Additionally, the Company is also pleased to announce that it has entered into an agreement with an arm’s-length private oil and gas exploration and production company (the “Purchaser“) to divest of the majority of the Company’s Red Earth asset, comprised of cash of $8.0 million and equity consideration of 10% of the Purchaser’s outstanding common shares (the “Divestiture“). Under the terms of the Divestiture, Highwood is entitled to reserve against the Red Earth assets an overriding royalty of 5%. Current production from the subject Red Earth field is approximately 950 bbl/d of oil.
Current net Company production is approximately 1,000 bbl/d of oil pro forma the Red Earth Divestiture.
Q4 2019 Drilling Results and 2020 Activity
- Drilled 5 wells (2.5 net) in the Clearwater play at Nipisi during the fourth quarter of 2019. The drilling activity included delineation of the company’s 24,320 acre gross Nipisi land position, further validating additional Nipisi drilling inventory. All wells are on production and meeting and/or exceeding the production expectations of the Company.
- Since the Company began its Clearwater development program in the fourth quarter of 2018, it has drilled 14 wells (7 net) to the end of 2019.
- Current Clearwater production is 1,500 bbl/d of oil (750 bbl/d net). The Company’s 2020 drilling program is underway, with further cashflow generation a focus at Nipisi while delineating additional acreage.
- Current operations include drilling our 3rd well (1.5 net) in 2020. The Company intends to remain active in the remainder of the year drilling 12-18 gross wells (6-9 net wells to Highwood).
Red Earth Divestiture Details
With the recent success of the Clearwater Fairway and the Company’s Clearwater drilling program, the Company has deemed the Red Earth assets to be non-core in nature. The Divestiture allows the Company to remove 87% or $31.7 million of decommissioning obligations from its statement of financial position (value as of September 30, 2019). Subsequent to regulatory approvals, the Company will have a pro-forma Liability Management Ratio (LMR) of 4.8 and anticipates a reduction to G&A expenses of 30 to 40%.
The Divestiture is closed in escrow subject to regulatory approval and license transfers. Upon receipt of regulatory and license transfers approvals, closing documents will be released from escrow and the transaction will close. The Company anticipates escrow release conditions being satisfied on or around April 2020. The effective date of the Divestiture is February 18, 2020. The Divestiture does not include any working interest in the Company’s Wabasca Crude Oil Transmission Pipeline which will remain within Highwood. Upon close of the transaction, Highwood will reserve a 5% overriding royalty over all wells and lands vended to the Purchaser.
Cash proceeds from the Divestiture will be used to pay down the Company’s bank line. Subsequent to regulatory approval and closing conditions of the Red Earth Divestiture being satisfied, the bank will reduce the Company’s credit facility from $38.0 million to $30.0 million. The Company’s next renewal date will remain at May 1, 2020.
The Company anticipates capital spending of $10–$15 million in 2020 mainly focused on production and reserve adding activities in the Clearwater. The company will remain focused on a balanced approach to infill cash flow generating opportunities and a few select step-out wells to further delineate the Company’s land position. Pro-forma the Red Earth Divestiture, the Company anticipates operating cash flow in 2020 to be comprised of approximately 25% midstream operations, approximately 10% royalty revenues, approximately 10% light oil production and approximately 55% Clearwater production providing for a balanced revenue stream.
The Company has, and will continue to, evaluate acquisition opportunities in the M&A market, but will remain disciplined to pursue only those opportunities that are accretive and deleveraging with a drilling inventory that is economic at current strip pricing. The Company intends to build a growing profile of recurring free funds flow that will provide maximum flexibility fund growth, debt repayment and / or other strategic M&A opportunities in a non-dilutive fashion.
The Clearwater oil resource play continues to deliver positive delineation results which underpin an expanding opportunity set for Highwood to pursue lower risk, highly economic, oil-weighted growth. Since early 2017, industry continues to delineate and grow the Clearwater play to achieve production in excess of 27,000 bbl/d. Highwood will continue to focus its efforts throughout 2020 on delineating its Clearwater lands in a capital-efficient manner, while mainly pursuing infill and pad drilling development opportunities offsetting positive initial production results.