Journey Energy Inc. Reports its Second Quarter 2018 Financial and Operating Results

CALGARY, Aug. 7, 2018 /CNW/ – Journey Energy Inc. (JOY – TSX) (“Journey” or the “Company“) announces its financial and operating results for the three and six month periods ending June 30, 2018.  The complete set of financial statements and management discussion and analysis for the periods ended June 30, 2018 and 2017 are posted on www.sedar.com and on the Company’s website www.journeyenergy.ca.

SECOND QUARTER 2018 HIGHLIGHTS

Highlights for the second quarter and to date are as follows:

• Achieved production of 10,036 boe/d in the second quarter, a 2% decrease from the second quarter of 2017. Liquids (oil and natural gas liquids) production accounted for 4,687 boe/d or 47% of total production during the quarter.
• Generated $5.3 million of funds flow in the second quarter as compared to $9.3 million in the second quarter of 2017 or $9.3 million excluding realized financial derivatives losses.
• Received a corporate average commodity price of $34.69/boe in the quarter, a 9% increase over the second quarter of 2017. Liquids production accounted for 90% of total sales revenues in the quarter.
• Drilled 4 (4.0 net) successful wells with three in Matziwin and one Duvernay stratigraphic test in Gilby. The three Matziwin wells were all offsetting Journey’s successful 14-28-23-13W4 well which was drilled in the first quarter. As expect all wells encountered virgin reservoir pressure. All three Matziwin wells were placed on-production in the third quarter.
• Disposed of 147 boe/d (65% natural gas) of non-core production plus a minor amount of undeveloped lands for total proceeds of $2.9 million.
• Closed the previously announced undeveloped land acquisition in the East Duvernay Shale Basin.
• Constructed a permanent facility to produce oil from a Duvernay oil well drilled in 2014 in Windfall. The well is expected to be placed on production in early August.

Second Quarter Financial & Operating Highlights

OPERATIONS

Journey achieved production of 10,036 Boe/d (47% liquids) in the second quarter of 2018, representing a 1% decrease from the first quarter of 2018.  Second quarter 2018 production was negatively impacted by turnarounds, an extended shut in of 14-28 while drilling and completing an offset well, and the installation of a liner in the main gathering line in our Brooks property. Liquids production in the third quarter is forecasted to increase from Q2 levels due to the impact of Matziwin and Windfall production additions.

Journey’s second quarter operating costs were impacted by turnaround activity, increased power costs, and increased chemical costs. Journey has increased power and chemical costs in our guidance moving forward. Journey currently forecasts operating expenses of $13 per boe for the remainder of 2018.

During the first quarter, Journey drilled two horizontal wells in its Matziwin core area.  The 14-28-23-13W4 well which was placed on production on March 13 has already produced in excess of 44,000 boe (80% oil).  This well encountered near virgin reservoir pressure, establishing a new undrained lobe in the center of our Matziwin field. The IP30 of this well was approximately 470 bbl/d of oil and is the highest IP30 oil production rate achieved by Journey in Matziwin to date.    Based upon Journey’s mapping of the pool, this extension is currently estimated to contain up to 20 million barrels of OOIP.  This pool may support up to eight additional locations. Journey drilled three additional development wells offsetting 14-28 in the third quarter. All wells are now on production with initial results suggesting they will meet or exceed our type curve forecast. As expected all wells encountered virgin pressure.  One well at 13-33-23-13W4 had test rates which were superior to 14-28. These results are encouraging and set up an additional three development wells for drilling early in 2019. Further updates on Matziwin drilling will be provided in November.

Journey has also been extremely active in advancing the development of its emerging Duvernay resource play.  Journey has now closed all previously announced undeveloped land acquisitions and assembled a highly prospective, contiguous, 100% working interest land block. Journey’s activity during the past few months has been focused on addressing near term expiry issues along with the modeling and planning for the initial development phase.  The results of the vertical test well at 6-28-42-3W5 confirm Journey’s interpretation that its land block contains some of the thickest and most prospective shales in the East Duvernay play. The 6-28 well was set up to be re-entered and drilled horizontally, which it anticipates will become the first horizontal well test.  Throughout the quarter, Journey continued to evaluate strategic partnerships to advance the development of this significant resource.  Journey will provide a more fulsome update to its shareholders in due course.

FINANCIAL

Daily sales volumes decreased by 2% in the second quarter of 2018 to 10,036 boe/d from 10,194 in the same quarter of 2017.  As the four wells drilled in the quarter were not completed and put on production until the third quarter, the decrease in production is mainly attributable to natural declines and the sale of small producing asset.  Production levels for the second quarter were very similar to those of the first quarter of 2018 which were 10,117 boe/d. Journey’s production mix in the second quarter had natural gas volumes accounting for 53% of total volumes while liquids (oil and natural gas liquids) volumes were 47%.

Average corporate realized commodity prices, before the impact of the hedging program, were 9% higher in the second quarter with oil increasing by 32%, natural gas decreasing by 59% and natural gas liquids increasing by 43%.  Liquids (oil and NGL) revenues comprised 90% of total second quarter revenues for Journey while for the same period in 2017 they were 73%.  Natural gas prices continued to be depressed as Journey averaged $1.11/mcf during the quarter, which is 59% lower than the $2.70/mcf realized in the second quarter of 2017 and 42% lower than the $1.90/mcf realized in the first quarter of 2018.

The net hedging losses for the second quarter had a significant impact on both funds flow and ultimately the net loss.  During the quarter, the realized loss on hedging was $4.0 million while the unrealized loss was $8.3 million.  WTI oil prices continued their escalation throughout the second quarter to the high $60 USD range, causing the hedges to go increasingly out-of-the-money. In late 2017 and early 2018 Journey hedged a significant portion of its 2018 oil production, with the purpose of guaranteeing a certain amount of funds flow in light of the additional leverage associated with the share buyback in early February.  The impact on Journey’s netbacks in the second quarter was significant as the realized loss from hedging amounted to $4.35 per boe and the mark-to-market portion of the hedging loss was $9.09 per boe.  Although the impact of hedging is significant on our 2018 cash flow projections, Journey’s low corporate decline, ability to maintain  production for less than the hedged 2018 cash flow, and the temporary nature of our hedges bode very well for the ability of our business to sustainably generate cash flow in 2019 and beyond.

Funds flow for the second quarter was $5.3 million as compared to $9.7 million in the second quarter of 2017.  The largest contributors to the lower funds flow was: the aforementioned realized hedging loss; a 16% increase in royalties; and an 8% increase in operating expenses.  On a per share basis, funds flow was $0.14per basic share and $0.13 per diluted share. Excluding the $4.0 million in realized hedging losses, Journey would have realized $9.3 million in funds flow for the quarter or $0.24 per basic weighted average share. Journey recorded a net loss of $12.3 million in the second quarter.  The net loss per basic and weighted average share in the second quarter was $0.32 bringing the year to date loss per share to $0.53.

Journey spent $7.5 million on its exploration and development program during the second quarter.  This included the acquisition of undeveloped lands; drilling, completing and tieing-in 4.0 net wells in Matziwin and Gilby; plus ongoing exploitation projects.  The Company also divested non-core properties in the Gull Lakeand Gilby areas for total proceeds of $2.9 million, including production of approximately 147 boe/d (65% natural gas).  Due to the timing of the dispositions, the impact on the second quarter production volumes was minimal at approximately 86 boe/d.

Journey exited the second quarter with net debt of $130.6 million which was 27% higher than at December 31, 2017 and 2% higher than the $128.2 million at the end of the first quarter. The increase in net debt from December 31 was primarily attributable to the increase in leverage due to the share repurchase on February 2.  Journey is committed to reducing its leverage over the next two years with a combination of reduced capital spending and non-core asset dispositions.  Based on Journey’s forecasted capital spending, dispositions already executed and expected funds flow, Management is currently projecting 2018 year-end net debt to be in the range of $126–$129 million. The Company is currently drawn approximately $66 million on its $100 million credit facility.

Outlook

Although Journey’s production volume forecast remains unchanged for 2018, the Company has adjusted its oil and natural gas prices as well as its oil price differential outlook and operating costs for 2018.  In addition, it has also adjusted funds flow for the effects of the new price forecasts on its existing hedges.  Journey’s annual guidance is presented in the table below:

Journey’s 2018 forecasted funds flow is based upon the following annual, average prices: WTI of US$67/bbl; Company differentials of $12/bbl for oil from Edmonton light sweet prices; AECO gas of CDN$1.55/mcf; and a foreign exchange rate of $0.78 US$/CDN$.

Although capital expenditures reflect all of Journey’s forecasted investments in the Duvernay play no additional volumes or upside from this play are reflected in Journey’s guidance.

On behalf of Journey’s management team and directors we would like to thank our shareholders for their continued support through this challenging time.  There are few companies within our peer group that share the same upside leverage to rising commodity prices that Journey does, and we remain steadfast in our goal to provide shareholders with superior returns over the longer term.

About the Company

Journey is a Canadian exploration and production company focused on conventional, oil-weighted operations in western Canada. Journey’s strategy is to grow its production base by drilling on its existing core lands, implementing water flood projects, executing on accretive acquisitions.  Journey seeks to optimize its legacy oil pools on existing lands through the application of best practices in horizontal drilling and, where feasible, with water floods.