Execution drives increase to midpoint of 2020 production guidance, 2021 budget targets stable production and free cash flow
CALGARY, Alberta – Seven Generations Energy Ltd. (TSX: VII)
THIRD QUARTER 2020 HIGHLIGHTS
- The company successfully completed its planned three-week turnaround and upgrade at the Karr plant and condensate stabilizer on-time and on-budget, while mitigating the impact to production volumes. Third quarter sales volumes were 168.9 Mboe/d (43% natural gas, 34% condensate, 23% other NGLs). October average field production estimates are in excess of 185 Mboe/d.
- 7G has increased the lower end of its full-year 2020 production guidance to average 180-185 Mboe/d, compared to its prior guidance of 175-185 Mboe/d. Planned capital investments for 2020 are unchanged at $650 million. Additionally, the upper end of full-year 2020 operating cost guidance has been reduced from $4.50-$5.00/boe to $4.50-$4.75/boe.
- The company restarted drilling and completion activity early in the third quarter and generated a modest amount of free cash flow despite the capital and volume impacts of the Karr turnaround. For both the fourth quarter and full-year 2020, 7G expects to generate free cash flow given the remaining capital investment, production volumes and hedging profile. 7G’s strategy of free cash flow generation continues despite the multitude of challenges faced in 2020. The company currently has 80% of net condensate volumes hedged in the fourth quarter and 55% hedged in the first quarter of 2021 at an average WTI price of US$44.60/bbl.
- Third quarter drilling and completions costs averaged $6.5 million dollars per well, an 11% improvement relative to the per-well costs achieved in the first half of 2020. Drilling costs per meter and completion costs per tonne of proppant pumped improved by 5% and 30% respectively compared to the first half of 2020.
- 7G continues to execute its symbiotic ESG-driven market access strategy. Supported by its Equitable Origin EO100™ certification and its low upstream emissions intensity profile, 7G entered into a supply agreement with Vermont Gas Systems, Inc. (VGS). VGS is an integrated energy services company that will distribute 7G’s responsibly developed natural gas to its consumer base and in return pay 7G a premium that the company will direct towards the 7G Sustainability Fund.
- The company also entered a combined renewable energy certificate (REC) natural gas supply transaction, that sees a portion of 7G’s Alberta-based natural gas sales receive a REC as part of the sales price in the fourth quarter. This transaction is expected to reduce 7G’s 2020 scope 2 emissions profile to net zero and ties with 7G’s continuing emissions reduction efforts.
- 2021 production is expected to average 180-185 Mboe/d on capital investments of $650 million. Year-over-year improvements to cash costs and operating efficiencies, combined with moderating corporate decline rates are expected to contribute to 7G’s growing free cash flow profile in 2021 at current strip prices.
- 7G’s 2021 WTI breakeven price is expected to be $35/bbl at current Henry Hub strip pricing of approximately US$2.75/MMbtu. In a $45/bbl WTI and $3/MMbtu Henry Hub price environment, 7G forecasts its 2021 capital investment plan to represent approximately 75% of forecasted funds flow.
OPERATIONAL AND FINANCIAL HIGHLIGHTS
|$ millions, except per share and unit of production amounts||Three months
|Funds flow ($)(1)||166.3||340.5||(51||)||138.8||20||580.1||1,034.6||(44||)|
|Per share – diluted ($)(1)||0.50||0.98||(49||)||0.42||19||1.74||2.94||(41||)|
|Free cash flow ($)(1)||1.0||55.9||(98||)||69.4||(99||)||79.6||38.0||109|
|Net income (loss) ($)||(66.8||)||85.1||nm||(116.9||)||(43||)||(1,192.9)||391.2||nm|
|Per share – diluted ($)||(0.20||)||0.25||nm||(0.35||)||(43||)||(3.58)||1.11||nm|
|Adjusted net income (loss) ($)(1)||(24.2||)||78.5||nm||(43.1||)||(44||)||(33.3)||259.8||nm|
|Per share – diluted ($)(1)||(0.07||)||0.23||nm||(0.13||)||(46||)||(0.10)||0.74||nm|
|Natural gas (MMcf/d)||434.6||515.3||(16||)||467.9||(7||)||463.7||496.3||(7||)|
|Other NGLs (mbbl/d)||38.8||43.2||(10||)||40.9||(5||)||40.9||43.9||(7||)|
|Total sales volumes (mboe/d)||168.9||204.6||(17||)||183.2||(8||)||181.8||201.3||(10||)|
|Natural gas ($/Mcf)||2.61||2.85||(8||)||2.49||5||2.59||3.47||(25||)|
|Other NGLs ($/bbl)||14.60||2.74||nm||12.01||22||11.73||4.79||145|
|Royalty expense ($/boe)||(1.76||)||(1.99||)||(12||)||(0.97||)||81||(1.68)||(2.16||)||(22||)|
|Operating expenses ($/boe)||(5.30||)||(4.81||)||10||(4.16||)||27||(4.65)||(4.91||)||(5||)|
|Transportation, processing and other ($/boe)||(7.86||)||(6.46||)||22||(7.53||)||4||(7.46)||(6.58||)||13|
|Operating netback before the following ($/boe)(1)(4)||11.32||18.71||(39||)||5.72||98||10.78||20.77||(48||)|
|Realized hedging gains ($/boe)||2.76||1.63||69||6.44||(57||)||4.27||0.46||nm|
|Marketing income (loss) ($/boe)(1)||(0.64||)||0.19||nm||(0.80||)||(20||)||(0.63)||0.34||nm|
|Operating netback ($/boe)(1)||13.44||20.53||(35||)||11.36||18||14.42||21.57||(33||)|
|Funds flow ($/boe)(1)||10.70||18.09||(41||)||8.33||28||11.65||18.83||(38||)|
|Capital investments ($)||165.3||284.6||(42||)||69.4||138||500.5||996.6||(50||)|
|Available funding ($)(1)||1,113.1||1,277.2||(13||)||1,110.7||—||1,113.1||1,277.2||(13||)|
|Net debt ($)(1)||2,178.8||2,213.7||(2||)||2,224.9||(2||)||2,178.8||2,213.7||(2||)|
|Purchase of common shares ($)||—||73.8||(100||)||—||—||15.6||117.9||(87||)|
|Common shares outstanding (mm)||333.3||340.5||(2||)||333.2||—||333.3||340.5||(2||)|
|Weighted average shares outstanding – basic (mm)||333.3||345.9||(4||)||333.1||—||333.3||350.2||(5||)|
|Weighted average shares outstanding – diluted (mm)||334.0||347.0||(4||)||333.8||—||333.9||352.0||(5||)|
|(1)||Refer to the Reader Advisory section at the end of this news release for additional information regarding the company’s GAAP and non-GAAP measures.|
|(2)||Represents the total of liquids and natural gas sales, net of royalties, gains (losses) on risk management contracts and other income.|
|(3)||See “Note Regarding Product Types” in the Reader Advisory section at the end of this news release.|
|(4)||Excludes realized hedging gains and losses, as well as the purchase and sale of condensate and natural gas in respect to the company’s transportation commitment utilization and marketing activities.|
|Three months ended
|Nine months ended
|Nest Activity||2020||2019||% Change||2020||2019||% Change|
|Horizontal wells rig released||9||20||(55||)||35||57||(39||)|
|Average measured depth (m)||6,416||5,979||7||6,121||6,037||1|
|Average horizontal length (m)||3,098||2,785||11||2,890||2,785||4|
|Average drilling days per well||31||25||24||29||28||4|
|Average drill cost per metre ($)(2)||487||502||(3||)||506||551||(8||)|
|Average well cost ($ millions)(2)||3.1||3.0||3||3.1||3.3||(6||)|
|Average tonnes pumped per metre||2.0||2.1||(5||)||1.9||2.0||(5||)|
|Average cost per tonne ($)(2)||646||917||(30||)||797||1,058||(25||)|
|Average cost per lateral metre ($)(2)||1,269||1,884||(33||)||1,543||2,080||(26||)|
|Average well cost ($ millions)(2)||3.4||5.4||(37||)||3.9||5.8||(33||)|
|Total D&C cost per well ($ millions)(2)(3)||6.5||8.4||(23||)||7.0||9.1||(23||)|
|Wells brought on production||23||15||53||49||57||(14||)|
|(1)||The metrics include all horizontal Montney wells that are tied in for production. Excluded from the metrics are vertical wells re-drilled, abandoned wells, water disposal wells, as well as any delineated and expiring wells not tied in for production. Drilling counts are based on rig release date and on production counts are based on the first production date after the wells are tied-in to permanent facilities.|
|(2)||Information provided is based on field estimates and is subject to change.|
|(3)||The number of horizontal wells rig-released do not correspond to the number of wells completed in the table above. Accordingly, the total average D&C costs per well may differ from the actual D&C costs for any individual well.|
OPERATIONS AND RESOURCE DEVELOPMENT
Seven Generations resumed field activity in early July 2020 and concluded the quarter with the successful planned turnaround of the Karr plant and upgrade of the Karr condensate stabilizer. The project was completed on-time and on-budget with a smooth post-turnaround start-up that led to average October production in excess of 185 Mboe/d. Importantly, efforts to mitigate the volume impact were successful, although there was a temporary condensate pricing and per unit cost impact.
During a three-week period in September, more than 400 contractors and staff were on site at peak times to complete the maintenance and upgrade work. Work teams adhered to strict small-cohorts, physical distancing measures and rigorous logistics plans to minimize health risks which ensured the project was completed safely during the COVID-19 pandemic. Coincident with the turnaround, the company also invested approximately $20 million to upgrade and enhance the reliability of the stabilizer’s boiler system which is expected to drive improvements to average condensate price realizations, while reducing operating costs and improving safety.
Drilling and completion costs in the quarter averaged $6.5 million per well. The company has continued to achieve record reductions in costs without sacrificing well productivity via a combination of improved drilling performance, advanced completion designs and execution efficiencies, and vendor collaboration. Notable structural cost improvements since the fall of 2019 include continued efficiency improvements to on-the-ground operational logistics, using limited entry plug-and-perf completion design with wider stage spacing, increased perforation clusters and optimized sand and water intensity.
Two additional lower Montney wells were also brought on stream in the Nest 3 region during the quarter. Early stage rates are encouraging relative to other wells in Nest 3, with IP60 sales rates of approximately 2.075 Mboe/d (685 bbl/d condensate, 480 bbl/d other NGLs, 5.5 MMcf/d natural gas) and 1.8 Mboe/d (573 bbl/d condensate, 425 bbl/d other NGLs, 4.8 MMcf/d of natural gas), respectively. Continued lower Montney success underscores 7G’s inventory along with half-cycle economics via the use of existing infrastructure.
2020 OUTLOOK AND 2021 BUDGET
Following the successful turnaround and continued strong execution, the company has increased the lower-end of its full-year 2020 production guidance to now average 180-185 Mboe/d, compared to the prior guidance of 175-185 Mboe/d.
Seven Generations has also released its 2021 budget, with total capital investments expected to total $650 million and production to average 180-185 Mboe/d. 2021 investments are expected to maintain a flat year-over-year production profile that is predicated on maximizing the company’s free cash flow generating capacity. Building on the durable cost efficiencies captured in 2020, the company anticipates ongoing improvements to its cost structure in 2021. The 2021 budget assumes similar well costs on a per metre and per tonne basis to those achieved in late 2020. Due to marginally longer average well lengths in the 2021 program, the company anticipates per well drill and complete costs to average $6.9 million, a 5% improvement relative to 2020 budget assumptions.
Free cash flow generated in the future will initially be prioritized for net debt reduction. The company has reduced its target leverage metric, net debt to adjusted EBITDA to 1.5x from the previous 2.0x target.
The 2021 capital program requires fewer wells brought on-stream than 2020 to maintain production given the company’s flattening decline profile. The company forecasts carrying an in-process inventory of 10-15 additional wells at year-end 2021 that create the option to respond to improved commodity prices in the year or to further reduce 2022 sustaining capital requirements in a “lower for longer” energy price environment.
With the continued moderation of decline rates, improvement in cost structure and expected optimization of natural gas revenues net of transportation costs in late 2022, Seven Generations expects to expand its free cash flow profile independent of commodity prices. 7G believes that returning capital to shareholders is an important component of total shareholder returns and will continue to evaluate the optimal allocation of free cash flow over time.
|2021 Budget(1)||2020 Budget(1)|
|Total Capital Investment||$650 million||$650 million|
|Average Production(2)||180 – 185 Mboe/d||180 – 185 Mboe/d|
|Development Wells Drilled (#)||65 – 70||50 – 60|
|Development Wells On-Stream (#)||50 – 60||65 – 70|
|Percent Natural Gas(2)||42 – 44%||42 – 44%|
|Percent Condensate(2)||32 – 36%||32 – 36%|
|Percent Other NGLs(2)||22 – 24%||22 – 24%|
|Royalty Rate(3)||5 – 7%||4 – 6%|
|Operating Expenses ($/boe)||$4.50 – $4.75||$4.50 – $4.75|
|Transportation ($/boe)||$7.50 – $7.75||$7.50 – $8.25|
|G&A ($/boe)||$0.80 – $0.90||$0.85 – $0.95|
|Interest ($/boe)||$1.80 – $2.00||$1.80 – $2.00|
|(1)||See “Forward-Looking Information Advisory” in the Reader Advisory in this news release.|
|(2)||See “Note Regarding Product Types” in the Reader Advisory in this news release.|
|(3)||2021 royalty guidance based on US$40 WTI and US$3.00 Henry Hub pricing.|
Seven Generations continues to execute its consistent hedging program that is designed to manage commodity price risk, support returns on invested capital, and ensure a minimum level of cash flow despite fluctuating commodity prices. Details of the company’s liquids and natural gas hedges at the end of the third quarter are shown below:
|WTI Hedges – bbl/d(1)||49,500||17,000||5,750|
|Floor Price – US$/bbl||$45.22||$45.70||$43.32|
|Natural Gas Hedges – MMbtu/d(2)||192,793||226,250||145,000|
|Floor Price – US$/MMbtu||$2.58||$2.55||$2.52|
|(1)||Combined USD and CAD WTI instruments. 7G also has the following sold puts in place within its hedging portfolio: 4,000 bbl/d for Q4 at US$40 and 1,750 bbl/d for 2021 at US$40.|
|(2)||Combined Henry Hub, Chicago Citygate and AECO fixed price instruments.|
|(3)||Complete details of 7G’s hedging program including FX hedges are available in the company’s Q3 November 2020 corporate presentation and MD&A.|
Seven Generations continues to advance its symbiotic ESG-driven market diversification strategy with the announcement of a new responsible natural gas supply agreement with Vermont Gas Systems, Inc. (VGS). VGS is an integrated energy services company providing clean, affordable and reliable thermal energy services to more than 53,000 customers in northwest Vermont. 7G continues to pursue additional arrangements with other counterparties interested in securing responsibly produced, low-carbon intensity natural gas, supported by its Equitable Origin EO100™ certification. The company’s commitment to delivering responsibly developed natural gas to consumer markets is an evolution of its market access strategy that is enabled by its diverse, continent-wide natural gas transportation portfolio. The premium received will be directed toward the 7G Sustainability Fund, a fund created to further reduce 7G’s environmental footprint and broaden Indigenous partnerships.
7G has also entered into an Alberta-based natural gas supply arrangement that sees the company receive a REC in addition to standard index based AECO pricing for a portion of its natural gas sales. As a result of this transaction, 7G expects a net zero 2020 Scope 2 emission profile.
7G management will hold a conference call to discuss its third quarter results and address investor questions today, November 9, 2020, at 9 a.m. MDT (11 a.m. EDT).
Participant Dial-In Numbers
|Dial in – toll-free:||1-888-664-6392|
|Dial in – toll:||416-764-8659|
|Replay dial in toll-free:||1-888-390-0541|
|Replay dial in toll:||416-764-8677|
|Conference ID:||023519 #|
|Available until:||November 16, 2020|
Seven Generations is a low supply-cost energy producer dedicated to stakeholder service, responsible development and generating strong returns from its liquids-rich Kakwa River Project in northwest Alberta. 7G’s corporate office is in Calgary, its operations headquarters is in Grande Prairie and its shares trade on the TSX under the symbol VII. Further information is available on the company’s website: www.7genergy.com.