2.2 million. These wells delineate 21 gross (20.5 net) undrilled contiguous sections of Montney rights which are located eight kilometres from the nearest well drilled into the Montney. The reservoir quality throughout the entire 225 metre thick Montney zone was evaluated with these wells.
- We renewed our $10.0 million demand revolving credit facility with a Canadian chartered bank. Net debt at December 31, 2018 was $2.0 million.
- We continue to layer in commodity price hedges and diversify our natural gas sales points with approximately 30% of forecast 2019 natural gas production currently hedged and greater than 33% of forecast 2019 natural gas production sold at Chicago pricing.
- 2018 net production expenses remained relatively flat at $11.63/boe compared to 2017. Specifically, production expenses averaged approximately $9.00/boe in our Birley/Umbach area.
- 2018 general and administrative expenses of $3.03/boe represented a decrease of $1.13 million, or 22%, compared to 2017 and reflected the impact of ongoing reductions in staffing, employee benefits and information system costs.
We believe that our previous capital programs which saw us drill and complete 13 (11.23 net) wells on our Birley/Umbach property as well as construct our 50 mmcf/d Birley facility puts us in an excellent position to accelerate activity when commodity prices recover. Our additional delineation work in the 2018 first quarter has increased the extension confidence of the Montney resource on our Martin lands. Although we are encouraged with our results to date, we remain cautious on making further significant capital expenditures until such time as commodity prices improve to a more constructive level.
Unfortunately, Enbridge’s (October 9, 2018) pipeline rupture near Prince George, BC has negatively impacted the natural gas price at Station 2. Enbridge subsequently issued a notice that this Westcoast pipeline has been repaired and returned to service in early November, albeit at a reduced operating pressure of approximately 80%. This reduced service is likely to have a continued negative impact on Station 2 gas prices for the duration of the restriction, understood to be for the remainder of the gas year. Although we continue to explore and contract additional egress options, most transport services are currently fully contracted or are not economically favourable. Prior to the pipeline rupture, commodity prices in 2018 had been higher than our internal forecasts, and should this pricing return to pre-pipeline rupture levels, they would serve to strengthen our balance sheet and facilitate future drilling activity.
Our average daily production for 2018 was 3,719 boe/d and we exited 2018 at approximately 3,500 boe/d through December. Our production was significantly impacted by third party restrictions during 2018. We experienced approximately four months of production restriction in the first and second quarters of 2018 due to the Oak pipeline integrity issue. Additionally, the T-South pipeline rupture during the fourth quarter restricted flows physically or by price related elective reductions during the fourth quarter of 2018. During significant portions of these periods of restriction, our production was limited to less than half of our productive capacity.
During 2018, we remained committed to capital discipline and cost control while continuing to develop our large Montney position at our Birley/Umbach property. We drilled and completed two (2.0 net) vertical wells on a 21 (20.5 net) section parcel of contiguous Montney rights at Martin, located five kilometres north of our main Montney land block at Birley, to determine the existence, thickness and quality of pay in the Montney interval. These vertical wells were drilled six kilometres apart and more than 12 kilometres north and east of the nearest Montney wells drilled to date. Each well encountered approximately 225 metres of total Montney thickness compared to approximately 238 metres at Birley. The quality of the reservoir encountered, particularly in the top 75 metres of the Montney, exceeded our expectations with some of the best and most consistent hydrocarbon charged porosity seen on wireline log data in the entire area. Each well was perforated to obtain pressure information, and will be fully abandoned in the first half of 2019 to satisfy flow-through financing obligations. We are encouraged by these results and believe a significant extension to the productive Montney fairway exists on our lands thus further expanding our future horizontal Montney drilling inventory.
Following an unplanned 22 day outage of the McMahon processing facility in January 2019, our production has returned to a largely unrestricted flow and is currently approximately 4,100 boe/d.
During the first quarter of 2019, we entered into the following commodity price contracts:
|Contractual Term||Notional Volumes||Index and Company’s Received Price|
|Natural gas swap|
|October 1, 2019 to December 31, 2019||3,000 GJ/d||Westcoast Station 2 CAD$1.645/GJ|
|Natural gas collar|
|October 1, 2019 to December 31, 2019||3,000 mmbtu/d||NYMEX US$2.25/mmbtu to US$3.68/mmbtu|
|Natural gas differential swap|
|October 1, 2019 to December 31, 2019||3,000 mmbtu/d||Price at Chicago = NYMEX less US$0.125/mmbtu|
The combination of the NYMEX natural gas collars and differential swaps provide us a minimum and maximum price on notional volumes sold at Chicago City Gate Monthly pricing during the fourth quarter of 2019.
The production growth potential of our Birley/Umbach area is significant, with approximately 53,200 acres (44,350 net) of Montney rights. There are 587 gross (511 net) management identified locations based on 400 metre inter-well spacing and 1,800 metre lateral lengths in both the upper and middle Montney, with additional potential to develop the lower Montney in areas with sufficient reservoirs.
We are committed to improving our cost structure and will see our office related expenditures decrease in 2019 primarily through the conclusion of our current office lease and lease of new space at current market rates. Additionally, we continue to lever our existing assets and have completed a transportation agreement for the partial use of our 12” Aitken Creek pipeline. The agreement will commence on the initial delivery of gas, anticipated to be late 2019 or early 2020, and will continue for a minimum period of two years. Minimum gathering charges will total approximately $1.6 million annually.
As Western Canadian natural gas price weakness continues related to export capacity constraints, including T-South restrictions, we remain cautious in deploying further capital. Consequently, our capital program in 2019 will be minimal until such time as commodity prices improve to constructive levels. Our management and Board of Directors will make adjustments to the capital program in response to changing market conditions.
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.
|For further information please contact:|
President and Chief Executive Officer
Chinook Energy Inc.
Telephone: (403) 261-6883
Vice President, Finance and Chief Financial Officer
Chinook Energy Inc.
Telephone: (403) 261-6883