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Consistent with our efforts to maintain a strong balance sheet, control costs, and ensure liquidity to execute our strategy, on May 1, 2017 Crew entered into a new arrangement resulting in the replacement of one of the partners in our Septimus Gas Processing Complex (comprised of the Septimus and West Septimus facilities). This new arrangement will not impact Crew's current 28% ownership or operatorship of the complex, while the other remaining partner retains a 22% ownership and the new partner a 50% ownership. This change to the arrangement will save the Company approximately $1 million per year on processing costs associated with the current complex further reducing overall Greater Septimus operating costs. As part of this arrangement, the new partner has agreed to fund 50% of the current West Septimus facility expansion. Crew has retained the option to buy both partners' interest in these facilities at future dates.
On March 14, 2017, Crew closed an offering of $300 million aggregate principal amount of 6.5% senior unsecured notes due March 14, 2024. Proceeds from the note offering were partially used to redeem Crew's $150 million, 8.375% senior unsecured notes due 2020, with the excess proceeds used to repay indebtedness under our credit facility and for the continued development of our Montney assets. Successful completion of this offering enhances Crew's liquidity and financial flexibility. Total net debt at the end of the quarter was $301.6 million, including working capital deficiency and our new $300 million ($293.0 million net of deferred financing costs) 6.5% senior unsecured notes that have a seven year term with repayment due in March of 2024. The Company also recently completed our annual bank facility review with the facility renewed at the same level of $235 million. The pending disposition of our non-core Goose asset will further contribute to our flexibility and add cash to our balance sheet.
TRANSPORTATION, MARKETING & HEDGING
Crew's realized natural gas price has outperformed the benchmark indices for the last six quarters, which demonstrates the value of our active marketing and hedging program, diversified sales markets as well as the 19% higher heat content of our natural gas over industry standards. One of the many advantages of our Montney land base is that we are situated with access to all three major export pipeline systems which provides substantial market and operational optionality. During the first quarter, our natural gas sales portfolio was allocated 45% to Chicago City Gate, 26% to AECO, 19% to Alliance ATP and 10% to Station 2. Crew will continue to plan for processing and transportation diversification that is timed to coincide with our longer term growth strategy, and afford us the ability to access new markets. Our transportation arrangement on the Spectra pipeline increased from 13 mmcf per day to 30 mmcf per day effective April 1, 2017. In the second quarter of 2018, we also secured 60 mmcf per day of capacity on the TransCanada pipeline system ("TCPL"), affording improved market diversity for natural gas from our Greater Septimus and Groundbirch areas. In mid-2019, we have also secured an additional 60 mmcf per day of firm capacity on the TCPL system.
In the interests of managing our commodity price risk and exposure, Crew continued to systematically add 2017 and 2018 hedges during the first quarter. For the balance of 2017, Crew's total natural gas hedged position is approximately 50% of our forecast 2017 gas sales at a transportation-adjusted equivalent price of $2.92 per gj, which when adjusting for the higher heat content of Crew's gas, equates to $3.62 per mcf. For liquids, we have approximately 50% of our 2017 light oil and natural gas liquids sales hedged at an average price of CDN$68.17 per bbl.
OPERATIONS
NE BC Montney - Greater Septimus Overview
During the first quarter, Crew continued to focus on drilling and completions activities primarily at our Greater Septimus area, while advancing our West Septimus facility expansion. We directed the majority of our first quarter capital to our Greater Septimus, including $14.1 million allocated to the doubling of our West Septimus processing facility from 60 mmcf per day to 120 mmcf per day. In addition, Crew drilled ten (10.0 net) Montney wells and completed three (3.0 net) Montney wells of our budgeted eight well Greater Septimus completions program in the quarter.
Crew continued to see efficiency improvements in the first quarter as the first five wells drilled off the 4-22 pad achieved a record low average 12.6 drilling days per well at an average well cost of $1.5 million, contributing to strong capital efficiencies and supporting returns. Following up on the success of our first two ultra condensate-rich wells, we spud the first well on a six well pad directly offsetting the 7-30 wells which continue to exceed expectations.
Late in 2016, industry activity increased significantly in NE BC, particularly the demand for reservoir stimulation services. All industry participants, including Crew, have been subject to scheduling challenges with service companies. The delays Crew experienced with completions in turn delayed new production volumes coming on-stream in the quarter. These delays reduced capital expenditures for completions by approximately $10 million in Q1 relative to our budget, which were partially offset by the West Septimus facility expansion running ahead of schedule.
Crew's geographic location in the Montney has typically provided year round access to conduct our drilling and completions operations, or at worst, resulted in modest delays during spring break-up. For the first time in Crew's operational history in the Montney, we were forced to completely shut down these activities in the middle of April. This year's spring break up was a 'perfect storm' of an initial spring thaw, complicated by a significant period of cool, snowy weather which led to extremely poor road conditions and resultant road bans. Given the circumstances, and an emphasis on prioritizing our capital efficiencies, Crew has adjusted our operational plan to incorporate an extended spring break-up period during which no drilling or completions activity will be undertaken until June. Crew currently has three drilling rigs sitting on Crew leases, a significant inventory of 18 wells drilled and uncompleted in NE BC and has made arrangements to secure necessary equipment and services to complete the wells once access to our well sites is available.
Greater Septimus
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Q1 Q4 Q3 Q2 Q1 Production & Drilling 2017 2016 2016 2016 2016 --------------------------------------------------------------------------- Average Daily Production (boe/d) 17,440 17,307 18,592 17,131 18,149 Wells drilled (gross / net) 10 / 10.0 8 / 7.7 8 / 7.0 - 4 / 4.0 Wells completed 3 5 7 7 3 ------------------------------------------------------------------------------------------------------------------------------------------------------ --------------------------------------------------------------------------- Operating Netback Q1 Q4 Q3 Q2 Q1 ($ per boe) 2017 2016 2016 2016 2016 --------------------------------------------------------------------------- Revenue 26.49 25.10 20.56 16.06 16.69 Royalties (1.66) (1.47) (0.94) (0.69) (0.79) Realized commodity hedge (loss)/gain (0.41) (0.39) 1.11 3.24 1.34 Operating costs (3.34) (3.34) (3.61) (4.02) (4.43) Transportation costs (1.67) (1.68) (1.59) (1.97) (2.21) --------------------------------------------------------------------------- Operating netback 19.41 18.22 15.53 12.62 10.60 ---------------------------------------------------------------------------
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First quarter production at Greater Septimus averaged 17,440 boe per day, representing approximately 76% of the Company's total production volumes. Greater Septimus operating netbacks of $19.41 per boe were the highest in the past five quarters, due to increased revenue, and supported by low operating costs of $3.34 per boe and $1.67 per boe transportation costs, which have been kept stable despite inflationary pressures as industry activity levels increase.
Crew's ultra condensate-rich area is the Company's new focus for development at Greater Septimus. Results from area wells at the 7-30 pad are compelling in the current environment, including C7-30 which has produced 70,000 bbls of condensate in 220 days on production with an average condensate gas ratio ("CGR") of 187 bbls per mmcf, and B7-30 which has produced 40,000 bbls of condensate over 165 days with an average CGR of 133 bbls per mmcf.
Three new well completions at Septimus in late 2016 have resulted in record well performance at an all-in average well cost of $3.8 million. Over a 123 day period, the wells each produced 0.8 bcf of natural gas with a well head condensate yield of 19 bbls per mmcf and have continued to produce at a current average rate of 4.7 mmcf per day per well.
NE BC Montney - Groundbirch overview
Crew spud the first of two delineation wells at Groundbirch that will employ the latest completion technology as part of further delineating our significant Groundbirch resource (which represents 18.7 TCFE of TPIIP in our Resource Evaluation) and in preparation for development drilling in 2018 as part of our long-term growth plan. The Company also acquired ownership of 10 sections of surface rights at Groundbirch on which we have planned the construction of a gas plant and associated Montney development of a minimum of 150 wells. Ownership is expected to reduce surface lease costs, improve access and timing of operations, provide access to a major rail line for potential trans-load capability in addition to providing access to proprietary gravel for lease and road maintenance and construction.
NE BC Montney - Tower overview
Crew's Montney Tower area continues to represent significant future development opportunity for the Company as crude oil prices strengthen. We realized increased oil production at Tower in Q1 as a result of successfully completing two light oil wells in the fourth quarter of 2016 and two light oil wells in the first quarter of 2017. These four wells were drilled in 2014 prior to the collapse in oil prices, and were designed to be completed using plug and perf technology, which has been the predominant completion technique within the light oil window of the Montney relative to the then available open-hole completion technology. The first two wells have been on production for 60 and 80 days at average rates of 365 and 600 boe per day, with 53% and 64% liquids, respectively. The second two wells were completed late in the first quarter and achieved average rates of 445 and 520 boe per day, with 55% and 58% liquids over 35 and 60 days, respectively. In both sets of wells, the stronger of the two was placed in Crew's "Upper B" interval of the upper Montney while the other two wells tested the deeper Montney "C" stratigraphic interval of the upper Montney. All four wells presently flow without the aid of artificial lift. Crew has also undertaken the first stage of facility modifications to install gas lift which we believe will allow us to further optimize fluid production rates from these wells.
Lloydminster, AB/SK overview
At Lloydminster, Crew drilled four (4.0 net) oil wells including two dual-leg horizontal wells, completed two (2.0 net) wells and recompleted four (3.5 net) oil wells in the quarter. Production at our Lloydminster heavy oil property averaged 1,865 boe per day in the first quarter of 2017 which reflects minimal impact from the drilling and completion operations, and is part of the Company's plan to maintain heavy oil production in the range of 2,000 boe per day. The two completions were vertical wells in the Swimming area (Sparky formation) and the Wildmere area (Colony formation). The wells were placed on production in early March and by mid-April were producing at a combined average rate of 220 bbls of oil per day. Crew's two dual leg horizontal wells also located in the Swimming area are expected to be completed when road ban restrictions are removed.
OUTLOOK
Crew has assembled a sizeable and uniquely situated land base of 474 net sections (prior to the impact of the pending Goose disposition) which offers exposure to condensate-rich natural gas and light oil. The intrinsic value of Crew's acreage coupled with owned and operated facilities and infrastructure, firm transportation arrangements, a diversified marketing strategy, a strong balance sheet and a returns-focused strategy provide the foundation for long-term profitable growth and value creation. Under our current plan, we expect to exit 2017 in a strong financial position with an estimated debt to annualized fourth quarter 2017 funds from operations ratio of 1.5 times. Given these strengths, we believe our share price does not always reflect the underlying value of Crew's assets and as such, the Company intends to apply to implement a normal course issuer bid ("NCIB") through the facilities of the Toronto Stock Exchange (the "TSX") and alternative Canadian trading platforms, pursuant to which Crew would have the ability to repurchase, from time to time, our outstanding shares for cancellation. This NCIB is expected to commence later in May following application being made to, and approved by, the TSX and will terminate one year later.
Exiting the first quarter, Crew has an inventory of 18 drilled but uncompleted wells that we intend to complete in order to bring on new volumes, and will continue to time our completions to ensure new volumes come on-stream with the commissioning of our West Septimus facility expansion. In the interests of creating value for our shareholders, we remain focused on return-on-capital in the development of our assets. Crew's activity levels can be scaled back in a weak market to preserve our valuable reserves. We believe in the potential of our Montney assets, and are excited by the results from the ultra condensate-rich area which offers attractive economics in the current environment. Additional improvements in well results will be pursued through enhanced completions, while striving to improve operational efficiencies. With stronger financial liquidity, proceeds from the pending sale of Goose and the $300 million note offering, we are well positioned to continue executing our Montney focused strategy over the near and longer-term.
We have revised our capital planning based on the previously referenced delays, with our projected second quarter capital program reduced by approximately $30 million to between $25 and $35 million. Production additions will be heavily weighted to the fourth quarter, concurrent with the commissioning of our West Septimus plant expansion. Also, during the second quarter of 2017, the third-party McMahon gas processing facility will be shut down for an estimated 21 days, which will impact Crew's volumes by approximately 900 boe per day in the second quarter. This shut down, combined with the production delays caused by the extended spring break-up, results in second quarter 2017 production estimates of approximately 20,000 to 21,000 boe per day. We anticipate that Q3 and Q4 2017 production will average between 24,500 to 26,500 boe per day, and 29,500 to 31,500 boe per day, respectively, spending approximately $100 million in the last half of 2017. Accordingly, our 2017 annual production guidance is reduced by 4% to 24,000 to 26,000 boe per day, with a positive impact to our forecast 2017 exit rate, which is increasing to over 31,000 boe per day while our $200 million capital budget remains unchanged.
We are very pleased to have secured additional financial flexibility, and have a high-quality asset base that only continues to improve with time and technology. We would like to thank our employees and Board of Directors for their commitment to Crew, and our shareholders for their ongoing support through ongoing market challenges.
A summary of Crew's operational and financial highlights are as follows:
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---------------------------------------------------------------------------- 2017 Average production(1) 24,000 - 26,000 boe/d ---------------------------------------------------------------------------- 2017 Exit production(1) greater than 31,000 boe/d ---------------------------------------------------------------------------- Total proved + probable reserves(2) 324 MMboe ---------------------------------------------------------------------------- Total proved + probable BT NPV10(2) $2 billion ---------------------------------------------------------------------------- Resource TPIIP(3) 112.2 TCFE ---------------------------------------------------------------------------- Montney potential drilling locations(4) 5,782 ---------------------------------------------------------------------------- 2017 Capital program(1) $200 MM ---------------------------------------------------------------------------- Net debt(5) $301.6 MM ---------------------------------------------------------------------------- Exit 2017 net debt / funds from operations(1) approx. 1.5x ---------------------------------------------------------------------------- Basic shares outstanding(5) 147.1 MM ---------------------------------------------------------------------------- Tax pools(5) approx. $1 billion ---------------------------------------------------------------------------- (1) Forecast. See "Forward Looking Information and Statements" (2) Reserves included herein are stated on a company gross basis (working interest before deduction of royalties without including any royalty interests). Information presented herein in respect of reserves and related information is based on our independent reserves evaluation for the year ended December 31, 2016 prepared by Sproule Associates Limited ("Sproule") details of which were provided in our press release issued on February 9, 2017. (3) As per the Resource Evaluation as at December 31, 2016 prepared by Sproule in accordance with the NI 51-101 and current COGE Handbook guidelines (4) Potential drilling locations are the total number of risked Contingent (2,071) and Prospective (3,355) resource locations as identified in Crew's year end independent Resource Evaluation plus the 2P booked locations (356) as identified in the independent reserves evaluation for the year ended December 31, 2016, both of which were prepared in accordance with the COGE Handbook provisions and NI 51-101 (5) As at March 31, 2017/T/
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