Lucero Energy Corp. announces fourth quarter and year-end 2022 financial & operating results, highlighted by record funds flow and net income, and reports year-end 2022 reserves

Lucero had a transformative year in 2022, which commenced with the appointment of a new management team (the “New Management Team”), who brought a proven track record of value creation for shareholders along with a refreshed strategy and corporate recapitalization. The New Management Team is sharply focused on disciplined capital allocation and a balanced pace of development, while prioritizing EBITDA generation, financial flexibility and long-term sustainability.

Several operational achievements were realized through the year, including the safe and efficient execution of the Company’s 2022 capital program, which was successfully completed within the previously announced budget and guidance range. In support of continued sustainability and the responsible development of Lucero’s high-quality, North Dakota Bakken asset base, the Company took intentional measures to moderate the production decline profile, which was maintained at an average of approximately 30%. Lucero’s operational success was also demonstrated by strong capital efficiencies across the reserves base both in 2022 and over the trailing three-year average, during which the Company’s finding and development costs and recycle ratios helped drive underlying corporate profitability.

Within a favourable commodity price environment, Lucero successfully generated record funds flow in 2022, which contributed to further debt reduction and demonstrated Lucero’s ongoing commitment to profitability and capital discipline while setting the stage to capitalize on future growth opportunities. The Company’s strong financial performance through the year was aided by stronger Bakken pricing differentials due to excess local pipeline capacity arising from regional Bakken production that was muted despite strong pricing for crude oil delivered to the U.S. Gulf Coast. Lucero continues to monitor such market trends with the view to adapting operations, marketing and other elements of the business to optimally respond to changing macro-economics and other broader industry conditions.

Lucero also continued to prioritize strong Environmental, Social, and Governance (“ESG”) principles across the organization, which translated into ongoing safe operations, responsible environmental stewardship, and a focus on people, culture and the team. The Company’s ESG commitment and actions will be highlighted and reported to Stakeholders within Lucero’s inaugural Sustainability Report which is expected to be issued before the end of April 2023.

Looking ahead, the New Management Team is confident in Lucero’s long-term growth prospects and committed to delivering value for all Stakeholders.

Lucero’s achievements in the fourth quarter and year-ended December 31, 2022 include the following:

Fourth quarter:

• 11,009 Boepd average production compared to 10,904 Boepd in Q3 2022 and 10,906 Boepd in Q4 2021;
• $37.0 million of funds flow¹, compared to $41.5 million in the previous quarter and $20.0 million in Q4 2021;
• $0.06 per share of funds flow¹, consistent with Q3 2022 and 50% higher than $0.04 per share generated in the same quarter of 2021;
• $44.07 per Boe average operating netback¹ prior to hedging, compared to $52.24 per Boe in the previous quarter and $43.74 per Boe in Q4 2021;
• $16.6 million of exploration and development (“E&D”) expenditures¹, allocated to drilling six (2.7 net) wells and completing two (1.98 net) operated wells, representing a conservative payout ratio¹ of 45% on funds flow¹ of $37.0 million; and
• $77.4 million of net debt¹ at December 31, 2022, reflecting a 22% decrease from $99.2 million at September 30, 2022, and 61% lower than $196.1 million at December 31, 2021.

Full year:

• 10,874 Boepd of average production, 3% higher than 10,548 Boepd in 2021;
• $147.1 million of funds flow¹, a 127% increase over $64.7 million in 2021;
• $52.81 per Boe average operating netback prior to hedging¹, a 52% increase over $34.74 per Boe in 2021;
• $59.9 million of E&D expenditures¹, allocated to the successful drilling of five (4.95 net) operated wells and an additional 1.8 net non-operated wells, along with the completion of three (2.48 net) operated wells, enabling Lucero to exit the year with nine (4.70 net) wells that were drilled but uncompleted (“DUCs”); and
• $80.5 million of net income ($0.12 per share basic and diluted), a record for the Company, and significantly higher than the net loss of $0.8 million recorded in 2021.

Year-end Reserves:

• 30.9 MMboe of proved developed producing (“PDP”) reserves, consistent with 31.0 MMboe at year-end 2021;
• 53.9 MMboe of proved reserves (“TP”) compared to 55.6 MMboe at year-end 2021;
• 73.5 MMboe of proved plus probable (“P+P”) reserves, an increase from 72.0 MMboe at year-end 2021;
• 13.2 years P+P reserve life index;
• $16.76 per Boe PDP finding, development & acquisition costs (“FD&A”) (including future development costs or “FDC”), which drove a recycle ratio of 3.1 times (based on the Company’s 2022 operating netback prior to hedging); and
• $13.70 per Boe P+P FD&A (including FDC) resulted in a recycle ratio of 3.9 times.

Throughout the year, the Company sought to enhance the sustainability of Lucero’s business model by prudently moderating the pace of development. With average production volumes of 10,874 Boepd in 2022, the Company exited the year with fourth quarter production averaging 11,009 Boepd, setting the stage for continued execution and balanced growth in 2023. Due to this more measured production growth profile, the Company’s overall corporate production decline rate improved meaningfully, which is expected to be further reduced in 2023 to approximately 28%. Flattening this decline curve has a direct impact on sustainability by reducing the level of capital required to keep production volumes constant.

With $59.9 million of capital invested in E&D activities during 2022, Lucero drilled five (4.95 net) operated wells and an additional 1.8 net non-operated wells. In addition, the Company completed three (2.48 net) operated wells in 2022, and set the stage for continued development in 2023 by exiting the year with nine (4.70 net) DUCs, which affords Lucero operational development flexibility in the future. All of the wells the Company brought on production exhibited strong results. Lucero also invested in important infrastructure that can help drive future efficiencies and reduce greenhouse gas emissions.

The combination of steady production volumes and strong operating netbacks led to Lucero generating $147.1 million of funds flow¹ during 2022, of which $59.9 million was invested in E&D expenditures¹ resulting in an annual payout ratio¹ of 41%. The Company invested an additional $8.9 million to acquire various working interests in the Company’s operated assets which are scheduled for near-term development in 2023. The balance of the funds flow was directed to debt repayment and continued strengthening of the balance sheet. As a result, Lucero exited 2022 with net debt¹ of $77.4 million, a 61% decrease from year-end 2021, and 22% lower than the previous quarter end, providing significant financial flexibility to execute on future growth opportunities. The Company’s net debt to funds flow ratio¹ improved from 3.0x in 2021, to 0.5x in 2022.

In this press release, all references to reserves are to gross Company reserves, meaning Lucero’s working interest reserves before deductions of royalties and before consideration of Lucero’s royalty interests. The reserves were evaluated by Netherland, Sewell & Associates, Inc. (“NSAI”) in accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”) effective December 31, 2022. Lucero’s Annual Information Form for the year ended December 31, 2022 (the “AIF”) will contain Lucero’s reserves data and other oil and natural gas information as mandated by NI 51-101. Lucero expects to file the AIF on SEDAR by March 31, 2023.

The following tables are a summary of Lucero’s petroleum and natural gas reserves, as evaluated by NSAI, effective December 31, 2022. As a reporting issuer in Canada, Lucero is required to report its reserves and net present value estimates using forecast pricing and costs, as stipulated under NI 51-101. The forecast prices reflected in the net present values are based on an average of the price decks of three independent engineering firms (GLJ Ltd., Sproule Associates Limited and McDaniel & Associates Consultants Ltd.). It should not be assumed that the estimates of future net revenues presented in the tables below represent the fair market value of the reserves. There is no assurance that the forecast prices and cost assumptions will be attained and variances could be material. The recovery and reserve estimates of our crude oil, natural gas liquids and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. It is important to note that the recovery and reserves estimates provided herein are estimates only. Actual reserves may be greater or less than the estimates provided herein. Reserves information may not add due to rounding.

Reserves Summary

Net Present Value of Future Net Revenue (in Canadian dollars)

Net Present Value of Future Net Revenue (in US dollars)

Capital Expenditures and Finding, Development, and Acquisition Costs

Net Asset Value per Share as at December 31, 2022

Lucero intends to release an inaugural Sustainability Report before the end of April 2023, which will profile the Company’s commitment to ESG principles and foundations, while aligning with recognized sustainability frameworks. Management and the Board are proud to report on the Company’s excellent health, safety, governance and environmental performance through 2022, highlighted by significant reductions in Scope 1 emission and emissions intensity year over year, along with a flawless safety record. Within the report, Lucero will also articulate a roadmap outlining how the Company will continue to uphold high levels of responsibility and accountability throughout the sustainability journey. This report will be made available on the Company’s website on or before April 30, 2023.

Lucero’s 2023 capital program is budgeted at US$70 million (C$95 million) and is expected to be primarily directed to light oil development projects, with over 75% planned to be allocated to drilling, completions and tie-ins, with the remainder to infrastructure and optimization development initiatives that are designed to enhance production efficiencies and continued environmental performance.

With a strong underlying production base, Lucero anticipates that the Company’s 2023 capital program will drive annual average production of approximately 11,500 Boepd (80% weighted to light oil and natural gas liquids) with an exit production rate of approximately 12,000 Boepd (80% light oil and natural gas liquids). This annual average volume expansion represents year-over-year production growth of 9% while maintaining a corporate production decline rate of less than 30%.

Lucero has established a unique position among Canadian-listed, growth-oriented exploration and production companies. With 100% exposure to U.S. light oil-weighted assets, Lucero offers a solid growth platform of lower-risk, high-impact development opportunities in the heart of the prolific North Dakota Bakken/Three Forks play. As current and future benchmark oil prices remain high due to the supply/demand imbalance, the Company remains well positioned to realize stable production rates, high estimated recoveries, and robust operating netbacks, all of which are key contributors to generating compelling rates of return and creating shareholder value. With a corporate production decline profile forecast at less than 30% for 2023 combined with a supportive pricing environment, Lucero’s assets are expected to yield significant free funds flow.

Building on the Company’s high quality asset base, management is focused on creating value through a disciplined long-term growth strategy supported by free funds flow, creating financial flexibility which ultimately positions Lucero to capitalize on further potential growth initiatives.

The Company is proud to highlight the following key operational and financial attributes:

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 the Company’s plans, strategy, business model, focus, objectives and other aspects of Lucero’s anticipated future operations and financial, operating and drilling and development plans and results, including, expected future production, production mix, reserves, drilling inventory, net debt, funds flow, operating netbacks, decline rate and decline profile, product mix, capital expenditure program, capital efficiencies, and commodity prices. In addition, and without limiting the generality of the foregoing, this press release contains forward-looking information regarding: Lucero’s expectation to reduce corporate decline rates in 2023 to approximately 28% compared to over 30% in 2021; the Company’s intention that its ESG commitment and actions will be highlighted and reported to Stakeholders within Lucero’s inaugural Sustainability Report which is expected to be issued before the end of April 2023; Lucero’s expectation on it long-term growth prospects and its commitment to delivering profitable, sustainable value for all Stakeholders; Lucero’s 2023 capital program budgeted of US$70 million (C$95 million) which is expected to be primarily directed to light oil development projects, with over 75% planned to be allocated to drilling, completions and tie-ins, with the remainder to infrastructure and optimization development initiatives that are designed to enhance production efficiencies and continued environmental performance; Lucero’s anticipation that the Company’s 2023 capital program will drive annual average production of approximately 11,500 Boepd (80% weighted to light oil and natural gas liquids) with an exit production rate of approximately 12,000 Boepd (80% light oil and natural gas liquids) and matters set forth under “Outlook and Sustainability”; Lucero’s anticipation of delivering on 2023 capital budget and production guidance; anticipated average and exit production rates, available free funds flow, management’s view of the characteristics and quality of the opportunities available to the Company; the Company’s intention to allocate free funds flow to debt repayments; and other matters ancillary or incidental to the foregoing.

Forward-looking information typically uses words such as “anticipate”, “believe”, “project”, “target”, “guidance”, “expect”, “goal”, “plan”, “intend” or similar words suggesting future outcomes, statements that actions, events or conditions “may”, “would”, “could” or “will” be taken or occur in the future. The forward-looking information is based on certain key expectations and assumptions made by Lucero’s management, including expectations concerning prevailing commodity prices, exchange rates, interest rates, applicable royalty rates and tax laws; capital efficiencies; decline rates; future production rates and estimates of operating costs; performance of existing and future wells; reserve and resource volumes; anticipated timing and results of capital expenditures; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the timing, location and extent of future drilling operations; the state of the economy and the exploration and production business; effects of inflation and other cost escalations results of operations; performance; business prospects and opportunities; the availability and cost of financing, labor and services; the impact of increasing competition; the impact of inflation on costs and expenses; ability to market oil and natural gas successfully and Lucero’s ability to access capital. Statements relating to “reserves” are also deemed to be forward looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and that the reserves can be profitably produced in the future.

Although the Company believes that the expectations and assumptions on which such forward–looking information is based are reasonable, undue reliance should not be placed on the forward–looking information because Lucero can give no assurance that they will prove to be correct. Since forward–looking information addresses future events and conditions, by its very nature they involve inherent risks and uncertainties. The Company’s actual results, performance or achievement could differ materially from those expressed in, or implied by, the forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do so, what benefits that the Company will derive there from. Management has included the above summary of assumptions and risks related to forward-looking information provided in this press release in order to provide security holders with a more complete perspective on Lucero’s future operations and such information may not be appropriate for other purposes. Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect Lucero’s operations or financial results are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com). These forward-looking statements are made as of the date of this press release and Lucero disclaims any intent or obligation to update publicly any forward–looking information, whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.

Non-GAAP Measures 

This document includes non-GAAP measures and ratios commonly used in the oil and natural gas industry. These non-GAAP measures and ratios do not have a standardized meaning prescribed by International Financial Reporting Standards (“IFRS”, or alternatively, “GAAP”) and therefore may not be comparable with the calculation of similar measures by other companies. For additional details, descriptions and reconciliations of these and other non-GAAP measures, see the Company’s Management’s Discussion and Analysis (“MD&A”) for the three months and year ended December 31, 2022.

“Funds flow“ represents cash from operating activities prior to changes in non-cash operating working capital, including cash finance expenses, and is a measure of the Company’s ability to generate funds to service its debt and other obligations and to fund its operations, without the impact of changes in non-cash working capital, which can vary based solely on timing of settlement of accounts receivable and accounts payable. “Funds flow, excluding transaction related costs” represents funds flow prior to transaction related costs.“Funds flow netback per Boe” represents funds flow divided by production volumes for the corresponding period, and is presented including and excluding transaction related costs.“Funds flow per share” represents funds flow divided by the basic weighted average shares outstanding for the corresponding period. The reconciliation between cash provided by operating activities, as defined by IFRS, and funds flow as well as funds flow, excluding transaction related costs, is as follows:

“Adjusted EBITDA” represents cash provided by operating activities prior to changes in non-cash working capital, to measure the Company’s ability to generate funds to service debt and other obligations and to fund the Company’s operations, without the impact of changes in non-cash working capital which can vary based solely on timing of settlement of accounts receivable and accounts payable. “Adjusted EBITDA per share basic and diluted” is a non-GAAP ratio that includes adjusted EBITDA, a non-GAAP measure. The Company calculates adjusted EBITDA per share basic and diluted as adjusted EBITDA divided by weighted average basic and diluted shares outstanding, respectively. Lucero believes that adjusted EBITDA and adjusted EBITDA per share basic and diluted are key industry performance measures of the Company’s ability to generate liquidity and are common measures within the oil and gas industry. The reconciliation between cash flow from operating activities, as defined by IFRS, and adjusted EBITDA, as defined herein, is as follows:

“Net debt” represents total liabilities, excluding decommissioning obligation, deferred tax liability, lease liability and financial derivative liability, less current assets, excluding financial derivative assets. Lucero believes net debt is a key measure to assess the Company’s liquidity position at a point in time. Net debt is not a standardized measure and may not be comparable with similar measures for other entities. Net debt is also expressed as a ratio to funds flow, referred to as “net debt to funds flow ratio”, and is calculated as the net debt at the end of a period divided by the funds flow in the same period. The reconciliation between total liabilities, as defined by IFRS, and net debt, as defined herein, is as follows:

“Operating netback” represents petroleum and natural gas revenue, plus or minus any realized gain or loss on financial derivatives, less royalties, operating expenses, production taxes, and transportation expenses. “Operating netback prior to hedging” represents operating netback prior to any realized gain or loss on financial derivatives. “Operating netback” and “Operating netback prior to hedging” is also presented on a per Boe basis by dividing by production volumes for the corresponding period. Lucero believes that in addition to net income (loss) and cash provided by operating activities, operating netback and operating netback prior to hedging are useful supplemental measures as they assist in the determination of the Company’s operating performance, leverage, and liquidity. Operating netback is commonly used by investors to assess performance of oil and gas properties and the possible impact of future commodity price changes on energy producers. “Operating netback per BOE” is a non-GAAP ratio that represents operating netback, a Non-GAAP measure, divided by production volumes for the corresponding period, and is presented including and excluding any realized gain or loss on financial derivatives. The table below discloses Lucero’s operating netback and operating netback prior to hedging, including the reconciliation to the Company’s most closely comparable GAAP measure, petroleum and natural gas revenues:

“Exploration and development expenditures” represents additions to property, plant and equipment in the cash flow used in investing activities, less capitalized general and administrative expenses. Exploration and development expenditures is a measure of the Company’s investments in property, plant and equipment. The most directly comparable GAAP measure to exploration and development expenditures is additions to property, plant and equipment in the cash flow used in investing activities. The reconciliation between additions to property, plant and equipment, as defined by IFRS, and exploration and development expenditures, as defined herein, is as follows:

“Free funds flow” represents funds flow, less exploration and development expenditures. Management considers this measure to be useful in determining its available discretionary cash to fund capital expenditures, acquisitions or returns of capital to shareholders.

“Payout ratio” is a non-GAAP ratio that represents exploration and development expenditures as a percentage of funds flow.

The term “boe” or barrels of oil equivalent may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent (6 Mcf: 1 bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Additionally, given that the value ratio based on the current price of crude oil, as compared to natural gas, is significantly different from the energy equivalency of 6:1; utilizing a conversion ratio of 6:1 may be misleading as an indication of value.

This press release discloses drilling locations in three categories: (i) proved locations; (ii) probable locations; and (iii) unbooked locations. Proved locations and probable locations are derived from the reserves evaluation prepared by NSAI as of December 31, 2022 and account for drilling locations that have associated proved and/or probable reserves, as applicable. Unbooked locations are internal estimates prepared by a qualified reserves evaluator based on Lucero’s prospective acreage and an assumption as to the number of wells that can be drilled per section based on industry practice and internal review. Unbooked locations do not have attributed reserves. Of the 40 net drilling locations identified herein, 20 are proved locations, 10 are probable locations and 10 are unbooked locations. Unbooked locations have been identified by management as an estimation of our multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production and reserves information. There is no certainty that Lucero will drill all unbooked drilling locations and, if drilled, there is no certainty that such locations will result in additional oil and gas reserves or production. The drilling locations on which we actually drill wells will ultimately depend upon the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, actual drilling results, additional reservoir information that is obtained and other factors. While certain of the unbooked drilling locations have been derisked by drilling existing wells in relative close proximity to such unbooked drilling locations, some of other unbooked drilling locations are farther away from existing wells where management has less information about the characteristics of the reservoir and therefore there is more uncertainty whether wells will be drilled in such locations and, if drilled, there is more uncertainty that such wells will result in additional oil and gas reserves or production.

SOURCE Lucero Energy Corp.

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