During the recently completed third quarter, the Company made significant progress on debt repayment and completed an initial test of a recompletion program which has the potential to have material, positive impacts on go-forward development of the Company’s Bakken oil pool.
Preliminary Third Quarter Results
Granite continued its focus on debt reduction during the third quarter of 2019, further decreasing net debt by an estimated $1.7 million to an estimated $41.1 million at the end of the quarter. The Company has successfully reduced net debt by approximately 14% over the first nine months of 2019, and is on-track to reduce it by a further ~4% by year end.
Capital expenditures for the quarter were approximately $1.5 million, which funded the recompletion test described below, well workovers, and facility projects designed to reduce future operating costs. Estimated production was approximately 1,575 boe/d, which is principally the result of the Company electing to keep over 250 bbl/d of oil production from five re-pressurized wells originally slated to be brought on-stream during the quarter shut-in for a future recompletion program. Severe weather in Southern Alberta at the end of September prevented the Company from shipping its oil inventory for the final three days of the quarter. This impacted oil sales, which averaged approximately 1,510 bbl/d, and associated revenue for the quarter. Accordingly, these sales volumes and revenues will be realized in October and reflected in the Company’s fourth-quarter results.
With the ever-increasing focus on abandonment liabilities of Canadian oil and gas producers, the Company remains proactive in its efforts to achieve its goal of abandoning all of its shut-in shallow gas wells by year-end 2020. During the third quarter, Granite completed the abandonment of approximately 18% of the Company’s wells slated for abandonment. This commitment to the responsible management of its assets will help to further improve Granite’s top-tier liability management ratio (‘LMR’) of 6.5, and will ultimately result in a significant reduction to operating costs as the Company removes tax and lease-rental obligations associated with these assets.
Granite continues to test new ways to improve both the efficiency at which it adds oil production and the ultimate, long-term oil recovery of its large, 100%-owned, early-life-cycle Bakken oil pool through its gas injection enhanced recovery scheme (‘EOR’) and other complementary strategies.
Over recent years, Granite has evolved its completion programs in parallel with its gas flood to optimize production rate and ultimate recovery of its development wells. As part of this evolution, the Company has tested progressively tighter frac spacing, having reduced from as high as 80 meters in 2015 down to approximately 26 meters on its most recent development well. Granite’s four most recent development wells have been completed with average frac interval spacing of approximately 33 meters and have demonstrated consistently stronger production performance.
With the success of increased frac density on new development wells, Granite has been evaluating the potential of a recompletion program to efficiently add production and increase the overall oil recovery of legacy producing wells originally completed with longer frac interval spacing.
During the third quarter, Granite tested a recompletion program on a producing well originally completed in 2015 with average frac interval spacing of approximately 80 meters. The test consisted of 21 new frac stages added over a previously completed lateral length of approximately 700 meters. Interval spacing between new frac stages averaged approximately 25 meters, with average proppant tonnages of approximately 7.5 tons per stage. The initial test was conducted on a well in the gas flood area which was underpressured, allowing for more accurate quantification of results, and has increased production by approximately three-times relative to the pre-frac production rate over an extended testing period.
The Company has identified 15 additional wells as recompletion candidates, with up to 12,000 meters of potential unstimulated lateral to be fracked. Of significant, compounding benefit is the Company’s ability to utilize its gas injection EOR scheme to increase reservoir pressure prior to future operations in order to enhance production rates following the recompletions. Accordingly, in anticipation of the test results, the Company elected to keep five wells shut-in in a repressurized area during the third quarter for a future recompletions program. The significantly higher reservoir pressure in this area relative to the test well is expected to provide additional torque on the production rates of these wells.
The Company will remain focused on its debt-reduction and efficiency goals through the remainder of 2019 and will commence a recompletion program in the first quarter of 2020. Granite is encouraged by the potential of future recompletions to accelerate its plans by strengthening the Company’s ability to add producing barrels through this relatively low-risk capital operation. With over 80 potential infill drilling locations that will serve as the backbone of future development of its Bakken pool, the recompletion strategy provides an additional mechanism by which Granite can increase shareholder value in the current energy environment.
Granite continues to strengthen its balance sheet while successfully navigating a volatile and challenging market. As the Company continues to pay down debt, it is increasing its inventory of highly economic capital projects, reducing its already limited abandonment liability, and improving corporate and operational efficiencies. Granite has consistently proven its free-cash-flow-generating capability and the efficiency at which it adds producing barrels. At its current debt repayment rate, Granite is rapidly positioning itself to increasingly deploy a larger component of its free cash flow to growth projects and other available avenues to increase shareholder value.