Calgary, Alberta – Bonavista Energy Corporation (TSX: BNP) (“Bonavista”) is pleased to report to shareholders its financial and operating results for the six months ended June 30, 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 health crisis and deceleration of the global economy has led to severe consequences, across the North American energy sector. Over the past quarter, the erosion in energy demand has led to extreme commodity price volatility triggering the voluntary curtailment of approximately 3 million bbls per day of oil production, 6 bcf per day of natural gas production, the idling of over 500 North American drilling rigs and the loss of tens of thousands of employment opportunities.
For Bonavista, our efforts throughout the quarter have been focused on cost containment across all areas of our business and the break-even economics of our producing assets and development opportunities. Notwithstanding the voluntary curtailment of approximately 1,150 boe per day on average for the quarter due to weakened commodity prices, our 2020 development program has performed ahead of expectations and the assets acquired in December 2019 continue to outperform. Corporate production of 65,268 boe per day represents a seven percent improvement over the same period last year and within two percent of prior quarter production notwithstanding the suspension of all development spending.
Our capital spending of $4.0 million during the quarter was focused solely on maintenance and preparing for projects scheduled for the latter half of 2020, aligned with our previously announced cost savings measures comprised of capital deferrals, operating costs reductions and general and administration cost reductions. Accordingly, our cash costs have improved six percent over the prior quarter and relative to the same period a year ago.
Most notable, on June 19, 2020, Bonavista announced a recapitalization transaction designed to restore balance within our capital structure, meaningfully strengthen our financial position and ultimately enhance sustainability during this time of unprecedented uncertainty.
SECOND QUARTER OPERATIONAL AND FINANCIAL ACCOMPLISHMENTS
- Produced 65,268 boe per day, representing a four percent improvement over budget and a modest two percent reduction from the prior quarter largely resulting from the voluntary curtailment of approximately 1,150 boe per day due to volatile pricing;
- Further moderated our corporate production decline to 21% reducing the future capital requirements to sustain our business;
- Incremental commodity balance was maintained across our asset portfolio with an increase in oil and liquids weighting to 33%, up from 28% during the same period last year and consistent with prior quarter;
- Adjusted funds flow of $30.9 million was 48% ahead of budget complimented by hedging activities but burdened by $8.8 million of advisory costs associated with the proposed restructuring;
- Contained capital spending to $4.0 million of maintenance initiatives and $0.5 million allocated to liability retirement; and
- Improved cash costs to $9.16 per boe, a six percent reduction over the prior quarter led by a six percent reduction in operating costs to $5.69 per boe, a 25% reduction in G&A costs to $0.60 per boe and a 17% reduction in interest expenses to $1.42 per boe, all relative to prior quarter expenses.
Q2 2020 CAPITAL AND OPERATIONAL UPDATE
The combination of spring breakup and the volatile pricing environment resulted in the suspension of most E&D activity in the second quarter of 2020. No wells were drilled nor completed with only $4.0 million dollars allocated to maintenance activities bringing total 2020 E&D capital expenditures in the first half of 2020 to $37.3 million, representing only 64% of adjusted funds flow.
At Willesden Green, two liquids rich Glauconite wells were brought on production in April. These two wells have averaged 4.2 mmcf per day with an average field condensate ratio of 23 barrels per mmcf over the first 80 days of production. These rates have exceeded our expectations with the average gas rate 17% higher and average field condensate ratio 31% greater than the direct offset wells.
The synergistic property acquisition that closed in Q4, 2019, continued to outperform expectations in the second quarter of 2020 as demonstrated by the following achievements and forecasts:
- Second quarter production of 8,950 boe per day is four percent higher than the prior quarter and seven percent ahead of budget notwithstanding minimal capital spending of $3.1 million year to date;
- Through continued optimization the decline rate has been moderated to 14%;
- Two gross (0.4 net) 2020 Garrington Glauconite wells were restarted in June with average rates of 315 bbl oil/condensate per day and 1.3 mmcf per day;
- Achieved operating costs of $7.98 per boe in the second quarter, a 15% improvement over the prior quarter; and
- The plan is to drill an additional 3.1 net wells on the acquisition lands in the second half of 2020 bring total capital to $17.2 million for 2020 and contributing to an exit rate of 10,800 boe per day, representing 30% growth in production throughout the year.
By June, Bonavista had curtailed up to 1,527 boe per day of production (75% oil-weighted), due to volatile oil and liquids pricing. Currently, we still have 1,120 boe per day of production curtailed for similar reasons.
In July, drilling activity has resumed with two rigs and plans to drill seven gross (6.45 net) wells in the second half of 2020 including two gross (1.75 net) Deep Basin wells and five gross (4.7 net) West Central wells. The completions of the four gross (4.0 net) drilled but uncompleted first quarter wells has commenced in July with first production expected in August and September.
Over the past three years we have reviewed and evaluated numerous options to balance our capital structure, reduce our debt leverage, improve access to liquidity and strengthen our financial position. A wide range of alternatives, including merger and acquisitions opportunities, assets sales and/or purchases, royalty sales and certain midstream transactions have been contemplated.
The moderated and ultimate closure of the equity and debt capital markets to Canadian energy producers during this time, and the risk of further commodity price erosion impacted our confidence in honoring our scheduled debt maturities in the coming months and years. Hence a year ago, we embarked upon discussions with each of the senior noteholders and existing lenders regarding an extension of the maturity dates of our credit instruments.
Negotiations with the senior noteholders and existing lenders proceeded throughout January and February of this year however, progress towards a consensual resolution was slow and ultimately unsuccessful. By March 2020, the scale and magnitude of energy demand erosion associated with the COVID-19 pandemic had placed crippling pressure on the sustainability and financial health of our business. We, like all energy providers across the continent, had to swiftly adapt our business plan and respond urgently to this shift in energy demand.
Detailed consultation and negotiations ensued with key stakeholders affirming the viability of developing and executing a comprehensive recapitalization transaction, that would address our disproportionate capital structure, our looming debt maturities and our liquidity constraints for the benefit of all stakeholders involved. Accordingly, our Board of Directors determined that the proposed recapitalization transaction announced on June 19, 2020 was the best transaction available to our stakeholders given the current circumstances.
On July 30, 2020, the recapitalization transaction was approved by the Corporations Senior Noteholders’ and Shareholders’, with 78.31% of the votes cast in favour of the Plan of Arrangement. Based on the results of the Senior Noteholders’ Meeting and the Shareholders’ Meeting, the Corporation expects the recapitalization transaction will be completed in early to mid-August, 2020 pending a court order approving the Plan of Arrangement.
The recapitalization transaction allows Bonavista to open a new chapter in our 23-year history with the following three key elements of strength:
- Balances our capital structure as debt is converted to equity creating a more capable and financially flexible company;
- Reduces our outstanding debt by $483 million which meaningfully improves our debt leverage and our ability to compete within our sector; and
- Reduces our annual interest payments by $16 million creating incremental liquidity and flexibility in challenging commodity price cycles.
We look forward to the opportunities in front of us as we emerge with a competitive balance sheet and a reliable asset portfolio at current commodity prices.
We would like to extend our gratitude to Mr. Chris Slubicki, Ms. Theresa B.Y. Jang and Ms. Mary C. Hemmingsen for their years of service on our Board of Directors. With changing circumstances, they have chosen not to stand for re-election and will be stepping down from our board, effective today. Mr. Slubicki, Ms. Jang and Ms. Hemmingsen have served on our board since 2007, 2017 and 2019 respectively and have provided fundamental guidance and unwavering support during their tenure with us.
We thank our entire Board of Directors, our employees and our shareholders for their commitment and their patience as we’ve transitioned through a very uncertain time in our history. We appreciate your support that you have entrusted us with over the last 23 years.