The COVID–19 pandemic has led to an unprecedented decrease in oil prices as a result of world oil demand destruction. Accordingly, InPlay has acted prudently in March and April in order to stabilize our financial position and to preserve the value of our crude oil reserves for an eventual price recovery. As previously announced, the Company immediately responded to this decline in prices with the suspension of our capital program in March. In addition, InPlay has implemented several operating and corporate cost reduction initiatives which we estimate will lead to approximately $7.0 million in savings for the remainder of the year. The key cost saving initiatives include:
- 20% reduction to Company wide salaries including office and field employees;
- Deferral of well workovers until oil prices support a six to nine month payout with careful consideration of fixed costs; and
- Supplier and vendor cost reductions in all areas of operations.
We value and respect our vendors and service providers and are appreciative of their collective response to this challenging environment. InPlay and the entire industry are in a period of austerity and we are pleased that most of our vendors have chosen to partner with us with an attitude of “we are in this unprecedented environment together”.
With the current economic environment being so severe, it is likely that most Exploration and Production companies in Canada would not conform to the standard reserve based lending (“RBL”) structures at the current future pricing scenarios. We are encouraged that the Federal Government has acknowledged the challenges facing the oil and gas industry and has announced a support program intended to provide a liquidity backstop to RBL credit facilities which will be administered through the Export Development Bank of Canada (“EDC”) and the Business Development Bank of Canada (“BDC”). In working directly with the primary banking financial institutions, additional lending and credit capacity is expected to be provided to qualifying oil and gas producers that (based on certain criteria) were deemed financially viable prior to the onset of the COVID-19 pandemic.
Based on the information provided to date, InPlay believes it would meet the criteria for liquidity support under the announced program. InPlay’s capital expenditure requirement in 2020 for annual production to remain flat at the 2019 annual average of 5,000 boe/d was estimated at $25 million. Based on pre COVID-19 pricing assumptions from our original 2020 forecast released January 21, 2020, which has since been withdrawn, this flat production profile would have resulted in $29-32 million of Adjusted Funds Flow(1) (“AFF”), approximately 25% above the $25 million capital spending requirement. InPlay’s low decline rate, top tier capital efficiencies (refer to our press release dated March 18, 2020 for further details on our top tier finding and development costs, recycle ratios and capital efficiencies amongst our light oil peers) and a strong net debt to AFF(1) ratio (1.7x for the year ended December 31, 2019) leads us to believe that we will be well positioned to meet the requirements of the EDC and BDC’s liquidity support programs.
The Company has completed a detailed analysis of its operating areas down to an individual well level to evaluate their economics at low commodity prices. InPlay has divided its operations into three tiers based on their cost structure, as well as ensuring operations continue to be conducted safely and efficiently. These tiers, based on recent months’ operating costs and production profiles, will be used to determine temporary production curtailments or shut-ins. The first tier has current production of approximately 1,000 boe/d and associated operating costs of approximately $9.40 per boe, excluding fixed costs, and will be the first area curtailed or shut in with curtailments having commenced in March. The third tier has current production of 750 boe/d and operating costs of $6.95 per boe, excluding fixed costs, and will be the last area potentially curtailed or shut in.
The process for placing nominations for sales volumes on pipelines is complex and difficult in a volatile pricing environment as producers are required to provide nominations five weeks prior to the actual month of production without knowing the final price of WTI or the MSW light oil differential. Our March field estimated production was approximately 5,000 boe/d (70% oil and liquids) which included production from recently drilled and completed wells that were produced at restricted rates. Based on a baseline production capacity of 5,000 boe/d, we have started curtailments and only nominated to sales of approximately 75% of our oil capacity in April which would result in estimated production of approximately 4,000 boe/d with a reasonable MSW differential of US$3.02/bbl discount to WTI. We have nominated May oil sales of approximately 35% of our oil capacity which would result in estimated production of approximately 2,500 boe/d of production. The Company has approximately 32,000 bbls of oil storage capacity that is currently 45% full allowing the Company to store oil for future sale into a better pricing environment. This is a complex process with the potential to nominate little to possibly no volumes in June and potentially longer until oil demand improves and oil prices strengthen.
InPlay also promptly entered into various near-term crude oil and natural gas derivative contracts in order to take advantage of the near-term contango that has occurred and reduce the Company’s exposure to these unprecedented low and volatile oil prices. InPlay currently has the following contracts in place:
|Crude oil||US dollar||500||32.00/bbl||May 1, 2020 – June 30, 2020|
|Crude oil||US dollar||250||31.85/bbl||May 1, 2020 – July 31, 2020|
|Natural gas||Canadian dollar||4,000||1.61/GJ||April 1, 2020 – October 31, 2020|
|Natural gas||Canadian dollar||1,000||1.76/GJ||May 1, 2020 – October 31, 2020|
|Natural gas||Canadian dollar||1,500||2.22/GJ||January 1, 2021 – December 31, 2021|
At current strip pricing these crude oil contracts would result in a gain of approximately $1.1 million(2).
- “Adjusted funds flow” or “AFF” and “net debt / adjusted funds flow ratio” do not have a standardized meaning under International Financial Reporting Standards (IFRS) and GAAP and therefore may not be comparable with the calculations of similar measures for other companies. Please refer to “Non-GAAP Financial Measures” and “BOE equivalent” at the end of this news release and to the section entitled “Non-GAAP Measures” in our most recently filed MD&A for details of calculations, rationale for use and applicable reconciliation to the nearest IFRS measure.
- Current strip pricing (USD WTI) of $11.57 (May), $18.69 (June) and $21.50 (July) and a foreign exchange rate of 0.70 was used to calculate the gain on commodity derivative contracts of approximately $1.1 million.
InPlay remains focused on managing costs, monitoring production economics and commodity sales on a daily basis, while prioritizing the preservation of liquidity and the value of our reserves. The economic benefit of realizing the proved developed producing reserve volumes at the current commodity price is significantly less than realizing these barrels in the future and discounting the proceeds to today, given the contango in the price curve. As one of our seasoned board members recently said, “Oil is not like cabbage, it doesn’t rot”. We will also be closely monitoring and actively working on potential access to the recently announced federal support programs through EDC and BDC, in conjunction with the support of our banking syndicate. Due to the current volatility and uncertainty related to commodity pricing, curtailments and potential shut-ins, InPlay is unable to provide 2020 guidance at this time. Guidance updates will be provided in the future when economic factors begin to stabilize and demand increases resulting in more stable and realistic commodity prices that can be relied upon.
The Company’s rapid and effective response to this extraordinary situation illustrates management’s ability to maintain our Corporate strategy in all scenarios. The Company will continue to respond quickly and with careful consideration to safety and business principles throughout this crisis.
We thank our employees and all of our service providers for their commitments and efforts in this unprecedented time as well as our directors for their ongoing commitment and dedication. Finally we thank all of our shareholders for their continued interest and support.