Strong liquids production, improving regional condensate pricing and reduced operating costs contribute to expected free cash flow generation in 2019
CALGARY, Alberta–(BUSINESS WIRE)–FIRST QUARTER 2019 HIGHLIGHTS
Key Nest 3 infrastructure development in progress, outlook for increasing free cash flow
7G had an active first quarter that included the build-out of its Nest 3 connector pipeline. This 2019 pipeline investment underpins the Nest 3 development plan and enables the tie-in of Nest 3 resource into the company’s larger gathering and processing infrastructure network. Nest 3 infrastructure development is expected to continue in the second quarter, before aligning toward a more resource development focused second half of the year. Once the connector is complete, 7G expects future infrastructure capital, as a percent of total cash flow, to fall relative to historical levels.
Capital discipline and returns to shareholders remain top priorities
As 7G transitions from one of the fastest drill-bit growth companies in Canadian history to a sustainable, free cash flow growth entity, capital discipline remains paramount. Strong liquids production, improving local condensate pricing and reduced operating costs are expected to generate free cash flow in excess of 7G’s $1.25 billion 2019 capital budget. 7G plans to apply free cash flow to a combination of share repurchases pursuant to the previously announced normal course issuer bid (NCIB) and net debt reduction.
OPERATIONAL AND FINANCIAL HIGHLIGHTS
| Three months ended March 31, |
Three months ended December 31, |
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($ millions, except boe
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2019 | 2018 | % Change | 2018 | % Change | |||||||||||||||
| Sales volumes | ||||||||||||||||||||
| Condensate (mbbl/d) | 72.7 | 67.3 | 8 | 81.8 | (11 | ) | ||||||||||||||
| NGLs (mbbl/d) | 44.1 | 41.5 | 6 | 47.4 | (7 | ) | ||||||||||||||
| Liquids (mbbl/d) | 116.8 | 108.8 | 7 | 129.2 | (10 | ) | ||||||||||||||
| Natural gas (MMcf/d) | 483.6 | 473.3 | 2 | 515.4 | (6 | ) | ||||||||||||||
| Total sales volumes (mboe/d)(1) | 197.4 | 187.7 | 5 | 215.1 | (8 | ) | ||||||||||||||
| Liquids % | 59% | 58% | 2 | 60% | (2 | ) | ||||||||||||||
| Realized prices | ||||||||||||||||||||
| Condensate ($/bbl) | 63.00 | 73.39 | (14 | ) | 53.57 | 18 | ||||||||||||||
| Natural gas ($/Mcf) | 4.32 | 3.54 | 22 | 4.77 | (9 | ) | ||||||||||||||
| NGLs ($/bbl) | 7.46 | 13.33 | (44 | ) | 8.44 | (12 | ) | |||||||||||||
| Total ($/boe)(1) | 35.44 | 38.19 | (7 | ) | 33.66 | 5 | ||||||||||||||
| Royalty expense ($/boe) | (2.30 | ) | (1.12 | ) | 105 | (0.99 | ) | 132 | ||||||||||||
| Operating expenses ($/boe) | (4.93 | ) | (5.73 | ) | (14 | ) | (5.25 | ) | (6 | ) | ||||||||||
| Transportation, processing and other ($/boe) | (6.65 | ) | (6.24 | ) | 7 | (7.07 | ) | (6 | ) | |||||||||||
| Operating netback before the following ($/boe)(1)(2) | 21.56 | 25.10 | (14 | ) | 20.35 | 6 | ||||||||||||||
| Realized hedging gains (losses) ($/boe) | (0.34 | ) | (0.78 | ) | (56 | ) | (1.58 | ) | (78 | ) | ||||||||||
| Marketing income ($/boe)(2) | 0.77 | 0.62 | 24 | 0.20 | 285 | |||||||||||||||
| Operating netback ($/boe)(2) | 21.99 | 24.94 | (12 | ) | 18.97 | 16 | ||||||||||||||
| Adjusted funds flow ($/boe)(2)(4) | 19.05 | 22.54 | (15 | ) | 17.06 | 12 | ||||||||||||||
| Financial Results | ||||||||||||||||||||
| Revenue ($)(3) | 546.3 | 648.5 | (16 | ) | 1,146.8 | (52 | ) | |||||||||||||
| Net income ($) | 10.8 | 22.7 | (52 | ) | 245.4 | (96 | ) | |||||||||||||
| Per share – diluted ($) | 0.03 | 0.06 | (50 | ) | 0.68 | (96 | ) | |||||||||||||
| Operating income ($)(2) | 84.0 | 129.4 | (35 | ) | 66.3 | 27 | ||||||||||||||
| Per share – diluted ($) | 0.24 | 0.36 | (33 | ) | 0.18 | 33 | ||||||||||||||
| Cash provided by operating activities ($) | 259.3 | 424.1 | (39 | ) | 410.1 | (37 | ) | |||||||||||||
| Per share – diluted ($) | 0.73 | 1.17 | (38 | ) | 1.13 | (35 | ) | |||||||||||||
| Adjusted funds flow ($)(4) | 338.5 | 380.8 | (11 | ) | 337.4 | — | ||||||||||||||
| Per share – diluted ($) | 0.95 | 1.05 | (10 | ) | 0.93 | 2 | ||||||||||||||
| CROIC (%)(2) | 17.7% | 18.1% | (2 | ) | 19.1% | (7 | ) | |||||||||||||
| ROCE (%)(2) | 11.9% | 10.4% | 14 | 12.9% | (8 | ) | ||||||||||||||
| Balance sheet | ||||||||||||||||||||
| Capital investments ($) | 400.9 | 582.6 | (31 | ) | 262.3 | 53 | ||||||||||||||
| Available funding ($)(2) | 1,280.9 | 1,312.6 | (2 | ) | 1,345.9 | (5 | ) | |||||||||||||
| Net debt ($)(4) | 2,229.9 | 2,118.2 | 5 | 2,206.8 | 1 | |||||||||||||||
| Weighted average shares – basic | 353.0 | 354.9 | (1 | ) | 359.2 | (2 | ) | |||||||||||||
| Weighted average shares – diluted | 355.6 | 363.5 | (2 | ) | 362.3 | (2 | ) | |||||||||||||
(1) Excludes the purchase and resale of condensate and natural gas in respect of the Company’s transportation commitment utilization and marketing activities.
(2) See “Non-IFRS Financial Measures” under Reader Advisory. Certain comparative figures have been adjusted to conform to current period presentation.
(3) Represents the total of liquids and natural gas sales, net of royalties, gains (losses) on risk management contracts and other income.
(4) Refer to Note 13 of the Q1 2019 condensed interim consolidated financial statements for further details.
| Three months ended March 31, |
Three months ended December 31, |
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| Nest Activity | 2019 | 2018 | % Change | 2018 | % Change | ||||||||||||||||||
| Drilling(1) | |||||||||||||||||||||||
| Horizontal wells rig released | 18 | 27 | (33 | ) | 19 | (5 | ) | ||||||||||||||||
| Average measured depth (m) | 5,911 | 5,621 | 5 | 6,010 | (2 | ) | |||||||||||||||||
| Average horizontal length (m) | 2,598 | 2,459 | 6 | 2,776 | (6 | ) | |||||||||||||||||
| Average drilling days per well | 30 | 28 | 7 | 28 | 7 | ||||||||||||||||||
| Average drill cost per metre ($)(2) | 614 | 642 | (4 | ) | 560 | 10 | |||||||||||||||||
| Average well cost ($ millions)(2) | 3.6 | 3.6 | — | 3.4 | 6 | ||||||||||||||||||
| Completion(1) | |||||||||||||||||||||||
| Wells completed | 19 | 20 | (5 | ) | 13 | 46 | |||||||||||||||||
| Average number of stages per well | 55 | 39 | 41 | 46 | 20 | ||||||||||||||||||
| Average tonnes pumped per metre | 1.9 | 2.4 | (21 | ) | 1.9 | — | |||||||||||||||||
| Average tonnes pumped per well | 4,750 | 5,923 | (20 | ) | 4,417 | 8 | |||||||||||||||||
| Average cost per tonne(2) | 1,215 | 1,218 | — | 1,282 | (5 | ) | |||||||||||||||||
| Average well cost ($ millions)(2) | 5.8 | 7.2 | (19 | ) | 5.7 | 2 | |||||||||||||||||
| Total D&C cost per well ($ millions)(2) | 9.4 | 10.8 | (13 | ) | 9.1 | 3 | |||||||||||||||||
(1) 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.
(2) Information provided is based on field estimates and is subject to change.
OPERATIONS AND RESOURCE DEVELOPMENT
Cost structure
Operating costs in the first quarter improved to $4.93 per boe, benefitting from investments in water handling infrastructure. At this time, 7G is not updating its previously disclosed 2019 operating expense budget of $5.00 to $5.50 per boe, and will continue to progress its water management initiatives, including increased recycling of produced water.
Lower Montney resource delineation update
7G’s second partial triple-stack pad, located in the western edge of Nest 2, came on stream slightly ahead of schedule and on budget. It targeted a single well in the lower Montney, below simultaneous completions of the upper and middle Montney. The lower Montney location delivered initial rates during the first 30 days of production of approximately 1,250 boe/d (63 percent condensate), while the middle and upper locations performed as expected. The pad is located approximately a township west of the company’s first partial triple-stack that was announced last year and enhances 7G’s understanding of the lower Montney resource across a broader areal extent. With continued lower Montney success, the company could materially expand its highly economic drilling inventory, while improving full cycle returns as surface costs are allocated across a larger well count.
Full triple-stack pad and advanced completions design
The company’s first full triple-stack pad, located in the north-western portion of Nest 2, has proceeded according to plan and budget, with three wells in each of the upper, middle and lower Montney completed in the first quarter and in the process of being tied-in. This triple-stack pad will help further delineate the lower Montney potential and evaluate the effectiveness of co-completions across all three Montney benches. In addition, 7G has deployed fibre-optic monitoring, micro-seismic, and image logging to improve understanding of the subsurface fracture network and to enhance future completion designs. 7G plans to use its expanding dataset to help analyze and advance the economic benefits of increasing intra-stage clusters that could materially improve the company’s capital efficiencies.
Nest 1 update
7G’s previously announced Nest 1 perimeter test continues to flow at rates and pressures exceeding expectations. Initial rates during the first 60 days of production averaged 1,898 boe/d (72 percent condensate) while flowing at restricted rates during most of the second month. This prolific result, located 12 kilometres east of the company’s existing Nest 1 development, provides important initial production data that will help guide development planning of the company’s inventory of 480 Nest 1 locations.
MARKET ACCESS INITIATIVES
During the first quarter, 7G acquired an additional 55 MMcf/d of market access from the US Midwest to the Gulf Coast. When combined with 7G’s existing 100 MMcf/d of direct Henry Hub sales, the company can potentially sell nearly one third of its Montney natural gas production directly into the global LNG market. This pipeline capacity provides price diversification and differentiated egress optionality for the company’s natural gas production. 7G remains committed to expanding its market access options to enhance price realizations across its entire production suite.
NORMAL COURSE ISSUER BID UPDATE
With benchmark WTI prices exceeding the assumptions used in the company’s 2019 budget, 7G has entered into incremental oil hedges subsequent to the first quarter to establish floor pricing on 5,000 bbl/d of its production above US$65/bbl for the balance of 2019. With hedged cash flows exceeding budgeted WTI pricing, and a commitment to execute the original $1.25 billion capital program, 7G intends to allocate excess free cash flow to a combination of its NCIB and net debt reduction.
GENERATIONS – 7G’S STAKEHOLDER AND SUSTAINABILITY REPORT
7G has published on its website the fourth annual edition of Generations, its stakeholder and sustainability report. Generations 2019 highlights 7G’s commitment to differentiated stakeholder service, responsible energy development and stakeholder engagement. Generations 2019 expands 7G’s reporting of quantitative and qualitative environmental, social and governance performance. Generations is available at:
https://www.7genergy.com/responsibility/generations-stakeholder-and-sustainability-report
OUTLOOK
2019 guidance remains unchanged. The company has provided additional details regarding expected royalty rates to reflect the current commodity price environment. During the second quarter of 2019, brief outages are planned for turnaround work at third party processing facilities and natural gas pipeline systems. The previously provided outlook reflects these maintenance-related events.
| Production | ||||
| Condensate (%) | 36 – 38 | |||
| Total liquids (%) | 58 – 60 | |||
| Natural gas (%) | 40 – 42 | |||
| Total production (Mboe/d) | 200 – 205 | |||
| H1 2019 (Mboe/d) | 195 – 200 | |||
| H2 2019 (Mboe/d) | 205 – 210 | |||
| Expenses | ||||
| Royalties at US$50 WTI (%) | 5 – 7 | |||
| Royalties at US$60 WTI (%) | 7 – 9 | |||
| Operating ($/boe) | 5.00 – 5.50 | |||
| Transportation ($/boe) | 6.75 – 7.25 | |||
| G&A ($/boe) | 0.80 – 0.90 | |||
| Interest ($/boe) | 1.80 – 1.90 | |||
| Capital investment ($mm) | 1,250 | |||
| Drilling and completions (%) | 55 – 60 | |||
| Pipelines and infrastructure (%) | 30 – 35 | |||
| Delineation (%) | 10 – 15 | |||
| Wells on-stream | 65 – 70 | |||
BOARD OF DIRECTORS UPDATE
As previously announced, 7G’s board of directors renewal process is currently underway with Mark Monroe taking on the chair role as of January 1, 2019 and Ronnie Irani joining 7G’s board of directors as of February 27, 2019. Founding chair Kent Jespersen did not stand for re-election at the company’s annual general meeting that took place on Wednesday, May 1, 2019. Additionally, directors Kevin Brown, Kaush Rakhit and Jeff van Steenbergen did not stand for re-election. Seven Generations thanks these directors for their guidance and contributions to the conception, evolution and foundational success of the company.
Additionally, 7G’s board of directors has appointed Leontine Atkins as a board member effective May 2, 2019. Atkins was previously a board member of KPMG Canada’s National Board of Directors until early 2019, having sat on the National Acquisitions and Admissions and Succession committees. She served as a Partner at KPMG Canada from 2006 until early 2019 and was previously a Partner at KPMG Netherlands until she moved to Canada in 2006. Atkins has 30 years of experience in the global oil and gas industry, with a focus on corporate strategy in each of the upstream, midstream and downstream sectors of the energy value chain.
Atkins currently serves as a director of Points International, a leading global loyalty ecommerce platform, the board of Calgary Economic Development as the chair of the audit committee and on the board of Heritage Park Museum where she also is a member of the audit committee. She was also the vice chair and past chair of the audit/investment committee of the Glenbow Museum board. Atkins holds a Bachelor of Business Administration in Finance from Acadia University and a Master of Business Administration from Dalhousie University. She has also obtained her CPA, CA designation as well as the ICD.D designation from the Institute of Corporate Directors.
CONFERENCE CALL
7G management will hold a conference call to discuss results and address investor questions today, May 3, 2019, at 9 a.m. MT (11 a.m. ET).
Participant Dial-In Numbers
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Dial in – toll free: |
(866) 521-4909 (647) 427-2311 http://event.on24.com/wcc/r/1983262-1/00B6104724F0B5814D2B0ABA6FF81F2D |
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| Replay dial in toll-free:
Replay dial in toll: |
(800) 585-8367 |
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| Audience passcode:
Available to: |
4178169 May 17, 2019 |
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Seven Generations Energy is a low-supply cost 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.