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US NEWS 
CALGARY, Alberta, Aug. 10, 2018 (GLOBE NEWSWIRE) — GRANITE OIL CORP. (“Granite” or the “Company”) (TSX:GXO)(OTCQX:GXOCF) is pleased to provide an operational update and report its financial and operational results and for the three months and six months ended June 30, 2018.
Executive Appointment and Director Retirement
The Company is pleased to announce that Mr. Devon Griffiths has been promoted to Chief Operating Officer. Mr. Griffiths joined Granite (formerly DeeThree Exploration Ltd.) in early 2014. Mr. Griffiths is a Professional Geologist and has a broad operational background including drilling, completions, production and reserves. Mr. Griffiths holds a Bachelor of Science degree in Geology and is a member of the Association of Professional Engineers and Geoscientists of Alberta. Granite’s CEO, Michael Kabanuk, added: “We would like to congratulate Devon on this well-deserved promotion and we are proud to recognize his continued efforts towards the Company’s success and our goal of adding value for shareholders.”
Mr. Henry Hamm has retired as a director of the Company effective August 9th, 2018. The Company would like to thank Mr. Hamm for his significant contributions and wish him every success in his future endeavors. The Company’s Board of Director is now comprised of Brendan Carrigy (Chair), Michael Kabanuk (Chief Executive Officer), Kevin Andrus, Martin Cheyne, Brad Porter and Kathy Turgeon.
Operational Update
Granite drilled and completed two wells in the second quarter. The first well was drilled in April on 400 m offset spacing and brought on-stream in May and was located on the Company’s crown lands on the western side of its core Bakken producing pool (in EOR Pod 4). This marks the first well to be completed in this area since commencing EOR-focused development in 2015. The second well was drilled on 200 m offset spacing and was brought on stream in late June. Granite tested increased propent loading and tighter frac spacing in both wells and has observed positive results in production performance.
To date, the 2018 wells, including the Company’s first well of 2018 brought onstream in January, have compared favorably to wells completed in 2015 and 2016. This marks a positive return in production performance since the Company observed pressure interference and decreased performance associated with the 100 m spacing wells tested during the first half of 2017. Granite has taken a number of steps to optimize pool performance and EOR efficiency associated with these 2017 wells to mitigate pressure interference and continues to repressurize affected portions of the pool. These steps included abandoning one well and shutting in production from a number of others, with estimated reduced total volumes of 80 bbls/d.
Granite’s continued focus is on operational and cost efficiencies. Steps taken to reduce operating expenses include the recent shut-in of the Company’s gas plant in conjunction with a shallow gas well abandonment program to reduce associated property taxes and further increase the Company’s industry leading liability management rating (“LMR”) of 8.62.
Second Quarter, 2018
Production during the second quarter averaged 2,217 boe/d (99% oil) resulting in funds from operations of $4.1 million. Capital expenditures for the quarter were $5.8 million which included the drilling and completion of two wells, the first of which was drilled in unfavourable breakup conditions, and the second of which was originally planned for the third quarter. Granite made the decision to accelerate the timing of this well due to better availability of services and associated capital efficiencies.
The Company’s net debt at the end of the second quarter was higher than forecast primarily due to the acceleration of Granite’s third-quarter well into the second quarter, hedging losses, and the deferred disposition of a minor property referred to in the Granite’s news release dated December 18, 2017. Net debt at the end of the quarter was $47.1 million, consisting of bank debt of $44.9 million and negative working capital of $2.2 million.
Granite’s cash flow and corporate netbacks continue to be negatively impacted by the combination of widening Western Canada Select (“WCS”) differentials and the Company’s hedging losses. Hedging losses in the quarter were $2.0 million dollars, totaling $3.4 million for the six months ended June 30, 2018. The Company continues to aggressively pursue various differential mitigation opportunities to protect its go-forward pricing and the balance sheet.
Differential Mitigation
The Company began delivering a portion of its oil production directly to a US refinery in June and has received an average net price increase of approximately $1.25 CAD/bbl for these volumes. The Company is delivering increased volumes to the refinery, with commitments through September, and is working towards a long-term strategic contract with a view towards an improved net pricing increase. Granite continues to pursue other differential mitigation opportunities to protect its go-forward pricing and the balance sheet.
Hedging
For the second half of 2018, Granite has 1,200 bbl/d hedged, including 800 bbl/d hedged at an average price of $55.09 USD and 400 bbl/d hedged at an average price of $74.94 CAD.
Currently, Granite has 800 bbls per day hedged for the first quarter of 2019 (100 bbl per day at $65.72 USD and 700 bbl per day at an average price of $85.86 CAD) and 400 bbls per day hedged for the second quarter at an average price of $85.04 CAD.
Outlook
With the current WCS differential outlook, the Company is setting forth a calculated, more moderated pace of development of its 100%-owned, early life-cycle Bakken oil pool, with the focus on: (1) sustainable production for the long-term; (2) minimizing costs and reducing debt levels; and (3) minimizing exposure to Canadian pricing risks through the implementation of WCS differential mitigation strategies.
With the continued uncertainty surrounding differentials, Granite is forecasting a budget ranging from 1,900 to 2,100 bbls/d of oil production for the second half of 2018, with capital spending of approximately $1.5 to $3.5 million. The Company will determine whether or not to proceed with drilling and completing a well in the fourth quarter based on prevailing price differentials and/or the success of its differential mitigation strategies. Moving forward, Granite has an inventory of 85 potential well locations with a plan to drill approximately five wells per year, in conjunction with the expansion of the EOR scheme, to ensure the most efficient, long-term recovery from the pool. At this pace, Granite has many years of future drilling, with forecast annual capital spending averaging between $10 and $12 million, and average annual production of 2,000 – 2,300 bbl/d.
FINANCIAL AND OPERATING HIGHLIGHTS
| Three Months Ended June 30, |
Six Months Ended June 30, |
||||||
| 2018 | 2017 | 2018 | 2017 | ||||
| (000s, except per share amounts) | ($) | ($) | ($) | ($) | |||
| FINANCIAL | |||||||
| Oil and natural gas revenues | 14,094 | 13,788 | 24,769 | 28,239 | |||
| Funds from operations (1) | 4,089 | 6,743 | 6,800 | 13,303 | |||
| Per share – basic | 0.12 | 0.2 | 0.2 | 0.39 | |||
| Per share – diluted (2) | 0.12 | 0.2 | 0.19 | 0.39 | |||
| Net income (loss) | -361 | -116 | -3,714 | 2,384 | |||
| Per share – basic | -0.01 | 0 | -0.11 | 0.07 | |||
| Per share – diluted (2) | -0.01 | 0 | -0.11 | 0.07 | |||
| Capital expenditures (3) | 5,841 | 5,846 | 9,302 | 10,637 | |||
| Net debt (4) | 47,072 | 35,985 | 47,072 | 35,985 | |||
| Shareholders’ equity | 192,730 | 212,735 | 192,730 | 212,735 | |||
| (000s) | (#) | (#) | (#) | (#) | |||
| SHARE DATA | |||||||
| At period-end | 34,191 | 34,169 | 34,191 | 34,169 | |||
| Weighted average – basic | 34,191 | 33,804 | 34,191 | 33,749 | |||
| Weighted average – diluted | 34,921 | 34,046 | 34,897 | 34,019 | |||
| OPERATING (5) | |||||||
| Production | |||||||
| Natural gas (mcf/d) | 121 | 448 | 204 | 588 | |||
| Crude oil (bbls/d) | 2,197 | 2,784 | 2,177 | 2,835 | |||
| Total (boe/d) | 2,217 | 2,859 | 2,211 | 2,933 | |||
| Average wellhead prices | |||||||
| Natural gas ($/mcf) | 0.88 | 3.24 | 1.8 | 2.75 | |||
| Crude oil and NGLs ($/bbl) | 70.45 | 53.91 | 62.69 | 54.46 | |||
| Combined average ($/boe) | 69.87 | 53.01 | 61.9 | 53.19 | |||
| Netbacks | |||||||
| Operating netback ($/boe) (7) | 28.83 | 30.37 | 24.51 | 29.05 | |||
| Gross (net) wells drilled | |||||||
| Oil (#) | 2 (2.0) | 3 (3.0) | 3 (3.0) | 6 (6.0) | |||
| Total (#) | 2 (2.0) | 3 (3.0) | 3 (3.0) | 6 (6.0) | |||
| Average working interest (%) | 100 | 100 | 100 | 100 | |||
| (1) Funds from operations and funds from operations per share are not recognized measures under International Financial Reporting Standards (IFRS). Refer to the commentary in the Management’s Discussion and Analysis under “Non-GAAP Measurements” for further discussion. | |||||||
| (2) The Company uses the weighted average common shares (basic) when there is a net loss for the period and the weighted average common shares (diluted) when there is net income in the period to calculate net income (loss) per share diluted. The Company uses the weighted average common shares (diluted) to calculate the funds from operations diluted. | |||||||
| (3) Total capital expenditures, excluding acquisitions and excluding non-cash transactions. Refer to commentary in the Management’s Discussion and Analysis under “Capital Expenditures and Acquisitions” for further information. | |||||||
| (4) Net debt, which is calculated as current liabilities (excluding derivative financial instruments) and bank debt less current assets (excluding derivative financial instruments), is not a recognized measure under IFRS. Please refer to the commentary under “Non-GAAP Measurements” for further discussion. | |||||||
| (5) For a description of the boe conversion ratio, refer to the commentary in the Management’s Discussion and Analysis under “Other Measurements”. | |||||||
| (6) Combined average realized prices includes all oil, gas and NGL sales revenue, excluding other income. | |||||||
| (7) Operating netback, which is calculated by deducting royalties, operating expenses and transportation expenses from oil and gas revenue and adjusting for any realized hedging on financial instruments, is not a recognized measure under IFRS. Please refer to the commentary under “Non-GAAP Measurements” for further discussion. | |||||||
Strategic Alternatives Update
On March 20, 2018, Granite announced the initiation of a process to review potential strategic alternatives available to it and the engagement of Cormark Securities Inc. and National Bank Financial Inc. as financial advisors in respect of this process. Granite has not set a definitive schedule for the process and does not intend to provide updates or otherwise disclose developments with respect to the process until the Board has approved a definitive transaction or strategic alternative, or otherwise determines that disclosure is necessary or appropriate.
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