CALGARY, March 21, 2019 /CNW/ – (TSX: EGL): Eagle Energy Inc. (“Eagle“) today reports its financial and operating results and its reserves information for the year ended December 31, 2018.
When reflecting on 2018, Wayne Wisniewski, President and Chief Executive Officer, stated, “Eagle continues to execute its previously announced plan to reduce debt and corporate costs. Our 2018 full year administrative expenses, excluding one-time costs associated with the Salt Flat and Twining dispositions, are 11% lower than our 2017 levels. We have undertaken cost cutting initiatives including reducing our staff headcount by 27% over the year and reducing our number of contractors by five. Overall, we estimate our 2019 full year administrative expenses to be 28% lower than 2018 levels. In addition, when compared to 2017 year-end, we have reduced our term loan at year end by 48%.”
Mr. Wisniewski continued, “We continue to work with our financial advisors to investigate, evaluate and consider possible asset sales and restructuring alternatives. Given the improvement in commodity prices since the end of 2018 and an upcoming sale of our Texas overriding royalty interests, we have decided to forego entering into another forbearance agreement with our lender at this time to replace the one that expired January 31, 2019. We feel this affords us the maximum flexibility in managing our business and avoids incurring additional fees and conditions associated with a forbearance agreement.”
Eagle’s reserves data and other oil and gas information is included in its Annual Information Form dated March 21, 2019 for the year ended December 31, 2018 (“AIF“). Eagle’s audited consolidated annual financial statements, management’s discussion and analysis and AIF have been filed with the securities regulators and are available online under Eagle’s issuer profile on SEDAR at www.sedar.com and on Eagle’s website at www.EagleEnergy.com.
This news release contains non-IFRS financial measures and statements that are forward-looking. Investors should read the sections titled “Non-IFRS Financial Measures” and “Note about Forward-Looking Statements” near the end of this news release. Figures within this news release are presented in Canadian dollars unless otherwise indicated.
2018 Year in Review
Eagle achieved the following results in 2018:
- A 23% increase in year-over-year field netback, to $25.83 per boe.
- A 48% reduction in year-end debt (from $US 58.2 million to $US 30.4 million).
- An 11% reduction in administrative expenses, excluding one-time costs associated with property dispositions.
- Undertook cost cutting initiatives that are estimated to reduce 2019 administrative expenses (excluding any one-time costs that may be associated with future asset dispositions) to $6.3 million, or $2.5 million below 2018.
- Posted reserve replacement ratios of 363% and 75% on a proved plus probable and proved basis, respectively.
Asset Sales, Debt Reduction and Ongoing Measures to address a Going Concern Uncertainty
- On February 8, 2018, Eagle sold its oil and gas interests in Salt Flat, located in Caldwell County, Texas for approximately $34.4 million cash and used the net proceeds from the sale to reduce its term loan by 34% (from $US 58.2 million to $US 38.5 million) and to further fund its drilling program in North Texas.
- On August 28, 2018, Eagle sold its oil and gas interests in the Twining area of Alberta, Canada for approximately $13.3 million cash and used the net proceeds from the sale to reduce its term loan by an additional 14% (from $US 38.5 million to $US 30.4 million) and to further fund its drilling program in North Texas.
At December 31, 2018, the following circumstances cause material uncertainties that may cast significant doubt regarding Eagle’s ability to continue as a going concern:
- Eagle had a working capital deficiency of $40.0 million.
- Eagle’s estimate of future cash flows from operating activities over the next twelve months is not sufficient to repay the loan principal, which is classified as a current liability.
- Eagle was in default of one of its four financial covenants under the four-year secured term loan from its U.S.-based lender (the “Loan Agreement“). Violation of any financial covenant constitutes an immediate event of default under the Loan Agreement. As a result, Eagle’s debt has been reclassified from a non-current to a current liability.
- Lower WTI oil prices during the fourth quarter of 2018 relative to the third quarter, combined with unprecedented wide oil price differentials in Alberta, led to lower fourth quarter 2018 funds flow. This caused Eagle to be in default of one of its cash flow related financial covenants, the Consolidated Fixed Charge Coverage Ratio.
- There is no assurance that Eagle will not be in violation of one or more financial covenants in future quarters.
Eagle has undertaken several cost-cutting measures to reduce administrative and operating expenses, such as reducing its staff headcount by 27% over the year, reducing its number of contractors by five, negotiating better pricing with contractors and listing its Calgary office space for sublease.
In December 2018, as a result of falling WTI prices and high Canadian oil differentials, Eagle implemented a selective well shut-in program in Canada to maximize cash flow and was able to remain cash flow positive at the field level for the fourth quarter of 2018.
For 2019, as WTI strengthens and the Canadian oil differentials narrow, Eagle has restored production levels to increase field level cash flow. Eagle continues to evaluate exposure to market risks from fluctuations in commodity prices and has entered into risk management contracts to reduce commodity price risks.
Eagle currently has curtailed all capital spending for 2019 and continues to work with its financial advisors to investigate, evaluate and consider possible asset sales and restructuring alternatives.
Eagle’s ability to meet its ongoing financial liabilities, including liabilities relating to its loan agreement, and to continue as a going concern, is dependent upon the ongoing support from its lender and its ability to fund the repayment of its debt by generating positive cash flows from operations, securing funding from additional debt or equity financing, disposing of assets or making other arrangements. There is no certainty that such initiatives will be successful.
Since 2018 year end, Eagle has undertaken the following:
- On March 6, 2019, Eagle signed a purchase and sale agreement to sell 100% of certain minor overriding royalty interests in Texas (the “ORRI Sale“) for estimated proceeds of $US 1.7 million, subject to customary closing adjustments. Closing is expected to occur on March 29, 2019 and will improve Eagle’s capacity to fund its outstanding obligations.
- On March 12, 2019, Eagle entered into a fixed price financial swap on 450 barrels of oil per day for the period of April 1 to September 30, 2019 at a WTI price of $US 57.81 per barrel in order to mitigate the risk that fluctuating commodity prices have on generating positive cash flows from operations.
- On March 15, 2019, the lender finalized its semi-annual borrowing base redetermination, based on December 31, 2018 reserves, and the borrowing base was set at $US 30.6 million (which adequately covers the current outstanding debt balance of $US 30.4 million).
- On March 18, 2019, Eagle and its lender entered into a Limited Consent and Seventh Amendment to the Loan Agreement (the “Consent“) under which the lender consented to the ORRI Sale and made certain amendments to the Loan Agreement. One of the amendments excludes 2018 consolidated financial statements from constituting an event of default due to them having a going concern note.
- As previously announced, the limited forbearance agreement between Eagle and its lender expired on January 31, 2019. Eagle was in violation of one of its four financial covenants at December 31, 2018 year end, which constitutes an event of default under the Loan Agreement. Eagle has continued to work diligently and constructively with its lender since the expiration of the forbearance agreement.
- Given the improvement in commodity prices since the end of 2018, Eagle’s ongoing work with its financial advisors in investigating, evaluating and considering possible asset sales and restructuring alternatives, and its recently signed ORRI Sale, Eagle has made the decision to forego entering into another forbearance agreement with its lender at this time. Eagle feels this affords it the maximum flexibility to manage its business and avoids incurring additional fees and conditions associated with a forbearance agreement.
- Under the Consent, the lender has not waived, and has expressly retained, all of its rights and remedies to which it is entitled under the Loan Agreement as a result of the event of default described above. Notwithstanding the default, the lender has not, as of the date hereof, exercised any of its available remedies, but there can be no assurance that it will not do so in the future.
2018 Year-end Reserves Information
An independent evaluation of Eagle’s U.S. reserves was conducted by Netherland, Sewell & Associates, Inc. and of Eagle’s Canadian reserves by McDaniel & Associates Consultants Ltd. These reserves evaluation reports are effective December 31, 2018 and were prepared in accordance with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. Details regarding Eagle’s reserves and oil and gas assets are set forth in Eagle’s AIF.
2018 Year-End Reserves Report – Overview (based on Company Gross reserves)
- Property divestitures on both sides of the border (Salt Flat assets in Texas and Twining assets in Alberta) were the primary focus, resulting in a year-over-year reduction in debt of 48%.
- Achieved year-end proved plus probable reserves of 16 million boe (60% total proved, 50% proved developed producing).
- Crude oil comprises 97% of proved developed producing reserves.
- Posted reserve replacement ratios of 363% and 75% on a proved plus probable and proved basis, respectively.(1) (3)
- Increased the reserve life indices to 27.1 years and 16.5 years on a proved plus probable and proved basis, respectively.(2) (3)
Notes: |
|
(1) |
Reserve replacement ratio is calculated by dividing company gross reserve additions by working interest production for the year, which, in 2018, is based on average working interest production of 1,622 boe per day (“boe/d”) after the sale of Salt Flat and Twining (2017 – 3,598 boe/d). This metric expresses the amount of reserves added to a company’s reserve base during the year as compared to the amount of oil and gas produced. It shows whether a company is increasing reserves or depleting them. |
(2) |
Reserve life index is calculated by dividing company gross reserves by working interest production for the year, which, in 2018, is based on average working interest production of 1,622 boe/d after the sale of Salt Flat and Twining (2017 – 3,598 boe/d). This metric expresses how long a company’s reserves will last at the current production rate with no additions to reserves. |
(3) |
Eagle cautions readers that the reserve replacement ratio and reserve life index are metrics that do not have any standardized meaning and may not be comparable to similar metrics presented by other issuers. |
The following tables summarize the independent reserves estimates and values of Eagle’s reserves as at December 31, 2018. Totals may not add due to rounding.
Summary of Reserves
Canadian Operations |
Company Gross(1) |
|||||
Reserves Categories |
Crude Oil |
Natural Gas |
Natural Gas |
Total Oil |
Total Oil |
|
(Mbbls) |
(Mbbls) |
(MMcf) |
(Mboe) |
(Mboe) |
||
Proved |
||||||
Developed producing |
6,354 |
21 |
961 |
6,536 |
7,643 |
|
Developed non-producing |
– |
– |
– |
– |
156 |
|
Undeveloped |
– |
– |
– |
– |
2,793 |
|
Total proved |
6,354 |
21 |
961 |
6,536 |
10,593 |
|
Total probable |
2,243 |
7 |
272 |
2,296 |
4,463 |
|
Total proved plus probable |
8,598 |
28 |
1,234 |
8,831 |
15,055 |
|
US Operations |
Company Gross(1) |
|||||
Reserves Categories |
Crude Oil |
Natural Gas |
Natural Gas |
Total Oil |
Total Oil |
|
(Mbbls) |
(Mbbls) |
(MMcf) |
(Mboe) |
(Mboe) |
||
Proved |
||||||
Developed producing |
1,337 |
41 |
351 |
1,436 |
3,145 |
|
Developed non-producing |
223 |
16 |
140 |
262 |
344 |
|
Undeveloped |
1,130 |
166 |
1,426 |
1,533 |
1,759 |
|
Total proved |
2,689 |
223 |
1,917 |
3,231 |
5,248 |
|
Total probable |
3,002 |
403 |
3,465 |
3,983 |
2,892 |
|
Total proved plus probable |
5,690 |
627 |
5,382 |
7,214 |
8,140 |
|
Total Company Operations |
Company Gross(1) |
|||||
Reserves Categories |
Crude Oil |
Natural Gas |
Natural Gas |
Total Oil |
Total Oil |
|
(Mbbls) |
(Mbbls) |
(MMcf) |
(Mboe) |
(Mboe) |
||
Proved |
||||||
Developed producing |
7,691 |
62 |
1,312 |
7,972 |
10,789 |
|
Developed non-producing |
223 |
16 |
140 |
262 |
500 |
|
Undeveloped |
1,130 |
166 |
1,426 |
1,533 |
4,552 |
|
Total proved |
9,043 |
245 |
2,878 |
9,767 |
15,841 |
|
Total probable |
5,245 |
410 |
3,737 |
6,278 |
7,355 |
|
Total proved plus probable |
14,288 |
655 |
6,615 |
16,045 |
23,196 |
|
Note: |
|
(1) |
Company gross reserves are Eagle’s total working interest share before the deduction of any royalties and exclude Eagle’s royalty interests. |
Summary of Net Present Value of Future Net Revenue of Reserves
Canadian Operations |
Net Present Value of Future Net Revenue Before Income Taxes Discounted at (%/year)(1) |
||||||
Reserves Category |
0% |
5% |
10% |
15% |
20% |
||
$CA |
($000’s) |
($000’s) |
($000’s) |
($000’s) |
($000’s) |
||
Proved |
|||||||
Developed producing |
181,393 |
103,242 |
68,994 |
51,090 |
40,409 |
||
Developed non-producing |
– |
– |
– |
– |
– |
||
Undeveloped |
– |
– |
– |
– |
– |
||
Total proved |
181,393 |
103,242 |
68,994 |
51,090 |
40,409 |
||
Total probable |
82,627 |
23,723 |
9,945 |
5,407 |
3,441 |
||
Total proved plus probable |
264,021 |
126,965 |
78,939 |
56,496 |
43,850 |
||
US Operations |
Net Present Value of Future Net Revenue Before Income Taxes Discounted at (%/year)(1) |
||||||
Reserves Category |
0% |
5% |
10% |
15% |
20% |
||
$US |
($000’s) |
($000’s) |
($000’s) |
($000’s) |
($000’s) |
||
Proved |
|||||||
Developed producing |
48,521 |
32,461 |
24,627 |
20,067 |
17,090 |
||
Developed non-producing |
9,847 |
5,222 |
3,717 |
3,001 |
2,545 |
||
Undeveloped |
25,656 |
17,641 |
15,527 |
9,071 |
6,634 |
||
Total proved |
84,024 |
55,325 |
40,871 |
32,138 |
26,270 |
||
Total probable |
113,807 |
68,892 |
46,372 |
33,354 |
25,115 |
||
Total proved plus probable |
197,831 |
124,217 |
87,242 |
65,492 |
51,385 |
||
Total Company Operations |
Net Present Value of Future Net Revenue Before Income Taxes Discounted at (%/year)(1)(2) |
||||||
Reserves Category |
0% |
5% |
10% |
15% |
20% |
||
$CA |
($000’s) |
($000’s) |
($000’s) |
($000’s) |
($000’s) |
||
Proved |
|||||||
Developed producing |
242,117 |
144,064 |
100,095 |
76,523 |
62,137 |
||
Developed non-producing |
12,248 |
6,520 |
4,652 |
3,761 |
3,193 |
||
Undeveloped |
31,687 |
21,765 |
15,433 |
11,154 |
8,138 |
||
Total proved |
286,052 |
172,349 |
120,180 |
91,438 |
73,468 |
||
Total probable |
223,686 |
109,183 |
67,516 |
46,849 |
34,670 |
||
Total proved plus probable |
509,738 |
281,532 |
187,696 |
138,287 |
108,138 |
||
Notes: |
|
(1) |
It should not be assumed that the net present values of estimated future net revenue shown above are representative of the fair market value of the reserves. There is no assurance that the underlying price and costs assumptions will be attained and variances could be material. The recovery and estimates of reserves provided in this news release are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual reserves may be greater than or less than the estimates provided. |
(2) |
To calculate the Total Company Operations, the amounts for the U.S. operations have been converted into Canadian dollars using the following foreign exchange rates: 2019 – $CA 1.00 equal to $US 0.757; 2020 – $CA 1.00 equal to $US 0.782; 2021- $CA 1.00 equal to $US 0.797; 2022 – $CA 1.00 equal to $US 0.803; 2023 – $CA 1.00 equal to $US 0.807, 2023 and thereafter – $CA 1.00 equal to $US 0.808 (as per the average of the exchange rate for the forecast prices of McDaniel & Associates Consultants Ltd., GLJ Petroleum Consultants Ltd. and Sproule Associated Limited as of January 1, 2019.) |
Selected Annual Information
The following table shows selected information for Eagle’s fiscal years ended December 31, 2018, December 31, 2017 and December 31, 2016.
Years ended December 31 |
2018 |
2017 |
2016 |
($000’s except per share amounts and production) |
|||
Sales volumes – boe/d |
2,258 |
3,821 |
3,972 |
Revenue, net of royalties |
37,296 |
55,569 |
48,993 |
Field netback |
21,285 |
29,354 |
23,437 |
Funds flow from operations |
6,334 |
12,695 |
15,798 |
per share – basic and diluted |
0.14 |
0.30 |
0.38 |
(Loss) earnings |
(25,470) |
(17,349) |
9,559 |
per share – basic and diluted |
(0.58) |
(0.40) |
0.23 |
Current assets |
7,751 |
13,869 |
9,302 |
Current liabilities |
45,395 |
13,715 |
74,595 |
Total assets |
136,674 |
207,314 |
218,036 |
Total non-current liabilities |
16,658 |
94,312 |
26,202 |
Shareholders’ equity |
74,621 |
99,287 |
117,239 |
Dividends declared |
– |
425 |
3,821 |
per issued share |
0.00 |
0.01 |
0.09 |
Shares issued |
44,244 |
43,302 |
42,452 |
Summary of Quarterly Results
Q4/2018 |
Q3/2018 |
Q2/2018 |
Q1/2018 |
Q4/2017 |
Q3/2017 |
Q2/2017 |
Q1/2017 |
|
($000’s except for boe/d and |
||||||||
Sales volumes – boe/d |
1,852 |
1,958 |
2,262 |
2,974 |
3,804 |
3,749 |
3,966 |
3,767 |
Revenue, net of royalties |
5,577 |
9,010 |
10,228 |
12,461 |
14,725 |
12,459 |
14,167 |
14,218 |
per boe |
32.73 |
50.01 |
49.69 |
46.57 |
42.08 |
36.12 |
39.25 |
41.95 |
Operating, transportation and marketing expenses |
2,730 |
3,946 |
4,206 |
5,109 |
6,864 |
6,301 |
5,885 |
7,165 |
per boe |
16.02 |
21.91 |
20.43 |
19.10 |
19.61 |
18.27 |
16.31 |
21.14 |
Field netback(1) |
2,847 |
5,064 |
6,022 |
7,352 |
7,861 |
6,158 |
8,282 |
7,053 |
per boe |
16.71 |
28.10 |
29.26 |
27.47 |
22.47 |
17.85 |
22.94 |
20.81 |
Funds flow from operations |
1,062 |
1,622(2) |
1,932 |
1,718(3) |
3,488 |
3,346 |
4,272 |
1,589 |
per boe |
6.23 |
9.00 |
9.39 |
6.42 |
9.98 |
9.70 |
11.84 |
4.69 |
per share – basic |
0.02 |
0.04 |
0.04 |
0.04 |
0.08 |
0.08 |
0.10 |
0.04 |
per share – diluted |
0.02 |
0.04 |
0.04 |
0.04 |
0.08 |
0.07 |
0.10 |
0.04 |
(Loss) earnings |
(5,922) |
(1,887) |
(15,093) |
(2,568) |
(14,293) |
(4,711) |
675 |
1,303 |
per share – basic |
(0.13) |
(0.04) |
(0.34) |
(0.06) |
(0.34) |
(0.11) |
0.02 |
0.03 |
per share – diluted |
(0.13) |
(0.04) |
(0.34) |
(0.06) |
(0.34) |
(0.11) |
0.02 |
0.03 |
Cash dividends declared |
– |
– |
– |
– |
– |
– |
– |
425 |
per issued share |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.01 |
Current assets |
7,751 |
13,270 |
10,920 |
14,941 |
13,869 |
11,122 |
11,847 |
18,819 |
Current liabilities |
43,395 |
9,686 |
5,762 |
7,528 |
13,715 |
8,042 |
6,599 |
11,474 |
Total assets |
136,674 |
141,264 |
159,935 |
174,877 |
207,314 |
213,867 |
222,155 |
233,951 |
Total non-current liabilities |
16,658 |
51,886 |
62,427 |
70,870 |
94,312 |
92,367 |
97,086 |
104,359 |
Shareholders’ equity |
74,621 |
79,692 |
81,709 |
96,479 |
99,287 |
113,458 |
118,470 |
118,118 |
Shares issued |
44,244 |
44,244 |
43,750 |
43,750 |
43,302 |
43,302 |
42,857 |
42,857 |
Notes: |
|
(1) |
Field netback is a Non-IFRS financial measure. See “Advisories – Non-IFRS Financial Measures”. |
(2) |
Includes one-time disposition costs of $0.7 million relating to the Twining disposition. |
(3) |
Includes one-time disposition costs of $3.4 million relating to the Salt Flat disposition |
During the fourth quarter of 2018, sales volumes decreased 5% when compared to the third quarter. Production from the North Texas properties increased by 176 boe/d due to the third well of the 2018 drilling program starting production. Production from the Canadian properties decreased by 282 boe/d primarily due to the disposition of the Twining properties at the end of August, as well as the selective well shut in process that was initiated in Dixonville in response to the low commodity price environment.
During the fourth quarter of 2018, field netback decreased 44% when compared to the third quarter due to lower production and a 35% decrease in realized prices net of royalties, which was consistent with the WTI price decrease and the dramatically wider price differentials on Canadian oil. When compared to the third quarter, the negative effect on field netback of lower prices was partially offset by a 31% decrease in operating, transportation and marketing expenses in the fourth quarter, as Eagle raised production from one well in North Texas and initiated a selective well shut in program in Dixonville.
For the Dixonville properties in Canada, the realized price in the fourth quarter of 2018 was $26.74 per boe as compared to $52.86 per boe in the fourth quarter of 2017. This 49% quarter-over-quarter realized price decrease occurred despite an 8% WTI price increase, and was due to wider Canadian oil price differentials. For the full year of 2018, the realized price averaged $55.39 per boe as compared to $48.61 per boe for the prior year. The wider Canadian oil price differentials held this year-over-year realized price increase to only 14% versus a 31% increase in the WTI price.
During the latter part of the fourth quarter, an unprecedented widening in oil price differentials caused a significant decrease in field netbacks in the Dixonville area. The differential between $CA WTI and Eagle’s received price was $58.86 per barrel in December, resulting in a December realized oil price of $4.60 per barrel. As a result of the low pricing in December, Eagle proactively initiated a selective well shut-in program, which reduced workover expenditures. This, in turn, lowered production, but resulted in Dixonville being cash flow positive at a field level during the fourth quarter of 2018.
Funds flow from operations decreased 35% from the third quarter of 2018. This was primarily due to 44% lower fourth quarter field netbacks being partially offset by a realized risk management gain of $1.3 million in the fourth quarter.
(Loss) earnings on a quarterly basis often do not move directionally or by the same amounts as funds flow from operations. This is due to items of a non-cash nature that factor into the calculation of (loss) earnings, and those that are required to be fair valued at each quarter end. Fourth quarter 2018 funds flow from operations decreased by 35% from the third quarter of 2018, yet the fourth quarter net income was 214% less than the third quarter of 2018 primarily as a result of a $5.3 million impairment expense realized in the fourth quarter relating to Dixonville.
Current assets decreased quarter-over-quarter due to a lower December revenue forming part of the December accounts receivable balance at year end, while September revenue, which formed part of the September accounts receivable balance, was higher due to stronger September oil prices.
Current liabilities increased in the fourth quarter when compared to the third quarter due to the reclassification of Eagle’s debt from a non-current liability to a current liability.