Calgary, Alberta – Bonavista Energy Corporation (TSX: BNP) (“Bonavista”) is pleased to report to shareholders its financial and operating results for the three months ended March 31, 2020. The financial statements and notes, as well as management’s discussion and analysis, are available on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at http://www.sedar.com and on Bonavista’s website at www.bonavistaenergy.com.
MESSAGE TO SHAREHOLDERS
The devastating COVID-19 health crisis and corresponding deceleration of the global economy has created unprecedented uncertainty in the balance between supply and demand for energy around the world. Throughout the first quarter of 2020, as society rapidly adjusted to isolation policies globally, energy demand eroded abruptly imposing extraordinary challenges for all providers of energy. Bonavista has rapidly adapted and responded to this crisis in a manner which ensures continuity of our critical business processes while declaring the safety and well-being of our Bonavista family paramount.
In response to the current economic outlook, we have taken measures to reduce costs and defer expenditures in 2020 totaling nearly $50 million relative to our original guidance. These cost savings are primarily comprised of capital spending deferrals, operating cost reductions and general and administration cost reductions. These steps will meaningfully enhance our sustainability through this time of crisis and will notably strengthen our foundation as we prepare for the future.
Throughout the quarter, operating performance exceeded our original expectations albeit with modified working environments near the end of the quarter. Production for the quarter was three percent ahead of our forecast while drilling and completion activity was on budget with eight wells drilled and five wells completed throughout the quarter.
In our West Central core area, we actively integrated operations within the assets we acquired in December 2019 with the goal to reduce operating expenses, increase netback and align processes with our protocols. These assets have been successfully incorporated into our operations and are performing above our expectations.
We also maintained our commitment to our asset retirement obligations (ARO) with the allocation of capital equal to 11% of our exploration and development (“E&D”) expenditures for the quarter, to the abandonment and reclamation of our inactive liabilities. We have taken numerous measures over the years to protect and restore the environment we operate in.
Subsequent to the quarter, on May 4th, 2020 we announced that we had entered into forbearance agreements with our banking syndicate and noteholders that allows us to continue to advance discussions with these parties in order to facilitate a solution to our debt maturities.
FIRST QUARTER OPERATIONAL AND FINANCIAL ACCOMPLISHMENTS
- Achieved production of 66,805 boe per day, six percent greater than prior quarter and three percent ahead of budget;
- Executed a successful E&D program, spending $33.4 million to drill eight (7.2 net) wells and complete five (3.4 net) wells, two of which were brought on production throughout the quarter;
- Generated $27.2 million of adjusted funds flow burdened by $2.3 million of professional advisory fees rendered on behalf of Bonavista and its creditors;
- Allocated $3.6 million to retire inactive liabilities, abandoning and reclaiming 24 and 13 wells respectively;
- Established a $1.7 million ESG budget for 2020, half of which will be allocated to reducing in excess of 50,000 tonnes of CO2e GHG emissions on an annualized basis; and
- Renegotiated and renewed our annual natural gas liquids sales contracts resulting in more reasonable price realizations relative to North American benchmarks when compared to the last contract year beginning April 1, 2019.
|Three Months Ended|
|December 31, 2019||March 31, 2020||March 31, 2019||% Change|
|($ thousands, except per share)|
|Cash flow from operating activities||47,952||50,669||54,485||(7)%|
|Adjusted funds flow(2)||47,702||27,193||58,181||(53)%|
|Net capital expenditures(2)||67,983||34,514||43,764||(21)%|
|Exploration and development||11,966||33,350||49,023||(32)%|
|Acquisitions, net of dispositions(3)||55,637||368||(5,378||107%|
|Weighted average outstanding equivalent shares: (thousands)(1)|
|(boe conversion – 6:1 basis)|
|Natural gas (mmcf/day)||260||267||282||(5)%|
|Natural gas liquids (bbls/day)||18,003||20,301||17,945||13%|
|Total oil equivalent (boe/day)||62,923||66,805||66,937||–|
|Natural gas ($/mcf)||2.39||2.03||2.61||(22)%|
|Natural gas liquids ($/bbl)||27.34||19.39||28.95||(33)%|
|Total oil equivalent ($/boe)||19.23||15.55||20.54||(24)%|
|Operating expenses ($/boe)||5.76||6.03||5.85||3%|
|Transportation expenses ($/boe)||1.37||1.20||1.44||(17)%|
|General and administrative expenses ($/boe)||0.86||0.80||0.84||(5)%|
|Cash costs ($/boe)(2)||9.55||9.75||9.55||2%|
|Operating netback ($/boe)(2)||11.04||7.32||11.92||(39)%|
(1) Basic per share calculations include exchangeable shares which are convertible into common shares on certain terms and conditions.
(2) Non-GAAP measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities. Reference should be made to the section entitled “Non-GAAP Measures”.
(3) Proceeds on property dispositions, net of expenditures on property acquisitions.
(4) Oil includes light, medium and heavy oil.
(5) Product prices include realized gains and losses on financial instrument commodity contracts.
(6) Includes the outstanding balance on Bonavista’s bank credit facility and senior unsecured notes classified as current liabilities and long-term liabilities.
Q1 2020 CAPITAL AND OPERATIONAL UPDATE
In the first quarter of 2020, $13.4 million or 40% of our E&D expenditures was invested in our Deep Basin core area with $11.5 million allocated to drilling and completions and $1.9 million allocated to support capital. All three wells were drilled in the northeast trend of the Wilrich formation and are 2-mile extended reach horizontal wells. The initial well was completed and came on production at the end of February. This well has exceeded expectations with an initial 60-day average restricted raw gas rate of 9.3 mmcf per day. The other two Wilrich wells are scheduled for completion in the third quarter.
Average first quarter production in the Deep Basin area was 18,653 boe per day comprised of 89% natural gas. For the remainder of the year, we plan to drill two (2.0 net) Notikewin wells to follow on our successful 2018 wells at Edson that have both paid out in approximately 1.5 years despite the low gas prices experienced throughout 2019. With recent strength in natural gas prices, we intend to allocate approximately 35% of our E&D budget to the Deep Basin core area in 2020, up meaningfully from 17% in 2019.
In the first quarter of 2020, 57% of our E&D expenditures were invested in our West Central core area. Of the $19.0 million invested in this area, 87% was allocated to the drilling five gross wells (4.2 net), and the completion of four gross wells (2.4 net) all in the Glauconite formation. Compared to the last quarter, average production in the West Central area was up 10% in the quarter to 45,645 boe per day comprised of 44% oil and natural gas liquids. With a reduced capital program in 2020, the first quarter activity was limited to two gross (2.0 net) wells at each of Willesden Green and Strachan, plus one gross (0.2 net) non-operated well at Garrington.
At Willesden Green, we drilled a Bonavista record length horizontal lateral measuring 4,425 meters or nearly 2.8 miles. Both Willesden Green wells were completed at the end of the quarter and came on production at restricted rates in April. The completion of the two Strachan wells is planned for the third quarter.
Also, in the first quarter of 2020, we participated in the drilling of one gross (0.2 net) well and the completion of two gross (0.4 net) wells in the oil/condensate rich Garrington Glauconite play. The initial well was placed on production at the beginning of March at restricted rates of 250 bbls per day oil and 1.2 mmcf per day of liquids rich natural gas but was shut-in on March 25th with the abrupt erosion in oil prices. The second well was completed in March and tested at approximately 500 bbls per day of light oil and 500 mcf per day of liquids rich natural gas with production delayed until oil prices improve.
For the remainder of the year in the West Central core area, we intend to drill four gross (4.0 net) Glauconite wells.
REFLECTION ON Q4 2019 SYNERGISTIC PROPERTY ACQUISITION
By February 2020 we achieved full operational, accounting and marketing control of the West Central assets acquired in December 2019 (the “synergistic property acquisition”). We have achieved the following value enhancements with our Q1 2020 results:
- Production averaged 8,625 boe per day in Q1 2020 which is five percent higher than forecasted;
- Optimization projects have added 720 boe per day of incremental production at a cost of approximately $0.4 million;
- Production at the end of March was up 11% over forecast at 8,900 boe per day;
- Base decline rate is approximately 16%, a significant improvement over 2019, and is supported by our recent optimization efforts;
- Initial operating expense reduction initiatives have lowered Q1 2020 operating cost by 21% from Q1 2019 to $9.44 per boe. We expect operating costs will average between $8.00 and $8.50 per boe for 2020, a significant reduction from 2019;
- Net horizontal drilling locations have increased 25% to 74.5 wells with growth in both the Willesden Green Glauconite play and the Garrington oil/condensate Glauconite play;
- Year-end 2019 GLJ reserve evaluation pertaining to the synergistic property acquisition, resulted in the following year-end reserve adjustments:
• Proved Developed Producing increased 40% to 23.8 mmboe resulting in a 7.8 reserve life index;
• Proved plus Probable reserves increased by 2%; and,
- A detailed review of the decommissioning liabilities (active and inactive) associated with the acquired assets resulted in a revised estimate of $81 million (uninflated and undiscounted) which is 22% lower than our initial estimates.
With the sharp decrease in oil and condensate pricing, the development activity on these assets in 2020 will be lower than initially contemplated. However, based on strip pricing in 2021 and beyond, these assets will provide several years of quality development opportunities.
As Canadians, we are in this together. We are relying on each other, our governments and our leaders to find the best path forward through these unprecedented times.
As Canadians, we are in a unique and enviable position. As a provider of independent and clean sources of energy, we can offer the world a more responsible and stable source of energy as the global economy recovers. Canada has proven to be a leader in environmental stewardship, corporate governance, and social responsibility and as such, should be a leader in providing Canadian natural resources to re-energize the world.
Should we choose to take that challenge as a nation, simplifying and optimizing regulation is of utmost importance at times like these. Reducing ineffective regulation in support of responsible and efficient resource development does not imply removing world class environmental and social standards, but rather enabling our nation to lead the world in balancing economic recovery and environmental protection. Canadian energy can undoubtedly become more economic and more accessible, but not without pragmatic and progressive government policy.
Canadian natural gas and LNG will play a significant role in Canada’s economic recovery. Fortunately, construction of the Coastal GasLink pipeline has progressed through the past few months, targeting export markets in three to four years. While current demand for LNG has moderated during this crisis, future demand growth remains constructive, and Canada is positioned to supply foreign markets with the clean, reliable source of energy that the world craves.
Our efforts to adapt through this crisis are focused on two priorities: the health and safety of our people and the sustainability of our business. We enacted remote and distance work protocols on March 16th with tremendous success to date. All critical business decisions and processes have been successfully executed and we expect these protocols will remain in place until our health organizations and governments suggest otherwise.
We have revised our capital spending down by $26 million (21%) and we have deferred six gross (5.3 net) development wells to next year as we honor our long-standing commitment to spend within our adjusted funds flow. Fortunately, with recent strength in the forward natural gas prices, development economics remain supportive of the completion of four wells which were drilled but uncompleted in the first quarter, and the drilling and completion of six additional wells in the second half of 2020. This approach to our spending levels is forecast (at current strip prices) to generate between $10 million and $20 million of excess adjusted funds flow for debt repayment.
In addition, our operating teams have made numerous adjustments to our cost structure in response to the current price environment. Their efforts have created an opportunity to reduce our 2020 operating cost budget by 10%, or $16 million for 2020.
Lastly, we have meaningfully reduced our general and administrative cost structure in 2020. In June, we are relocating our head office and expect to realize annualized savings of $1.9 million. We have suspended our long-term incentive program, our employee savings plan and have reduced billable hours and corresponding salaries for all employees by approximately 20%. Collectively, 2020 total compensation for our executive team will drop between 25% and 40% relative to last year. We have also adjusted our director compensation and certain directors have deferred all further compensation for 2020.
Clearly, our commitment to adapt is evident. It is our intent to maintain a sustainable business model during these extraordinarily uncertain times. We plan to maintain production between 61,000 and 64,000 boe per day with E&D spending of between $85 million and $95 million, which is within our forecasted adjusted funds flow for the year. Notwithstanding the breach of our financial covenants as at March 31, 2020, we have signed forbearance agreements with our creditors to advance negotiations as it pertains to our debt maturities. We remain committed to our resilient business philosophy and remain focused on strengthening our foundation for future success.
Effective March 12, 2020, Mr. Robert Phillips retired from our Board of Directors. Mr. Phillips provided invaluable guidance and oversight through his six years of service. We thank him for his dedication to Bonavista and wish him well in his future endeavors.
We would also like to thank to our stakeholders for their continued support as we navigate this unprecedented crisis and our Bonavista family would like to send our deepest gratitude to the health care and frontline workers. Your dedication, commitment and courage are saving countless lives, and we thank you for your service.