CALGARY, Alberta – Seven Generations Energy Ltd. (TSX: VII)
FOURTH QUARTER & FULL-YEAR 2020 HIGHLIGHTS
2020 RESERVES
OPERATIONAL AND FINANCIAL HIGHLIGHTS
| $ millions, except per share and unit of production amounts |
Three months ended December 31, |
Three months ended September 30, |
Year ended December 31, |
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| 2020 | 2019 | % Change | 2020 | % Change | 2020 | 2019 | % Change | ||||||||||
| Financial Results | |||||||||||||||||
| Funds flow ($)(1) | 274.6 | 353.2 | (22 | ) | 166.3 | 65 | 854.7 | 1,387.8 | (38 | ) | |||||||
| Per share – diluted ($) | 0.82 | 1.05 | (22 | ) | 0.50 | 64 | 2.56 | 3.98 | (36 | ) | |||||||
| Free cash flow ($)(1) | 149.1 | 120.3 | 24 | 1.0 | nm | 228.7 | 158.3 | 44 | |||||||||
| Net income (loss) ($) | (961.2 | ) | 82.6 | nm | (66.8 | ) | nm | (2,154.1 | ) | 473.8 | nm | ||||||
| Per share – diluted ($) | (2.86 | ) | 0.24 | nm | (0.20 | ) | nm | (6.46 | ) | 1.36 | nm | ||||||
| Adjusted net income (loss) ($)(1) | 57.6 | 89.7 | (36 | ) | (24.2 | ) | nm | 24.3 | 349.0 | (93 | ) | ||||||
| Per share – diluted ($) | 0.17 | 0.27 | (37 | ) | (0.07 | ) | nm | 0.07 | 1.00 | (93 | ) | ||||||
| Revenue ($)(2) | 714.0 | 669.6 | 7 | 469.6 | 52 | 2,479.0 | 2,729.4 | (9 | ) | ||||||||
| CROIC (%)(1) | 8.2 | 14.0 | (41 | ) | 9.0 | (9) | 8.2 | 14.0 | (41 | ) | |||||||
| ROCE (%)(1) | 3.0 | 9.0 | (67 | ) | 3.5 | (14) | 3.0 | 9.0 | (67 | ) | |||||||
| Sales volumes(3)(4) | |||||||||||||||||
| Condensate (mbbl/d) | 66.0 | 75.0 | (12 | ) | 57.6 | 15 | 64.2 | 74.8 | (14 | ) | |||||||
| Natural gas (MMcf/d) | 486.2 | 523.1 | (7 | ) | 434.6 | 12 | 469.4 | 503.0 | (7 | ) | |||||||
| Other NGLs (mbbl/d) | 43.1 | 45.9 | (6 | ) | 38.8 | 11 | 41.5 | 44.4 | (7 | ) | |||||||
| Total sales volumes (mboe/d) | 190.1 | 208.1 | (9 | ) | 168.9 | 13 | 183.9 | 203.0 | (9 | ) | |||||||
| Liquids (%) | 57 | 58 | (2 | ) | 57 | — | 57 | 59 | (3 | ) | |||||||
| Realized prices(4) | |||||||||||||||||
| Condensate ($/bbl) | 52.87 | 66.39 | (20 | ) | 47.40 | 12 | 46.16 | 66.76 | (31 | ) | |||||||
| Natural gas ($/Mcf) | 3.42 | 3.25 | 5 | 2.61 | 31 | 2.80 | 3.41 | (18 | ) | ||||||||
| Other NGLs ($/bbl) | 16.77 | 10.75 | 56 | 14.60 | 15 | 13.03 | 6.34 | 106 | |||||||||
| Total ($/boe) | 30.92 | 34.48 | (10 | ) | 26.24 | 18 | 26.21 | 34.44 | (24 | ) | |||||||
| Royalty expense ($/boe) | (2.23 | ) | (2.62 | ) | (15 | ) | (1.76 | ) | 27 | (1.82 | ) | (2.28 | ) | (20 | ) | ||
| Operating expenses ($/boe) | (3.52 | ) | (4.43 | ) | (21 | ) | (5.30 | ) | (34) | (4.36 | ) | (4.79 | ) | (9 | ) | ||
| Transportation, processing and other ($/boe) | (7.58 | ) | (7.01 | ) | 8 | (7.86 | ) | (4) | (7.49 | ) | (6.69 | ) | 12 | ||||
| Operating netback before the following ($/boe)(1)(4) | 17.59 | 20.42 | (14 | ) | 11.32 | 55 | 12.54 | 20.68 | (39 | ) | |||||||
| Realized hedging gains ($/boe) | 1.11 | 0.55 | 102 | 2.76 | (60) | 3.45 | 0.48 | nm | |||||||||
| Marketing income (loss) ($/boe)(1) | (0.37 | ) | 0.18 | nm | (0.64 | ) | (42) | (0.56 | ) | 0.30 | nm | ||||||
| Operating netback ($/boe)(1) | 18.33 | 21.15 | (13 | ) | 13.44 | 36 | 15.43 | 21.46 | (28 | ) | |||||||
| Funds flow ($/boe)(1) | 15.70 | 18.45 | (15 | ) | 10.70 | 47 | 12.70 | 18.73 | (32 | ) | |||||||
| Balance sheet | |||||||||||||||||
| Investments in oil and natural gas assets ($) | 125.5 | 232.9 | (46 | ) | 165.3 | (24) | 626.0 | 1,229.5 | (49 | ) | |||||||
| Available funding ($)(1) | 1,030.8 | 1,351.0 | (24 | ) | 1,113.1 | (7) | 1,030.8 | 1,351.0 | (24 | ) | |||||||
| Net debt ($)(1) | 1,940.9 | 2,099.3 | (8 | ) | 2,178.8 | (11) | 1,940.9 | 2,099.3 | (8 | ) | |||||||
| Purchase of common shares ($) | — | 50.2 | (100 | ) | — | — | 15.6 | 168.1 | (91 | ) | |||||||
| Weighted average shares outstanding – basic | 333.3 | 336.5 | (1 | ) | 333.3 | — | 333.3 | 346.8 | (4 | ) | |||||||
| Weighted average shares outstanding – diluted | 336.2 | 337.9 | (1 | ) | 334.0 | 1 | 334.3 | 348.5 | (4 | ) | |||||||
| (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 of the Company’s transportation commitment utilization and marketing activities. |
| Three months ended December 31, |
Year ended December 31, |
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| Nest Activity | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||
| Drilling(1) | ||||||||||||||
| Horizontal wells rig released | 14 | 20 | (30 | ) | 49 | 78 | (37 | ) | ||||||
| Average measured depth (m) | 6,362 | 5,782 | 10 | 6,190 | 5,966 | 4 | ||||||||
| Average horizontal length (m) | 3,159 | 2,579 | 22 | 2,967 | 2,729 | 9 | ||||||||
| Average drilling days per well | 30 | 26 | 15 | 29 | 28 | 4 | ||||||||
| Average drill cost per metre ($)(2) | 475 | 526 | (10 | ) | 497 | 545 | (9 | ) | ||||||
| Average well cost ($ millions)(2) | 3.0 | 3.1 | (3 | ) | 3.1 | 3.3 | (6 | ) | ||||||
| Completion(1) | ||||||||||||||
| Wells completed | 19 | 10 | 90 | 65 | 79 | (18 | ) | |||||||
| Average tonnes pumped per metre | 2.1 | 1.7 | 24 | 2.0 | 2.0 | — | ||||||||
| Average cost per tonne ($)(2) | 563 | 1,070 | (47 | ) | 711 | 1,073 | (34 | ) | ||||||
| Average cost per lateral metre ($)(2) | 1,156 | 1,850 | (38 | ) | 1,405 | 2,131 | (34 | ) | ||||||
| Average well cost ($ millions)(2) | 3.6 | 4.8 | (25 | ) | 3.7 | 5.7 | (35 | ) | ||||||
| Total D&C cost per well ($ millions)(2)(3) | 6.6 | 7.9 | (16 | ) | 6.8 | 9.0 | (24 | ) | ||||||
| Wells brought on production | 19 | 26 | (27 | ) | 68 | 83 | (18 | ) | ||||||
| (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’ balanced activity levels progressed through the fourth quarter of 2020 and are forecast to remain stable throughout 2021. Fourth quarter drilling costs were lower than forecast despite average lateral lengths measuring 3,159 metres, or 13% longer than the company’s standard design of 2,800 metres. At $475 per metre, fourth quarter 2020 drilling costs represent a 10% reduction to the per-metre drill costs achieved during the fourth quarter of 2019.
Completion costs in the fourth quarter averaged $563 per tonne, a 47% reduction in costs relative to the same period in 2019. Reductions in completion costs reflect the combination of limited entry techniques, enhanced water management and newly negotiated contract pricing. The company continues to evaluate potential cost optimization initiatives across its supply chain.
Operating costs of $3.52/boe for the quarter and $4.36/boe for the year were lower than updated guidance and represent a record-low for the company. Fourth quarter 2020 operating costs were lower than the third quarter due to 7G’s September 2020 turnaround expenditures and higher volume throughput. Full-year 2021 guidance of $4.50-$4.75/boe reflects the impact of planned compressor maintenance and minor pad turnarounds anticipated throughout the year.
2020 YEAR-END RESERVES
The following table summarizes 7G’s reserves, based upon reports prepared by McDaniel, as at December 31, 2019 and December 31, 2020 (the “McDaniel Reports”), using the forecast price and cost assumptions in effect at the applicable effective reserve evaluation dates.
| Year ended December 31, |
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| ($ millions) | 2020 | 2019 | ||||||||
| Reserve Category(1) | MMboe | $MM(2) | MMboe | $MM(2) | ||||||
| Gross proved developed producing reserves | 259 | $ | 2,390 | 261 | $ | 2,899 | ||||
| Gross proved (“1P”) reserves | 710 | $ | 5,057 | 842 | $ | 6,730 | ||||
| Gross proved plus probable (“2P”) reserves | 1,544 | $ | 10,501 | 1,604 | $ | 12,602 | ||||
| (1) | Refer to the Reader Advisory section at the end of this news release for additional information regarding the company’s estimated reserves and net present value of future net revenue. | |
| (2) | Estimated pre-tax net present value of discounted cash flows from reserves using a 10% discount rate. |
Changes to the company’s 1P reserves in 2020 primarily reflect a moderated pace of future development. This is due to the current energy price and market environment and the resulting delay in development activities beyond the time horizon constraints established by the Canadian Oil & Gas Evaluators Handbook. Reductions in the pre-tax net present value of reserves reflect the combination of reduced evaluator price expectations year-over-year and the deferral of activity due to the pace of development, offset by improving future development costs.
PDP FD&A costs of $9.49/boe represent the lowest cost of reserves development in the history of the company. 2020’s PDP FD&A represents a 27% improvement relative to 2019. Despite the challenges of global commodity pricing, 2020 PDP operating netback recycle ratios held stable relative to 2019 at 1.6x.
2021 OUTLOOK
Subject to the completion of the Merger Transaction described below, the company reiterates prior full-year guidance expectations, with production expected to average between 180-185 Mboe/d and capital investments expected to be approximately $650 million. Other detailed assumptions remain unchanged and are available in the company’s latest corporate presentation.
RISK MANAGEMENT
Seven Generations continues to execute its consistent hedging program that is designed to manage commodity price risk, support returns on invested capital, and ensure a minimum level of cash flow despite fluctuating commodity prices. Details of the company’s liquids and natural gas hedges at the end of the fourth quarter are shown below:
| 2021 | 2022 | 2023 | ||||||
| WTI Hedges – bbl/d | 24,000 | 6,750 | – | |||||
| Floor Price – US$/bbl | $44.20 | $42.83 | n/a | |||||
| Ceiling Price – US$/bbl | $48.03 | $44.35 | n/a | |||||
| Natural Gas Hedges – MMbtu/d(1) | 252,500 | 150,000 | 52,500 | |||||
| Floor Price – US$/MMbtu | $2.58 | $2.53 | $2.53 | |||||
| Ceiling Price – US$/bbl | $2.64 | $2.55 | $2.53 |
| (1) | Combined Henry Hub, Chicago Citygate and AECO fixed price instruments. | |
| (2) | Complete details of 7G’s hedging program including CAD/USD hedges are available in Management’s Discussion and Analysis for the years ended December 31, 2020 and 2019, and the March 2021 corporate presentation. |
ESG UPDATE
Aligned to its goal of economically reducing its emissions profile, 7G is pleased to announce its first fully electrified pad. The 13-10 pad is the first of its kind for the company, with entirely electric instrumentation, compression and pumps. The electrification of the pad is also anticipated to modestly improve the overall pad economics with electrification costs being more than offset by a reduction in consumed natural gas input costs and lower future maintenance expenses. Moving forward, the company anticipates adding additional electric-powered pads.
In keeping with its commitment to safe operations, Seven Generations also achieved a record low total recordable incident frequency (“TRIF”) during the fourth quarter, at just 0.08, with a full-year TRIF of 0.42. December was the first month in the history of the company with zero recordable injuries, and the company continues to advance initiatives targeting ongoing improvements in safe operations.
Seven Generations and Sustainitech have entered into an agreement to construct and operate a modular Controlled Environment Agriculture (“CEA”) farm on five acres of land directly adjacent to 7G’s Gold Creek Plant. 7G will hold a 20% equity stake in the project, that will be funded through the company’s 7G Sustainability Fund (“7GSF”). The CEA farm is the first of its kind co-located on an industrial site and will be powered by waste heat and electricity pulled off of 7G’s Gold Creek facility. Once operational, this project is anticipated to generate approximately 4,800 metric tonnes of carbon credits to 7G on an annual basis. Overall, this innovative project will enable approximately 15,000 metric tonnes of CO2e emissions avoidance annually, while creating employment opportunities and sustainable food production in the region. The 7GSF has been funded through 7G’s responsible natural gas supply agreements, with additional commercial agreements remaining a priority for the company.
7G was also recently included in the 2021 Bloomberg Gender-Equality Index (“GEI”) with companies from a variety of industries, including automotive, banking, consumer services, engineering and construction, and retail. The GEI brings transparency to gender-related practices and policies at publicly listed companies increasing the breadth of environmental, social and governance data available to investors. The comprehensive, transparent GEI scoring methodology allows investors to assess company performance and compare across industry peer groups. 7G was included in this year’s index for scoring at or above a global threshold established by Bloomberg to reflect a high level of disclosure and overall performance across the framework’s five pillars.
ARC RESOURCES AND SEVEN GENERATIONS STRATEGIC MONTNEY COMBINATION
On February 10, 2021, Seven Generations and ARC Resources Ltd. (“ARC”) announced a definitive agreement to combine in an all-share transaction valued at approximately $8.1 billion, inclusive of net debt (the “Merger Transaction”). Under the terms of the agreement, if the Merger Transaction is completed, Seven Generations shareholders will receive 1.108 common shares of ARC for each common share of Seven Generations. Following the close of the Merger Transaction, ARC shareholders will own approximately 49 per cent of total shares outstanding of the combined company, and Seven Generations shareholders will own approximately 51 per cent, on a fully diluted basis. The combined company will operate as ARC Resources Ltd. and remain headquartered in Calgary, Alberta.
The Merger Transaction has been unanimously approved by the Boards of Directors of Seven Generations and ARC and is structured through a plan of arrangement in respect of the securities of Seven Generations under the Canada Business Corporations Act, and is subject to the approval of at least two-thirds of the votes cast by holders of Seven Generations common shares. The issuance of ARC common shares is subject to the approval of the majority of votes cast by holders of ARC common shares. The transaction is also subject to regulatory approvals and other customary closing conditions and is expected to close in the second quarter of 2021. The press release and investor presentation for the Merger Transaction are available online at www.7genergy.com.
The announcement of the Merger Transaction created a requirement to perform an impairment review, and should the Merger Transaction be completed, ARC will be acquiring 7G’s shares. In the impairment review, the IFRS fair value hierarchy prioritizes observable market-based valuations over discounted cash flow models. The implied deal value of this equity-based exchange indicated that the net book value of the Company’s Property Plant and Equipment (PP&E) exceeded its fair market value. The recoverable value of the Kakwa River Project as at December 31, 2020 was primarily based on the value of consideration anticipated to be received by the Company, which was determined to be 110.8% of ARC’s estimated share price at the date of closing for each of Seven Generations’ outstanding common shares and dilutive share-based compensation units. The results of the impairment test indicated that the net book value of the Company’s PP&E exceeded its recoverable value and Seven Generations recognized a non-cash impairment loss of $1.413 billion.
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.
Reader Advisory
Non-GAAP Financial Measures
This news release includes certain terms or performance measures commonly used in the oil and natural gas industry that are not defined under International Financial Reporting Standards (“IFRS”), including “operating netback”, “funds flow per boe”, “funds flow per diluted share”, “marketing income per boe”, “adjusted net income”, “adjusted net income per diluted share”, “free cash flow”, “CROIC”, “ROCE”, “available funding” and “adjusted working capital.”
The data presented is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Such non-GAAP measures should be read in conjunction with the company’s consolidated financial statements for the years ended December 31, 2020 and 2019 and the accompanying notes. Readers are cautioned that the non-GAAP measures do not have any standardized meaning and should not be used to make comparisons between the company and other companies without also taking into account any differences in the way the calculations were prepared. For additional information about these measures, please see “Advisories and Guidance – Non-GAAP measures” in Management’s Discussion and Analysis dated February 17, 2021, for the years ended December 31, 2020 and 2019.
“Net debt” has been included in Note 16 – Capital Management in the company’s consolidated financial statements for the years ended December 31, 2020 and 2019 and “funds flow” has been presented in the consolidated cash flow statement. Accordingly, these performance measures are additional GAAP measures and are not considered non-GAAP measures. Readers are cautioned that these additional GAAP measures do not have any standardized meaning and should not be used to make comparisons between Seven Generations and other companies without also taking into account any differences in the methods by which the calculations are prepared. For additional information about these measures, please see “Advisories and Guidance – GAAP measures” in Management’s Discussion and Analysis dated February 17, 2021, for the years ended December 31, 2020 and 2019.