International Petroleum Corporation (IPC or the Corporation) (TSX, Nasdaq Stockholm: IPCO) today released its financial and operating results and related management’s discussion and analysis for the three months ended March 31, 2020.
- In the April 2, 2020 press release, IPC revised its forecast 2020 net average production to be in the range of 30,000 to 45,000 barrels of oil equivalent (boe) per day (boepd), estimated operating costs for 2020 to be in the range of USD 12 to 13 per boe, and reductions in total forecast 2020 expenditure of between USD 125 and 190 million as compared to estimates announced at IPC’s Capital Markets Day (CMD) in February 2020.
- Operational decisions that IPC has subsequently made allow it to revise the forecast 2020 expenditure reductions to between USD 175 and 190 million as compared to CMD estimates. This comprises USD 85 million in reduced capital and decommissioning expenditures and USD 90 to 105 million in reduced operating costs. As a result, IPC’s forecast 2020 net average production guidance range is 30,000 to 37,000 boepd. IPC’s estimated 2020 capital and decommissioning expenditures are USD 77 million and IPC’s forecast 2020 operating costs are in the range of USD 140 to 155 million, resulting in estimated 2020 unit operating costs in the range of USD 12 to 13 per boe.
- Financial headroom under the current terms of IPC’s existing and new credit facilities has increased to in excess of USD 100 million.
- Assuming average 2020 Brent oil prices of USD 25 per barrel and assuming Western Canadian Select (WCS) oil prices are at zero for the remainder of the year, IPC expects to utilize less than 40% of its existing financial headroom.
- In March 2020, IPC announced the completion of the acquisition of Granite Oil Corp. (the Granite Acquisition), comprising light oil proved plus probable reserves of 14.0 million barrels of oil equivalent (MMboe) and 6.2 MMboe of contingent resources (best estimate, unrisked) as at December 31, 2019.
Q1 2020 Financial and Operational Highlights
- Average net production of approximately 46,000 boepd for Q1 2020 (43% heavy crude oil, 20% light and medium crude oil and 37% natural gas).
- First quarter 2020 operating costs per boe of USD 12.5, slightly ahead of Q1 2020 guidance.
- In connection with IPC’s revised 2020 business plan, operational activities and capital expenditures have been reduced, deferred or cancelled in each region in response to the low oil price environment.
|Three months ended
|Operating cash flow||21,481||83,056|
|Free cash flow||(42,712)||52,064|
- Net debt increased from USD 291 million as at December 31, 2019 (including the cost of the Granite Acquisition) to USD 302.5 million as at March 31, 2020.
- Operating cash flow generation for Q1 2020 amounted to USD 21.5 million, below the original CMD guidance as a result of the weakness in commodity prices towards the end of Q1 2020. This coincided with two cargo liftings in Malaysia in March 2020 when Brent prices averaged USD 32 per bbl and the falling commodity prices also impacted the revenues in France where pricing is based on one month forward Brent prices.
- Under the previously announced share repurchase program, IPC repurchased for USD 17.6 million and cancelled approximately 4.4 million IPC shares during Q1 2020, in addition to the 3.9 million IPC shares cancelled in 2019. In order to conserve liquidity, IPC has suspended further share repurchases under the program.
Mike Nicholson, IPC’s Chief Executive Officer, commented,
“Given the extraordinary market situation that the oil and gas business is facing in response to the global Covid-19 outbreak, the resulting collapse in world oil demand, and the initial breakdown in co-operation among the OPEC+ group in dealing with the supply challenge, we have witnessed an unprecedented level of volatility and commodity price weakness during 2020. As a result of this, IPC announced on April 2, 2020 that we are taking decisive action to reset our 2020 expenditure plans in order to maximize the financial flexibility of the Corporation.
Since that announcement, we have seen encouraging steps taken by OPEC+, G20 nations and oil producers that we are confident should remove significant supply, helping to deal with the massive demand destruction that we have witnessed as well as the inevitable inventory build. We expect that these actions should flatten the curve of inventory builds and set a course to rebalance markets in the second half of 2020 and into 2021. Clearly though, the magnitude and pace of the recovery in oil demand will be critical in reducing the uncertainty around when oil prices will recover.
Reset of 2020 CMD Business Plan
Given that IPC operates the majority of our assets, IPC has the financial and operational flexibility to react swiftly to recent events and to positively prepare the Corporation to navigate through this period of extremely low commodity prices. All remaining discretionary 2020 expenditures have been deferred or cancelled and we have built into our forecast production range the temporary curtailment of production from those fields that are not expected to generate positive cash flows at these low pricing levels. These production curtailments relate to a portion of our oil production. Our Canadian gas production is not curtailed as we currently forecast positive cash flows.
In our April 2, 2020 announcement, we revised our forecast 2020 net average production to be in the range of 30,000 to 45,000 boepd, estimated operating costs for 2020 to be in the range of USD 12 to 13 per boe, and reductions in total forecast 2020 expenditure of between USD 125 and 190 million as compared to 2020 CMD estimates.
Operational decisions that we have subsequently made allow us to revise our forecast 2020 expenditure reductions to between USD 175 and 190 million as compared to CMD estimates. This comprises USD 85 million in reduced capital and decommissioning expenditures and USD 90 to 105 million in reduced operating costs. As a result, our forecast 2020 net average production guidance range is 30,000 to 37,000 boepd. IPC’s estimated 2020 capital and decommissioning expenditures are USD 77 million and IPC’s forecast 2020 operating costs are in the range of USD 140 to 155 million, resulting in estimated 2020 unit operating costs in the range of USD 12 to 13 per boe. The upper end of our revised production guidance assumes that the curtailments in Canada to the end of June 2020 continue through to the end of the year, with the lower end of the range assuming full curtailment of our Canadian oil production in the second half of 2020. We retain the flexibility to ramp production back up during the second half of 2020 should market conditions improve.
Maximizing Financial Flexibility
Having reset our 2020 business plan, we have also been very active in engaging with our banks to ensure that we can maximize our financial flexibility. As at the end of the first quarter 2020, we had available liquidity headroom of around USD 90 million under our existing international and Canadian credit facilities. We commenced discussions with our international banking partners to potentially extend the maturity of and increase our existing reserves-based lending (RBL) credit facility as we do not believe that this was fully maximized under previous conditions. In parallel, we have been exploring IPC’s ability to access some of the special financial assistance packages being offered by the government authorities in France.
I am very pleased to report a positive outcome on the latter. We have been able to secure a EUR 13 million credit facility from a French financial institution under this program. The credit facility has an initial term of 12 months and is extendable by IPC for up to a further five years. The credit facility is unsecured and is on less expensive terms than IPC’s existing credit facilities.
In Canada, we have also commenced discussions with our banking partners. Our primary Canadian RBL facility is currently sized at CAD 375 million and we have drawn CAD 297 million at the end of the first quarter. Whilst our RBL redetermination discussions are not expected to be completed until later in Q2 2020, we have been encouraged by the financial support package that has been announced by the Canadian Federal Government, through Export Development Canada (EDC). This program aims to support the oil and gas sector by maintaining liquidity during the crisis, through the form of guarantees provided by EDC in respect of RBL facilities. Our CAD 42.5 million facility assumed as part of the Granite Acquisition is not up for review until the year end. This is currently drawn at CAD 40 million.
In addition, IPC has the benefit of a hedging program in Canada in place through to the end of June 2020, that is expected to provide a minimum average realized WCS price of approximately USD 16 per bbl on our curtailed oil production levels in Canada during Q2 2020.
We retain access to financial headroom under the current terms of our existing and new credit facilities available to us in excess of USD 100 million. Taken together with our operational choices and updated hedging program, we expect to be able to fully fund our revised 2020 expenditure program from cash flows and current borrowing capacity. Assuming average 2020 Brent oil prices of USD 25 per barrel and assuming WCS oil prices are at zero for the remainder of the year, we expect to utilize less than 40% of our existing liquidity headroom. This demonstrates the financial resilience of IPC to respond to sustained low oil prices.
Q1 2020 Performance
During Q1 2020, our assets delivered average daily net production of 46,000 boepd, in line with our original CMD Q1 2020 guidance. Our operating costs per boe for Q1 2020 was USD 12.5, slightly below our original CMD Q1 2020 guidance.
Operating cash flow generation for the first quarter amounted to USD 21.5 million, below our original CMD guidance as a result of the weakness in commodity prices towards the end of Q1 2020. This coincided with two cargo liftings in Malaysia in March 2020 when Brent prices averaged USD 32 per bbl and the falling commodity prices also impacted the revenues in France where pricing is based on one month forward Brent prices.
Capital expenditure during Q1 2020 of USD 56 million was around USD 6 million below forecast as we began implementation of our expenditure reduction program.
Net debt increased from the 2019 year end level of USD 291 million (including the cost of the Granite Acquisition) to USD 302.5 million as at March 31, 2020 which also includes the funding of USD 17 million of share repurchases under the share repurchase program in Q1 2020.”
International Petroleum Corp. (IPC) is an international oil and gas exploration and production company with a high quality portfolio of assets located in Canada, Malaysia and France, providing a solid foundation for organic and inorganic growth. IPC is a member of the Lundin Group of Companies. IPC is incorporated in Canada and IPC’s shares are listed on the Toronto Stock Exchange (TSX) and the Nasdaq Stockholm exchange under the symbol “IPCO”.