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Razor Energy Corp. Announces Strategic Acquisition and Second Quarter 2019 Results


CALGARY, Alberta, Aug. 21, 2019 (GLOBE NEWSWIRE) — Razor Energy Corp. (“Razor” or the “Company”) (TSXV: RZE) is pleased to announce a strategic acquisition with Little Rock Resources Ltd. (“Little Rock”) and its second quarter 2019 financial and operating results. Selected financial and operational information is outlined below and should be read in conjunction with Razor’s unaudited condensed consolidated interim financial statements and management’s discussion and analysis for the quarter ended June 30, 2019 which are available on SEDAR at www.sedar.com and the Company’s website www.razor-energy.com.

STRATEGIC ACQUISITION

The Company has entered into a binding pre-acquisition agreement (the “Pre-Acquisition Agreement”) with Little Rock, an arm’s length private exploration and production company operating in southern Alberta. The Pre-Acquisition Agreement provides for the acquisition by Razor of all the issued and outstanding common shares (the “Little Rock Shares”) of Little Rock (the “Transaction”). There are 13,293,405 Little Rock Shares issued and outstanding.

Under the terms of the Pre-Acquisition Agreement, Little Rock shareholders will receive 0.45 of a Razor common share for each Little Rock Share held. All the officers and directors of Little Rock have entered into support agreements in favor of the Transaction. The Transaction includes a reciprocal break fee of $0.5 million.

The Transaction implies a value of approximately $12.7 million for Little Rock, including $10.6 million of equity from Razor and the assumption of Little Rock’s net debt of $2.1 million. Little Rock’s current production is approximately 900 boe/d, while independently evaluated proved developed producing reserves were 2.15 MMBoe at December 31, 2018.

STRATEGIC RATIONALE

Razor has focused on the exploitation and optimization of legacy oil and gas producing fields, as demonstrated with its success in Swan Hills and Kaybob. Little Rock’s assets share similar operational criteria and opportunities and provide Razor with a second core region in southern Alberta, with a significant presence in the Jumpbush, Majorville, Badger, Enchant and Chin Coulee areas. Razor is aggressively seeking additional corporate and asset consolidation opportunities.

The table below are values and metrics based on Little Rock’s Reserve Report (as defined herein):

Reserves Category Net Present Value of Future
Net Revenue, Before Income
Taxes Discounted at 10% 1
Working Interest
Reserves boe
Working Interest Reserves
boe / Implied Transaction Value
Proved Producing $16,451,000 2,148,000 $5.93
Total Proved $42,087,000 3,228,000 $3.95
Total Proved Plus Probable $68,394,000 4,719,000 $2.70

1) Estimated values of future net revenue disclosed do not represent fair market value.

Using strip pricing assumptions and select maintenance spending, the total Transaction cost (including assumed debt) is approximately 3.6 times estimated annualized 2019 funds flow.

In addition to over 400 boe/d of well reactivation upside, drilling upside within certain Mannville lithic channels has been identified. Razor will carefully consider using different techniques to exploit this resource. Power generation, transportation and oil marketing opportunities will also be pursued within the areas.

The board of directors of each of Razor and Little Rock have unanimously approved the Transaction and recommended that Little Rock shareholders support the Transaction. The Transaction remains subject to customary closing conditions including the acquisition by Razor of not less than 90% of the Little Rock shares, the TSX Venture Exchange and other regulatory approvals, and is expected to close on or about September 19, 2019.

NEAR AND MEDIUM-TERM OBJECTIVES

•     Strengthening the balance sheet by reducing capital spend for the remainder of 2019 and actively seeking and considering business combinations with other oil and gas producers as well as service companies;
•     Continuing to invest in infrastructure and equipment and increasing efficiencies;
•     Improving production efficiency through low-risk, lower-cost capital activities which include waterflood optimization,
stimulations, recompletions and workovers;
•     Developing a technically viable and commercially sustainable solution to recover geothermal waste heat;
•     Analyzing further ancillary opportunities including various power generating projects, oil blending and services integration;
•     Maintaining the monthly dividend; and
•     Acquiring and consolidating complementary assets and disposing assets when appropriate.

Q2 2019 HIGHLIGHTS

OPERATING

•     Sales volumes averaged 4,332 boe/d, down 14% from the same quarter of last year, mainly due to operational challenges resulting from third party fuel gas composition and supply issues, the failure of a third-party fuel gas line that caused outages at Razor’s major Swan Hills properties and wells awaiting downhole repair. Sales volumes were higher than production volumes in the second quarter as the Company continued selling inventory accumulated during Q4 2018.
•     Reported cash flows from operating activities of $8.3 million in the second quarter of 2019 compared to $3.8 million in the second quarter of 2018.
•     Reported funds flow of $3.9 million in the second quarter of 2019 compared to $8.5 million in the second quarter of 2018.
•     Reported a $1.7 million net loss in the second quarter of 2019 compared to $2.5 million net income in the same period last year.

CAPITAL

•     Invested $4.6 million in its capital program in the second quarter of 2019, primarily in the well reactivation program.
•     Reactivated 11 gross (10.9 net) wells during the second quarter of 2019, resulting in 205 boe/d of additional production.

DIVIDENDS

•    Paid a monthly cash dividend of $0.0125 per share for a total of $0.6 million in dividends paid in the quarter. The dividend is paid monthly and is   subject to commodity prices, production levels and other factors.

SELECT QUARTERLY HIGHLIGHTS

The following tables summarizes key financial and operating highlights associated with the Company’s financial performance.

  Three Months Ended June 30, Six Months Ended June 30,
($000’s, except for per share amounts and production)  2019  2018  2019  2018
Production
Light Oil (bbl/d) 2,744 3,274 2,704 3,153
Gas (mcf/d) 1 3,414 4,056 3,670 3,673
NGL (boe/d) 831 1,074 933 924
Total (boe/d) 4,143 5,023 4,249 4,690
Sales volumes 2
Light Oil (bbl/d) 2,932 3,274 2,837 3,153
Gas (mcf/d)1 3,414 4,056 3,670 3,673
NGL (bbl/d) 831 1,074 933 924
Total (boe/d) 4,332 5,023 4,382 4,690
Closing oil inventory volumes (bbls) 11,228 11,228
Revenue
Oil and gas sales 22,853 27,907 42,468 50,141
Sale of commodities purchased from third parties 2,413 7,031 8,454 7,031
Blending and processing income 2,332 3,560 4,573 5,935
Other revenue 272 1,642 625 1,875
Total revenue 27,870 40,140 56,120 64,982
Cash flows from operating activities 8,263 3,783 11,867 9,240
Per share -basic and diluted 0.54 0.24 0.78 0.59
Funds flow 3 3,878 8,468 5,043 13,786
Per share -basic and diluted 0.26 0.54 0.33 0.88
Adjusted funds flow 3 3,624 8,733 5,001 14,263
Per share -basic and diluted 0.24 0.55 0.33 0.91
Net income (loss) (1,746 ) 2,504 (11,537 ) 2,771
Per share – basic and diluted (0.12 ) 0.16 (0.76 ) 0.18
Dividends per share 0.04 0.08
Capital expenditures 4,619 11,981 8,694 26,383
Netback ($/boe)
Oil and gas sales 4 57.98 61.05 53.55 59.07
Royalties (8.81 ) (8.61 ) (7.90 ) (10.50 )
Operating expenses (34.12 ) (32.63 ) (34.09 ) (29.48 )
Transportation and treating (2.72 ) (2.78 ) (2.34 ) (2.29 )
Operating netback 3 12.33 17.03 9.22 16.80
Income (loss) on sale of commodities purchased from third parties3 0.40 0.18 (0.14 ) 0.10
Net blending and processing income 3 3.01 3.88 3.28 3.88
Realized loss on commodity contracts settlement (4.72 ) (2.61 ) (2.72 ) (3.20 )
Other revenues 0.69 3.59 0.79 2.21
General and administrative (2.06 ) (2.96 ) (3.87 ) (2.99 )
Interest (3.13 ) (2.46 ) (3.06 ) (2.57 )
Corporate netback 3 6.52 16.65 3.50 14.23

1) Gas production and sales volumes include internally consumed gas used in power generation.
2) Sales volumes include change in inventory volumes.
3) Refer to “Non-IFRS measures”.
4) Excludes the effects of financial risk management contracts but includes the effects of fixed price physical delivery contracts.

June 30, December 31,
($000’s, except for share amounts) 2019 2018
Total assets 172,367 157,937
Cash 5,324 2,239
Long-term debt (principal) 46,017 46,155
Minimum lease obligation 5,108 3,860
Net debt 1 60,632 54,244
Number of shares outstanding 15,093,434 15,188,834
1) Refer to “Non-IFRS measures”.


OPERATIONAL UPDATE

Sales volumes in the second quarter of 2019 averaged 4,332 boe/d, down 14% from the sales volumes in the same period in 2018 as the Company continued selling inventory accumulated during Q4 2018.

Production averaged 4,143 boe/d in Q2 2019 down 18% from the same quarter in 2018. Production in the second quarter was adversely impacted by the failure of a third-party fuel gas line, which caused outages at Razor’s major Swan Hills properties. Razor achieved a solution to enable temporary resumption of production. However, if Razor had not taken immediate action to secure fuel gas at key facilities within the Swan Hills area, production would have decreased by approximately 2,200 boe/d, which would have reduced Q2 2019 production by approximately 1,100 boe/d. Third-party fuel gas composition issues continued in Q2 2019, resulting in further production interruptions in the Swan Hills area throughout the quarter. These operational disruptions accounted for 285 boe/d in reduced production as compared to Q2 2018.  It is expected that these issues will be addressed in Q3 2019. Kaybob production was down in this quarter due to the sale of the Kaybob BHL Unit 1 in Q1 2019, as this Unit accounted for 173 boe/ d of production in Q2 2018. Kaybob production was further impacted in Q2 2019 compared to Q2 2018 due to wells awaiting downhole workovers.

Effective July 2018, Razor began utilizing a portion of its own gas production to generate electrical power. Gas production of internally consumed gas for the three and six months ended June 30, 2019 was 1,055 mcf/d and 933 mcf/d, respectively.

Due to the unprecedented discounts on Western Canadian Light Sweet Oil (“MSW”) in the fourth quarter of 2018, Razor did not sell all of its produced oil, instead Razor was temporarily stored it in existing surface tanks which established material inventory. MSW differentials and WTI pricing improved significantly in 2019 and the Company has been reducing its inventory levels. As at June 30, 2019, Razor had 11,228 bbls of light oil inventory (December 31, 2018 – 35,267 bbls).

Razor realized an oil price of $76.48 per barrel during the second quarter of 2019, which was a 4% discount to the WTI (CAD), down from the 11% and 9% discounts in Q1 2019 and Q2 2018, respectively, mostly due to the tightening of the MSW differential to WTI since Q4 2018.

During the second quarter of 2019, the Company realized an average operating netback of $12.33/boe, down 28% from the second quarter of 2018, due to lower realized prices, decreased production volumes and higher per boe operating expenses. For the first six months of 2019, operating netback was down 45% from the same period in 2018 as a result of lower realized prices, which were down 9%, and higher operating costs, which were up 16%.

Royalty rates averaged 15% in the second quarter of 2019 compared to 14% for the same period in 2018. This increase is mostly due to the relative decrease in gas production compared to oil production, as gas volumes attract lower royalty rates than oil volumes. For the first six months of the year, royalties averaged 15%, down 17% from the same period last year, mostly due to lower prices and production volumes.

Operating expenses increased 5%, on a per boe basis, in the second quarter of 2019 compared to the same period in 2018, mostly due to lower sales volumes. On a dollar basis, operating expense was down 10% in the second quarter compared to the second quarter in 2018.  Workovers and facility and pipeline integrity expenses averaged $8.52/boe in the second quarter of 2019 compared to $9.23/boe in the same quarter of 2018. For the first six months of the year, operating costs were an average of 16% higher compared to the same period last year, mostly due to increased workover costs.

The top cost drivers, fuel and electricity, labour, property taxes and repairs and workovers accounted for 71% of total operating expenses in the second quarter of 2019 (70% in Q2 2018). Electricity and fuel increased 10% in the quarter due to failure of a third-party fuel gas pipeline in May 2019 as well as third party fuel gas composition issues that started in February 2019 and continued in Q2 2019.  In order to minimize production disruptions, as a result of these unforeseen gas supply disruptions, Razor trucked in compressed natural gas at a cost of $1.1 million or $2.73/boe in the second quarter of 2019. In June 2019, the Company implemented an alternative to natural compressed gas by repurposing certain pipelines to supply the gas required.  Excluding the cost of compressed natural gas, electricity and fuel costs decreased 16% in Q2 2019 from Q2 2018, mostly due to decreased usage of grid-based electricity directly attributable to the installation of natural gas power generation in July 2018.

Workovers decreased 64% in Q2 2019 from Q2 2018, accounting for 8% of operating expenses in the second quarter, down from 18% in the same period last year. Similarly, pipeline and facility repairs decreased 29% in Q2 2019 from Q2 2018, accounting for 17% of operating expenses in Q2 2019. For the first six months of the year, workovers increased 21%, mostly due to work deferred from Q4 2018 being completed in Q1 2019 and compressed natural gas costs in Q2 2019.

CAPITAL PROGRAM & GUIDANCE ADJUSTMENT

In the second quarter of 2019, the Company reactivated a total of 11 gross (10.9 net) wells, 7 of which were brought on production in the quarter.  The resulting production was 205 boe/d net.  The reactivation capital includes 9 Virginia Hills reactivations, 1 South Swan Hills Unit reactivation and 1 Kaybob reactivation.

During second quarter of 2019, Razor invested $0.8 million in the design phase of its co-produced geothermal electricity project. The Company expects the capital cost of the project to be $15 to $20 million, generating 3 to 5 MW of renewable electricity, with a $5 million contribution from Natural Resources Canada’s Clean Growth Program and a $2 million contribution from Alberta Innovates.

During the first half of 2019, Razor received $3.0 million in government grants from the clean power development and energy efficiency initiatives.

In response to lower than anticipated cash flow from operations resulting from the third-party outages, the Company anticipates capital spending in 2019 to be reduced $3.0 to $10.5 million net of government grants, including $1.0 million on end- of-life well and facility expenditures.

As a result of lower capital spending, third-party fuel gas pipeline supply and gas composition challenges in the Swan Hills area, additional third-party production curtailments starting in July 2019 at Simonette, the decision to shut in uneconomic gas production and offset by the business acquisition announced herein, Razor has revised its full-year production guidance to between 4,400 boe/d and 4,900 boe/d. The range reflects the uncertainty of when third-party production will resume.

Razor is working closely with the operators of the facilities and pipelines impacting production. Gas composition issues are expected to be resolved in September 2019, with the commissioning of key processing equipment in late August. The third-party gas pipeline is expected to be repaired in late Q3 or early Q4 2019. Uneconomic gas production will remain shut-in until gas and NGL prices improve.

ABANDONMENT, RECLAMATION, AND REMEDIATION EXPENDITURES

Razor inherited decommissioning liabilities in its Swan Hills and Kaybob acquisitions. As at June 30, 2019, the Company had 22 wells remaining in its Inactive Well Compliance program that need to be addressed before March 31, 2020. The Company continues to invest in end-of-life well and facility decommissioning.

ABOUT RAZOR

Razor is a publicly traded junior oil and gas development and production company headquartered in Calgary, Alberta, focused on shareholder returns through sustainable monthly dividends, production and margin growth through a combination of acquiring, enhancing, and producing oil and gas from properties primarily in Alberta. The Company is led by experienced management and a strong, committed Board of Directors, with a long-term vision of growth focused on efficiency and cost control in all areas of the business.

Razor started operations in the first quarter of 2017, through an acquisition of producing assets in the Swan Hills area.  In the second quarter of 2017, Razor added to its asset base with the acquisition of complementary assets in the Kaybob area. These predominantly light oil assets provide a foundation for strong shareholder return through abundant low risk operations. Razor plans to concurrently grow Swan Hills and Kaybob, and execute on similar acquisitions, using its experience to extract upside value.

Razor is a pivotal leading-edge enterprise, balancing creativity and discipline, focused on growing an enduring energy company. Razor currently trades on TSX Venture Exchange under the ticker “RZE”.



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