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 and six month periods ended June 30, 2021 which are available at www.sedar.com and on our website at www.cardinalenergy.ca.
Q2 2021 HIGHLIGHTS
- Adjusted funds flow of $25.3 million ($0.16 per diluted share) was 57% higher than the previous quarter and was impacted by a realized commodity price risk management loss of $13.7 million;
- Maintained capital discipline while executing a $10.3 million capital program which included drilling two Midale injection wells for our Enhanced Oil Recovery (“EOR”) CO2 injection program;
- Second quarter production of 17,949 boe/d was 5% higher than the same period in 2020;
- Free cash flow reduced net debt by $12.1 million in the second quarter of 2021. In the first six months of 2021, net debt has been reduced by $40.5 million or 16% of the net debt level at December 31, 2020;
- Subsequent to the end of the second quarter, Cardinal closed the acquisition of Venturion Oil Ltd. (“Venturion”) adding approximately 2,400 boe/d (~83% oil) focused in central Alberta for $47.5 million;
|($ 000’s except shares, per share and operating amounts)||Three months ended June 30||Six months ended June 30|
|2021||2020||% Chg||2021||2020||% Chg|
|Petroleum and natural gas revenue||99,106||31,711||213||184,653||95,184||94|
|Cash flow from operating activities||22,463||(10,276||)||n/m (3)||35,738||11,765||204|
|Adjusted funds flow (1)||25,300||2,065||n/m (3)||41,449||17,013||144|
|per share basic||$||0.18||$||0.02||n/m (3)||$||0.30||$||0.15||100|
|per share diluted||$||0.16||$||0.02||n/m (3)||$||0.30||$||0.15||100|
|Earnings (loss)||9,095||(27,546||)||n/m (3)||(16,866||)||(478,490||)||(96||)|
|per share basic and diluted||$||0.06||$||(0.24||)||(125||)||$||(0.14||)||$||(4.22||)||(97||)|
|Development capital expenditures (1)||10,028||776||n/m (3)||15,935||22,558||(29||)|
|Other capital expenditures (1)||277||280||(1||)||571||639||(11||)|
|Acquisitions, net||8||–||n/m (3)||3,334||–||n/m (3)|
|Total capital expenditures||10,313||1,056||n/m (3)||19,840||23,197||(14||)|
|Common shares, net of treasury shares (000s)||144,172||113,382||27|
|Adjusted working capital deficiency (1)||10,662||5,012||113|
|Net bank debt (1)||188,901||222,218||(15||)|
|Secured notes||17,429||–||n/m (3)|
|Net debt (1)||206,330||266,669||(23||)|
|Net debt to H1 annualized adjusted funds flow ratio (1)||2.5||7.8||(68||)|
|Total payout ratio (1)||38||%||153||%||(75||)|
|Average daily production (2)|
|Light oil (bbl/d)||7,129||7,117||–||7,086||7,454||(5||)|
|Medium/heavy oil (bbl/d)||7,638||7,134||7||7,688||8,217||(6||)|
|Natural gas (mcf/d)||13,173||12,873||2||13,765||13,620||1|
|Netback ($/boe) (1)|
|Petroleum and natural gas revenue||60.68||20.30||199||56.16||27.90||101|
|Net operating expenses (1)||21.56||14.81||46||21.47||17.94||20|
|Realized hedging loss (gain)||8.40||(2.12||)||n/m(3)||8.37||(3.38||)||n/m(3)|
|Netback after risk management (1)||19.88||4.78||n/m(3)||16.84||8.86||90|
|Interest and other||2.07||1.58||31||2.15||1.59||35|
|Adjusted funds flow netback (1)||15.49||1.33||n/m(3)||12.61||4.98||153|
(1) See non-GAAP measures
(2) See Supplemental Information regarding Product Types
(3) Not meaningful – ie. absolute greater than 300% or not calculable
SECOND QUARTER OVERVIEW
The second quarter of 2021 continued to build on the momentum experienced in the prior quarter with increased oil prices. West Texas Intermediate (“WTI”) oil prices averaged over US$66/bbl, a 14% increase over the first quarter average price.
During the second quarter, the Company spent $10.0 million of development capital on the drilling of two injection wells at Midale, Saskatchewan as we continue to develop our EOR CO2 injection program, upgrading our facility and pipeline infrastructure and well recompletion and workover activity. During the second half of 2021, drilling plans include the drilling of six (5.0 net) wells throughout our asset base. The second half drilling program is underway with the second of two (2.0 net) wells currently being drilled in central Alberta and the first of two (1.0 net) wells currently being drilled at Elmworth, Alberta. The remaining two wells will be drilled on our southern Alberta Bantry property, where drilling is expected to begin in early September.
During the second quarter, the Company generated $25.3 million of adjusted funds flow which, after capital and asset retirement spending, allowed Cardinal to decrease our net debt by $12.1 million. The Company continues to execute its debt reduction strategy and has decreased our net debt by over $40 million in the first six months of 2021. In the past twelve months, Cardinal has reduced its net debt by over $60 million, or 23%, to $206.3 million as of June 30, 2021. At current pricing levels, the Company forecasts our net debt to Q4 2021 annualized adjusted funds flow ratio to be below 1.0x.
Second quarter 2021 net operating expenses per boe were comparable with the prior quarter coming in at $21.56/boe. Costs are higher than historical levels as Alberta power prices have significantly increased in the first half of 2021. In the first six months of 2021, Alberta power prices have averaged over $100/MWh as compared to an average price of $46/MWh in 2020. This equated to a second quarter 2021 increase of approximately $2.90/boe in our total Alberta operating costs when comparing to the same period in 2020. The Company has a number of initiatives that it continues to evaluate to reduce our exposure to volatile power prices. Cardinal second quarter net operating expenses were also impacted by its increased workover and reactivation activity in order to bring production back on that was deferred in 2020.
Increased oil prices boosted revenue in the second quarter of 2021; however, the effect on Cardinal’s adjusted funds flow was reduced due to realized hedging losses. During the last half of 2020, Cardinal hedged approximately 39% of its second quarter 2021 oil production (6,000 bbl/d) to protect a portion of our 2021 capital program. In the second half of 2021, after taking into account the acquired Venturion production and associated existing hedging contracts, approximately 17% (3,000 bbl/d) of the Company’s forecasted oil production is hedged. With the current backwardation of the oil price curve, Cardinal will be selective in our hedging activity. At this time, the Company remains unhedged for 2022.
On July 15, Cardinal closed the acquisition of Venturion which added approximately 2,400 boe/d of production (~83% oil) predominantly focused adjacent to our Wainwright operating area with the issuance of 6.3 million Cardinal common shares and $27.5 million in cash. The cash portion was financed with the issuance of $12.5 million of subordinated second lien notes and $15 million from the Company’s existing bank facility. All incremental bank borrowings from this acquisition are expected to be repaid with Cardinal’s free cash flow by the fourth quarter of 2021. Cardinal will continue to look for synergistic acquisitions that fit within our operating areas.
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 89,000 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 50,000 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 135 wells, numerous pipeline segments and has initiated work on inactive facilities.
Moving into the second half of 2021, the Company has confidence in its continued debt reduction strategy given the current macro environment and our conservative capital program. As our second half commodity hedging exposure decreases throughout the remainder of 2021 and into 2022, under forecast pricing, we expect to generate additional free cash flow enabling the Company to continue to reduce our debt. Our goal remains to enhance shareholder value through net debt repayment, increased focus on carbon reduction and ESG initiatives and when appropriate, the resumption of dividends and share buybacks.
We look forward to reporting our third quarter results in November which will incorporate the Venturion operations.