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Seven Generations delivers $1.67 billion of adjusted funds flow, or $4.60 per share, up 36 percent in 2018


Proved plus probable reserves valued at $12.3 billion by independent reserve evaluator as of December 31, 2018

CALGARY, Alberta–(BUSINESS WIRE)–2018 HIGHLIGHTS

  • 2018 adjusted funds flow of $1.67 billion or $4.60 per share, representing a per share increase of 36 percent compared to 2017.
  • 2018 net income of $440 million, $1.21 per share. Operating income of $574 million, $1.58 per share, up 76 percent versus 2017. As of December 31, 2018, 7G’s trailing 12-month return on capital employed was 12.9 percent and its cash return on invested capital was 19.1 percent.
  • 2018 sales volumes were 16 percent higher than 2017, averaging 202,600 boe/d, with liquids representing 60 percent of 7G’s total production. Condensate sales of 76,400 bbls/d increased by 25 percent in 2018. Fourth quarter condensate sales were 81,800 bbls/d, total liquids sales were 129,200 bbls/d, and total sales were 215,100 boe/d.
  • 7G’s market access initiatives drove fourth quarter natural gas realizations to $4.77 per Mcf due to the company’s marketing arrangements in the US Midwest, Gulf Coast and Eastern Canada.
  • 2018 capital investments were $1.77 billion. Drilling and completion costs per-well were reduced by 10 percent year-over-year.
  • 7G completed its natural gas processing facility at Gold Creek on time and under budget. The facility successfully tested its 250 MMcf/d design capacity during December.
  • Year-end gross proved plus probable (2P) reserves of 1.64 billion boe were valued at $12.3 billion as at December 31, 2018, on a before-tax net present value basis, at a 10 percent discount rate, by McDaniel & Associates Consultants Limited (McDaniel), the company’s independent qualified reserves evaluator. At 2018 production levels, this represents a 22-year reserve life index.

Surpassing the 200,000 boe per day milestone

“Our hard-working team delivered excellent technical, operating and financial performance in 2018, achieving a significant milestone – annual average production that exceeded 200,000 boe/d. Capital investments of $1.77 billion remained within our capital guidance range as we grew daily production by 16 percent to 202,600 boe/d and enhanced the value of our assets through disciplined scientific analysis and successful delineation drilling,” said Marty Proctor, 7G’s President & Chief Executive Officer.

Enhancing asset value with disciplined self-funded investment in 2019

“Assuming a WTI oil price of US$50 per bbl and a Henry Hub natural gas price of US$3.00 per Mcf in 2019, we plan a self-funded capital program of $1.25 billion, about $500 million less than the 2018 program. This 2019 capital plan maintains annual average production above 200,000 boe/d while continuing to enhance the value of our asset base through further delineation of the lower Montney and development of the Nest 3 and Nest 1 areas of our Kakwa River Project. Our strategy in this commodity price environment includes lower growth that mitigates production decline rates and preserves our top-tier drilling inventory, disciplined execution to improve operating and capital cost efficiencies, infrastructure investments to lower operating costs and expand margins, plus delineation drilling to increase our inventory and maximize lower Montney value,” Proctor said.

OPERATIONAL AND FINANCIAL HIGHLIGHTS

Three months ended
December 31,

Three months ended
September 30,

Year ended
December 31,

($ millions, except boe
and per share amounts)
2018 2017 % Change 2018 % Change 2018 2017 % Change
Sales volumes
Condensate (mbbl/d)(1) 81.8 70.0 17 87.3 (6) 76.4 61.3 25
NGLs (mbbl/d)(1) 47.4 45.1 5 47.3 44.4 41.1 8
Liquids (mbbl/d) 129.2 115.1 12 134.6 (4) 120.8 102.4 18
Natural gas (MMcf/d) 515.4 493.4 4 511.3 1 490.5 435.5 13
Total sales volumes (mboe/d)(2) 215.1 197.3 9 219.8 (2) 202.6 175.0 16
Liquids % 60% 58% 3 61% (2) 60% 58% 3
Realized prices
Condensate ($/bbl)(1) 53.57 67.95 (21) 79.26 (32) 71.63 61.28 17
Natural gas ($/Mcf) 4.77 3.53 35 3.65 31 3.98 3.84 4
NGLs ($/bbl)(1) 8.44 18.30 (54) 14.02 (40) 12.21 14.56 (16)
Total ($/boe)(2) 33.66 37.13 (9) 42.99 (22) 39.33 34.45 14
Royalty expense ($/boe) (0.99 ) (1.18 ) (16) (2.20 ) (55) (1.34 ) (0.97 ) 38
Operating expenses ($/boe) (5.25 ) (5.69 ) (8) (5.22 ) 1 (5.52 ) (5.60 ) (1)
Transportation, processing and other ($/boe) (7.07 ) (6.43 ) 10 (6.14 ) 15 (6.65 ) (6.09 ) 9
Operating netback before the following(2)(3) 20.35 23.83 (15) 29.43 (31) 25.82 21.79 18
Realized hedging gains (losses) ($/boe) (1.58 ) 0.38 nm (1.79 ) (12) (1.33 ) 0.25 nm
Marketing income ($/boe)(3) 0.20 0.65 (69) 0.28 (29) 0.39 0.39
Operating netback ($/boe)(3) 18.97 24.86 (24) 27.92 (32) 24.88 22.43 11
Adjusted funds flow ($/boe)(3)(5) 17.06 22.25 (23) 25.81 (34) 22.65 19.23 18
Financial Results
Revenue ($)(4) 1,146.8 615.1 86 809.0 42 3,169.9 2,454.6 29
Net income ($) 245.4 83.1 195 196.4 25 439.9 562.5 (22)
Per share – diluted ($) 0.68 0.23 196 0.53 28 1.21 1.54 (21)
Operating income ($)(3) 66.3 129.2 (49) 208.3 (68) 573.6 326.3 76
Per share – diluted ($) 0.18 0.36 (50) 0.57 (68) 1.58 0.90 76
Cash provided by operating activities ($) 410.1 310.3 32 536.9 (24) 1,796.3 1,154.3 56
Per share – diluted ($) 1.13 0.85 33 1.47 (23) 4.94 3.17 56
Adjusted funds flow ($)(5) 337.4 403.8 (16) 522.0 (35) 1,674.2 1,228.3 36
Per share – diluted ($) 0.93 1.11 (16) 1.43 (35) 4.60 3.37 36
CROIC (%)(3) 19.1% 17.9% 7 20.5% (7) 19.1% 17.9% 7
ROCE (%)(3) 12.9% 9.8% 32 15.6% (17) 12.9% 9.8% 32
Balance sheet
Capital investments ($) 262.3 322.3 (19) 358.2 (27) 1,765.7 1,651.4 7
Available funding ($)(3) 1,345.9 1,467.4 (8) 1,379.4 (2) 1,345.9 1,467.4 (8)
Net debt ($)(5) 2,202.8 1,866.4 18 2,059.5 7 2,202.8 1,866.4 18
Weighted average shares – basic 359.2 354.7 1 361.9 (1) 358.6 353.3 2
Weighted average shares – diluted 362.3 363.9 365.7 (1) 363.9 364.4
(1) Beginning in 2018, Seven Generations began presenting C5+ (pentanes plus) in the NGL mix as a condensate volume (previously reported as an NGL volume). 2017 liquids and natural gas sales have been adjusted to conform to this current period presentation.
(2) Excludes the purchase and resale of condensate and natural gas in respect of the company’s transportation commitment utilization and marketing activities.
(3) See “Non-IFRS Financial Measures” under Reader Advisory. Certain comparative figures have been adjusted to conform to current period presentation.
(4) Represents the total of liquids and natural gas sales, net of royalties, gains (losses) on risk management contracts and other income.
(5) Refer to Note 17 of the audited consolidated financial statements of the company for the years ended December 31, 2018 and 2017.

Three months ended
December 31,

Three months ended
September 30,

Year ended
December 31,

Nest Activity 2018 2017 % Change 2018 % Change 2018 2017 % Change
Drilling(1)
Horizontal wells rig released 19 20 (5 ) 21 (10 ) 91 88 3
Average measured depth (m) 6,010 5,278 14 5,691 6 5,735 5,742
Average horizontal length (m) 2,776 2,128 30 2,557 9 2,551 2,537 1
Average drilling days per well 28 29 (3 ) 28 27 33 (18 )
Average drill cost per lateral metre ($)(2) $ 1,236 $ 1,760 (30 ) $ 1,373 (10 ) $ 1,389 $ 1,592 (13 )
Average well cost ($ millions)(2) $ 3.4 $ 3.6 (6 ) $ 3.5 (3 ) $ 3.5 $ 3.9 (10 )
Completion(1)
Wells completed 13 16 (19 ) 28 (54 ) 89 88 1
Average number of stages per well 46 39 18 58 (21 ) 48 41 17
Average tonnes pumped per metre 1.9 2.2 (14 ) 2.0 (5 ) 2.3 2.4 (4 )
Average tonnes pumped per well 4,417 5,643 (22 ) 5,206 (15 ) 5,402 6,236 (13 )
Average cost per tonne(2) $ 1,282 $ 1,107 16 $ 1,240 3 $ 1,228 $ 1,190 3
Average well cost ($ millions)(2) $ 5.7 $ 6.2 (8 ) $ 6.5 (12 ) $ 6.6 $ 7.3 (10 )
Total D&C cost per well ($ millions)(2) $ 9.1 $ 9.8 (7 ) $ 10.0 (9 ) $ 10.1 $ 11.2 (10 )
(1) The drilling and completion counts include only horizontal Montney wells in the Nest. The drilling counts and metrics exclude wells that are re-drilled or abandoned.
(2) Information provided is based on field estimates and are subject to change.

OPERATIONS UPDATE

With the temporary weakness in fourth quarter Canadian condensate pricing, 7G elected to defer until January the start-up of seven Nest 2 upper/middle Montney wells that were previously drilled, completed, equipped and tied-in. This was an economic decision driven by visibility toward improved condensate differentials in the beginning of 2019. 7G has seen a significant strengthening in the Canadian condensate market with the local discount to WTI currently averaging approximately US$3.25 per bbl.

Average well drilling and completion costs in 2018 were 10 percent lower than the previous year with reductions roughly equal in both drilling and completions. Drilling activity benefitted from an 18 percent reduction in drilling days versus 2017, on wells of a similar depth and lateral length. 7G continues to evolve its completions design, which has shifted towards a higher stage count and a lower per-stage proppant intensity in order to efficiently develop and recover its resource at reduced costs. The company is encouraged with the results from its evolving completions designs and will continue to innovate and progress its resource understanding to enhance corporate returns.

7G’s third owned and operated processing plant, located in the Gold Creek area, was brought on stream in November of 2018. It was successfully tested at full capacity during December. This 250 MMcf/d interconnected plant provides heightened operating flexibility to mitigate both planned and unplanned downtime and is built to accommodate a cost-effective expansion to 500 MMcf/d. The plant’s connectivity to the NGTL and Alliance pipeline systems also provides opportunities to optimize the pricing of 7G’s natural gas and NGL revenue stream between the Alberta market and Aux Sable facilities in the US Midwest. The Gold Creek plant was designed, engineered and constructed to achieve the company’s lowest emissions intensity with a carbon dioxide emission intensity about 10 percent lower than 7G’s other plants.

7G continues to evaluate infrastructure partnership opportunities and is encouraged by the level of interest. The company is evaluating proposals aimed at enhancing the value of its infrastructure assets.

RESERVES AND RESOURCES

The following table summarizes 7G’s reserves at December 31, 2018 and 2017 as estimated by the company’s independent qualified reserves evaluator using the forecast price and cost assumptions in effect at the applicable reserves evaluation date.

Reserves

Year ended
December 31,

2018 2017
Reserve Category(1) MMboe $MM(2) MMboe $MM(2)
Gross proved developed producing (PDP) 242 2,824 211 2,470
Gross proved reserves (1P) 856 6,518 870 6,133
Gross proved plus probable reserves (2P) 1,644 12,282 1,695 11,988
Gross best estimate risked (2C) contingent resources 1,323 2,942 1,291 2,579
(1) For important additional information regarding the independent reserves and resources evaluations conducted by McDaniel, please see “Reader Advisory” and the Annual Information Form dated February 27, 2019 for the year ended December 31, 2018 that is available on SEDAR.
(2) Estimated pre-tax net present value of discounted cash flows from reserves using a 10% discount rate.

7G is committed to increasing the long-term value of its resource within one of the most economic plays in Western Canada. As discussed in 2018, the company saw increased condensate volumes and reduced natural gas volumes in its production stream. This dynamic drove a 2.5 percent increase in the pre-tax net present value of the company’s 2P reserves, despite a year-over-year reduction in reserve evaluator price forecasts and wider local price differentials. The company’s increase in condensate reserves were offset by a reduction in natural gas volumes on a boe basis. Based on 2018 production levels of 202,600 boe/d, 7G’s 1.64 billion boe 2P reserves represent more than 22 years of reserve life.

Total PDP reserve volumes increased 14.7 percent year-over-year, replacing 142 percent of 2018 production. These gains were consistent with a successful 2018 development program. Per-boe future development capital continues to fall on a 1P and 2P basis, and is consistent with the company’s 5-year trend as the company completes initial investments in its natural gas processing build-out.

The company’s 2C contingent resources increased by 2.5 percent to 1,323 MMboe representing a pre-tax net present value of $2.9 billion, an increase of 14 percent. Approximately 98 percent of the 2C contingent resources attributed to the company’s properties by McDaniel, as at December 31, 2018, are in the Montney formation and have been classified in the “development pending” project maturity subclass. 7G also includes more than 170 lower Montney locations within the 2C contingent resource estimate. Development plans for these locations are expected to be established once the 2019 lower Montney delineation program is complete.

RESOURCE DEVELOPMENT UPDATE

Nest 1 Perimeter

7G recently concluded completion operations on the first well of 2019’s Nest 1 perimeter delineation program. The company is encouraged by initial results that have exceeded expectations, with initial wellhead rates of approximately 2,200 boe/d (75% condensate) over the first 30 days. The company will use the delineation results to design gathering systems and artificial lift for full-scale Nest 1 development anticipated to begin in 2020.

Lower Montney

The company completed drilling of its comprehensive triple-stack test in January, consisting of three wells in the upper Montney, three wells in the middle Montney, and three wells in the lower Montney. Completion operations commenced in February. Following tie-in and sufficient flow data, management anticipates providing an update on initial rates in the second half of 2019. Upon successful lower Montney results, future development has the potential to benefit from improved cost efficiencies and the use of existing surface infrastructure.

NORMAL COURSE ISSUER BID (NCIB)

During 2018, the company retired 9.67 million shares at an average cost of $10.72 per share plus transaction costs, reducing its outstanding shares at the beginning of 2019 to 352.6 million, a 2.7 percent reduction of 7G’s outstanding shares. 7G continues to evaluate further allocation of excess cash to the NCIB, reduction of debt and other investment opportunities in its portfolio, subject to commodity prices generating additional adjusted funds flow in excess of its budgeted capital requirements.

OUTLOOK

7G’s 2019 guidance remains unchanged, as below:

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
Wells on-stream 65 – 70

CORPORATE UPDATE

7G is pleased to announce that Ronnie Irani, an executive and director with more than 39 years of experience in the oil and gas industry, has joined the 7G Board effective February 27, 2019. Irani is founder and Chief Executive Officer of RKI Energy Resources, LLC, a private company headquartered in Oklahoma City. He also serves as a director of Enable Midstream Partners, LP, a NYSE-listed company.

Irani was founder, President and Chief Executive Officer of RKI Exploration and Production until the company sold its assets for US$3.5 billion in 2015. He was Senior Vice President and General Manager with Dominion Resources, a Fortune 200 company, until 2005 and previously held senior executive positions at Louis Dreyfus Natural Gas Corp. and Woods Petroleum Corporation, both NYSE-listed companies. Irani has served on several private and public boards, including Quest Resource Corporation and Seventy Seven Energy Inc. He has made significant contributions to broader industry and community initiatives having served as a director of the Greater Oklahoma City Chamber of Commerce, the Integrated Petroleum Environmental Consortium, the US Department of Energy Industry Oil Review Panel, and as a founding board member and past Chair of the Oklahoma Energy Explorers.

Irani holds a Bachelor of Science in Chemistry from Bombay University, India, a Bachelor’s and a Master’s degree in Petroleum Engineering from the University of Oklahoma, and an MBA from Oklahoma City University.

CONFERENCE CALL

7G management will hold a conference call to discuss results and address investor questions today, February 28, 2019, at 9 a.m. MT (11 a.m. ET).

Participant Dial-In Numbers

Dial in – toll free: (866) 521-4909
Dial in – toll: (647) 427-2311
Webcast link:

http://event.on24.com/wcc/r/1931320-1/B530CDB6FF3FD30AA1CBED8CE94ACD14

Replay dial in toll-free: (800) 585-8367
Replay dial in toll: (416) 621-4642
Audience passcode: 9578078
Available to: March 14, 2019

Seven Generations Energy

Seven Generations Energy is a low-supply cost energy producer dedicated to stakeholder service, responsible development and generating strong returns from its liquids-rich Kakwa River Project in northwest Alberta. 7G’s corporate office is in Calgary, its operations headquarters is in Grande Prairie and its shares trade on the TSX under the symbol VII.

Further information on Seven Generations is available on the company’s website: www.7genergy.com



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