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Delphi Energy Corp. Reports Third Quarter 2019 Results


CALGARY, Alberta, Nov. 06, 2019 (GLOBE NEWSWIRE) — Delphi Energy Corp. (“Delphi” or the “Company”) is pleased to announce its financial and operational results for the quarter ended September 30, 2019.

THIRD QUARTER 2019 HIGHLIGHTS

  • Average production in the quarter of 8,386 barrels of oil equivalent per day (“boe/d”) was down twelve percent from the 9,514 boe/d in the comparative quarter of 2018. During the third quarter of 2019, the liquids yield averaged 117 barrels per million cubic feet (“bbls/mmcf”), up 18 percent from the 99 bbls/mmcf in the third quarter of 2018.  Of the 117 bbls/mmcf, 87 bbls/mmcf were the higher valued condensate and pentane products;
  • Delphi’s realized natural gas price, including marketing income (excluding the Permanent Assignment Transaction, defined below) and excluding realized gains on risk management, averaged $2.56 per thousand cubic feet (“mcf”) comparing favourably to the average daily AECO benchmark which averaged $0.91 per mcf.  Approximately 56 percent of the Company’s natural gas was sold in the Chicago natural gas market;
  • Realized gains of $5.4 million and $9.6 million on the settlement of risk management contracts in the three and nine months ended September 30, 2019. The fair value of financial contracts outstanding as at September 30, 2019 is estimated to be a net asset of $15.1 million;
  • Completed the sale of permanent assignment of approximately 35 percent of its firm full-path Alliance service (the “Permanent Assignment Transaction”) for net proceeds of $11.5 million. The net proceeds from the Permanent Assignment Transaction were used to repay bank indebtedness;
  • Total cash revenues, excluding the Permanent Assignment Transaction, decreased six percent in the third quarter of 2019 compared to the same period in 2018.  Crude oil and natural gas revenues decreased 34 percent in the third quarter of 2019 over the comparative quarter due to weaker commodity prices and lower production volumes.  On a per unit basis, total cash revenues increased seven percent to $36.47 per boe in the third quarter of 2019 from $34.19 per boe in the third quarter of 2018;
  • The operating netback in the third quarter increased six percent over the comparative period in 2018 largely due to realized gains on risk management partially offset by lower realized prices and higher operating expenses;
  • Adjusted funds flow for the third quarter, excluding the Permanent Assignment Transaction, decreased 16 percent over the comparative quarter, largely due to lower total cash revenues and increased finance costs. On a per unit basis, the cash netback before the Permanent Assignment Transaction, decreased five percent in comparison to the same period in 2018;
  • Reduced bank debt plus adjusted working capital deficit by $28.6 million from the first quarter of 2019; and
  • Advanced a series of transactions (collectively the “Proposed Recapitalization Transaction”) which would, if successfully implemented, among other things: extend the maturity date of the Company’s $105.0 million senior secured notes to April 15, 2023 from July 15, 2021, raise gross proceeds of $46.5 million exclusively for the development of the Company’s Montney asset or a consolidation of assets in Delphi’s core area, allow for repayment of a portion of bank indebtedness, and provide for a common share consolidation of 15 to 1.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
Three months ended September 30 Nine months ended September 30
2019 2018 % Change 2019 2018 % Change
Financial
($ thousands, except per share)
Crude oil and natural gas revenues 20,612 31,399 (34 ) 73,991 100,468 (26 )
Net earnings (loss) 10,628 1,252 749 (61,499 ) (9,048 ) 580
Per share – basic and diluted 0.06 0.01 500 (0.33 ) (0.05 ) 560
Cash flow from operating activities 17,289 11,385 52 41,288 44,700 (8 )
Per share – basic and diluted(1) 0.09 0.06 50 0.22 0.24 (8 )
Adjusted funds flow(1) 21,291 11,600 84 45,605 37,725 21
Per share – basic and diluted(1) 0.11 0.06 83 0.25 0.20 25
Net debt(1) 165,722 163,422 1 165,722 163,422 1
Capital expenditures, net of dispositions (91 ) 19,317 (100 ) 26,777 63,892 (58 )
Weighted average shares (000s)
Basic and diluted 185,547 185,547 185,547 185,547
Operating
(boe conversion – 6:1 basis)
Production:
Field condensate (bbls/d) 2,154 2,196 (2 ) 2,412 2,508 (4 )
Natural gas liquids (bbls/d) 1,299 1,359 (4 ) 1,269 1,451 (13 )
Natural gas (mcf/d) 29,600 35,751 (17 ) 30,502 35,553 (14 )
Total (boe/d) 8,386 9,514 (12 ) 8,765 9,885 (11 )
Average realized sales prices, before financial instruments
Field condensate ($/bbl) 63.99 79.65 (20 ) 64.96 75.58 (14 )
Natural gas liquids ($/bbl) 21.20 51.85 (59 ) 26.11 46.73 (44 )
Natural gas ($/mcf) 1.97 2.67 (26 ) 2.63 3.08 (15 )
Netbacks ($/boe)
Crude oil and natural gas revenues 26.72 35.87 (26 ) 30.92 37.24 (17 )
Marketing income (1) 2.09 1.48 41 1.86 1.34 39
Realized gain (loss) on financial instruments 6.97 (4.21 ) 4.00 (3.50 )
Revenue, after realized financial instruments 35.78 33.14 8 36.78 35.08 5
Royalties (2.34 ) (2.36 ) (1 ) (2.05 ) (2.20 ) (7 )
Operating expense (9.48 ) (7.62 ) 24 (9.29 ) (8.72 ) 7
Transportation expense (4.09 ) (4.36 ) (6 ) (4.27 ) (5.00 ) (15 )
Operating netback (1) 19.87 18.80 6 21.17 19.16 10
Permanent Assignment Transaction 14.96 4.82
General and administrative expenses (1.77 ) (1.61 ) 10 (1.78 ) (1.61 ) 11
Finance charges (5.25 ) (3.75 ) 40 (4.95 ) (3.39 ) 46
Settlement of unutilized take-or-pay contract (0.22 ) (0.19 ) 16 (0.21 ) (0.19 ) 11
Cash netback (1) 27.59 13.25 108 19.05 13.97 36

(1)  Refer to non–GAAP measures

MESSAGE TO SHAREHOLDERS

Delphi’s third quarter results demonstrate the Company’s commitment to strengthen its financial position and improve the going concern nature of its business, with a 31 percent reduction in its net bank indebtedness since the first quarter of 2019 and the announcement of a Proposed Recapitalization Transaction. The Proposed Recapitalization Transaction benefits the Company by:

  • Further reducing the Company’s bank debt while replacing/increasing producing reserves, thus addressing the current broad downward pressure on borrowing base redeterminations from Senior Lenders;
  • Extending the non-revolving debt maturity to April 2023, and;
  • Providing the working capital to carry out a sustainable 2019/2020 winter capital program while pursuing and participating in consolidation opportunities.

Beyond the recapitalization plan, the Company remains focused on improving its operational and capital efficiencies through continued cost reduction efforts and even stronger well results. Delphi expects its condensate production to continue to grow disproportionately to its natural gas production over the next three to five years. The impact of the Company’s condensate growth, product marketing advantages, cost reductions and hedging strategy continues to demonstrate a strong cash generating business model in this challenging macro environment. The Company’s challenge remains achieving the necessary corporate size and scale to most efficiently develop its high quality liquids-rich Montney asset.

Delphi, as a junior oil and gas company that is tirelessly sourcing a path back to relevancy in today’s capital markets, continues to focus on the elements of its business it can control, and mitigate to the best of its ability the elements it cannot influence. The Company has assembled all of the right attributes to be successful in this challenging macro environment, where a required emphasis on defense has challenged our ability to deliver the growth and scale necessary to generate sustainable free cash:

  • The Company’s condensate yields, total liquids content and operating netbacks are among the highest of its Montney peers. The twelve West Bigstone Montney wells drilled to date have averaged 61 percent liquids (207 bbl/mmcf field condensate) resulting in field netbacks that are 60 percent greater than in East Bigstone where condensate yields average 40 bbl/mmcf.
  • The significant pipeline and facility infrastructure owned and operated by the Company are material under-appreciated assets that continue to support efficient delineation and development on the 148 sections of land Delphi controls.
  • The move to multi-well pad drilling will drive improved capital efficiencies over time, as line of sight to 20 to 25 percent cost savings are achievable. An optimized fracture stimulation design continues to deliver improved and more consistent well results in the ultra liquids-rich area of West Bigstone.
  • The diversified natural gas market access weighted to Chicago continues to deliver top-quartile realized pricing for its natural gas and mitigate stubborn AECO natural gas price weakness.
  • The Company’s risk management program continues to successfully mitigate commodity price volatility with realized gains in 2019 estimated to be approximately $14 million, contributing to an almost $114 million gain over the past 14 years.

Delphi remains well positioned with a high quality resource base supported by its significant infrastructure footprint. The increased financial flexibility provided by the Proposed Recapitalization Transaction offers our shareholders the opportunity to realize potential equity appreciation, from both further development of its core asset as well as participation in a much broader spectrum of consolidation opportunities. Upon completion of the Proposed Recapitalization Transaction, Delphi will be in a much stronger financial position to create a sustainable relevant path forward.

OPERATING AND FINANCIAL HIGHLIGHTS FOR THE QUARTER ENDED SEPTEMBER 30, 2019

With the successful completion of the Permanent Assignment Transaction and no deployment of capital projects in the third quarter, Delphi was able to further reduce net bank indebtedness. Since the end of the first quarter of 2019, Delphi has reduced bank debt plus adjusted working capital deficit by $28.6 million, representing a 31 percent reduction.

Weak commodity prices continue to put downward pressure on the Company’s operating netback although the Company’s hedge book supports some measure of stability during this volatile commodity price environment.  Crude oil and natural gas revenues, marketing revenues (excluding Permanent Assignment Transaction) and realized gains on risk management contracts totaled $28.1 million in the third quarter of 2019, down six percent from $29.9 million in the third quarter of 2018.  On a per boe basis, total cash revenues increased seven percent to $36.47 per boe in the third quarter of 2019 from $34.19 per boe in the third quarter of 2018.  For the three and nine months ended September 30, 2019, Delphi realized gains of $5.4 million and $9.6 million, respectively, on the settlement of risk management contracts. As at September 30, 2019, the fair value of Delphi’s risk management contracts are estimated to be a net asset of $15.1 million.

Production volumes in the third quarter of 2019 averaged 8,386 boe/d, a decrease of eight percent from the 9,157 boe/d average in the second quarter of 2019 as no additional wells have been drilled since the second quarter of 2019.  Production volumes in the third quarter of 2019 are twelve percent lower in comparison to the same period in 2018, primarily due to lower natural gas volumes.  Field condensate and natural gas liquids volumes decreased two percent and four percent over the comparative periods, respectively. Production from the four-well pad has shifted the production mix slightly and contributed to higher liquids yields.  The liquids yield in the third quarter of 2019 averaged 117 bbls/mmcf, up 18 percent from the 99 bbls/mmcf in the comparative quarter of 2018.  In the quarter, production was weighted 26 percent to field condensate, 15 percent to natural gas liquids and 59 percent to natural gas.  The production portfolio for the comparative quarter in 2018 was weighted 23 percent to field condensate, 14 percent to natural gas liquids and 63 percent to natural gas.

Crude oil and natural gas revenues were $20.6 million, down 24 percent from the second quarter of 2019 largely due to lower field condensate volumes and weaker benchmark prices for field condensate and natural gas.  In comparison, crude oil and natural gas revenues in the third quarter of 2019 were $10.8 million or 34 percent lower than the third quarter of 2018.  Approximately $9.3 million of the $10.8 million decrease in crude oil and natural gas revenues is due to lower benchmark prices.

Operating expenses in the third quarter of 2019 were negatively impacted by $0.4 million of third-party equalizations related to prior periods and higher costs associated with road and lease maintenance as a result of wet field conditions.  Production volumes on a per boe basis averaged $9.48 per boe in the third quarter of 2019 compared to the $7.62 per boe in the same period of 2018.  Production expenses in the third quarter of 2019 have decreased $0.8 million (adjusted for the prior period equalizations) in comparison to the second quarter of 2019 largely due to less field activity, as production from the four-well pad stabilizes, and lower processing fees due to a decrease in production volumes. Transportation expenses in the third quarter of 2019 decreased 17 percent in comparison to the same period of 2018 as the Company ships more of its natural gas volumes on the less costly NGTL system and realizes lower per unit costs for trucking field condensate.

The cash netback in the quarter, excluding the Permanent Assignment Transaction, was $12.63 per boe, down five percent over the comparative quarter in 2018 principally due to lower realized prices, higher operating expenses, and higher finance costs partially offset by a realized gain on risk management.

On October 23, 2019, Delphi completed the closing of the private placement offerings as part of the Proposed Recapitalization Transaction, as disclosed in the management, discussion and analysis dated November 5, 2019, raising $46.5 million, the maximum amount contemplated under the private placement.  The proceeds are held in escrow and will be released upon satisfaction of events as described in the management, discussion and analysis. The Proposed Recapitalization Transaction would, if successfully implemented, among other things: extend the maturity date of the Company’s $105.0 million senior secured notes to April 15, 2023 from July 15, 2021, raise gross proceeds of $46.5 million exclusively for the development of the Company’s Montney asset or a consolidation of assets in Delphi’s core area, allow for repayment of a portion of bank indebtedness, and provide for a common share consolidation of 15 to 1.

In connection with the Proposed Recapitalization Transaction, Delphi accelerated the timing of the senior lenders’ semi-annual borrowing base review of the senior credit facility.  On November 1, 2019, the senior lenders completed the semi-annual review of the borrowing base and amended the credit facility. Effective on the earlier of the closing date of the Proposed Recapitalization Transaction and November 29, 2019, the borrowing base of the senior credit facility will be renewed at $80.0 million. The borrowing base and revolving period of the amended credit facility is dependent on the completion of the Proposed Recapitalization Transaction.  If the Proposed Recapitalization Transaction is completed, the revolving period of the amended credit facility will be extended to May 28, 2020 with a maturity date of May 29, 2021. The terms of the amended credit facility satisfy a critical condition of the Proposed Recapitalization Transaction.

In the event the Proposed Recapitalization Transaction is not approved by shareholders and noteholders, the funds held in escrow will be returned to subscribers of the Private Placements.  More importantly, if the Proposed Recapitalization Transaction is not completed by December 13, 2019, the revolving period and maturity date of the senior credit facility would not be extended and the borrowing base of the amended senior credit facility would be redetermined on December 13, 2019.  A decrease in the borrowing base resulting in borrowing base shortfall would require a repayment to the lenders within 60 days of any amounts drawn in excess of the reduced borrowing base.

While management and the Board of Directors of the Company believe that all of the conditions required for the approval of the Proposed Recapitalization Transaction will occur, there can be no assurance that the Proposed Recapitalization Transaction, or other strategies, will be successfully implemented, consequently there exists a material uncertainty that may cast significant doubt upon the Company’s ability to continue as a going concern. Refer to note 3 of the condensed consolidated interim financial statements for the three and nine months ended September 30, 2019.

Special meetings of the shareholders and noteholders will be held on November 15, 2019 in relation to the Proposed Recapitalization Transaction. If approved by the shareholders and noteholders, the Proposed Recapitalization Transaction is expected to be completed by the end of November 2019.

NATURAL GAS MARKETING

Natural gas accounted for 25 percent of crude oil and natural gas revenues in the third quarter primarily due to further weakening in the AECO and Chicago benchmarks.

Prior to commissioning the amine facility in May 2018, approximately 90 percent of the Company’s natural gas was sold in the Chicago market.  Since commissioning the amine facility, sweetened Montney natural gas from the facility has been processed at Delphi’s 25 percent owned Bigstone sweet natural gas plant and shipped on NGTL.  The proportion of natural gas sold in the Chicago market was 56 percent and 57 percent in the three and nine months ended September 30, 2019.  This compares to the proportion of natural gas sold in the Chicago market for the three and nine months of 2018 at 60 percent and 75 percent, respectively. With reactivation of the Alliance lateral pipeline at the Bigstone sweet natural gas plant (expected in 2022), the proportion of natural gas sold in Chicago is anticipated to be about 90 percent of total natural gas sales.

Subsequent to the Permanent Assignment Transaction, Delphi has approximately 29.8 mmcf/d of firm service and 7.5 mmcf/d of priority interruptible service on the Alliance pipeline system in addition to approximately 22 mmcf/d of firm service on NGTL.

With its excess Alliance service, Delphi maintains exposure above volumes that are sold in the premium price Chicago gas market and generated $1.6 million of marketing income equivalent to $0.59 per mcf in the third quarter.  By marketing more than half of its natural gas outside of the weak and volatile AECO market, Delphi was able to realize a natural gas price including risk management and marketing income of $2.87 per mcf in the third quarter of 2019.

HEDGING

Delphi’s realized prices for condensate and NGL for the remainder of 2019 are well protected by WTI crude oil swap contracts for an average volume of 2,350 bbl/d at an average price of $87.89 per bbl and Conway propane swap contracts for an average volume of 400 bbl/d at an average price of $44.30 per bbl.  The Company’s realized price for natural gas for the remainder of 2019 is protected by NYMEX HH natural gas swap contracts for an average volume of 11,600 million British thermal units per day (“mmbtu/d”) at an average price of $3.78 per million British thermal units (“mmbtu”) and Chicago – NYMEX natural gas basis swap contracts for an average volume of 16,300 mmbtu/d at an average basis discount of $0.30 per mmbtu, resulting in an average swap price of $3.48 per mmbtu in Chicago.

Hedging contracts in place for the last quarter of 2019 protect the realized price for approximately 70 percent of Chicago natural gas sales and approximately 80 percent of field condensate and NGL sales combined, based on production in the third quarter of 2019.

Commodity Hedges Q4 2019 1H 2020 2H 2020
Natural gas (mmcf/d) 11.7 8.8 2.5
Average hedge price (C$/mcf)(2) $3.78 $3.56 $3.47
% of natural gas production hedged(3) 40% 30% 8%
Crude oil (bbl/d) 2,350 2,000 1,500
Average hedge price (C$/bbl) $87.89 $83.31 $83.12
Propane (bbl/d) 400 100 100
Average hedge price (C$/bbl) $44.10 $42.84 $42.84
% of condensate and NGL production hedged(3) 80% 61% 46%

(1) Assumes an FX of $1.32 CAD per USD
(2) Includes the impact of NYMEX HH natural gas – Chicago basis hedges
(3) Based on Q3 production of 29.6 mmcf/d of natural gas production, 3,453 bbl/d of condensate and NGL production

OPERATIONS UPDATE

Although Delphi was not actively drilling in the third quarter, it was busy optimizing its infrastructure footprint for natural gas and condensate pipeline connections to sales, as well as pipeline connecting its 7-11-60-23W5 (“7-11”) facility for more efficient water disposal. This activity is in addition to the previous projects of constructing the amine processing facility, the 1-3-60-24W5 West Bigstone facility, and pipeline connecting West Bigstone to the 7-11 facility in East Bigstone.

Delphi recently entered into an agreement whereby a third party mid-stream company will build a pipeline from its Montney assets at West and East Bigstone for transportation of its field condensate to a full service terminal at Fox Creek where the fluids are then sold onto the Pembina pipeline system.  This project not only improves the safety and environmental impact of the Company’s operations by getting trucks off the road, it also provides for operating cost savings which is a key focus for Delphi as the Company continues to improve the margins of the Bigstone Montney asset.  There are no take or pay commitments associated with the pipeline project, however, Delphi has entered into a dedicated production area for its operated Montney field condensate and oil production for a term of 15 years.  Netbacks of the Bigstone Montney asset are expected to increase by approximately $0.40/boe.

Delphi and Alliance have entered into an agreement whereby Alliance will repair and reactivate the Bigstone Lateral that connects the Bigstone Plant to Alliance’s natural gas mainline approximately 50 kilometres southwest of Fox Creek, Alberta and Delphi will pay for the updating and reactivation of the Alliance Meter Station at the Bigstone Plant and commit to deliver approximately 10 mmcf/d.  The planned in-service date for the re-activated lateral is February of 2022.  In light of the current and foreseeable natural gas market, the Company views natural gas market egress optionality, particularly to Chicago, as very strategic.  Once the Bigstone Lateral is reactivated, approximately 95 percent of Delphi’s natural gas production will be processed at the three natural gas plants that will be dually connected to the Alliance and TCPL pipeline systems.

The Company commenced delivering produced water via a pipeline connecting the 7-11 facility to a third party water disposal well and facility in April.  This pipeline and third party facility has eliminated the need to truck produced water from the 7-11 facility and has furthered Delphi’s efforts to improve safety, reduce environmental impacts and increase the netbacks of the Montney at Bigstone.

OUTLOOK

The winter capital program is expected to commence in December, assuming the Proposed Recapitalization Transaction becomes effective. As already stated, should the Proposed Recapitalization Transaction not be completed, the capital program would be deferred and the borrowing base of the amended senior credit facility would be subject to a redetermination on December 13, 2019.

The Board of Directors and management of Delphi believe that it is important that the Proposed Recapitalization Transaction be approved and implemented to address Delphi’s capital structure and liquidity needs, thereby placing the Company in a stronger position to pursue a sustainable path forward. Securityholders should refer to the management information circular for additional details with respect to the Proposed Recapitalization Transaction and instructions on how to vote at the securityholder meetings.

The Proposed Recapitalization Transaction is expected to become effective on or around November 26, 2019 if all of the conditions precedent to such effectiveness are satisfied or waived on or before that date.



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