CALGARY, Alberta – Cardinal Energy Ltd. (“Cardinal” or the “Company“) (TSX: CJ) is pleased to announce its operating and financial results for the third quarter ended September 30, 2021 and its 2022 budget.
Selected financial and operating information is shown below and should be read in conjunction with Cardinal’s unaudited condensed interim consolidated financial statements and related Management’s Discussion and Analysis for the three and nine months ended September 30, 2021 which are available at www.sedar.com and on our website at www.cardinalenergy.ca.
FINANCIAL HIGHLIGHTS FROM THE THIRD QUARTER OF 2021
- Increased adjusted funds flow(1) by 184% to $37.6 million ($0.25/basic share) as compared to the third quarter of 2020;
- Third quarter 2021 free cash flow(1) increased to $21.0 million or 142% over the third quarter of 2020 leading to a total payout ratio(1) of 44%;
- Reduced net bank debt(1) to $187.5 million despite incurring approximately $15.3 million of additional net bank debt on the acquisition of Venturion Oil Limited (“Venturion”);
- Continued with our disciplined capital program spending $17.5 million of capital expenditures which included the drilling of five (4.0 net) wells;
- Closed the corporate acquisition of Venturion adding approximately 2,400 boe/d of low decline production (83% oil);
(1) See non-GAAP measures
The following table summarizes our third quarter 2021 operating and financial highlights:
|Three months ended Sept 30,||Nine months ended Sept 30,|
|($000’s except shares, per share and operating amounts)||2021||2020||% Chg||2021||2020||% Chg|
|Petroleum and natural gas revenue||120,007||61,982||94||304,660||157,166||94|
|Cash flow from operating activities||37,410||18,950||97||73,148||30,715||138|
|Adjusted funds flow (1)||37,563||13,206||184||79,012||30,219||161|
|per basic share||$ 0.25||$0.12||108||$ 0.56||$ 0.27||107|
|per diluted share||$ 0.23||$0.12||92||$ 0.52||$ 0.27||93|
|Earnings / (Loss)||262,326||(4,659||)||n/m||245,460||(483,149||)||n/m|
|per basic share||$ 1.76||$ (0.04||)||n/m||$ 1.74||$ (4.26||)||n/m|
|per diluted share||$ 1.64||$ (0.04||)||n/m||$ 1.63||$ (4.26||)||n/m|
|Development capital expenditures (1)||16,532||4,510||267||32,467||27,068||20|
|Other capital expenditures(1)||301||232||30||872||871||–|
|Property acquisitions, net||694||–||n/m||4,028||–||n/m|
|Total capital expenditures||17,527||4,742||270||37,367||27,239||34|
|Common shares, net of treasury shares (000s)||150,332||113,496||32|
|Adjusted working capital deficiency||17,238||10,898||58|
|Net bank debt (1)||187,467||214,916||(13||)|
|Net debt (1)||217,737||259,367||(16||)|
|Net debt to adjusted funds flow ratio (1)||2.4||4.4||(45||)|
|Total payout ratio (1)||41||%||101||%||(59||)|
|Average daily production|
|Light oil (bbl/d)||7,485||6,861||9||7,220||7,255||–|
|Medium/heavy oil (bbl/d)||8,871||7,721||15||8,087||8,051||–|
|Natural gas (mcf/d)||15,101||13,448||12||14,215||13,562||5|
|Netback ($/boe) (1)|
|Petroleum and natural gas revenue||66.99||38.16||76||59.98||31.21||92|
|Net operating expenses(1)||23.53||16.82||40||22.20||17.58||26|
|Realized gain (loss) on commodity contracts||(5.79||)||(3.63||)||60||(7.46||)||1.12||n/m|
|Netback after risk management contracts (1)||24.71||11.95||107||19.61||9.86||99|
|Interest and other||1.65||2.18||(24||)||1.97||1.78||11|
|Adjusted funds flow netback (1)||20.96||8.13||158||15.55||6.00||159|
(1) See non-GAAP measures
THIRD QUARTER OVERVIEW
Commodity prices continued to increase through the third quarter of 2021 providing Cardinal with significantly increased adjusted funds flow of $37.6 million, a 48% increase over the second quarter of 2021. Increased adjusted funds flow combined with our disciplined capital program enabled Cardinal to generate free cash flow of $21 million allowing us to continue with our net bank debt reduction strategy.
During the third quarter, the Company closed the Venturion acquisition adding approximately 2,400 boe/d (83% oil) of production. Cardinal’s $17.5 million capital program included the drilling and completion of five (4.0 net) wells across our asset base in Alberta with the majority of the production from these wells being added early in the fourth quarter. Current production based on field estimates is approximately 21,000 boe/d. The Company also continued with its Enhanced Oil Recovery (“EOR”) CO2 injection program at Midale, Saskatchewan where the two new injection wells we drilled in the second quarter are injecting up to 9 mmcf/d of incremental CO2 (~500 tonnes/day).
Subsequent to the end of the third quarter, Cardinal closed the disposition of approximately 200 boe/d of non-core gas weighted production and associated lands and liabilities for gross proceeds of $10.5 million. With a portion of these disposition proceeds, the Company plans to accelerate the drilling of four wells initially planned for 2022 in order to secure access to drilling services and replace the sold production. Full year net capital expenditures are expected to decrease to $46 million.
During the third quarter of 2021, our free cash flow was directed towards partially funding the Venturion acquisition and repayment of bank debt. All of the incremental net bank debt of approximately $15.3 million incurred in connection with the acquisition was fully repaid from free cash flow within the third quarter.
Third quarter 2021 net operating expenses per boe were 9% higher than the prior quarter at $23.53/boe. Costs are higher than historical levels as Alberta power prices have significantly increased in the first nine months of 2021. Alberta power prices have averaged over $100/MWh in the third quarter as compared to an average price of $44/MWh in the third quarter of 2020 which has impacted the Company’s Alberta operating costs by approximately $2.50/boe in the third quarter. The Company is also experiencing inflationary pressures on well services as a shortage in labor and supply chain disruptions are negatively impacting operating costs. Additional workover and reactivation activity has also continued to increase in the third quarter in order to bring production back online which was deferred in 2020. During the third quarter of 2021, unplanned third party facility outages also negatively impacted production; however, all but one of the third party facilities are now back online.
From a risk management perspective, for the remainder of 2021, including the hedges acquired through the Venturion acquisition, Cardinal’s hedged average volume decreases significantly from 23% in the third quarter to approximately 11% of its forecasted oil production or 2,250 bbl/d. Approximately 60% of the Company’s natural gas is hedged at $2.64/gj for the fourth quarter of 2021. The Company remains unhedged moving into 2022.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)
Cardinal continues to be a net negative emissions (scope 1) company. Through our world class Carbon Capture and Sequestration (“CCS”) EOR operation at Midale, the Company has sequestered approximately 152,000 tonnes of CO2 year to date and is forecasting to sequester over 233,000 tonnes in 2021. Two additional injection wells were drilled and brought online at Midale, Saskatchewan over the summer. Over their first year of operation, these injectors are forecasted to sequester over 100,000 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 continues to be 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 decommissioning of several inactive facilities.
- Increased average annual production by 5% to 7% to approximately 20,000 to 20,500 boe/d;
- Generate adjusted funds flow of $200 to $210 million assuming a WTI price of US$70/bbl;
- Approximately $90 to $100 million or approximately 45% to 50% of adjusted funds flow will be directed to debt repayment;
- Exiting 2022 with an annual net debt to adjusted funds flow ratio below 0.3x;
- Contemplates a dividend reinstatement once the Company’s net bank debt is below $100 million, currently estimated for mid-2022;
- Executing a $70 to $80 million capital program which includes drilling and completion of 18 wells;
- Investment of $8 to $10 million for asset retirement obligations (“ARO”) complementing government subsidy programs and continuing with our ESG focused activity.
Cardinal’s 2022 capital budget takes advantage of our low corporate decline rate and focuses on optimizing our long life asset base. The capital budget includes the drilling and completion of 18 wells across our asset base and reactivating and optimizing down production. The Company will continue with our CO2 injection program at Midale and by drilling two CO2 injectors in 2022 increase the amount of carbon we capture and continue to proactively upgrade our pipeline and facility infrastructure. As part of this budget, funds will also be directed to increasing liquids recovery from our gas production as well as to continue our focus on ESG initiatives that provide economic returns including the reduction in direct emissions.
|Average production (boe/d)||20,000 to 20,500|
|Adjusted funds flow ($ mm)||$200 to $210|
|Total capital expenditures ($ mm)||$70 – $80|
|Operating costs ($/boe)||$22.00 – $22.75|
|Transportation costs ($/boe)||$0.55 – $0.65|
|G&A ($/boe)||$2.00 – $2.25|
|US$ WTI ($/bbl)||$70.00|
|US/CAD Exchange Rate||0.80|
|US$ WTI-WCS Basis Differential ($/bbl)||($12.50)|
|US$ WTI-MSW Basis Differential ($/bbl)||($4.30)|
Cardinal was created around a strategy to build a low decline, sustainable business that enabled its shareholders to receive returns in the form of dividends.
When Cardinal went public in 2014, WTI oil was at $98/bbl and we set our initial dividend rate at $0.65/share per year. We were able to keep increasing our dividend to $0.84/share per year despite oil prices eventually dropping to $50/bbl. Subsequent to that, WCS oil differentials significantly widened and then the COVID-19 pandemic hit. A combination of both of these events caused the suspension of our dividend to preserve capital.
Over the past few years Cardinal has optimized its assets and operating structure and now, with the increase in oil prices, is able to revisit its dividend strategy.
As in any business, influences that are beyond our control present risk and the ability to control our outside influences is paramount to our success. We believe one of the largest risk factors that we have limited control over is the amount and term of loans that our banks are willing to provide us. We plan to pursue a strategy that reduces this risk factor and thus, go forward we plan to minimize our borrowing exposure, which, in our opinion, is the most prudent way to run our business.
At year end 2021, we are projecting to have $175 to $180 million of net debt which will be comprised of $160 to $165 million of bank debt with the remainder being term debt.
Based on our adjusted funds flow projections, we feel that a reasonable level of bank debt should be approximately $100 million in this environment. With this in mind, we have forecasted to reinstate our dividend once our corporate bank debt reaches this level, which we expect to occur mid-2022, based on a budgeted $70/bbl WTI price, which is Phase 1 of our returns to shareholder plan. The repayment of bank debt to this level will add approximately $0.50 per share to the net asset value of the Company (based on approximately 150.4 million issued and outstanding shares).
Phase 2 of our plan, once the Phase 1 bank debt target is reached, will be to allocate approximately 50% of our free cash flow less ARO expenditures to dividends and 50% to further debt repayment. Future dividends are expected to be paid monthly based on prevailing commodity prices at that time.
The next milestone the Company will target is a $50 million net debt level which will allow us to amend and increase the percentage allocated to dividends and increase our ARO and ESG initiatives.
For further information, the Company has posted an updated presentation on its corporate website www.cardinalenergy.ca.
We are excited about our recent results and forecasts as we move into 2022 and look forward to reporting our 2021 reserve, operating and financial results in the first quarter of 2022.