CALGARY – (CJ:TSX) Cardinal Energy Ltd. (“Cardinal” or the “Company”) is pleased to announce that its Board of Directors has approved an operating and capital budget for 2020 that will focus on debt reduction, a sustainable dividend, operating costs reductions and increasing production volumes. Cardinal also announces that the Toronto Stock Exchange (the “TSX”) has accepted the notice of Cardinal’s intention to commence a normal course issuer bid (the “NCIB”).
Highlights of 2020 Budget
- Forecasting net debt reduction of 15% by year-end;
- Low corporate production decline rate allows for a conservative $60 to $65 million development capital expenditure budget;
- Generates free cash flow of $40 to $45 million for debt repayment, asset retirement obligation (“ARO”) expenditures or normal course issuer bid (“NCIB”) activity;
- Forecasting 6% debt adjusted production per share growth;
- Targeting a 5% decrease in operating and general and administrative (“G&A”) expenses;
- Reduction of our total 2020 net debt to annual adjusted funds flow ratio to 1.7x; and
- Increased adjusted funds flow results in a total payout ratio of approximately 65% to 70%.
Cardinal’s 2020 capital budget follows up on the success of our ongoing asset development with particular focus on drilling in Southern Alberta, which earns additional lands in our core area. Additionally, we plan to increase expenditures in our CO2 enhanced recovery project at Midale, continue with ongoing operating cost reduction projects including additional power generation projects throughout our operating areas, and proactively upgrading our pipeline and facility infrastructure. Cardinal’s 2020 budget includes the abandonment of over 80 non-producing wells and reclamation of 100 inactive leases as we continue to reduce our environmental footprint for the long-term sustainable development of our Company. In addition, the budget forecasts a 15% reduction in net debt. The Company has renewed its NCIB to purchase and cancel the maximum allowable 10% of the outstanding balance of convertible debentures (the “Convertible Debentures”) and will opportunistically repurchase and cancel common shares through our ongoing common share NCIB.
Cardinal’s 2020 operating budget is expected to produce adjusted funds flow of approximately $125 to $130 million ($1.11 per share), assuming a royalty rate of 17%, a West Texas Intermediate (“WTI”) oil price of US$55/bbl, US/CAD exchange rate of 0.76 and a $1.75/mcf AECO natural gas price. During 2020, Cardinal’s operating expenses per boe are forecasted to decrease by approximately 5% over 2019 levels due to the Company’s 2019 cost reduction projects in operation for 2020 combined with new cost reduction projects being forecasted to be implemented in 2020.
Cardinal’s 2020 capital budget is structured to take advantage of our top tier low decline rate and includes drilling and completing 17 (14.6 net) wells and completing three (3.0 net) additional wells which were drilled in 2019. The drilling is focused on farm-in wells in our Alberta South business unit along with select development wells across our asset base and new CO2 injection wells at Midale, Saskatchewan. In addition, Cardinal will continue to optimize our multiple existing water flood projects and our carbon sequestration development at Midale where we sequester more CO2 than we directly emit throughout the entire Company. Approximately 80% of the Company’s oil’s production is under secondary recovery schemes including water and miscible floods. The Company’s 2020 capital budget will continue the successful operating cost reduction program initiated in 2019 which includes reducing our dependence on the power grid and upgrading our infrastructure to facilitate the handling of additional volumes through our underutilized facilities. The capital budget is allocated as follows:
|Capital budget||$ mm|
|Drill, complete and tie-in new wells||$26 – $28|
|Enhanced oil recovery, facility & pipeline upgrades||20 – 22|
|Maintenance capital||14 – 15|
|Total development capital expenditures||$60 – $65|
|Capitalized G&A and other||3 – 4|
|Total capital expenditures||$63 – $69|
The capital budget results in free cash flow of approximately $40 to $45 million for debt repayment, ARO expenditures or NCIB activity for our common share and Convertible Debenture buybacks and cancellations.
Cardinal’s total payout ratio, which is represented by the development capital expenditures plus dividend payments divided by adjusted funds flow is expected to be 65% to 70%. Production is forecasted to average 20,500 to 20,800 boe/d for 2020, which is approximately 3% higher than our estimated 2019 average. Forecasted production takes into account all planned facility turnarounds and downtime.
2020 Budget Summary
|Average production (boe/d)||20,500 to 20,800|
|Adjusted funds flow ($ mm)||$125 to $130|
|Closing net debt ($ mm)||$215 – $220|
|Debt adjusted per share production growth (1)||6%|
|Total capital expenditures ($ mm)||$63 – $69|
|Operating costs ($/boe)||$19.75 – $20.25|
|Transportation costs ($/boe)||$0.30 – $0.40|
|G&A ($/boe)||$2.05 – $2.25|
|US$ WTI ($/bbl)||$55.00|
|US/CAD Exchange Rate||0.76|
|US$ WTI-WCS Basis Differential ($/bbl)||($15.00)|
|US$ WTI-MSW Basis Differential ($/bbl)||($5.00)|
(1) Debt adjusted shares are calculated with weighted average outstanding shares adjusted for the change in net debt divided by an average share price of $2.50 for forecasted 2019 and the 2020 budget.
Cardinal has budgeted approximately $7.0 million for abandonments and reclamations in 2020 and has opted into the Area Based Closure (“ABC”) program approach implemented by the Alberta Government and plans to focus its 2020 abandonment and reclamation activities in our Southern Alberta business unit. The Company’s current plans are to abandon over 80 non-producing wells and reclaim at least 100 inactive leases in 2020.
We are committed to the environmentally responsible development of our resources and will continue to manage our abandonment and reclamation obligations with a view of long-term sustainability. In 2019, the Company exceeded our required spend under the ABC program to proactively reduce our environmental footprint by abandoning and reclaiming inactive sites and wells. Over the last five years, Cardinal has abandoned over 230 wells and reclaimed 384 locations.
|Input||Effect on adjusted funds flow ($ mm)|
|US $1/bbl change in WTI||$7.0|
|US $1/bbl MSW basis||$1.9|
|US $1/bbl WCS basis||$4.0|
Our 2020 budget is expected to generate approximately $40 to $45 million of free cash flow which will be used to reduce debt, provide returns to our shareholders with NCIB activity and reduce our environmental footprint through ARO expenditures. Our 2020 production is expected to increase by approximately 3% over average 2019 production levels while operating costs per boe are forecasted to decrease by 5%. Cardinal plans to exit the year with a healthy balance sheet targeting a 1.7x net debt to annual adjusted funds flow ratio and a 65% to 70% total payout ratio. Our conservative spending and cost reduction program during 2019 and budgeted into 2020 is intended to maintain ample liquidity, allowing us to reduce both our overall debt and our higher cost borrowings through the repayment of our Convertible Debentures when they become due.
During 2020, we plan to continue with our environmental stewardship and reduce our future liabilities by increasing our ARO spending to approximately $7.0 million by abandoning and reclaiming non-producing wells and inactive facilities.
Our conservative budget gives us the flexibility to increase our capital program, pay down additional debt and/or provide increased returns to our shareholders through our NCIB or increased dividend payments if commodity prices increase. Cardinal’s shares represent a compelling investment with a projected 6% debt adjusted production per share growth and an approximate 9% dividend yield.
Cardinal’s annual 2019 reserve results will be released on February 26, 2020 with the 2019 financial and operating results to be released on March 17, 2020.
Renewal of Normal Course Issuer Bid
The NCIB allows the Company to purchase up to $4.45 million aggregate principal amount of its 5.50% convertible unsecured subordinated debentures (“Convertible Debentures”) (representing approximately 10% of its public float of $44.5 million aggregate principal amount of the issued and outstanding Convertible Debentures as of December 5, 2019), in each case, over a period of twelve months commencing on December 19, 2019. The NCIB will expire no later than December 18, 2020.
Under the NCIB, Convertible Debentures may be repurchased in open market transactions on the TSX, and/or alternative Canadian trading systems, or by such other means as may be permitted by the TSX and applicable securities laws and in accordance with the rules of the TSX governing NCIB’s. The average daily trading volume of the Convertible Debentures is $40,000. As a result, the total number of Convertible Debentures that Cardinal is permitted to purchase is subject to a daily purchase limit of $10,000 aggregate principal amount of Convertible Debentures however, Cardinal may make one block purchase per calendar week which exceeds the daily repurchase restrictions. Any Convertible Debentures that are purchased under the NCIB will be cancelled upon their purchase by the Company.
The Company’s previous NCIB for Convertible Debentures will expire on December 18, 2019 (the “Previous NCIB”). Under the Previous NCIB, Cardinal obtained the approval of the TSX to purchase up to $5 million principal amount of Convertible Debentures, which represented 10% of the “public float” at the time of approval. The Company purchased the maximum amount of Convertible Debentures under the Previous NCIB.
Management of Cardinal believes that, from time to time, the market price of its Convertible Debentures may not fully reflect the underlying value of the Convertible Debentures and that at such times the purchase of Convertible Debentures would be in the best interests of Cardinal. The purchase of Convertible Debentures will increase the proportionate interest of, and be advantageous to, all remaining security holders.
Cardinal confirms that our dividend of $0.015 per common share will be paid on January 15, 2020 to shareholders of record on December 31, 2019. The Board of Directors of Cardinal has declared the dividend payable in cash. This dividend has been designated as an “eligible dividend” for Canadian income tax purposes.