Selected financial and operating information is shown below and should be read in conjunction with Cardinal’s unaudited condensed interim financial statements and related Management’s Discussion and Analysis for the three months ended March 31, 2021 which are available at www.sedar.com and on our website at www.cardinalenergy.ca.
- Generated $16.1 million of adjusted funds flow, an 8% increase over the same period in 2020 and a 19% increase over the prior quarter. Excluding realized hedging losses, adjusted funds flow was $30 million;
- Maintained discipline while executing a $9.5 million capital program focused on asset base optimization which included a minor consolidating acquisition of light oil production which closed at the end of March;
- Demonstrated the continued resilience of our asset base with average production of 18,385 boe/d in the quarter;
- Reduced net debt by $28.4 million in the quarter or 11% from year-end 2020. Net debt has decreased by $55.4 million or 20% as compared to the first quarter of 2020;
- Subsequent to the end of the first quarter, Cardinal completed the annual renewal of our $225 million credit facility extending the maturity date to May 2023;
- Higher forecasted prices have allowed us to increase our 2021 capital budget to approximately $46 million which we expect to contribute to incremental net debt reduction of approximately $40 million over the previously released 2021 budget.
|($ 000’s except shares, per share and operating amounts)||Three months ended March 31,|
|Petroleum and natural gas revenue||85,547||63,473||35|
|Cash flow from operating activities||13,275||22,041||(40||)|
|Adjusted funds flow (1)||16,149||14,948||8|
|per share basic and diluted||$0.12||$0.13||(8||)|
|per share basic and diluted||$(0.20||)||$(3.98||)||(95||)|
|Development capital expenditures (1)||5,907||21,782||(73||)|
|Other capital expenditures (1)||294||359||(18||)|
|Total capital expenditures||9,527||22,141||(57||)|
|Common shares, net of treasury shares (000s)||144,388||113,354||27|
|Adjusted working capital deficiency (1)||12,655||35,909||(65||)|
|Net bank debt (1)||201,639||228,874||(12||)|
|Net debt (1)||218,448||273,805||(20||)|
|Net debt to Q1 annualized adjusted funds flow ratio (1)||3.4||4.6||(26||)|
|Total payout ratio (1)||37||%||169||%||(78||)|
|Average daily production (2)|
|Light oil (bbl/d)||7,042||7,792||(10||)|
|Medium/heavy oil (bbl/d)||7,739||9,301||(17||)|
|Natural gas (mcf/d)||14,364||14,368||–|
|Netback ($/boe) (1)|
|Petroleum and natural gas revenue||51.70||34.32||51|
|Net operating expenses (1)||21.39||20.58||4|
|Realized hedging loss (gain) on commodity contracts||8.34||(4.44||)||n/m|
|Netback after risk management (1)||13.83||12.31||12|
|Interest and other||2.22||1.59||40|
|Adjusted funds flow netback (1)||9.76||8.09||21|
(1) See non-GAAP measures
(2) See Supplemental Information regarding Product Types
FIRST QUARTER OVERVIEW
The first quarter of 2021 marked a significant increase in global oil prices as the world continued its recovery from the coronavirus pandemic (“COVID-19”) with vaccine distributions and gradual re-opening of economies. West Texas Intermediate (“WTI”) oil prices averaged over US$58/bbl, a 36% increase over the average in the fourth quarter of 2020. While spending a modest $5.9 million on development capital expenditures, Cardinal continued its debt reduction strategy during the first quarter of 2021 lowering net debt by 11% over year-end 2020 levels. Since March 2020, Cardinal has reduced its net debt by $55.4 million or 20% through disciplined capital spending, cost reductions and the redemption of convertible debentures.
During the first quarter of 2021, we maintained financial discipline executing an optimization focused capital program. The low decline nature of our asset base kept first quarter production consistent with the prior quarter at 18,385 boe/d. First quarter 2021 operating costs per boe increased 4% over the same period in 2020 as Alberta electricity prices increased by 42% which was partially offset by Cardinal’s 13% reduction in power consumed from the Alberta power grid. The Company’s workover and reactivation activity was also increased in the first quarter as much of this work was deferred in 2020 due to the lower oil price environment. A combination of reduced staffing and consultants combined with certain government grants reduced our first quarter 2021 general and administrative (“G&A”) costs per boe by 30% over the first quarter of 2020.
Although oil prices significantly increased in the first quarter of 2021, the effect on Cardinal’s adjusted funds flow was reduced due to realized hedging losses. In order to protect the Company’s 2021 first half capital program, during the last half of 2020, Cardinal hedged approximately 59% (9,333 bbl/d) of its first quarter budgeted oil production. Our oil hedging exposure reduces to 39% (6,000 bbl/d) in the second quarter of 2021 and in the second half of 2021, it drops significantly to approximately 13% (2,000 bbl/d) of budgeted oil production.
During the first quarter of 2021, all the outstanding convertible debentures were converted or redeemed which reduced net debt by approximately $28 million. On May 12, the Company completed the renewal of its credit facility with its syndicate of banks extending the maturity date to May 2023. We continue our focus on debt and risk reduction in 2021.
With the increase in oil prices, the Company has revisited its initial conservative 2021 budget which did not contemplate drilling any wells during 2021. The Company’s Board of Directors has approved a revised capital budget increasing from $27 million to $46 million. The revised budget contemplates drilling eight wells across our operating areas which includes two CO2 injection wells planned at Midale, Saskatchewan for our enhanced oil recovery program. It is forecasted that the updated budget will allow the Company to increase production through the year with a fourth quarter average rate increasing by approximately 10% over the initial 2021 budget. Higher oil prices and increased production are expected to generate approximately $14 million more free cash flow in the updated budget which contemplates and average price for WTI of US$60 for the remainder of 2021. The incremental free cash flow is earmarked for additional debt repayment.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)
Cardinal continues to be a net zero emissions (scope 1) company. Through our world class Carbon Capture and Sequestration (“CCS”) enhanced oil recovery (“EOR”) operation at Midale, the Company has sequestered approximately 45,000 tonnes of CO2 year to date and is forecasting to sequester over 200,000 tonnes in 2021. Two additional injectors are included in our updated capital program which, over their first year of operation, are forecasted to sequester over 40,000 tonnes of CO2 while supporting incremental oil recovery from the Midale unit. To date, the Midale CCS EOR project has sequestered approximately five million tonnes of CO2 and reduced oil production decline rates to approximately 3% to 5%.
Cardinal’s safety record is in the top tier of the industry as is our regulatory compliance approval level.
In 2021, Cardinal continues to actively participate in various government programs focused on well and pipeline abandonments and facility decommissioning. To date in 2021, Cardinal has abandoned approximately 100 wells, numerous pipeline segments and has initiated work on inactive facilities.
The first quarter of 2021 has brought a renewed confidence to the Canadian oil and gas market. Cardinal’s first quarter adjusted funds flow was somewhat muted by losses from hedges that were put in place during 2020. Our second quarter will see a significant reduction in outstanding hedges which will be further reduced in the second half of 2021.
We have made the decision to increase our capital program to $46 million which will see the Company drill two wells in each of its four operating areas. We are also preparing to drill our first Clearwater wells in early 2022.
As expected, we had our bank line renewed with our banking syndicate with no reduction to the size of our bank line. Cardinal will continue to prioritize debt repayment in 2021 with a goal of exiting the year with a net debt to fourth quarter annualized adjusted funds flow ratio of less than 1.0x.
Note Regarding Forward-Looking Statements
This press release contains forward-looking statements and forward-looking information (collectively “forward-looking information”) within the meaning of applicable securities laws relating to Cardinal’s plans and other aspects of Cardinal’s anticipated future operations, management focus, objectives, strategies, financial, operating and production results. Forward-looking information typically uses words such as “anticipate”, “believe”, “project”, “expect”, “goal”, “plan”, “intend”, “may”, “would”, “could” or “will” or similar words suggesting future outcomes, events or performance. The forward-looking statements contained in this press release speak only as of the date thereof and are expressly qualified by this cautionary statement.
Specifically, this press release contains forward-looking statements relating to: our business strategies, plans and objectives, plans to focus on debt and risk reduction, our 2021 capital programs and spending plans, our drilling plans, adjusted funds flow, free cash flow and net debt, our continuing COVID-19 response plans, the quality of our asset base and decline rates, our abandonment and reclamation program, our future ESG performance, our future financial position, plans for production growth in 2021, plans to continue to strengthen our balance sheet and to reduce liabilities and plans to operate our assets in a responsible and environmentally sensitive manner.
Forward-looking statements regarding Cardinal are based on certain key expectations and assumptions of Cardinal concerning anticipated financial performance, business prospects, strategies, regulatory developments, production curtailments, current and future commodity prices and exchange rates, applicable royalty rates, tax laws, industry conditions, availability of government subsidies and abandonment and reclamation programs, future well production rates and reserve volumes, future operating costs, the performance of existing and future wells, the success of its exploration and development activities, the sufficiency and timing of budgeted capital expenditures in carrying out planned activities, the timing and success of our cost cutting initiatives and power projects, the availability and cost of labor and services, the impact of competition, conditions in general economic and financial markets, availability of drilling and related equipment, effects of regulation by governmental agencies including curtailment, the ability to obtain financing on acceptable terms which are subject to change based on commodity prices, market conditions and drilling success and potential timing delays.
These forward-looking statements are subject to numerous risks and uncertainties, certain of which are beyond Cardinal’s control. Such risks and uncertainties include, without limitation: the impact of general economic conditions; volatility in market prices for crude oil and natural gas; industry conditions; currency fluctuations; imprecision of reserve estimates; liabilities inherent in crude oil and natural gas operations; environmental risks; incorrect assessments of the value of acquisitions and exploration and development programs; competition from other producers; the lack of availability of qualified personnel, drilling rigs or other services; changes in income tax laws or changes in royalty rates and incentive programs relating to the oil and gas industry including government subsidies and abandonment and reclamation programs; hazards such as fire, explosion, blowouts, and spills, each of which could result in substantial damage to wells, production facilities, other property and the environment or in personal injury; and ability to access sufficient capital from internal and external sources.
Management has included the forward-looking statements above and a summary of assumptions and risks related to forward-looking statements provided in this press release in order to provide readers with a more complete perspective on Cardinal’s future operations and such information may not be appropriate for other purposes. Cardinal’s actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits that Cardinal will derive there from. Readers are cautioned that the foregoing lists of factors are not exhaustive. These forward-looking statements are made as of the date of this press release and Cardinal disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.
Supplemental Information Regarding Product Types
This press release includes references to 2021 and 2020 production. The Company discloses crude oil production based on the pricing index that the oil is priced off of. The following table is intended to provide the product type composition as defined by NI 51-101.