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Journey Energy Inc. Reports 2018 Reserves and Provides an Update on its Emerging Duvernay Resource Play


CALGARYFeb. 27, 2019 /CNW/ – Journey Energy Inc. (JOY – TSX) (“Journey” or the “Company“) is pleased to report its year-end 2018 oil and gas reserves evaluation.  During 2018, the Company invested approximately $27 million in capital projects net of acquisition and divestiture (“A&D“) activities. Exploration and development (“E&D“) activities accounted for approximately $32 million while A&D activities resulted in net proceeds of approximately $5 million. E&D activities included drilling and waterflood development at two of our core properties, spending on infrastructure and an investment for the future in our emerging Gilby Duvernay resource. A&D initiatives throughout the year included the disposition of certain non-core assets and consolidation of certain working interests in core areas.

After announcing the Duvernay joint venture on August 29, Journey and its partner have acquired additional Duvernay lands and now have an interest in over 165 gross sections of contiguous lands concentrated in the oil window.  Journey selected an experienced joint venture partner Kiwetinohk Resources Corp. (“KRC“) to develop this resource and Journey will retain a 37.5% working interest in its commercial development.  The initial two commitment wells have been drilled and Fraced.  It is anticipated that these wells will be on test within the next few weeks.  KRC has Fraced the Duvernay in a standing horizontal well as the first option well and is set to spud a second option well during the week of February 25th.  All costs associated with the drilling, completion and equipping of the commitment and option wells are borne by KRC. There have been no land values or reserves assigned to the Duvernay in this report.

2018 Reserve Report Highlights:

  • Proved reserves decreased by 5% over 2017, however the oil and NGL weighting increased from 45% to 47% in the same period.
  • Proved plus probable net asset value of $9.11 per basic share outstanding represents a 10% increase from $8.28 per share in 2017.
  • Proved developed producing reserves accounted for 44% of total proved plus probable reserves while proved reserves accounting for 62%.
  • Achieved finding and development costs* (“F&D”) costs, including changes in future development capital, of:
    • $19.56 per boe for proved reserves.
    • $19.58 per boe for proved plus probable reserves*Journey’s 2018 F&D costs were negatively impacted by economic revisions associated with declining commodity prices and by the allocation of less capital to drilling and completions as a portion of the overall capital invested. Journey drilled 8 conventional wells in 2018 and this resulted in reserve additions for extensions and infill drilling. The results of these expenditures exceeded our expectations on a half cycle basis. Plans for 2019 include follow up programs to build on this success. In 2018, Journey also invested higher than normal capital in conventional infrastructure projects, land acquisition in our emerging Gilby Duvernay play, and a Duvernay strat well.  No reserves have been assigned to the Duvernay in this reserves report.
  • Despite low FD&A recycle ratios for 2018, Journey has maintained attractive 3-year FD&A recycle ratios, which Journey management feels may be more indicative of the longer term potential within our asset base. For the year ended December 31, 2018, we achieved a 3-year ratio of:
    • 1.5 times for FD&A costs with proved reserves.
    • 1.8 times for FD&A costs with proved plus probable reserves.
  • Proved plus probable reserve life index of 15.5 years, with only $3.61/boe of future development capital booked in the reserve report.
  • Proved developed producing and proved plus probable developed producing reserve life index of 7.6 and 9.8 years respectively, are testaments to Journey’s low decline asset base.

Duvernay Highlights:

  • The first two Commitment wells were drilled in Q4/18 and recently Fraced in Q1/19 resulting in an average completion length of 3,390m with 60 completed Frac stages, 5,000 tonnes of total proppant and an average proppant intensity of 1.5 T/m. Journey expects flow-back testing to commence in March followed by the equipping of a single well oil battery and tie-in of the gas into Journey’s existing gas gathering system to be processed at the Journey owned 1-4 Gilby Gas Plant. With an average of 3,500m drilled horizontal sections, these wells represent some of the longest horizontal sections drilled in the East Duvernay play to date.
  • Journey and KRC have recently added approximately 20 gross sections of Duvernay lands, increasing the East Duvernay resource base to approximately 165 gross sections of contiguous lands.

COMPANY GROSS WORKING INTEREST OIL AND GAS RESERVES AND NET PRESENT VALUES

The following table provides summary information presented in the GLJ Petroleum Consultants Limited (“GLJ“) independent reserves assessment and evaluation effective December 31, 2018, (the “GLJ Report“).  GLJ evaluated 100% of Journey’s crude oil, natural gas liquids and natural gas reserves.  The evaluation of all of its oil and gas properties was done in accordance with the definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook (“COGE Handbook”) and National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities (“NI 51-101”).  Detailed reserve information will be presented in the Company’s upcoming Statement of Reserves Data and Other Oil and Gas Information section of the Company’s Annual Information Form scheduled to be filed on SEDAR on or before March 31, 2019.

Company Gross Reserves
Based on Forecast Price and Costs as at December 31, 2018

Light
Medium
Oil

Heavy

Oil

Natural 
Gas

NGLs

Total(2)

Reserves Category

(Mbbl)

(Mbbl)

(MMcf)

(Mbbl)

(Mboe)

Proved

Producing

5,717

2,963

84,302

2,357

25,087

Developed non-producing

118

5

6,170

245

1,396

Undeveloped

3,000

1,300

22,409

893

8,928

Total proved

8,835

4,268

112,881

3,495

35,412

Probable

7,062

3,045

61,175

1,670

21,972

Total proved plus probable

15,897

7,313

174,056

5,165

57,384

Included in Above

Proved plus probable producing

7,795

4,113

112,943

2,978

33,710

Notes:

(1) 

Company Gross Reserves consists of Journey’s working interest (operated and non-operated) share of reserves before deduction of royalties payable and without including royalties receivable by the Company.

(2)  

In the case of natural gas volumes, boes are derived by converting natural gas to oil using the ratio of six thousand cubic feet of natural gas to one barrel of oil (6 Mcf:1 bbl).

(3)   

Total values may not add due to rounding.

Net Present Values of Future Net Revenue (Based on Forecast Prices and Costs)

Before Tax Net Present Value
($000’s)

Reserves category

0%

5%

10%

15%

20%

Proved

Producing

322,420

257,867

212,664

180,749

157,424

Developed non-producing

15,233

10,560

8,073

6,491

5,376

Undeveloped

150,036

88,282

53,493

32,670

19,498

Total proved

487,690

356,709

274,230

219,910

182,299

Probable

541,035

326,489

217,642

155,407

116,446

Total proved plus probable

1,028,724

683,198

491,872

375,317

298,744

Included in Above

Proved plus probable producing

508,279

368,132

285,352

232,704

196,854

Notes:

(1)

Total values may not add due to rounding

(2)

Forecast pricing used is the average of the published price forecasts for GLJ Petroleum Consultants Ltd., Sproule Associates Ltd. and McDaniel & Associates Consultants Ltd. as at December 31, 2018.

(3) 

It should not be assumed that the net present values of future net revenues estimated by GLJ represent fair market value of the reserves. There is no assurance that the forecast price and cost assumptions will be attained and variances could be material.

The forecast prices and foreign exchange rates used in the GLJ Report are as follows:

WTI Cushing

Oklahoma

($US/bbl)

Edmonton

40 API
($CDN/bbl)

WCS Crude

Oil Stream 
($CDN/bbl)

Alberta

AECO-spot

($CDN/Mmbtu)

NYMEX

Henry Hub
($US/bbl)

Foreign

Exchange

($US/$CDN)

2019

58.58

67.30

51.55

1.88

3.00

0.7567

2020

64.60

75.84

59.58

2.31

3.13

0.7817

2021

68.20

80.17

65.89

2.74

3.33

0.7967

2022

71.00

83.22

68.61

3.05

3.51

0.8033

2023

72.81

85.34

70.53

3.21

3.62

0.8067

2024

74.59

87.33

72.34

3.31

3.70

0.8083

2025

76.42

89.50

74.31

3.39

3.77

0.8083

2026

78.40

91.89

76.44

3.46

3.85

0.8083

2027

79.98

93.76

78.10

3.54

3.92

0.8083

2028

81.59

95.68

79.81

3.62

4.01

0.8083

2029

83.22

97.57

81.40

3.70

4.08

0.8083

2030

84.87

99.52

83.00

3.78

4.16

0.8083

2031

86.57

101.52

84.69

3.85

4.25

0.8083

2032

88.30

103.55

86.37

3.92

4.33

0.8083

2033

90.08

105.65

88.11

4.00

4.42

0.8083

Thereafter

+2.0%/yr

+2.0%/yr

+2.0%/yr

+2.0%/yr

+2.0%/yr

0.8083

FINDING, DEVELOPMENT AND ACQUISITION COSTS

Journey’s finding and development (“F&D“) and finding, development and acquisition (“FD&A“) costs for 2018, 2017 and the three-year average are presented in the tables below.  The capital costs used in the calculations are those costs related to: land acquisition and retention, seismic, drilling, completions, tangible well site, tie-ins, and facilities, plus the change in estimated future development costs (“FDC“) as per the independent evaluator’s reserve report.  Net acquisition costs are the cash outlays in respect of acquisitions; minus the proceeds from the disposition of properties during the year.  Due to the timing of capital costs and the subjectivity in the estimation of future costs, the aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated FDC’s generally will not necessarily reflect total FDC’s related to reserve additions for that year.  The reserves used in this calculation are working interest reserve additions, including technical revisions and changes due to economic factors.  The 2018 and the three-year average capital expenditures are unaudited as the 2018 financial results are in the process of being finalized.

Proved Finding, Development & Acquisition Costs

2018

2017

3 Year

Capital expenditures (including A&D) ($000’s)

26,608

65,543

99,095

Change in future capital ($000’s)

11,507

20,073

44,257

Total capital for FD&A (000’s)

38,115

85,616

143,352

Reserve additions, including A&D (Mboe)

1,783

10,834

16,820

Proved FD&A costs – including changes in future capital ($/boe)

21.38

7.90

8.52

Proved FD&A costs – excluding changes in future capital ($/boe)

14.92

6.05

5.89

Recycle ratio(1)

Including changes in future capital

0.6

1.6

1.5

Proved plus Probable Finding, Development

& Acquisition Costs

2018

2017

3 Year

Capital expenditures (including A&D) ($000’s)

26,608

65,543

99,095

Change in future capital ($000’s)

(1,712)

41,710

30,031

Total capital for FD&A (000’s)

24,896

107,253

129,126

Reserve additions, including A&D (Mboe)

877

16,058

18,028

Proved plus Probable FD&A costs – including changes in
future capital ($/boe)

28.39

6.68

7.16

Proved plus Probable FD&A costs – excluding changes
in future capital ($/boe)

30.34

4.08

5.50

Recycle ratio (1)

Including changes in future capital

0.5

1.9

1.8

Proved Finding & Development Costs

2018

2017

3 Year

Capital expenditures (excluding A&D) ($000’s)(2)

31,738

30,406

77,640

Change in future capital ($000’s)(2)

14,567

(985)

32,205

Total capital for F&D ($000’s)

46,305

29,421

109,845

Reserve additions, (excluding A&D) (Mboe)

2,367

1,007

7,510

Proved F&D costs – including changes in future capital
($/boe)

19.56

29.22

14.63

Proved F&D costs – excluding changes in future capital
($/boe)

13.41

30.19

10.34

Recycle ratio (1)

Including changes in future capital

0.7

0.4

0.9

Proved Plus Probable Finding & Development Costs

2018

2017

3 Year

Capital expenditures (excluding A&D) ($000’s)(2)

31,738

30,406

77,640

Change in future capital ($000’s)(2)

4,469

(1,860)

18,413

Total capital for F&D ($000’s)

36,207

28,546

96,053

Reserve additions (excluding A&D) (Mboe)

1,850

1,203

6,098

Proved  plus Probable F&D costs – including changes in
future capital ($/boe)

19.58

23.73

15.75

Proved plus Probable  F&D costs – excluding changes in
future capital ($/boe)

17.16

25.28

12.73

Recycle ratio (1)

Including changes in future capital

0.7

0.5

0.8

Notes:

(1)   

Recycle ratio is calculated as the operating netback per boe divided by F&D or FD&A costs per boe as applicable. The operating netbacks used in the respective years are as follows: 2018 (unaudited) – $13.11/boe; 2017 – $12.56 and the three year average is $12.65.

(2)  

Development capital has been adjusted for the effects of reserves categorized as acquisitions and dispositions.

FUTURE DEVELOPMENT COSTS

The following table provides the breakdown of future development costs deducted in the estimation of the future net revenue attributable to the proved and proved plus probable reserve categories noted below:

Year

Proved

($000’s)

Proved Plus 
Probable
($000’s)

2019

22,673

24,753

2020

27,009

56,154

2021

33,762

71,953

2022

24,197

37,877

2023

8,551

8,551

Remaining

6,598

7,625

Total (Undiscounted)

122,790

206,913

RESERVE LIFE INDEX

The Company’s reserve life index (“RLI“) is calculated by taking the Company Gross Reserves from the GLJ Report and dividing them by the projected 2019 production as estimated in the GLJ report.

Company Gross
Reserves

2019 Company
Gross Production

RLI

Reserves Category

(Mboe)

(Mboe)

(Years)

Proved, developed, producing

25,087

3,315

7.6

Total proved

35,412

3,545

10.0

Proved plus probable producing

33,710

3,432

9.8

Proved plus probable

57,384

3,696

15.5

NET ASSET VALUE

The following table provides a calculation of Journey’s estimated net asset value (“NAV“) and net asset value per share (“NAVPS“) as at December 31 based on the estimated future net revenues associated with Journey’s reserves as presented in the GLJ Report.  The following numbers were used in the NAV calculation and are pending finalization of the year-end audit: 1) net debt of approximately $135 million; and 2) funds flow of approximately $18 million, based on production of approximately 10,075 boe/d (47% oil and NGL’s) for the year.

Reserves Category

Net Asset Value ($000’s)

Net Asset Value Per share ($)

2018(1)

2017(1)

%

2018(2)

2017(2)

%

Proved, developed, producing

77,886

148,726

(48)

1.99

2.90

(31)

Total proved

139,452

204,641

(32)

3.56

3.99

(11)

Proved plus probable producing

150,574

223,320

(33)

3.84

4.36

(12)

Total proved plus probable

357,094

424,145

(16)

9.11

8.28

10

Notes:

(1)  

Aggregate NAV is calculated by taking the future net revenues per the GLJ report, on a before tax basis, discounted at 10% and subtracting net debt at December 31, 2018 of approximately $134,800 thousand (unaudited);  (December 31, 2017 – $103,021 thousand).

(2)  

Year-end NAVPS is calculated by taking the NAV and dividing it by the basic shares outstanding as at December 31, 2018 of 39,218 thousand shares (December 31, 2017 – 51,241 thousand). All share counts have been rounded to the nearest 1,000 shares.

Duvernay Resource Play Update

Since entering into the joint venture arrangement on August 29th, 2018, KRC has been actively drilling and completing the initial two well commitment phase, as well as re-entering an existing standing cased well as part of the Five Option Well Phase under the terms of the joint venture.

As previously indicated, the joint venture arrangement contemplates a two well commitment phase followed by a five well option phase.  KRC and Journey continue to work together in formulating the most effective drilling program to delineate the resource, mitigate land expiries and test potential development concepts.   Details and an operations update of each phase are as follows:

Two Well Commitment Phase Update

  • For each well of the two well commitment phase, KRC will pay 100% of the capital costs to drill, complete, and equip and tie in and have a 100% working interest in such wellbore only before payout of 58.33% of its capital costs. Journey will retain a 3.75% gross over-riding royalty on the production from each well prior to payout. After payout, and conversion by Journey of its royalty, KRC will have a 70.83% working interest and Journey will have a 29.17% working interest in each of the commitment phase wellbores. After the earning obligations have been satisfied, the joint working interests in the balance of each block of earned lands outside of the two commitment wells, will be KRC 62.5% and Journey 37.5%. KRC will be the operator of all of the lands earned.
  • KRC has drilled and completed the following two Commitment Phase wells: Test Well #1: HZ 102/16-15-042-03W5/00 (6,500m TMD; 3,590m horizontal length)Completed length:  3,530m Completed stages:  68 Total proppant: 5,361 tonnes Proppant Intensity: 1.52 tonnes/mTest Well #2 HZ 102/15-31-042-03W5/00 (6,352 TMD; 3,413m horizontal length)Completed length:  3,248m Completed stages:  52 Total proppant: 4,727 tonnes Proppant Intensity: 1.44 tonnes/mJourney expects flow-back testing on each of Test Well #1 & #2 to commence in March followed by the equipping of a single well oil battery and the tie-in of associated natural gas into Journey’s existing Gilby gas gathering system to be processed at the Journey owned 1-4 Gilby gas plant.

Five Well Option Phase

  • For the five well option phase, KRC will pay 100% of the capital costs, and have a 100% working interest, before payout of 33.33% of its costs to drill, complete, equip and tie in. Journey will receive no royalty prior to payout. After payout, KRC will have 70.83% working interest in the option wellbores while Journey will have a 29.17% working interest. After earning, the final working interests in the applicable earned Option blocks, outside of the five option wells, will be KRC 62.5% and Journey 37.5%. KRC will be the operator of all of the lands earned.
  • KRC is currently active on the following two option phase wells: Option Well #1: HZ 100/12-09-044-03W5/00 (1,400m horizontal length) KRC re-entered the standing, cased well, extended the well 200m and performed two 100 tonne Frac’s on the extended portion. KRC is currently completing the original 1,200m existing lateral section of the well and expects the flow-back testing operation to commence thereafter.
  • Option Well #2: HZ 100/11-02-042-04W5/00 (6,590m TMD; 3,400m horizontal length) KRC has licensed this well and expects to spud the well during the week of February 25th. The current well path anticipates a horizontal length similar in nature to the commitment wells. After drilling operations, Journey anticipates Fracing operations to occur early in the second quarter followed by the flow-back testing operation.

During the fourth quarter of 2018, Journey and KRC were successful in adding approximately 20 gross sections of Duvernay lands, thereby increasing the joint ventures’ resource base to approximately 165 gross sections of contiguous lands.

Journey looks forward to updating our shareholders on future activities in the East Duvernay as further information becomes available.

Outlook

In future years, when Journey reflects upon 2018, it may turn out to be both the most challenging and the most transformational year in our corporate history.  Early in 2018, Journey repurchased and canceled 25% of our outstanding shares from its then majority shareholder.  It was challenging for the impact it had on our balance sheet, yet transformational for placing the control of our own destiny in the hands of all shareholders.  Also, early in 2018, Journey through a series of transactions made a strategic investment in our future by assembling over 100 sections of land in the heart of the East Duvernay oil fairway.  It was challenging for the impact this had on our F&D costs and balance sheet, yet transformational in terms of the potential the Company can realize over time from this investment.

Journey has decided to take a conservative approach to capital spending for 2019 in light of the historically wide differentials experienced in the fourth quarter of 2018. The Alberta Government announced a production curtailment initiative in December designed to improve the relative pricing for Canadian barrels.  Clearly any initiative such as this will have its detractors’, however, the success of this initiative early in 2019 for a company like Journey is apparent, as the differentials have since contracted to the $57 USD/bbl level.   Journey has prudently decided to delay the initiation of our 2019 capital program until June, reduce our forecasted capital program from $40 million to $30 million, and carefully monitor volatility in commodity pricing to insure our debt levels are reduced from 2018 exit debt levels by year end 2019.

Journey’s initial 2019 guidance is presented in the table below:

Annual average production

9,200 – 9,600 Boe/d (49% liquids)

Exploration and development capital

$30 million

Funds flow

$33-37 million

Year-end net debt

$128 – $132 million

Funds flow per basic weighted average share

$0.84 – $0.94 share

Corporate annual decline rate

16%

Journey’s 2019 forecasted funds flow is based upon the following assumed annual, average prices: WTI of $58.50/bbl USD; Company differentials of $5.50/bbl USD for oil from Edmonton light sweet prices; realized natural gas price of CDN$1.90/mcf CDN; and a foreign exchange rate of $0.76 US$/CDN$.

In August of 2018 Journey entered into a joint venture relationship with KRC for the early stage development of its Duvernay resource play.  KRC’s focus is to take this play from proof of concept to commercial success.  In the most likely scenario, by the end of 2019, KRC will have drilled six and completed and equipped seven horizontal Duvernay test wells on our joint venture block.  This project is not something Journey could have funded internally for 2019 on its own.  In 2019, Journey shareholders will have the opportunity to benefit from KRC’s expertise and their capital investment to realize significant value on our go forward 37.5% working interest in a significant resource.

Over the course of 2019, we look forward to reporting to you on all of the challenges and transformations this year will hold for us. We thank you for both your patience and your support as we navigate through these volatile times.

About the Company

Journey is a Canadian exploration and production company focused on oil-weighted operations in western Canada.  Journey’s strategy is to grow its production base by drilling on its existing core lands, implementing waterflood projects, and by 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. Journey is also in the early phases of advancing development of an unconventional shale resource play in the oil window of the Duvernay, in the western shale basin of our central core area.



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