Third Quarter 2020 Highlights
- Adjusted funds flow from operations1 was $1.1 million in Q3 2020 (51% higher than Q2 2020 and in-line with Q3 2019) and $2.6 million for the first nine months of 2020 (28% higher than the same period in 2019).
- Production of 13,215 Mcfe/d2 in Q3 2020 was 12% higher than Q2 2020, attributable to Southern’s Mechanicsburg assets resuming production in mid-June 2020, while volumes of 12,602 Mcfe/d3 for the first nine months of the year were 6% higher than the same period of 2019. Increases reflect the impact of a strategic acquisition in 2019 offset by minimal maintenance capital invested in 2020 and natural declines.
- At September 30, 2020, bank debt and net debt1 were reduced by $0.6 million (US$0.5 million) and $0.9 million, respectively, compared to the previous quarter, as Southern exited Q3 2020 with net debt1 of $30.7 million, which is evidence of the Company’s continued focus on capital preservation and strategic utilization of excess adjusted funds flow from operations1.
- Production and operating costs of $1.20/Mcfe in Q3 2020 represented a 4% decline over the previous quarter and a 7% decline over the same period in 2019, due to streamlining business and operational processes and the optimization of field equipment and well setups.
- General and administrative (“G&A“) costs relative to the respective periods in 2019 declined 18% to $861 thousand in Q3 2020 and 21% in the first nine months of 2020, as Southern recorded lower payroll, consulting and financial advisor fees and benefited from Government of Canada subsidies.
- Southern recorded positive adjusted working capital1 of $1.2 million as at September 30, 2020, excluding royalty payables and bank debt and recorded minimal capital expenditures in Q3 2020, with $78 thousand invested in facilities, equipment and pipelines.
- Realized oil and natural gas prices for Q3 2020 averaged $50.37/bbl and $2.49/Mcf (Q3 2019 – $76.42/bbl and $2.76/Mcf), respectively, benefiting from pricing at US sales hubs which are currently trading at a premium to Canadian benchmark prices.
- Improved quarter-over-quarter operating netbacks by 15%, which averaged $1.64/Mcfe in Q3 2020, compared to $1.42/Mcfe in Q2 2020 and consistent with Q3 2019, as the year-over-year change reflected lower commodity prices offset by lower royalty expenses, higher realized gains on derivatives and reduced operating costs.
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1 See “Non-IFRS Measures” under “Reader Advisory” below”. |
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2 Q3/20 volumes weighted 92% to natural gas, 6.9% to oil and 1.2% to NGLs. |
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3 Nine months ended Sept. 30 2020 volumes weighted 93% to natural gas, 6.6% to oil and 0.1% to NGLs. |
“The Company continued to focus on identifying opportunities to enhance operational performance while exercising disciplined cost control and prudently deploying capital during the period. Southern benefited from stronger commodity prices in Q3 2020 relative to the previous quarter, and is encouraged by the improved outlook for natural gas prices stemming from significant gas supply reductions associated with curtailed drilling activity at the same time as seeing record LNG exports from the U.S.,” said Ian Atkinson, Southern’s President & CEO. “With our low cost, low decline rate on our stable asset base, we can preserve capital and focus on generating excess adjusted funds flow1 from operations to continue strategically responding to an ever-changing environment.”
Financial & Operating Highlights
Three months ended Sept 30, |
Nine months ended Sept 30, |
|||||||
(000s, except $ per share) |
2020 |
2019 |
2020 |
2019 |
||||
Petroleum and natural gas sales |
$ |
3,537 |
$ |
5,145 |
$ |
9,412 |
$ |
13,604 |
Adjusted funds flow from operations (2) |
1,136 |
1,143 |
2,564 |
2,000 |
||||
Per share (1) |
0.01 |
0.01 |
0.01 |
0.01 |
||||
Net loss from continuing operations |
(2,958) |
(1,081) |
(15,045) |
(3,109) |
||||
Net loss per share from continuing operations |
||||||||
Per share (1) |
(0.01) |
(0.00) |
(0.07) |
(0.01) |
||||
Total net loss |
(2,958) |
(1,081) |
(15,045) |
(3,086) |
||||
Total net loss per share |
||||||||
Per share (1) |
(0.01) |
(0.00) |
(0.07) |
(0.01) |
||||
Capital expenditures |
78) |
595 |
119 |
22,754 |
||||
Weighted average shares outstanding |
||||||||
Basic |
220,770 |
223,770 |
220,770 |
212,321 |
||||
Fully diluted |
220,770 |
223,770 |
220,770 |
212,321 |
||||
As at period end |
||||||||
Common shares outstanding |
||||||||
Basic |
220,770 |
223,770 |
220,770 |
223,770 |
||||
Fully diluted |
220,770 |
223,770 |
220,770 |
223,770 |
||||
Total assets |
36,290 |
59,602 |
36,290 |
59,602 |
||||
Non-current liabilities |
12,583 |
12,493 |
12,583 |
12,493 |
||||
Net debt (2) |
$ |
30,719 |
$ |
32,130 |
$ |
30,719 |
$ |
32,130 |
Notes: |
|
(1) |
Basic and fully diluted weighted average shares outstanding. |
(2) |
See “Reader Advisories – Non-IFRS Measures”. |
Outlook
To further support the Company’s near and longer-term sustainability, Southern has entered into fixed price hedges on production of 6,000 Mcf/d of natural gas at an average price of US$2.55/Mcf through December 31, 2020. These hedged volumes equate to approximately 45% of the Company’s current production. Southern also entered into a buy-back swap on April 27, 2020, for 75 Bbl/d of oil production. This transaction, in combination with the Southern’s two existing oil swaps, provides the Company with realized proceeds of US$68 thousand per month for the balance of 2020. Approximately 45% of Southern’s budgeted calendar 2021 natural gas production is also hedged at an average price of US$2.45/Mcf.
Natural gas pricing had been challenged during the first nine months of 2020, primarily due to strong supply growth from the associated natural gas in the Permian combined with a global pandemic and weaker global LNG demand as a result of Covid-19 related demand destruction following warm winters in Europe and Asia. However, this has changed dramatically due to the demand destruction of oil caused by COVID-19 and the large reduction in rig counts resulting from lower oil prices. Southern believes the decrease in new oil and natural gas wells being drilled should be beneficial to natural gas prices over the medium to long term. This has been evident as the calendar 2021 strip pricing for Henry Hub is currently trading at an average of US$2.82/MMBtu. The U.S. natural gas market dynamic is rapidly changing with significant production declines of more than 10 Bcf/d of U.S gas production to date year-on-year at the same time as new record U.S. LNG exports of more than 10 Bcf/d.
As a result of its very low corporate decline rate, Southern is able to expend minimal capital to maintain production volumes, and has set a conservative capital program of $0.1 million for the remainder of 2020, designed to protect the balance sheet and enhance overall sustainability. The capital program will be funded through excess adjusted funds flow from operations4 and management will continue to actively monitor the operating and pricing environment to determine whether incremental financial or operating adjustments are required.
Based on the Company’s long-term strategy, management intends to continue building a socially-responsible and environmentally-conscious company seeking to develop and consolidate prolific reservoirs situated outside of more expensive shale basins. With the forward curve for natural gas showing significant structural improvement, Southern believes there may be opportunities to execute accretive asset acquisitions at attractive valuations to ultimately enhance its asset base, grow production volumes, and drive cash flow generation.
Southern thanks all of its shareholders, employees and other stakeholders for their ongoing support through these challenging market conditions.
Subsequent Event
Subsequent to September 30, 2020, Southern entered into a first amendment and second amendment (the “Credit Facility Amendments”) to the Amended and Restated Credit Agreement dated July 20, 2020 between Southern and its lenders (the “A&R Credit Agreement”). The Credit Facility Amendments resulted in: (a) the redetermination of the Company’s borrowing base limit to US$13.3 million (US$8.5 million under the Company’s conforming facility and US$4.8 million under the Company’s non-conforming facility) to account for debt repayments made during the year;(b) a waiver for non compliance of the leverage ratio financial covenant under the A&R Credit Agreement as at September 30, 2020; and (c) the extension of the maturity date under the non-conforming facility to February 1, 2021 (the same as the conforming facility).
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1 |
See “Non-IFRS Measures” under “Reader Advisory” below”. |
Annual General Meeting of Shareholders
Southern will be holding its Annual General and Special Meeting of shareholders of the Company (the “Meeting“) on December 8, 2020 at 10:00 a.m. (Calgary time). The Meeting will be held at its offices located at Suite 2400, 333 – 7th Avenue S.W., Calgary, AB, T2P 2Z1. In accordance with current public health guidelines, non-registered shareholders will not be allowed to physically attend the Meeting, and Southern strongly discourages registered shareholders from physically attending the Meeting. In order to ensure as many common shares as possible are represented at the Meeting, Southern strongly encourages registered shareholders to complete and deliver their form of proxy. Shareholders may also use the following information to listen to the Meeting via webcast (however, voting will not be permitted via webcast):
Webcast: Via Zoom using the following link to register for the Meeting,
https://us02web.zoom.us/webinar/register/WN_YOmcpE-ATu2eca7vuK24Tg
About Southern Energy Corp.
Southern Energy Corp. is an oil and natural gas exploration and production company. Southern has a primary focus on acquiring and developing conventional light oil and natural gas resources in the southeast Gulf States of Mississippi and Alabama. Our management team has a long and successful history working together and have created significant shareholder value through accretive acquisitions, optimization of existing oil and natural gas fields and the utilization of horizontal drilling and multi-staged fracture completion techniques.