TORONTO – International Petroleum Corporation (IPC or the Corporation) (TSX, Nasdaq Stockholm: IPCO) today released its financial and operating results and related management’s discussion and analysis (MD&A) for the three and six months ended June 30, 2021. IPC also released its Sustainability Report 2020, which details the Corporation’s environmental, social and governance (ESG) performance.
Q2 2021 Business and Financial Highlights
- Average net production of approximately 44,600 barrels of oil equivalent (boe) per day (boepd) for the second quarter of 2021 is above the high end of the 2021 Capital Markets Day (CMD) guidance range for the period (42% heavy crude oil, 20% light and medium crude oil and 38% natural gas)(1).
- Full year 2021 average net production forecast revised upwards to above 44,000 boepd(1).
- Operating costs(2) per boe of USD 15.6 for the second quarter of 2021, in line with CMD guidance. Full year guidance revised to USD 15.5 per boe from USD 14.6 per boe.
- Capital and decommissioning expenditures of MUSD 21 for the first six months of 2021, in line with CMD guidance. Full year guidance has been increased to MUSD 73 from MUSD 37 following the addition of drilling projects in Malaysia and Canada in the second half of 2021.
- Exceptionally strong free cash flow (FCF)(2) generation of MUSD 50 for the second quarter of 2021. FCF(2) generation of MUSD 99 for the first six months of 2021 represents close to 13% of IPC’s market capitalization as at July 30, 2021.
- Increased working interest in the Bertam field, Malaysia from 75% to 100% from April 10, 2021.
- Production commenced at the new Pad D’ at Onion Lake Thermal, Canada ahead of schedule and within budget.
- Proved plus probable (2P) reserves as at December 31, 2020 of 272 million boe (MMboe), with a reserves life index (RLI) of 18 years(1).
- Contingent resources (best estimate, unrisked) as at December 31, 2020 of 1,102 MMboe(1).
- Forecast cumulative FCF(2) for 2021 to 2025 of approximately MUSD 600 to MUSD 1,200 (Brent USD 55 to 75 per barrel), generating estimated average annual free cash flow yield over the five year period of between 16% and 32%(3).
- Operating cash flow (OCF)(2) and FCF(2) generation for the second quarter of 2021 amounted to MUSD 67 and MUSD 50 respectively, above the high end of the CMD guidance.
- Full year OCF(2) guidance is revised upwards to between USD 235 million to USD 290 million (actual realized prices for the first half of 2021 and Brent USD 55 to 75 per barrel for the second half of 2021) from USD 165 million to USD 220 million (Brent USD 55 to 65 per barrel).
- Full year FCF(2) guidance is revised upwards to between USD 135 million to USD 195 million (actual realized prices for the first half of 2021 and Brent USD 55 to 75 per barrel for the second half of 2021) from USD 100 million to USD 155 million (Brent USD 55 to 65 per barrel).
- Net debt(2) of MUSD 241 as at June 30, 2021, down from MUSD 286 at the end of the first quarter of 2021.
- Net debt(2) to 12 month rolling EBITDA(2) ratio as at June 30, 2021 was below 1.2 times.
- Canadian reserve-based lending facility (RBL) amended and extended until the end of May 2023.
- Net result of MUSD 22 for the second quarter of 2021.
|Three months ended June 30||Six months ended June 30|
|Gross profit / (loss)||34,286||(16,537)||72,216||(28,973)|
|Operating cash flow||66,959||14,742||134,680||36,223|
|Free cash flow||50,366||717||99,317||(41,995)|
|(1)||See “Supplemental Information regarding Product Types” below and the Corporation’s annual information form for the year ended December 31, 2020 (AIF), available on the SEDAR website (www.sedar.com) and IPC’s website (www.international-petroleum.com).|
|(2)||See “Non-IFRS Measures” below.|
|(3)||Free cash flow yield based on IPC market capitalization at July 30, 2021 (41.4 SEK/share, 8.6 SEK/USD, 750 MUSD). Assumptions described below in “Forward-Looking Statements”.|
Mike Nicholson, IPC’s Chief Executive Officer, commented,
“Market conditions for oil and gas producers have continued to improve during the first half of 2021. Second quarter 2021 average Brent oil price was USD 69 per barrel, in excess of the first quarter 2021 price that averaged just above USD 60 per barrel.
Proactive supply management by the OPEC+ group, led by Saudi Arabia, is rebalancing the market. The International Energy Agency (“IEA“) is forecasting a net supply deficit during the second half of 2021 and excess oil inventory levels are reported to have drawn back down below pre-pandemic levels.
The pace of recovery in oil demand is accelerating as we see the easing of restrictions on mobility following the continued roll-out of Covid-19 vaccination programs to the wider population. With demand still not expected to fully recover to pre-Covid-19 levels until next year, and new variants on the rise, continued proactive supply management on the part of OPEC+ members remains crucial. It is encouraging to see the OPEC+ cooperation agreement extended until the end of 2022.
In Canada, second quarter 2021 Western Canadian Select (“WCS“) crude price differential averaged below USD 12 per barrel and forward markets into 2022 and 2023 are pricing the WCS differential at around USD 13 per barrel. Clearly the positive construction progress on both Enbridge’s Line 3 replacement as well as the TransMountain pipeline expansion project is providing a much more constructive outlook for Canadian oil market egress relative to the tightness we have witnessed over the past five years. IPC has positioned itself well to benefit from this situation.
Gas markets have also been much stronger driven by a combination of increasing demand, lower supply and warmer than average temperatures diverting gas supply away from injecting into storage which could lead to further tightness during winter if cold temperatures prevail.
Given the very strong start to the year, IPC is well placed to deliver results above our high case free cash flow guidance and as a result, we plan to add some additional capital expenditure activities that are expected to enable us to grow production as we move into 2022. Details are set out below in our revised guidance.
In addition, IPC remains opportunistic in our approach with respect to further Mergers and Acquisitions (“M&A“) activity and we have witnessed an uptick in activity levels that we anticipate will continue in the months ahead.
Second Quarter 2021 Highlights
During the second quarter of 2021, our assets delivered average net production of 44,600 boepd. This sits above the top end of our guidance range for the second quarter in succession and was largely driven by the very high uptime performance across all our assets as well as increasing our working interest in the Bertam field from 75% to 100% in April 2021. The decision was taken to defer the Bertam turnaround to the third quarter 2021 in order to optimize the planned maintenance activities. Production would have remained above high end guidance had we adjusted for the original second quarter turnaround timing. First half 2021 production averaged 44,200 boepd.
As a result of the robust production performance in the first half, we are revising upwards our full year guidance to above 44,000 boepd which represents a 1,000 boepd increase above our previous high case guidance. With Pad D’ production ramping up at Onion Lake Thermal during the second half of 2021, we expect IPC to exit 2021 with production in excess of 45,000 boepd, some 2,000 boepd higher than our previous guidance.
Our operating costs per boe for the second quarter of 2021 was USD 15.6, in line with guidance. Full year operating costs per boe are expected to increase from USD 14.6 per boe to USD 15.5 per boe to take account of higher energy costs (gas and electricity) and the restart of some higher cost production in Canada.
Operating cash flow generation for the second quarter of 2021 amounted to USD 67 million, stronger than our February 2021 Capital Markets Day (“CMD“) high case (Brent USD 65 per barrel) forecast as a result of stronger than forecast production, tighter Canadian crude price differentials and stronger realized Canadian gas prices. This takes our first half operating cash flow generation to USD 135 million or more than 60% of our full year CMD high case.
Full year operating cash flow guidance is now revised upwards to between USD 235 million to USD 290 million (actual realized prices for the first half of 2021 and Brent USD 55 to 75 per barrel for the second half of 2021) from USD 165 million to USD 220 million (Brent USD 55 to 65 per barrel).
Capital and decommissioning expenditures during the first half of 2021 of MUSD 21 was in line with forecast, representing just below 60% of our originally guided full year expenditure program of USD 37 million.
Following the improved oil and gas prices in 2021, we now believe it is prudent to expand the 2021 program to position IPC to capture some additional high return, quick payback opportunities that are forecast to add production growth as we move into 2022.
As a result, we are increasing our full year 2021 capital expenditure budget by USD 36 million to USD 73 million. In Malaysia, we now plan to drill the A15 sidetrack well in the Bertam field during the fourth quarter 2021. We have also elected to take advantage of having a rig on location to upgrade the size of three Electrical Submersible Pumps (“ESPs“) on existing producing Bertam field wells to be able to operate at higher liquid rates as well as to execute other well maintenance activities. In Canada, we plan to drill five infill wells at Onion Lake Thermal as well as to perform optimization work at the Suffield Oil property. Undertaking this activity in the fourth quarter of 2021 is expected to add more than 2,500 boepd of production potential in 2022 which will assist in achieving our forecast five year average production level of 45,000 boepd.
Free cash flow generation was exceptionally strong at USD 50 million during the second quarter 2021 and just below USD 100 million for the first half 2021. This represents close to 13% of IPC’s current market capitalization.
Full year 2021 free cash flow guidance is now revised upwards to between USD 135 million to USD 195 million (actual realized prices for the first half of 2021 and Brent USD 55 to 75 per barrel for the second half of 2021) from USD 100 million to USD 155 million (Brent USD 55 to 65 per barrel). The increased capital program is more than fully funded from excess free cash flow generation. This revised guidance translates into a full year free cash flow yield of between 18 to 26%.
Over the 2021 to 2025 period, we retain our longer term guidance of generating between USD 600 and 900 million of free cash flow with average Brent prices between USD 55 to 65 per barrel. In a more bullish world, with Brent at USD 75 per barrel, our five year cumulative free cash flow would increase to approximately USD 1,200 million. At this level, the entire enterprise value of IPC would be liquidated in less than five years.
Net debt was reduced during the second quarter of 2021 by MUSD 45 to MUSD 241. Net debt to EBITDA drops to below 1.2 times from 3 times at the year-end 2020 (trailing 12 months) or to below 1.0 times on an annualized basis. We have continued to delever through the first half of 2021 and the momentum should continue into next year with the second half of 2021 increased capital program providing additional production growth as we enter 2022.
Environmental, Social and Governance (“ESG“) Performance
Health, Safety & Environmental performance remains a priority for all operational assets. Our objective is to reduce risk and eliminate hazards to prevent the occurrence of accidents, ill health and environmental damage, as these are essential to the success of our operations. During the second quarter of 2021, IPC recorded no material safety or environmental incidents. In response to the Covid-19 pandemic, we remain focused on protecting the health and safety of our employees, contractors and other stakeholders, while also working to ensure business continuity. In the second quarter of 2021, IPC continued the health protocols implemented throughout the organization.
Responsible operatorship and ensuring that we adhere to the highest principles of business conduct have been an integral part of how we do business since the creation of IPC in 2017. An important part of our sustainability journey involves the measurement and transparent reporting of a broad range of ESG metrics. Alongside the publication of our second quarter 2021 financial report, we are very pleased that IPC is today presenting to our stakeholders our second Sustainability Report.
The Sustainability Report 2020 details the Corporation’s ESG performance. The Sustainability Report 2020 advances the Corporation’s non-financial sustainability disclosures and provides stakeholders with relevant operational and sustainability context in which IPC operates, as well as the Corporation’s management approach and performance with respect to these areas. The report is available on IPC’s website at www.international-petroleum.com.
Highlights of IPC’s sustainability performance for 2020 include:
- Zero severe incidents
- Lost time incident rate of 0.6 in 2020 vs 1.8 in 2019
- Proactive COVID-19 health and safety management
- On track with our commitment to reducing net GHG emissions intensity by 50% by the end of 2025
- 35,000 tonnes of CO2e credits generated through emission reduction initiatives
- Doubled carbon offsets compared to 2019 with 100,000 tonnes of CO2e
- Workforce drawn 99% from local hiring and composed of 29% women
- Meaningful support and engagement with the Onion Lake Cree Nation (OLCN) community and MUSD 12.7 contracted with First Nations businesses
- Support to local communities’ mental health programs, including by partnering with the United Way in Canada
- Participation in community projects in Malaysia, including youth internships and coral reef preservation
We encourage everyone to read the IPC’s second Sustainability Report and see first-hand the good work that is being done within our company.”
International Petroleum Corp. (IPC) is an international oil and gas exploration and production company with a high quality portfolio of assets located in Canada, Malaysia and France, providing a solid foundation for organic and inorganic growth. IPC is a member of the Lundin Group of Companies. IPC is incorporated in Canada and IPC’s shares are listed on the Toronto Stock Exchange (TSX) and the Nasdaq Stockholm exchange under the symbol “IPCO”.