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, 2022 which are available at www.sedar.com and on our website at www.cardinalenergy.ca.
FINANCIAL AND OPERATING HIGHLIGHTS FROM THE SECOND QUARTER OF 2022
- Strong drilling results coupled with lower than forecasted base decline rates increased second quarter production by 8% over the first quarter of 2022 to a Cardinal record of 22,280 boe/d;
- Higher production and strong commodity prices increased petroleum and natural gas revenue for the second quarter of 2022 by 31% over the first quarter of 2022;
- Adjusted funds flow(1) increased to a Cardinal record of $128.3 million ($0.82/diluted share), a 48% increase over the previous corporate record in the first quarter of 2022;
- Second quarter free cash flow(1) increased to $103.3 million which enabled the Company to significantly reduce net debt(1), resume the monthly dividend and increase shareholder returns through our normal course issuer bid (“NCIB”) and trust share purchases;
- Net debt (1) decreased by $85.2 million to $62.0 million, a 58% decrease over the balance at March 31, 2022. In 2022, Cardinal has reduced our net debt by $116.2 million or 65%;
- Second quarter netback(1) increased to $66.51/boe and the adjusted funds flow per boe(1) was $63.31/boe;
|(1)||See non-GAAP and other financial measures|
The following table summarizes our second quarter financial and operating highlights:
|($000’s except shares, per share and operating amounts)||Three months ended June 30||Six months ended June 30|
|2022||2021||% Chg||2022||2021||% Chg|
|Petroleum and natural gas revenue||228,917||99,106||131||403,255||184,653||118|
|Cash flow from operating activities||120,210||22,463||435||170,253||35,738||376|
|Adjusted funds flow(1)||128,337||25,300||407||214,888||41,449||418|
|per share – basic||$||0.84||$||0.18||367||$||1.42||$||0.30||373|
|per share – diluted||$||0.82||$||0.16||413||$||1.38||$||0.30||360|
|Earnings / (Loss)||98,586||9,095||984||155,826||(16,866||)||n/m|
|per share – basic||$||0.64||$||0.06||967||$||1.03||$||(0.14||)||n/m|
|per share – diluted||$||0.63||$||0.06||950||$||1.00||$||(0.14||)||n/m|
|Development capital expenditures(1)||25,018||10,028||149||59,965||15,935||276|
|Other capital expenditures(1)||520||277||88||1,369||571||140|
|Property acquisitions, net||–||8||(100||)||–||3,334||(100||)|
|Total capital expenditures||25,538||10,313||148||61,334||19,840||209|
|Common shares, net of treasury shares (000s)||159,143||144,172||10||159,143||144,172||10|
|Adjusted working capital (surplus)/deficiency(1)||(4,994||)||10,662||(147||)|
|Net bank debt(1)||61,962||188,901||(67||)|
|Net debt to H1 annualized adjusted fund flow ratio(1)||0.1||2.5||(96||)|
|Average daily production|
|Light oil (bbl/d)||8,252||7,129||16||7,917||7,086||12|
|Medium/heavy oil (bbl/d)||10,515||7,638||38||10,209||7,688||33|
|Natural gas (mcf/d)||15,511||13,173||18||14,704||13,765||7|
|Petroleum and natural gas revenue||112.91||60.68||86||103.90||56.16||85|
|Net operating expenses(1)||(22.69||)||(21.56||)||5||(23.49||)||(21.47||)||9|
|Realized loss on commodity contracts||–||(8.40||)||(100||)||–||(8.37||)||(100||)|
|Interest and other||(0.95||)||(2.07||)||(54||)||(1.03||)||(2.15||)||(52||)|
|Adjusted funds flow(1)||63.31||15.49||309||55.37||12.61||339|
|(1)||See non-GAAP and other financial measures|
|n/m||Not meaningful or not calculable|
SECOND QUARTER OVERVIEW
In the second quarter of 2022, global oil prices continued to rise with the West Texas Intermediate (“WTI”) benchmark oil price averaging over US$108/bbl. In addition, Western Canadian Select (“WCS”) and Edmonton Light (“MSW”) benchmark differentials narrowed in comparison to the first quarter of 2022. Cardinal remained unhedged on all commodities during the second quarter and was able to fully take advantage of the increased prices. Cardinal’s successful first half of 2022 drilling program led to an 8% increase in production over the first quarter of 2022 with production averaging 22,280 boe/d. Net operating expenses decreased quarter over quarter despite inflationary pressures impacting the industry. The higher commodity prices combined with increased production elevated the Company’s adjusted funds flow by 48% over Cardinal’s previous record in the first quarter of 2022 to a new corporate record of $128.3 million or $0.82 per diluted share.
Increased adjusted funds flow combined with our disciplined capital program enhanced our free cash flow during the quarter to $103.3 million, more than doubling our first quarter free cash flow of $51.6 million. The significant free cash flow allowed Cardinal to accelerate our net debt reduction strategy reducing our net debt by $85.2 million in the second quarter of 2022. The Company has reduced our net debt by $116.2 million in 2022 to $62.0 million at June 30. Significantly lower debt levels have reduced bank fees and decreased our second quarter 2022 interest charges per boe by 54% as compared to the same period in 2021.
Cardinal achieved our phase one net debt target of $100 million in May and accelerated our shareholder returns by resuming our corporate dividend at $0.05 per common share in June and implementing an NCIB. Since the implementation of the NCIB, the Company has bought back 3,000,000 shares for cancellation at an average cost of $7.09 per share. During the second quarter, the Company also purchased through its independent trust 1.7 million shares to be used for the potential settlement of restricted and performance awards.
The Company’s low decline crude oil focus has increased our second quarter 2022 netback per boe to $66.51/boe, up 135% over the same period in 2021, while the adjusted funds flow per boe has increased to a record $63.31/boe.
The Company has an estimated $1.4 billion of high quality tax pools at June 30, 2022 to be applied against future income for tax purposes.
During the second quarter, the Company spent a total of $25.0 million on development capital expenditures which included the drilling of seven (6.3 net) wells and completion of five (4.7 net) wells. Two (1.6 net) wells were completed in July. In addition, Cardinal spent $8.1 million to construct new facilities and upgrade existing infrastructure across our asset base and continued with the enhanced oil recovery program (“EOR”) with CO2 injection at Midale, Saskatchewan. The Company also continued with its well reactivation program spending $3.1 million on recompletions and workovers throughout its operating areas.
In the second quarter, continued strong operational results confirm the quality of the Company’s existing asset base and development drilling inventory. Production in the quarter averaged 22,280 boe/d, which is approximately 1,900 boe/d above our internal budget forecast. As in the first quarter, base decline continued to be lower than forecasted and was complemented with better than forecasted production from our 2021-2022 drill program.
Cardinal has the lowest corporate base decline rate in our peer group at less than 10% annually. Successful waterflood and miscible CO2 flood management, along with ongoing optimization of wells and infrastructure within our legacy assets are the foundation of this low base decline. Cardinal will continue to focus on prudent management of its long life assets throughout the organization.
Building on our first quarter drilling success, Cardinal’s second quarter drilling program continued to exhibit positive results as follows:
- Two (2.0 net) single-leg Ellerslie horizontal wells in the Tide Lake/Bantry areas which tested at rates exceeding budget forecast, however are currently shut in awaiting infrastructure expansion expected to be completed in the third quarter.
- Two (2.0 net) horizontal Glauconitic channel wells in the Tide Lake/Bantry area, one of which came on stream in May and continues to produce at approximately 300 bbls/d of oil, again exceeding our projections. The second of these is shut in pending the same infrastructure project referenced above.
- Three (2.3 net) horizontal wells were drilled at Midale, Saskatchewan, consisting of two new producers and one new water/CO2 injection well. This injection well is to commence operations within a week, while the two producers came on stream in July at initial combined net oil rates of approximately 300 bbl/d, well above expectations.
At Tide Lake in Southern Alberta, based upon the continued success of our Ellerslie multilateral development, Cardinal increased our prospective land position in the second quarter and is in the process of expanding the capacity of our infrastructure, as the size and productivity of the Ellerslie development continues to expand beyond our initial expectations.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (“ESG”)
Cardinal’s strong corporate emissions performance has continued in 2022 with ongoing CO2 sequestration in Saskatchewan and implementation of various emissions reduction projects across Alberta. Through our world class Carbon Capture and Sequestration (“CCS”) EOR operation at Midale, the Company sequestered approximately 157,000 tonnes of CO2 equivalent during the first six months of 2022. This amount of carbon sequestration far exceeds the emissions directly related to the Company’s operations. To date, the Midale CCS EOR project has sequestered over five million tonnes of CO2 and has reduced oil production decline rates from this project 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.
Since 2020, Cardinal has continued to actively participate in various government programs focused on site closure, including abandonments, decommissioning and reclamation. To date Cardinal has spent approximately 90% of the nearly $30 million in allocated funding. In addition, Cardinal’s 2022 asset retirement obligation (“ARO”) budget has been increased to $19 million, four times the required regulatory spend requirements, demonstrating Cardinal’s commitment to reducing our environmental footprint.
INCREASE TO CAPITAL BUDGET
The Board of Directors has approved a $30 million increase to Cardinal’s 2022 capital budget. Cardinal has decided to increase its development capital budget this year to take advantage of opportunities and to account for inflationary pressures on our existing capital budget.
The increased capital budget will be used as follows:
- $6.0 million to account for inflationary cost increases to our existing capital program.
- $13.0 million to construct a new pipeline and related facility infrastructure to transport and process our oil and natural gas from the recent drilling success with our Ellerslie oil wells in the Tide Lake area of Southern Alberta. Production in the area is currently curtailed due to lack of pipeline capacity in the area. We anticipate this project will reduce area operating costs, provide the ability to produce shut in volumes and allow Cardinal to further develop the area efficiently.
- $10.0 million to fund a five well Ellerslie drilling program in Tide Lake. Cardinal was able to acquire an additional 11.25 sections of land which we believe are highly prospective to additional Ellerslie oil wells. A condition of acquiring the lands was that Cardinal will drill five wells prior to year end 2022. We anticipate that all of these wells, if successful will commence production through our new facilities prior to year end.
- $1.0 million to participate in one (0.75 net) non-operated well with a third party in a Clearwater development opportunity.
As outlined in January of 2022, we have embarked on a plan to substantially de-risk Cardinal’s business and directly reward our shareholders through debt reduction and direct payments to shareholders with dividends. We have now paid our first re-instated dividend payment of $0.05/common share on July 15th and reduced our net debt to $62.0 million as at June 30th. On June 27, 2022 we announced the implementation of an NCIB as part of our shareholder return strategy.
As of July 28th, Cardinal has purchased for cancellation 3,000,000 common shares at an average cost of $7.09 per common share, 2% of our outstanding shares.
In addition, Cardinal acquires common shares for potential settlement of employee share-based compensation through open market share purchases with an independent trust. In the second quarter of 2022, $14.0 million of share purchases through the independent trust were completed. Cardinal currently has over 2.5 million common shares held in the trust for the potential settlement of future share-based compensation. The advantage to this program for Cardinal’s shareholders is that we currently do not issue any shares out of treasury for share-based compensation reducing the dilutive impact. We don’t anticipate making any further purchases this year under this program.
There has been a tremendous amount of oil price volatility in the past few months and the Company’s goal is to balance a long-term sustainable base dividend with opportunities to improve our business and provide shareholder returns with dividend increases and additional common share purchases under our NCIB. The Company will continue to reduce our external risk factors with a strategy of being debt free by the end of 2022.
We anticipate that our net debt will decrease to under $50 million in the third quarter at which time we outlined that we would revisit our overall shareholder return strategy with an increase to the dividend rate. With the implementation of the NCIB we expect to balance dividend increases with opportunities to utilize the NCIB.