For further information regarding our financial and operational results for the second quarter of 2017, please see "Second Quarter 2017 Financial and Operational Results" below.
SECOND QUARTER 2017 FINANCIAL AND OPERATIONAL RESULTS
Production
Production for the second quarter of 2017 averaged 64,636 boe/d, which represents a 64% increase over our quarterly average production of 39,513 boe/d in the second quarter of 2016. The increase in production from the second quarter of 2016 is primarily attributable to the production from our assets in Gordondale which we acquired on July 28, 2016 (the "Gordondale Acquisition").
Production consisted of approximately 77% natural gas, 11% light oil and 12% NGLs in the second quarter of 2017 as compared to 90% natural gas, 6% light oil and 4% NGLs in the second quarter of 2016. The increase in oil and NGLs weighting as compared to the second quarter of 2016 is due to the more heavily-weighted oil and NGLs production from our assets in Gordondale.
Funds Flow from Operations and Net Income
Funds flow from operations was $88.6 million ($0.33 per basic common share), a 568% increase from $13.3 million ($0.09 per basic common share) in the second quarter of 2016. This increase from the second quarter of 2016 was largely due to higher average realized sales prices and the production from our assets in Gordondale which we acquired pursuant to the Gordondale Acquisition.
We saw a return to net income in the second quarter of 2017 as compared to the second quarter of 2016. We had net income of $18.0 million as compared to the net loss of $23.3 million in the second quarter of 2016. We recorded net income to common shareholders of $17.0 million ($0.06 per basic common share) in the second quarter of 2017 as compared to the net loss to common shareholders of $24.3 million ($0.16 per basic common share) in the second quarter of 2016. The changes were largely due to higher funds flow from operations.
Commodity Prices
During the second quarter of 2017, the average benchmark price for WTI oil was US$48.29/bbl, up 6% from US$45.59/bbl during the second quarter of 2016, and the average benchmark price for natural gas sold at AECO was $2.78/MMbtu, up 99% from $1.40/MMbtu during the second quarter of 2016. The average corporate realized sales price during the quarter was $24.90/boe, a 90% increase from $13.13/boe during the second quarter of 2016.
Operating Costs and General and Administrative Expense
Operating costs in the second quarter of 2017 were $4.67/boe, an 11% decrease from $5.22/boe in the first quarter of 2017 and a 35% increase from $3.45/boe in the second quarter of 2016. The increase in operating costs per boe from the second quarter of 2016 was largely due to the higher cost structure associated with our liquids-rich Gordondale assets that were acquired pursuant to the Gordondale Acquisition and additional fees incurred to process natural gas from Gordondale at AltaGas' deep-cut natural gas processing facility located in Gordondale (the "AltaGas Facility").
General and administrative expense in the second quarter of 2017 was $1.07/boe, a 14% decrease from $1.24/boe in the second quarter of 2016. The decrease is due to an increase in production, partially offset by an increase in aggregate general administrative expenses in the second quarter of 2017 as compared to the second quarter of 2016.
Interest Expense
Our interest expense was $1.16/boe, a 47% decrease from $2.18/boe in the second quarter of 2016. The decrease is due to an increase in production and a lower average outstanding total credit facilities balance in the second quarter of 2017 as compared to the second quarter of 2016.
Pouce Coupe Gas Plant Netbacks
Approximately 57% of our total corporate natural gas production and 46% of our total corporate production was processed at our Pouce Coupe Gas Plant during the six months ended June 30, 2017 as compared to 79% and 73%, respectively, during the six months ended June 30, 2016. These decreases are primarily due to the liquids-rich production additions associated with our Gordondale assets. The average plant and field operating cost for production processed through the Pouce Coupe Gas Plant for the six months ended June 30, 2017 was $0.33/Mcfe ($1.90/boe) and the estimated operating netback at the Pouce Coupe Gas Plant was $2.63/Mcfe ($15.80/boe), resulting in an operating margin of 77%.
The following table details our average daily production and estimated operating netback for wells producing to the Pouce Coupe Gas Plant on a production month basis for the periods indicated:
/T/
------------------------------------------------------ Six months ended Six months ended Six months ended June 30, 2017 June 30, 2016 June 30, 2015 ---------------------------------------------------------------------------- Average daily production, net to Birchcliff: Natural gas (Mcf) 169,040 171,422 157,462 Oil & NGLs (bbls) 1,081 967 1,249 ---------------------------------------------------------------------------- Total boe 29,254 29,537 27,494 ---------------------------------------------------------------------------- AECO - C daily ($/Mcf)(1) $2.74 $1.61 $2.70 ---------------------------------------------------------------------------- Netback and cost: $/Mcfe $/boe $/Mcfe $/boe $/Mcfe $/boe Petroleum and natural gas revenue(2) 3.41 20.44 1.93 11.61 3.20 19.21 Royalty expense (0.10) (0.67) (0.05) (0.30) (0.12) (0.74) Operating expense(3) (0.33) (1.90) (0.25) (1.47) (0.35) (2.11) Transportation and marketing expense (0.35) (2.07) (0.30) (1.88) (0.32) (1.92) ---------------------------------------------------------------------------- Estimated operating netback $2.63 $15.80 $1.33 $7.96 $2.41 $14.44 ---------------------------------------------------------------------------- Operating margin 77% 77% 69% 69% 75% 75% ---------------------------------------------------------------------------- (1) $1.00/MMbtu = $1.00/Mcf based on a standard heat value Mcf. (2) Excludes the effect of hedges using financial instruments. (3) Represents plant and field operating costs./T/
Funds Flow Netback and Total Cash Costs
During the second quarter of 2017, we had funds flow netback of $15.07/boe, a 308% increase from $3.69/boe in the second quarter of 2016. The increase was primarily driven by higher production and higher average realized oil and natural gas prices, partially offset by an increase in total cash costs per boe.
During the second quarter of 2017, we had total cash costs of $10.27/boe, an 8% increase from $9.47/boe in the second quarter of 2016. On a per boe basis, the increase in total cash costs in the second quarter of 2017 was primarily driven by higher royalty, operating and transportation and marketing expenses associated with our Gordondale assets, which were partially offset by lower general and administrative and interest expenses when compared to the second quarter of 2016.
Capital Activities and Expenditures
During the second quarter of 2017, we had net capital expenditures of $120.8 million as compared to $4.7 million during the second quarter of 2016. Our total F&D capital during the second quarter of 2017 (which excludes acquisitions, dispositions and administrative expenses) was $130.5 million, which consists of $0.7 million on land and seismic, $79.9 million on drilling and completions, $46.8 million on facilities and infrastructure and $3.1 million on other capital expenditures attributed to the execution of our capital program. Of the $46.8 million spent on facilities and infrastructure, approximately $20.0 million was spent on the Phase V and VI expansions of the Pouce Coupe Gas Plant. See "Advisories - Capital Expenditures".
Drilling and Completions
Our drilling and completions activities during the second quarter of 2017 were focused on our Montney/Doig Resource Play in our Pouce Coupe and Gordondale areas. During the quarter, we drilled a total of 22 (22.0 net) wells with a 100% success rate. In Pouce Coupe, we drilled 16 (16.0 net) Montney/Doig horizontal natural gas wells, of which 10 were Montney D1 natural gas wells, 4 were Basal Doig/Upper Montney natural gas wells and 2 were Montney D4 natural gas wells. In Gordondale, we drilled 6 (6.0 net) Montney horizontal wells, of which 1 was a Montney D1 liquids-rich natural gas well, 1 was a Montney D1 oil well and 4 were Montney D2 oil wells. At June 30, 2017, we have successfully drilled and cased an aggregate of 338 (332.7 net) Montney/Doig horizontal wells, which includes 87 (81.8 net) wells acquired in the Gordondale Acquisition.
Credit Facilities and Debt
Our extendible revolving credit facilities have an aggregate principal amount of $950 million (the "Credit Facilities") and are comprised of an extendible revolving syndicated term credit facility of $900 million (the "Syndicated Credit Facility") and an extendible revolving working capital facility of $50 million (the "Working Capital Facility"). The Credit Facilities are subject to a semi-annual review of the borrowing base limit by our syndicate of lenders. We may each year, at our option, request an extension to the maturity date of the Syndicated Credit Facility and the Working Capital Facility, or either of them, for an additional period of up to three years from May 11 of the year in which the extension request is made.
In the second quarter of 2017, our syndicate of lenders completed its semi-annual review of the borrowing base limit and in connection therewith, Birchcliff and the lenders agreed to an extension of the maturity dates of each facility from May 11, 2018 to May 11, 2020 and to the borrowing base remaining unchanged at $950 million. In addition, subject to the terms and conditions of the agreement governing the Credit Facilities, the lenders consented to the disposition of certain assets of Birchcliff (which includes the Worsley Disposition and the Additional Disposition) and to the borrowing base remaining at $950 million after giving effect to such disposition. The next semi-annual review is scheduled for November 2017. The Credit Facilities do not contain any financial maintenance covenants.
At June 30, 2017, our long-term bank debt was $628.4 million (June 30, 2016: $709.5 million) from available credit facilities of approximately $950 million (June 30, 2016: $750 million), leaving $302.5 million of unutilized credit capacity after adjusting for outstanding letters of credit and unamortized interest and fees. Total debt at June 30, 2017 was $700.5 million as compared to $715.7 million at June 30, 2016. The decreases in long-term debt and total debt from June 30, 2016 are largely due to the fact that the remaining net proceeds from the equity financings completed in July 2016 (after the payment of the balance of the purchase price for the Gordondale assets acquired pursuant to the Gordondale Acquisition) were used to reduce indebtedness under our credit facilities, offset by increased capital spending in excess of funds flow from operations during the first half of 2017.
Risk Management
At June 30, 2017, we are committed under our financial and physical hedge contracts to the sale of 195,000 GJ/d or approximately 50% of our forecast corporate natural gas production from July 1, 2017 to December 31, 2017 at an average price of $3.03/GJ. At June 30, 2017, we had the following AECO natural gas hedges outstanding on a quarterly basis:
/T/
------------------------------------------------- Estimated Average Natural Gas Natural Gas Production Wellhead AECO AECO Hedged Price (GJ/d) ($/GJ) (Mcf/d) ($/Mcf(1)) --------------------------------------------------------------------------- Q3 2017 180,000 3.00 157,245 3.44 Q4 2017 210,000 3.05 183,453 3.50 --------------------------------------------------------------------------- July 1, 2017 to December 31, 2017 195,000 3.03 170,349 3.47 --------------------------------------------------------------------------- (1) See "Advisories" for the conversion from GJ to Mcf./T/
We have outstanding financial derivative contracts for 1,500 bbls/d of crude oil production from July 1, 2017 to December 31, 2017 at an average WTI price of CDN$69.90/bbl for 2017.
FINANCIAL AND OPERATIONAL UPDATE
Series of Asset Sales for Expected Proceeds of $142 Million
We have completed and entered into definitive agreements for a series of asset sales (the "Asset Sales") for expected total proceeds to Birchcliff of approximately $142 million ($132 million in cash; $10 million in securities) (subject to closing adjustments). The Asset Sales collectively represent forecast 2017 production of 3,600 boe/d (approximately 62% light oil and NGLs).
During the second quarter of 2017, we completed the disposition of certain non-core assets for total proceeds of approximately $10 million (prior to closing adjustments). On August 1, 2017, we entered into a definitive purchase and sale agreement for the sale of our Worsley Charlie Lake Light Oil Pool for total consideration of approximately $100 million ($90 million in cash; $10 million in securities of an affiliate of the purchaser) (the "Worsley Disposition"). Closing of the Worsley Disposition is expected to occur on or about August 31, 2017, subject to the receipt of all necessary regulatory approvals and the satisfaction of other customary closing conditions. In addition, further to our press release of August 1, 2017, we have now entered into a definitive agreement for the sale of some of the remaining assets that were being marketed for sale for total cash consideration of $31.7 million (subject to closing adjustments) (the "Additional Disposition"). The effective adjustment date of the Additional Disposition is August 1, 2017 and closing is expected to occur on or about October 2, 2017, subject to the satisfaction of customary closing conditions.
Update on Birchcliff Gas Plant Expansions
Pouce Coupe Gas Plant - Phase V
We have commenced the commissioning of our 80 MMcf/d Phase V expansion of our Pouce Coupe Gas Plant, which will increase the processing capacity from the current 180 MMcf/d to 260 MMcf/d. We anticipate that Phase V will be brought on-stream in early September 2017, under budget and ahead of our initially scheduled on-stream date of October 1, 2017.
Pouce Coupe Gas Plant - Phase VI
The engineering and licensing work has been completed for the 80 MMcf/d Phase VI expansion, which will increase processing capacity from 260 MMcf/d to 340 MMcf/d. Fabrication of the major components has commenced and it is currently expected that Phase VI will be brought on-stream in October 2018. The total estimated cost for the Phase VI expansion is approximately $46 million, of which we expect to spend approximately $26.5 million in 2017 and approximately $19.5 million in 2018.
Pouce Coupe Gas Plant - Phases VII and VIII
As previously announced, we have commenced the planning and initial work to further expand the processing capacity of our Pouce Coupe Gas Plant: (i) by 150 MMcf/d to 490 MMcf/d (Phase VII), which expansion would include deep-cut capability; and (ii) by 100 MMcf/d to 590 MMcf/d (Phase VIII). An engineering and design study for Phases VII and VIII was completed in June 2017. Once we have finalized the design scope for Phases VII and VIII, we expect to commence the regulatory approval process.
We had initially been planning for an on-stream date of 2019 for Phase VII and 2020 for Phase VIII; however, given our focus on maintaining a strong balance sheet, reducing indebtedness and funding capital expenditures from internally generated funds flow from operations, Birchcliff has made the decision to defer these dates by one year to 2020 for Phase VII and 2021 for Phase VIII. Birchcliff feels that this is a prudent decision which will help to ensure that no unnecessary stress is placed on our balance sheet over the next few years as capital is required to construct these plant expansions. Our revised arrangement with AltaGas which is discussed below, allows us to defer our planned expansions for each of Phase VII and VIII by approximately one year, ensuring that natural gas processing is available to Birchcliff until the construction of Phase VII is complete.
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