CALGARY, Alberta – Razor Energy Corp. (“Razor” or the “Company”) (TSXV: RZE) announces its second quarter 2020 financial and operating results. Selected financial and operational information is outlined below and should be read in conjunction with Razor’s unaudited condensed consolidated interim financial statements and management’s discussion and analysis for the quarter ended June 30, 2020 which are available on SEDAR at www.sedar.com and the Company’s website www.razor-energy.com.
Q2 2020 HIGHLIGHTS
- Achieved operating expenses of $21.52/boe in the second quarter of 2020, down 33% from the same period in 2020 due to a strict focus in cost reductions and operating efficiencies. Razor operated properties realized operating expenses of $22.32/boe for the six months ended June 30, 2020 while non-operated property operating expenses averaged $58.91/boe during the same period.
- Production volumes in the second quarter of 2020 averaged 3,782 boe/d, down 9% from the production volumes in the same period of 2019, due to production curtailments and shut ins due to low crude oil pricing as a result of COVID-19.
- Reported negative $0.5 million of cash flows from operating activities in the second quarter of 2020 compared to positive $8.3 million of cash flows from operating activities in the second quarter of 2019.
- The Company continues to operate its six natural gas-powered generators which has reduced its reliance on grid electric power and resulted in savings of $0.4 million in Q2 2020 (Q2 2019 – $0.8 million). Electricity and fuel decreased 27% in Q2 2020 as compared to the same quarter of last year mostly due to a 49% decrease in average electricity pool prices.
- Received approval for $1.4 million in funding under the Alberta government’s Site Rehabilitation Program (“SRP”) to assist with abandonment and reclamation activities.
- Eliminated all operated capital investment with the exception of critical end of life expenditures.
- Invested $0.6 million on its capital program in the second quarter of 2020, mainly on the South Swan Hills co-produced geothermal power generation project.
- Razor utilized its crude oil storage capacity of 96,000 bbls to manage the realized value of its oil due to the low commodity prices during most of the second quarter of 2020. The Company increased inventory volumes of crude oil in Q2 2020 to 21,111 bbls of light oil inventory (December 31, 2019 – 9,251 bbls) of which a significant portion is anticipated to be sold in the third quarter of 2020 due to improved oil prices.
- The Company uses in house marketing expertise to take advantage of pricing opportunities and enhance returns.
- Razor implemented cost saving measures by internalizing certain oilfield services through its subsidiary, Blade Energy Services Corp. (“Blade”), which provides services such as crude oil hauling along with earthworks and environmental services. Blade conducted $0.5 million of services on behalf of Razor during Q2 2020 and $1.1 million of services for the six months ended June 30, 2020.
NEAR AND MEDIUM-TERM OBJECTIVES
- Reducing net debt through significantly reduced capital spending, operating costs, and general and administrative expenses.
- Actively identifying and considering business combinations with other oil and gas producers as well as service companies.
- Developing a technically viable and commercially sustainable solution to recover geothermal waste heat to power.
- Analyzing further ancillary opportunities including power generating projects, oil blending and services integration.
The recent volatility in both West Texas Intermediate (“WTI”) and Edmonton light sweet crude oil differentials has resulted in limited capital spending in 2020. Razor will take a cautious and case-by-case approach to spending in 2020, focusing on low risk, low capital opportunities to increase field and corporate netbacks. Cost control will be prioritized over production levels with the significant decrease in oil prices resulting from the COVID-19 virus, lowered global demand, and uncertainty related to supply.
In response to the aforementioned decrease in oil prices, during the early part of second quarter of 2020 the Company shut in all of its operated heavy oil production, along with certain light oil wells which were sub-economic at the time, and also built oil inventory in anticipation of improved future crude oil prices. Since June 2020, WTI pricing and local price differentials have improved as global demand for oil has rebounded as countries gradually ease COVID-19 lockdown restrictions. Starting in the later part of the second quarter, the Company began the process of restarting the heavy oil and light oil wells which were shut in and at June 30, 2020 the Company had approximately 21,000 barrels of oil inventory which a significant portion is anticipated to be sold in the third quarter. As of the date of this press release, the Company is forecasting Q3 2020 production to be approximately 3,500 boe/d. The Company actively monitors the economics for all its operated production and expects to reactivate additional wells as prices further improve. The timing to restart shut in oil wells is dependent on both WTI prices and local price differentials.
The preparation of financial forecasts is challenging at this time; however, the Company anticipates minimal cash flow from operations during the second half of 2020 if oil prices remain at current levels. The Company is working to mitigate losses by limiting field spending and applying for government assistance programs where available, including the Canada Emergency Wage Subsidy which has provided the Company with just over $725 thousand since the subsidy was introduced, of which $454 thousand was accounted for as a reduction of general and administrative expenses and $272 thousand was accounted for as a reduction of operating expenses.
RAZOR’S RESPONSE TO COVID-19
Razor is dedicated to ensuring the health, safety and security of its employees, contractors, partners and residents within all of its operating areas and communities. The Company has implemented business procedures that comply with Alberta Health Guidelines to protect the well-being of all stakeholders. Razor has successfully transitioned the majority of its corporate staff back to the head office and the field sites continue to take site specific pre-cautionary measures related to COVID-19. The Company has not experienced any COVID-19 cases in the Calgary office or at its field sites.
SELECT QUARTERLY HIGHLIGHTS
The following tables summarizes key financial and operating highlights associated with the Company’s financial performance.
|June 30,||December 31,|
|($000’s, except for share amounts)||2020||2019|
|Long-term debt (principal)||47,312||45,876|
|Minimum lease obligation||4,703||5,329|
|Net debt 1||71,499||66,911|
|Number of shares outstanding||21,064,466||21,064,466|
|1) Refer to “Non-IFRS measures”.|
SELECT QUARTERLY HIGHLIGHTS (continued)
|Three Months Ended June 30,
||Six Months Ended June 30,
|($000’s, except for per share amounts and production)||2020||2019||2020||2019|
|Light Oil (bbl/d)||1,996||2,744||2,319||2,704|
|Gas (mcf/d) 1||5,528||3,414||4,602||3,670|
|Sales volumes 2|
|Light Oil (bbl/d)||1,971||2,932||2,254||2,837|
|Gas (mcf/d) 1||5,528||3,414||4,602||3,670|
|Closing oil inventory volumes (bbls)||21,111||11,228||21,111||11,228|
|Oil and gas sales||7,896||22,525||20,372||41,380|
|Natural gas sales||742||328||1,366||1,088|
|Sale of commodities purchased from third parties||–||2,413||–||8,454|
|Blending and processing income||1,061||2,332||2,674||4,573|
|Cash flows from (used in) operating activities||(540||)||8,263||1,714||11,867|
|Per share -basic and diluted||(0.03||)||0.54||0.08||0.78|
|Funds flow 3||1,985||3,878||(1,673||)||5,043|
|Per share -basic and diluted||0.09||0.26||(0.08||)||0.33|
|Adjusted funds flow 3||2,010||3,624||(1,303||)||5,001|
|Per share -basic and diluted||0.10||0.24||(0.05||)||0.33|
|Net income (loss)||(4,083||)||(1,746||)||(38,311||)||(11,537||)|
|Per share – basic and diluted||(0.19||)||(0.12||)||(1.82||)||(0.76||)|
|Dividends per share||–||0.04||0.01||—|
|Weighted average number of shares outstanding (basic and diluted)||21,064||15,162||21,064||15,189|
|Oil and gas sales 4||25.26||57.98||30.44||53.55|
|Transportation and treating||(1.70||)||(2.72||)||(1.75||)||(2.34||)|
|Operating netback 3||(0.51||)||12.33||(3.85||)||9.22|
|Income (loss) on sale of commodities purchased from third parties 3||–||0.40||–||(0.14||)|
|Net blending and processing income 3||3.36||3.01||3.28||3.28|
|Realized loss on commodity contracts settlement||(2.74||)||(4.72||)||(2.46||)||(2.72||)|
|General and administrative||(2.21||)||(2.06||)||(3.72||)||(3.87||)|
|Corporate netback 3||2.30||6.52||(40.33)||3.50|
1) Gas production and sales volumes include internally consumed gas used in power generation.
2) Sales volumes include change in inventory volumes.
3) Refer to “Non-IFRS measures”.
4) Excludes the effects of financial risk management contracts but includes the effects of fixed price physical delivery contracts.
Sales volumes in the second quarter of 2020 averaged 3,757 boe/d, down 13% from the sales volumes in the same period in 2019 as Razor was building up inventory volumes in existing surface tanks due to low commodity prices during Q2 2020. As at June 30, 2020, Razor had 21,111 bbls of light oil inventory (December 31, 2019 – 9,251 bbls) which is anticipated to be sold in the third quarter of 2020 due to improved crude oil pricing.
Production averaged 3,782 boe/d in Q2 2020 down 9% from the same quarter in 2019, primarily due to production curtailments and shut ins due to low crude oil pricing as a result of COVID-19. For the first six months of 2020, production averaged 3,989 boe/d, down 10% as compared to the same period last year, as the Company’s non-operated production was impacted in the Swan Hills and Kaybob areas, but was offset by production in the Southern Alberta area due to the Little Rock acquisition.
Effective July 2018, Razor began utilizing a portion of its own gas production to generate electrical power. Gas production of internally consumed gas for the three and six months ended June 30, 2020 was 1,414 mcf/d and 1,269 mcf/d, respectively.
Razor realized an oil price of $30.95/bbl during the second quarter of 2020, which was a 19% discount to the WTI (CAD) price and is an improvement from the 22% discount in Q1 2020 and down from the 4% discount in Q2 2019. These discounts were partially due to lower average oil quality realized by the Company as a result of the Little Rock acquisition in Q3 2019, which added WCS exposure to Razor’s oil pricing portfolio, as well as timing of monthly sales contracts. For the six months June 30, 2020 the Company realized oil price was down 44% from the same period of 2019 mostly due to a lower WTI index price.
During the second quarter of 2020, the Company realized an operating loss of $0.51/boe down from operating income of $12.33/boe in the second quarter of 2019 due to lower realized prices, decreased production and sales volumes.
Royalty rates averaged 10% in the second quarter of 2020 as compared to 15% for the same period in 2019. This decrease in royalties is mostly due to the decrease in commodity prices and production volumes. For the first six months of the year, royalties averaged 11%, down 15% from the same period last year, mostly due to lower prices and production volumes.
Operating expenses decreased 37%, on a per boe basis, in the second quarter of 2020 compared to the same period in 2019 and was down $6.1 million on a total dollar basis. Workovers, facility and pipeline integrity expenses averaged $1.10/boe in the second quarter of 2020 down 90% from $8.52/boe in the same quarter of 2019. The Company has limited its well intervention activity in response to the current weak commodity price environment. Razor operated properties had an operating cost of $22.32/boe for the first six months of 2020, while non-operated properties had an operating cost of $58.91/boe for the same period.
The top cost drivers, fuel and electricity, labour, property taxes, facility repairs and non-operated pipeline repairs accounted for 71% of total operating expenses in the second quarter of 2020 (Q2 2019 – 65%). For the first six months of 2020, the top cost drivers, fuel and electricity, labour, property taxes, facility repairs and non-operated pipeline repairs accounted for 65% of total operating expenses (2019 – 57%).
Electricity and fuel decreased 27% in Q2 2020 as compared to the same quarter of last year mostly due to a 49% decrease in average electricity pool prices and a decreased reliance on compressed gas and lower production levels. The Company continues to operate its six natural gas-powered generators which reduced its reliance on grid electric power and resulted in savings of $0.4 million in Q2 2020 (Q2 2019 – $0.8 million).
In the second quarter of 2020, due to the volatile commodity price environment, the Company did not initiate any projects related to finding and development capital. Amounts recorded in the second quarter of 2020 related to final cost true ups on projects from 2019.
During the second quarter of 2020, Razor invested $0.6 million on its South Swan Hills co-produced geothermal power generation project. The Company expects the capital cost of the project to be $35 million, generating 21 MW of grid connected power, of which 6MW will be from geothermal power generation.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
Starting in 2020, Razor has committed to the Alberta Energy Regulator’s (“AER”) Area Based Closure program (“ABC program”), which requires companies to commit to an inactive liability reduction target. The program encourages the oil and gas industry to abandon and reclaim inactive sites, thereby de-risking future liabilities to the general public. Benefits to companies joining the program include focused expenditures on end-of-life activities and as well as enabling companies to maintain compliance on low risk infrastructure through regular inspection rather than allocating funds to well suspension activities which provide no actual reduction in liability.
Razor’s original spend target in 2020 under the ABC program was anticipated to be $2.3 million but on May 14, 2020, the AER reduced all liability reduction targets for 2020 to zero in response to COVID-19 and the decline in oil prices. The 2021 liability reduction target will be announced later in 2020. Razor plans to continue to participate in the ABC program as future requirements are announced.
Pending A&D activity, Razor anticipates a consistent annual spend for the next five years of approximately $2.5 million on end-of-life activities. Furthermore, Razor will focus activities in a concentrated area to focus on efficiency and the greatest reduction in liability for its expenditures.
Razor has been very successful in obtaining approved applications under the Alberta government’s SRP. To date, Razor has received approval for $1.4 million in funding to assist with abandonment and reclamation activities. The Company also expects to receive additional grants in subsequent phase of the SRP. As the work related to each grant is completed, these amounts will be reflected as a reduction in our decommissioning obligation liability.
Razor has participated in the energy management program at Energy Efficiency Alberta and has decreased its annual GHG emissions through the power generation project.
Razor is actively involved in community engagement and recognizes the importance of supporting charitable organizations in the communities in which the Company operates. Since commencing operations in 2017, Razor has supported STARS air ambulance, the Swan Hills school, The Terry Fox Foundation, Kids Cancer Care, Ovarian Cancer Canada, Movember Foundation, and Crohn’s and Colitis Canada. In addition, the Company has provided sponsorship funds to community events and initiatives, as well as community sporting events.
The Company also announces the resignation of Mr. Sony Gill from the Company’s Board of Directors. Razor wishes to thank Mr. Gill for his contributions to the Company and wishes him well in his future endeavours.
Razor is a publicly-traded junior oil and gas development and production company headquartered in Calgary, Alberta, concentrated on acquiring, and subsequently enhancing, and producing oil and gas from properties primarily in Alberta. The Company is led by experienced management and a strong, committed Board of Directors, with a long-term vision of growth focused on efficiency and cost control in all areas of the business. Razor currently trades on TSX Venture Exchange under the ticker “RZE.V”.