This two-year plan sets the stage for Crew to increase the pace of development for our world-class Montney resource, capturing value from stronger commodities futures pricing through prudent hedging, while we optimize production and infrastructure utilization, enhance margins, increase AFF and ultimately, improve leverage metrics. Our strategy to better calibrate the Company has been structured to generate meaningful free AFF1, which is estimated to range between $35 and $65 million in 2022 based on current assumptions, as outlined in the table below titled ‘Key Budget Assumptions‘.
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1 Non-IFRS Measure. See “Advisories – Non-IFRS Measures”. |
CAPITAL PROGRAM
2021
Through 2021, Crew plans to invest between $120 to $145 million, allocated to drilling 19 wells and completing between 14 to 21 wells in the Greater Septimus area of northeast British Columbia (“NEBC”). Four of the planned wells are lease preserving wells, which will not be completed and hence will contribute to production through 2022. This investment is expected to result in average annual production of 26,000 to 28,000 boe per day, and achieve an exit rate of over 30,000 boe per day, which is defined as average production through the month of December 2021. Seven wells on the 9-5 pad are expected to be brought on production in late December 2020, and Crew will enter 2021 with an additional six drilled and uncompleted wells in inventory.
20221
During 2022, Crew is currently planning to invest $70 to $95 million, targeting the drilling of nine wells and completion of between nine and 16 wells at Greater Septimus. This investment, if undertaken following the planned 2021 budget, would target average annual production of 31,000 to 33,000 boe per day with an exit rate of over 33,000 boe per day which would represent a 160% increase in production from our most recently released quarter.
OVERVIEW
Crew’s two-year plan is designed to take advantage of an active hedging program for natural gas, the prices of which the market has not seen since 2014. A strong hedge book, combined with competitive service costs and technological advancements that have significantly improved efficiencies, offer a unique opportunity to increase production and improve margins, AFF and debt metrics, which are expected to markedly improve Crew’s long-term sustainability. Our plan to calibrate production with infrastructure and transportation capacity is expected to drive the following positive attributes:
Calibrating Transportation Commitments with Processing Capacity
Crew is planning to reduce firm natural gas transportation commitments over the next two years from approximately 250 million cubic feet (“mmcf”) per day in 2020 to approximately 210 mmcf per day in 2021 and ultimately drive commitments down to approximately 165 mmcf per day in 2022. Crew will retain the right to use additional interruptible transportation service on three major Canadian export pipelines adjacent to our Montney asset base. As a result of these active reductions, Crew’s transportation costs per unit are expected to be reduced by approximately 30% through this period. Crew’s current available processing capacity is 180 mmcf per day. In 2021, we forecast processing requirements to range between 90 and 165 mmcf per day and 120 and 180 mmcf per day in 2022, greatly improving alignment between production and processing capacity, while affording the opportunity for additional growth in the future.
Reducing Expenses
Through production increases and reduced transportation commitments, Crew expects to reduce per unit costs, including operating, transportation, general and administrative and interest expenses in aggregate by over 25% from 2020 to 2022. As a result, the Company’s per boe expenses are expected to decline from a range of $13 to $14 in 2020 to between $11 and $12 in 2021 and further decline to between $9.50 and $10.50 in 2022.
Robust Natural Gas Hedging
Average forward natural gas prices for 2021 and 2022 have been higher than they have been since 2014. Crew acted quickly and took the opportunity to lock in approximately 45% of our forecast natural gas production for 2021 at an average price of $2.48 per Gigajoule (“GJ”) (or $3.08 per thousand cubic feet (“mcf”) calculated using Crew’s heat content factor) and approximately 36% of targeted natural gas production for 2022 at an average price of $2.46 per GJ (or $3.05 per mcf using Crew’s heat content factor). This program has enabled the Company to underpin a material portion of AFF for both years, in addition to securing attractive payouts2 on capital investments targeting an estimated 11 to 14 months.
Free Adjusted Funds Flow
The two-year plan is designed to materially increase AFF by increasing production, reducing per unit expenses and increasing margins with the objective of improving leverage metrics. In order to execute on our calibration initiatives, Crew expects to outspend AFF in 2021 by $30 to $45 million, which will be funded in part by the net $23 million of cash proceeds received in Q4/20 from the previously disclosed strategic infrastructure transactions and available liquidity on our bank line. The funding landscape changes dramatically in 2022 as we plan to underspend AFF and generate between $35 and $65 million of forecasted free AFF2, while materially increasing our production base and sustainability. Additionally, we have an option to convert a further 11.4% ownership interest in our Septimus and West Septimus facilities for $37.5 million of gross proceeds starting in 2021.
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1 Crew’s plans for 2022 remain preliminary in nature and do not reflect a Board approved capital expenditures budget. |
2 Non-IFRS Measure. See “Advisories – Non-IFRS Measures”. |
Improving Leverage Metrics
At year-end 2020, Crew’s debt metrics are expected to be approximately 5.5 to 6.0 times net debt2 to trailing last-twelve-months (“LTM”) EBITDA1. With increased production, a robust hedging program and lower per unit expenses, net debt to LTM EBITDA at the end of 2021 is expected to be 3.0 to 3.5 times, further improving at the end of 2022 to a targeted 2.0 to 2.5 times, based on the two-year plan contemplated and the commodity prices outlined below. This would represent a potential reduction in leverage metrics of over 60% at the midpoint in two years. Based on forward commodity prices, Crew has modeled that keeping production in the 33,000 boe per day range would require annual maintenance capital investment of approximately $100 million, generating free AFF1 which would further reduce targeted debt to EBITDA below 2.0 times.
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1 Non-IFRS Measure. See “Advisories – Non-IFRS Measures”. |
Key Budget Assumptions |
2021 |
2022 |
Capital Expenditures ($MM) |
120-145 |
70-95 |
Annual Average Production (boe/d) |
26,000 – 28,000 |
31,000 – 33,000 |
AFF ($MM) |
85 – 105 |
120 – 150 |
Average Hedge Volume (GJ) |
70,500 |
62,200 |
Average Hedged Price (per GJ | per mcf1) |
$2.48 | $3.08 |
$2.46 | $3.05 |
Oil price (WTI)($US per bbl) |
$45.20 |
$44.60 |
Natural gas price (AECO 5A) ($C per mcf) |
$2.60 |
$2.50 |
Natural gas price (NYMEX) ($US per mmbtu) |
$2.80 |
$2.70 |
Natural gas price (Crew est. wellhead) ($C per mcf) |
$3.00 |
$2.90 |
WCS price ($C per bbl) |
$42.00 |
$40.00 |
Foreign exchange ($US/$CAD) |
$0.77 |
$0.77 |
Royalties |
5% |
5% |
Operating costs ($ per boe) |
$4.75-$5.25 |
$4.25-$4.75 |
Transportation ($ per boe) |
$3.00-$3.50 |
$2.25-$2.75 |
G&A ($ per boe) |
$0.90-$1.10 |
$0.80-$1.00 |
Interest rate – bank debt |
6.0% |
6.0% |
Interest rate – high yield |
6.5% |
6.5% |
1 Reflects a pricing premium given Crew’s higher heat content gas |
Budget Sensitivities
2021 SENSITIVITIES |
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AFF ($MM) |
AFF/Share |
||
100 bbl per day Condensate1 |
$1.9 |
$ 0.01 |
|
C$1.00 per bbl WTI |
$1.4 |
$ 0.01 |
|
US $0.10 NYMEX (per mmbtu) |
$3.3 |
$ 0.02 |
|
1 mmcf per day natural gas |
$1.0 |
$ 0.01 |
|
$0.10 AECO 5A (per GJ) |
$2.1 |
$ 0.01 |
|
$0.01 FX CAD/US |
$1.8 |
$ 0.01 |
|
2022 SENSITIVITIES |
|||
AFF ($MM) |
AFF/Share |
||
100 bbl per day Condensate1 |
$1.8 |
$ 0.01 |
|
C$1.00 per bbl WTI |
$2.0 |
$ 0.01 |
|
US $0.10 NYMEX (per mmbtu) |
$4.6 |
$ 0.03 |
|
1 mmcf per day natural gas |
$1.0 |
$ 0.01 |
|
$0.10 AECO 5A (per GJ) |
$3.2 |
$ 0.02 |
|
$0.01 FX CAD/US |
$2.7 |
$ 0.02 |
(1) |
Condensate is defined as a mixture of pentanes and heavier hydrocarbons recovered as a liquid at the inlet of a gas processing plant before the gas is processed and pentanes and heavier hydrocarbons obtained from the processing of raw natural gas. |
Summary
We are excited about the opportunities presented by this innovative, two-year asset development plan. By continuing to successfully execute through 2021 and 2022, we expect to expand margins through efficient calibration of the organization’s production to approximate our infrastructure and transportation commitments. In the interests of building a sustainable business for all stakeholders, Crew remains committed to identifying opportunities to enhance our financial flexibility by reducing leverage metrics to more conservative levels through increased AFF and strategic dispositions.
We have also prepared a refreshed corporate presentation to highlight the fundamentals of our updated strategic plan and outline Crew’s compelling investment thesis for shareholders and investors, which is available on our website here.