Seven Generations’ board approves $1.25 billion capital budget in 2019

January 10, 2019 Globe Newswire

Includes $1.1 billion to maintain production and $150 million for infrastructure and delineation projects

CALGARY, Alberta, Jan. 10, 2019 (GLOBE NEWSWIRE) — Seven Generations Energy’s Board of Directors has approved a 2019 capital investment budget of $1.25 billion that is expected to be funded from operations and that, given the current price environment, strikes a reasoned balance between current production and future growth projects.

“Our 2019 budget maintains our balance sheet strength while making prudent investments that position us for greater profitability when commodity prices and market conditions recover. 7G’s 2019 capital investments are expected to be approximately half a billion dollars lower than they were in 2018. Despite our lower capital investments, we expect to both maintain production at the 2018 level and make substantial investments for future growth. Approximately 12 percent of our 2019 budget supports important investments that will enhance understanding of our Lower Montney resource through further delineation drilling and will expand future growth capabilities with valuable infrastructure,” said Marty Proctor, 7G’s President and Chief Executive Officer.

2019 budget highlights

At US$50/bbl WTI, 2019 capital investments are projected to:
° Approximately equal adjusted funds flow
° Generate a cash return on invested capital greater than 13 percent
$1.25 billion capital investment program includes approximately:
° $1.1 billion of maintenance capital consisting of $780 million for core Nest 2 development and $320 million for Nest 1 and 3 development. Nest 3 development capital includes key infrastructure and pipelines required to fully integrate the region into the company’s existing gathering and processing network
° $125 million for Lower Montney and Wapiti region delineation drilling and advanced completion design testing along the Nest 1 north and east perimeters
° $25 million of value-enhancing infrastructure projects including production and pressure optimization initiatives, workovers and water handling
2019 production forecast of approximately:
° 200,000 to 205,000 boe/d of total production, including 75,000 boe/d of condensate
° 36 – 38% condensate
° 58 – 60% total liquids
° 40 – 42% natural gas
Capital allocation philosophy
7G is committed to an investment philosophy that maximizes shareholder returns over the long term and manages financial risk by maintaining a strong balance sheet supported by a measured hedging program. If stronger commodity prices lead to increased corporate cash flows, the company will evaluate the optimal allocation of additional funds to alternatives that may include share buybacks, high-return production growth and margin-enhancing infrastructure investments.

7G’s first-half-weighted capital investment plan in 2018 led to fewer new wells being brought on in late 2018. Similar to previous years, the 2018 investment profile will result in reduced production volumes during the first half of 2019. 7G’s 2019 production additions in the second half of the year are planned to coincide with additional oil egress solutions out of Western Canada that should add further support to regional condensate demand and price dynamics.

7G’s 2019 production profile will moderate corporate decline rates resulting in a reduced maintenance capital requirement in 2020 and beyond, which is expected to help drive a meaningful free cash flow profile in a US$50-$55/bbl WTI price environment. 7G’s 2019 key, non-recurring, infrastructure investments in Nest 3 of $30 million will add approximately 40,000 boe/d of capacity to its base gathering system. This will support near term development of the area’s prolific multi-year drilling inventory and potential inventory expansion in the region.

2019 delineation-drilling investments follow the company’s recent successful Lower Montney result that has averaged 1,050 boe/d (72 percent condensate) in its first 90 days of production despite a completions intensity lower than the company’s standard. The company expects to test five to seven new wells in the Lower Montney bench in 2019 across its Nest 2 and 3 areas in order to assess resource potential across 7G’s broader land holdings.

2019 guidance and outlook

Production
Condensate (%) 36 – 38
Total liquids (%) 58 – 60
Natural gas (%) 40 – 42
Total production (Mboe/d) 200 – 205
H1 2019 (Mboe/d) 195 – 200
H2 2019 (Mboe/d) 205 – 210
Expenses
Royalties (%) 5 – 7
Operating ($/boe) 5.00 – 5.50
Transportation ($/boe) 6.75 – 7.25
G&A ($/boe) 0.80 – 0.90
Interest ($/boe) 1.80 – 1.90
Capital investment ($mm) 1,250
Drilling and completions (%) 55 – 60
Pipelines and infrastructure (%) 30 – 35
Delineation (%) 10 – 15
2018 update
7G expects 2018 production to average approximately 202,000 boe/d and capital investments to be in line with the company’s 2018 guidance. Due to fourth quarter 2018 condensate price weakness, the company deferred until January the start-up of seven new wells that were drilled, completed and tied-in during November 2018.

Midstream update
As previously disclosed, 7G has initiated a formal process to identify partnership opportunities involving its processing plant located in the Gold Creek region. The company has received notable interest from a broad range of potential strategic and financial partners. This process affirms the value and revenue potential of the company’s infrastructure network. 7G will provide updates on midstream developments in due course.

Financial strength
7G exited the year with approximately $80 million of cash on hand. The company recently extended the maturity of its currently undrawn $1.4 billion credit facility to the fourth quarter of 2023. This credit facility is subject to standard net-debt-to-EBITDA covenants and now has an accordion feature that provides 7G with the option to add an additional $300 million to the facility. The credit agreement and amending agreements for the credit facility are available on SEDAR at www.sedar.com.

Normal Course Issuer Bid (NCIB) update
With the initiation of the company’s NCIB on November 5, 2018, 7G has purchased and cancelled 9.67 million shares or 2.7 percent of its issued and outstanding shares at an average price of $10.72 per share as of December 31, 2018. The company believes the purchase of its shares has created value for shareholders and will continue to evaluate opportunities to return capital to shareholders by allocating cash on hand and funds flow in excess of its capital investment plan to the NCIB program.