Highlights for the first quarter are as follows:
Note:
The financial results reported in the first quarter have been negatively impacted by one-time charges related to a natural gas marketing arrangement. The net impact of this arrangement was to reduce the recorded revenue in the first quarter by $1.8 million from that which would have been realized by selling our natural gas under AECO spot pricing. Further to this, the revenues received for all of Journey’s marketed natural gas (contracted or otherwise) for the period from February 1- March 31 was withheld by the purchaser, resulting in a charge of $1.9 million to general and administrative expenditures. The cumulative impact of these events was to reduce the reported Funds Flow from $3.6 million (absent this contractual arrangement) to the ($0.2) million as reported. Effective April 1 Journey entered new natural gas marketing arrangements with a new purchaser and moving forward, anticipates receiving AECO based pricing. Given Journey’s gas weighting this will help to mitigate the losses incurred from the unprecedented drop in worldwide oil demand and pricing associated with the COVID-19 pandemic.
|
Three months ended March 31, |
|||
|
Financial ($000’s except per |
2020 |
2019 |
% change |
|
Production revenue |
18,336 |
28,498 |
(36) |
|
Funds flow |
(205) |
7,722 |
(103) |
|
Per basic share |
(0.01) |
0.20 |
(105) |
|
Per diluted share |
(0.01) |
0.19 |
(105) |
|
Net loss |
(65,441) |
(4,087) |
1,501 |
|
Per basic share |
(1.52) |
(0.10) |
1,419 |
|
Per diluted share |
(1.52) |
(0.10) |
1,419 |
|
Capital expenditures, net |
3,276 |
960 |
241 |
|
Net debt |
128,435 |
127,769 |
1 |
|
Share Capital (000’s) |
|||
|
Basic, weighted average |
43,087 |
39,226 |
10 |
|
Basic, end of period |
43,087 |
39,232 |
10 |
|
Fully diluted |
48,174 |
43,590 |
11 |
|
Daily Production |
|||
|
Natural gas volumes (mcf/d) |
28,822 |
29,339 |
(2) |
|
Crude oil (bbl/d) |
3,808 |
3,886 |
(2) |
|
Natural gas liquids (bbl/d) |
713 |
553 |
29 |
|
Corporate (Boe/d) |
9,325 |
9,330 |
– |
|
Realized Prices (excluding |
|||
|
Natural gas ($/mcf) |
1.23 |
2.49 |
(51) |
|
Crude Oil ($/bbl) |
40.03 |
57.90 |
(31) |
|
Natural gas liquids ($/bbl) |
19.00 |
33.31 |
(43) |
|
Corporate ($/BOE) |
21.61 |
33.94 |
(36) |
|
Netbacks ($/BOE) |
|||
|
Realized prices (excl. hedging) |
21.61 |
33.94 |
(36) |
|
Royalty expense |
(3.18) |
(3.89) |
(18) |
|
Operating expense |
(13.86) |
(14.09) |
(2) |
|
Transportation expense |
(0.53) |
(0.49) |
8 |
|
Operating netback |
4.04 |
15.47 |
(74) |
|
Hedging gains (losses) |
2.73 |
(0.33) |
(927) |
|
Operating netback incl. hedging |
6.77 |
15.14 |
(55) |
OPERATIONS
Journey achieved production of 9,325 boe/d (49% liquids) in the first quarter of 2020, essentially unchanged from 9,330 boe/d (48% liquids) recorded in the first quarter of 2019. Journey’s primary focus over the past year has been to maintain its oil production while improving financial flexibility, and allowing third party capital to de-risk its world class Duvernay acreage. Despite a challenging environment, Journey was successful in maintaining liquids production while maintaining current leverage.
The Duvernay drilling program has advanced to the point where Journey now has significant production history on the three wells drilled by its joint venture partner, Kiwetinohk Resources Corporation (“KRC”). These wells rank in the top tier of all wells drilled to date in the East shale Duvernay basin. The success to date in this play highlights the significant development potential of the Duvernay land block. In early April, with oil prices collapsing, KRC made the prudent decision to shut in all four producing wells. In this play in particular, the recent announcement by the Alberta government, regarding the extension of 2020 expiring mineral leases for an additional year, will provide substantial benefits to Journey allowing us to preserve the future opportunity value of this world class resource even though the wells are currently shut in due to low prices.
The joint venture currently controls approximately 112 gross sections where Journey has a working interest of 37.5% (42 net sections). KRC has the ability to earn 62.5% in an additional 30 gross sections of land through the drilling and completion of three additional wells prior to the expiry of the option phase in late August of 2020. Should KRC not complete all earning, Journey will retain its 100% interest in these 30 sections plus an additional 6 gross sections resulting in Journey controlling 78 net sections or approximately 54% of the total acreage within the total Duvernay land block.
In mid-March of this year, with the onset of the COVID-19 pandemic and systematic shutdowns of global economies, the world oil price experienced a substantial decline. WTI oil prices have recently declined below USD $20/bbl making several of Journey’s properties uneconomic to operate at these levels. Consequently, Journey took the prudent and immediate action to shut-in approximately 1,500 boe/d (73% oil and NGL) of its production effective the first week of April. Journey has continued to maintain production in properties with a high natural gas weighting. Recent changes to our marketing arrangements for natural gas (described above) will benefit the company in the coming months as increases in realized pricing for natural gas will help mitigate the drop in liquids (oil and natural gas liquids) prices.
Journey continues to evaluate all of its oil properties as candidates for shut-in. If the recent positive momentum in oil pricing and narrow differential levels continue into the coming months, Journey anticipates bringing the majority of this production back on in July. However, due to the continued volatility, Journey will not be providing further guidance at this time.
Capital expenditures have been reduced to maintenance capital where deemed necessary as well as the completion of its power generation project. As a result, the Company anticipates spending approximately $4 million for the first half of 2020 of which $3.2 million was spent in the first quarter. The power project is still slated to begin operation in the third quarter of this year. Journey continues to work with purchasers on certain non-core asset dispositions. The dispositions are not expected to generate material proceeds for the Company. However, they will allow Journey to shed certain higher operating costs assets, with an immaterial impact on production volumes.
Journey has a development ready drilling program in Skiff, Cherhill and Crystal. The horizontal development program in south Skiff follows up the three wells drilled there in 2018. During the third quarter of 2019, the central well of the three well pattern was converted to a water injection well, and the offsetting producers have now begun to respond favorably to the injection. Due to the high level of volatility experienced with commodity prices, Journey will continue to monitor broader market forces and adjust its capital plans on an ongoing basis. Journey’s low decline and predictable asset base will help the company maintain our business as we navigate through these difficult days.
FINANCIAL
The first quarter of 2020 was challenging in many respects. Oil and natural gas prices started off the year relatively strong as WTI prices were in the mid-$57/bbl USD range in January. By the end of the quarter they had plummeted to less the $20/bbl US range as the impact of the COVID-19 pandemic set in. Natural gas prices were relatively stable over the quarter with AECO averaging $2.03/mcf during the quarter, but these prices were moderated by a warmer than usual winter.
Corporately, realized average commodity prices were 36% lower during the first quarter of 2020 as compared to 2019. Natural gas prices decreased by 51%, while oil and natural gas liquids decreased by 31% and 43% respectively. Journey’s production mix was similar for both quarters with natural gas volumes accounting for 51% of total volumes for 2020 and 52% for 2019. Liquids (oil and NGL) volumes were 49% and 48% respectively. On the revenue side, liquids comprised 83% of total revenues for Journey in 2020 while in 2019 they were 77%. Journey’s strong hedging position yielded a realized gain of $2.3 million and a mark-to-market gain of $9.7 million during the first quarter. The rapidly declining oil prices by the end of March caused all of the oil hedges to go well into the money. Aggregate field operating expenses (royalties, operating expenses, and transportation expenses) were 5% lower at $17.57/boe in the first quarter of 2020 as compared to $18.47/boe in the first quarter of 2019. First quarter operating costs were materially impacted by extremely high realized prices for electricity in January.
Finance expense related to borrowings increased by 5% to $2.5 million from $2.4 million due mainly to increased borrowing rates. Attributable to the material decrease in forward looking commodity prices, Journey took a $60.9 million impairment on its property, plant and equipment assets during the quarter. This was the largest single contributor to Journey’s net loss of $65.4 million during the quarter.
As previously mentioned, the financial results reported in the first quarter have been negatively impacted by one-time charges related to a natural gas marketing arrangement. Included in general and administrative expense is a $1.9 million charge related to a bad debt provision stemming from this dispute with Journey’s then natural gas purchaser. Journey replaced this purchaser effective April 1.
The Company spent $3.3 million in its capital program during the first quarter with most of the spending primarily directed to Journey’s power generation project. No wells were drilled in the quarter. Journey exited the first quarter with net debt of $128.4 million which was 3% higher than at December 31, 2019.
OUTLOOK
In response to the rapid onset of the financial impact stemming from the pandemic, Journey has shut in higher operating cost production and has also implemented a number of cost-cutting measures in both the field and in its head office. Most notably, fourteen employees (three in the field and eleven in the head office) and nine field consultants have been temporarily laid off. In addition, all remaining employees’ compensation has been reduced by approximately 10%, which is in addition to the previous compensation reductions achieved through the implementation of four-day work week in 2019. All non-essential services were curtailed while preserving the safe operation of our wells and facilities. All remaining employees in the head office have undertaken a work-at-home program to help protect themselves and the community from the pandemic. Capital spending has been restricted to the completion of the power generation project, which is slated to begin operations during the third quarter. Journey has also reached out to many of its other stakeholders with the hope of continuing to find win-win solutions while working together and towards a brighter future. We would like to thank those stakeholders who have chosen the path to work with us. Journey, and its service providers have applied for over $5 million in projects under the recently announced government subsidized abandonment and reclamation program and are currently awaiting the results of those applications. Although Journey has refrained from providing guidance at this time Journey feels that the company can maintain current leverage levels as long as prices remain at or near current strip forecasts.
On behalf of Journey’s management team and directors we would like to thank our shareholders for their continued support through this challenging time. We would like to thank all of our stakeholders who are helping the company bridge between today and a better day tomorrow.
Annual General Meeting
Journey’s annual general meeting (the “Meeting”) is scheduled for 3:00 pm (Calgary time) on August 12, 2020. In response to the COVID-19 pandemic, Journey is discouraging physical attendance at the Meeting and has decided to offer shareholders an opportunity to listen to the business to be conducted at the Meeting by teleconference. Shareholders not attending in person must vote on the matters not less than forty-eight (48) hours (excluding Saturdays, Sundays and statutory holidays in the Province of Alberta) before the time of the Meeting. Further instructions on how to listen to the Meeting and how to vote in advance of the Meeting will be found in Journey’s management information circular that will be posted on the Company’s website and on SEDAR in due course. In line with Journey’s commitment to safety, in-person attendance by directors and senior management of Journey will be limited and will be subject to the orders, limitations, advice and guidance of the federal and provincial health ministries and other governmental authorities. Accordingly, Journey expects to only have a minimum number of in-person attendees present to conduct the formal business of the Meeting and does not intend to provide a corporate presentation after the Meeting.
About the Company
Journey is a Canadian exploration and production company focused on conventional, oil-weighted operations in western Canada. Journey’s strategy is to grow its production base by drilling on its existing core lands, implementing water flood projects, executing on accretive acquisitions. Journey seeks to optimize its legacy oil pools on existing lands through the application of best practices in horizontal drilling and, where feasible, with water floods.
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