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Seven Generations Reports $353 Million of Funds Flow and $233 Million of Capital Investments in the Fourth Quarter Of 2019


CALGARY, Alberta – Seven Generations Energy Ltd. (TSX: VII):

FOURTH QUARTER 2019 HIGHLIGHTS

  • Net income per diluted share was $0.24 in the fourth quarter, and $1.36 for the full year, an increase of 12% over 2018 on a full year basis.
  • Fourth quarter and full year 2019 funds flow was $353 million and $1.39 billion, respectively, with capital investments of $233 million for the fourth quarter and $1.23 billion for the full year. Free cash flow was $120 million in the fourth quarter and $158 million for full year 2019.
  • Sales volumes were 208,100 boe/d (36% condensate, 22% other NGLs, 42% natural gas) in the fourth quarter of 2019, and average sales volumes were 203,000 boe/d (37% condensate, 22% other NGLs, 41% natural gas) for the full year in 2019, consistent with 2019 guidance.
  • Operating expenses averaged $4.43 per boe in the fourth quarter and $4.79 per boe for the full year 2019, below the full year guidance range of $5.00 to $5.25 per boe, representing a 13% improvement year over year.
  • During 2019, the company repurchased 22.1 million shares at a volume weighted average price of $7.61 per share, representing 6.3% of shares outstanding at the beginning of the year. The company has repurchased 31.8 million shares, equivalent to 8.8% of its share count since the commencement of the company’s first normal course issuer bid (“NCIB”) effective November 5, 2018.
  • 7G continues to be a sustainability leader. The company recently received an A- rating from CDP for its environmental disclosure and performance. As previously announced, the company has also entered into a responsible natural gas supply agreement with Québec’s main natural gas distributor, Énergir s.e.c. (“Énergir”), after achieving Equitable Origins’ EO100™ Standard for Responsible Energy Development certification.

2019 RESERVES AND RESOURCE HIGHLIGHTS

  • McDaniel & Associates Consultants Ltd. (“McDaniel”), the company’s independent qualified reserves evaluator, has estimated 7G’s gross total proved (“1P”) reserves of 842 million boe with an NPV10 of $6.7 billion and gross proved plus probable (“2P”) reserves of 1.6 billion boe with an NPV10 of $12.6 billion, as at December 31, 2019.
  • Capital efficiency gains drove a $940 million reduction to total undiscounted 2P future development costs, as assessed by McDaniel at December 31, 2019, compared to the prior year. Proved developed producing (“PDP”) reserve finding, development and acquisition (“FD&A”) costs, including changes to future development capital, of $13.06 per boe drove a recycle ratio of 1.6x for the year, based upon operating netback, before the effects of hedging and marketing income. 1P reserve and 2P reserve recycle ratios were 2.6x and 2.4x, respectively.
  • The Company’s delineation efforts in 2019 successfully expanded the known boundary of high-deliverability, condensate-rich locations in the western portion of Nest 2, which was previously considered part of the Wapiti region at year end 2018. This has converted approximately 100 upper/middle Montney reserve and resource locations from a Wapiti to a Nest 2 type well for year end 2019.

7G’s results in the fourth quarter and full year 2019 reflect the company’s 2019 strategic objectives of increasing per share value, expanding free cash flow potential and achieving significant inventory delineation, with differentiated ESG performance.

OPERATIONAL AND FINANCIAL HIGHLIGHTS

($ millions, except boe
and per share amounts)

Three months ended
December 31

Three months ended
September 30

Year ended
December 31

2019

2018

% Change

2019

% Change

2019

2018

% Change

Financial Results

Funds flow ($)(1)

353.2

336.2

5

340.5

4

1,387.8

1,672.2

(17

)

Per share – diluted ($)

1.05

0.93

13

0.98

7

3.98

4.60

(13

)

Free cash flow ($)(1)

120.3

73.9

63

55.9

115

158.3

(93.5

)

nm

Net income ($)

82.6

245.4

(66

)

85.1

(3

)

473.8

439.9

8

Per share – diluted ($)

0.24

0.68

(65

)

0.25

(4

)

1.36

1.21

12

Adjusted net income ($)(1)

89.7

66.3

35

78.5

14

349.0

573.6

(39

)

Per share – diluted ($)

0.27

0.18

50

0.23

17

1.00

1.58

(37

)

Revenue ($)(2)

669.6

1,146.8

(42

)

718.0

(7

)

2,729.4

3,169.9

(14

)

CROIC (%)(1)

14.0%

19.1%

(27

)

14.1%

(1

)

14.0%

19.1%

(27

)

ROCE (%)(1)

9.0%

14.1%

(36

)

8.6%

5

9.0%

14.1%

(36

)

Sales volumes(3)

Condensate (mbbl/d)

75.0

81.8

(8

)

75.5

(1

)

74.8

76.4

(2

)

Natural gas (MMcf/d)

523.1

515.4

1

515.3

2

503.0

490.5

3

Other NGLs (mbbl/d)

45.9

47.4

(3

)

43.2

6

44.4

44.4

Total sales volumes (mboe/d)(4)

208.1

215.1

(3

)

204.6

2

203.0

202.6

Liquids %

58%

60%

(3

)

58%

59%

60%

(2

)

Realized prices

Condensate ($/bbl)

66.39

53.57

24

65.59

1

66.76

71.63

(7

)

Natural gas ($/Mcf)

3.25

4.77

(32

)

2.85

14

3.41

3.98

(14

)

Other NGLs ($/bbl)

10.75

8.44

27

2.74

nm

6.34

12.21

(48

)

Total ($/boe)(4)

34.48

33.66

2

31.97

8

34.44

39.33

(12

)

Royalty expense ($/boe)

(2.62

)

(0.99

)

165

(1.99

)

32

(2.28

)

(1.34

)

70

Operating expenses ($/boe)

(4.43

)

(5.25

)

(16

)

(4.81

)

(8

)

(4.79

)

(5.52

)

(13

)

Transportation, processing and other ($/boe)

(7.01

)

(7.07

)

(1

)

(6.46

)

9

(6.69

)

(6.65

)

1

Operating netback before the following ($/boe)(1)(4)

20.42

20.35

18.71

9

20.68

25.82

(20

)

Realized hedging gains (losses) ($/boe)

0.55

(1.58

)

nm

1.63

(66

)

0.48

(1.33

)

nm

Marketing income ($/boe)(1)

0.18

0.20

(10

)

0.19

(5

)

0.30

0.39

(23

)

Operating netback ($/boe)(1)

21.15

18.97

11

20.53

3

21.46

24.88

(14

)

Funds flow ($/boe)(1)

18.45

16.99

9

18.09

2

18.73

22.61

(17

)

Balance sheet

Capital investments ($)

232.9

262.3

(11

)

284.6

(18

)

1,229.5

1,765.7

(30

)

Available funding ($)(1)

1,351.0

1,345.9

1,277.2

6

1,351.0

1,345.9

Senior notes ($)

2,030.2

2,129.8

(5

)

2,069.3

(2

)

2,030.2

2,129.8

(5

)

Net debt ($)(1)

2,099.3

2,206.8

(5

)

2,213.7

(5

)

2,099.3

2,206.8

(5

)

Repurchase of common shares ($)

50.2

104.2

(52

)

73.8

(32

)

168.1

104.2

61

Common shares outstanding

334.7

352.6

(5

)

340.5

(2

)

334.7

352.6

(5

)

Weighted average shares outstanding – basic

336.5

359.2

(6

)

345.9

(3

)

346.8

358.6

(3

)

Weighted average shares outstanding – diluted

337.9

362.3

(7

)

347.0

(3

)

348.5

363.9

(4

)

(1)

Refer to the Reader Advisory at the end of this news release and the Advisories and Guidance section of the company’s Management’s Discussion and Analysis for the years ended December 31, 2019 and 2018 for additional information regarding the Company’s non-GAAP and additional GAAP measures. Certain comparative figures have been adjusted to conform to current period presentation.

(2)

Represents the total of liquids and natural gas sales, net of royalties, gains (losses) on risk management contracts and other income.

(3)

See “Note Regarding Product Types” in the Reader Advisory at the end of this news release and the Advisories and Guidance section of the

company’s Management’s Discussion and Analysis for the years ended December 31, 2019 and 2018.

(4)

Excludes the purchase and sale of condensate and natural gas in respect of the Company’s transportation commitment utilization and marketing activities.

Three months ended
December 31

Three months ended
September 30

Year ended
December 31

Nest Activity

2019

2018

% Change

2019

% Change

2019

2018

% Change

Drilling(1)

Horizontal wells rig released

20

19

5

20

78

91

(14

)

Average measured depth (m)

5,782

6,010

(4

)

5,979

(3

)

5,966

5,735

4

Average horizontal length (m)

2,579

2,776

(7

)

2,785

(7

)

2,729

2,551

7

Average drilling days per well

26

28

(7

)

25

4

28

27

4

Average drill cost per metre ($)(2)

526

560

(6

)

502

5

545

607

(10

)

Average well cost ($ millions)(2)

3.1

3.4

(9

)

3.0

3

3.3

3.5

(6

)

Completion(1)

Wells completed

10

13

(23

)

30

(67

)

79

89

(11

)

Average tonnes pumped per metre

1.7

1.9

(11

)

2.1

(19

)

2.0

2.3

(13

)

Average cost per tonne ($)(2)

1,070

1,282

(17

)

917

17

1,073

1,228

(13

)

Average cost per lateral metre ($)(2)

1,850

2,350

(21

)

1,953

(5

)

2,131

2,718

(22

)

Average well cost ($ millions)(2)

4.8

5.7

(16

)

5.4

(11

)

5.7

6.6

(14

)

Total D&C cost per well ($ millions)(2)(3)

7.9

9.1

(13

)

8.4

(6

)

9.0

10.1

(11

)

Wells brought on production

26

8

nm

15

73

83

91

(9

)

(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. Drilling counts are based on rig release date and on production counts are based on the first production date after the wells are tied in to permanent facilities.

(2)

Information provided is based on field estimates and is subject to change.

(3)

The number of horizontal wells rig-released do not correspond to the number of wells completions in the table above. Accordingly, the total average D&C costs per well may differ from the actual D&C costs for any individual well.

OPERATIONS UPDATE

Drilling and completion costs for full year 2019 averaged $9 million per well, an 11% reduction relative to the $10.1 million achieved in 2018. Drilling and completion costs in the fourth quarter averaged $7.9 million per well, representing a 12% reduction relative to the 2019 average. While shorter lateral lengths during the fourth quarter contributed to a portion of the reduced costs, the results also included wells with enhanced completions designs. This design includes an increased number of per-stage fracture initiation points, which the company believes will lead to similar effective fracture initiations, but with lower per-well costs. The company has also benefitted from ongoing supply chain management optimization.

Operating expenses for the fourth quarter were $4.43 per boe, while full year operating expenses were $4.79 per boe, both meaningfully below the 2019 guidance range of $5.00 to $5.25 per boe. These results are a function of the company’s previous water handling investments, a strengthening culture of cost mindfulness and continuous improvement throughout the organization. 2020 operating cost guidance remains in a range of $4.75 to $5.25 per boe, due to slightly reduced sales volumes expected in the first half of the year and the previously announced Karr facility turnaround and upgrade.

RESOURCE UPDATE

Moderating Sustaining Capital Requirements

As 7G evolves from a high-growth model to a value-focused, free cash flow generating business, the company has moderated its corporate production decline rates, reducing the amount of capital investment required to sustain production at current levels by approximately 10% year over year, consistent with prior 2020 budget disclosures. With the maturing of its asset base, the company anticipates a continued reduction in its production decline rates and sustaining capital requirements that will make meaningful contributions to its free cash flow profile and optionality.

Nest 2 Upper/Middle Montney Inventory

Due to the company’s 2019 delineation program, 7G now has data to support transferring 100 upper/middle Montney locations to its Nest 2 region, which were previously categorized with a Wapiti type well assumption. The conversion of 100 locations from Wapiti to Nest 2 (booked in either reserves or contingent resources at year end 2019) exceeds the pace of development in the Nest, which saw 78 locations rig released. McDaniel has evaluated the new Nest 2 locations and expects them to be sweet, high condensate rate locations analogous to other undeveloped locations in the western region of Nest 2. The region also remains prospective for lower Montney locations to be validated with future delineation efforts.

Nest 3 Update

The company’s development efforts continued in the Nest 3 region during the fourth quarter. The table below shows results from the 8-well Nest 3 pad discussed in the company’s third quarter news release, and the second Nest 3 pad, consisting of 8 wells, brought onstream in October. This second pad saw periods of intermittent rate curtailment to manage pressures across the broader Nest infrastructure, but is now flowing at unrestricted rates. Despite flow restrictions, these latest wells have trended in-line with expectations on total productivity, and more than 20% ahead of expectations on condensate deliverability.

The most productive location within 7G’s 2019 Nest 3 program is the lower Montney location which has outperformed upper/middle Montney locations and was brought onstream with the lowest well cost among the locations drilled on these two pads. The company anticipates additional follow-up stacked development of the lower Montney at Nest 3 throughout the 2020 capital program.

Sales Volumes(1)

Average D&C
Cost

IP120
(boe/d)

Condensate
(bbl/d)

Other NGLs
(bbl/d)

Natural Gas
(mcf/d)

First 8-Well Pad

$8.8 MM

2,289

673

558

6,346

Second 8-Well Pad

$8.7 MM

1,964

473

515

5,855

Lower Montney Location

$8.5 MM

2,253

693

539

6,127

1) See “Note Regarding Early Production” in the Reader Advisory in this news release.

2019 YEAR-END RESERVES

The following table summarizes 7G’s reserves, based upon reports prepared by McDaniel, as at December 31, 2018 and December 31, 2019 (the “McDaniel Reports”), using the forecast price and cost assumptions in effect at the applicable effective reserve evaluation dates.

Year ended
December 31

2019(1)

2018(1)

Reserve Category

MMboe

$MM(2)

MMboe

$MM(2)

Gross PDP reserves

261

$

2,899

242

$

2,824

Gross 1P reserves

842

$

6,730

856

$

6,518

Gross 2P reserves

1,604

$

12,602

1,644

$

12,282

(1)

Refer to the Reader Advisory in this news release and the Annual Information Form dated February 26, 2020 (for the year ended December 31,

2019) and dated February 27, 2019 (for the year ended December 31, 2018), which are available on SEDAR for additional information regarding

the Company’s reserves and the estimated net present value of future net revenue associated with such reserves, evaluated by McDaniel.

(2)

Estimated pre-tax net present value of discounted cash flows from reserves using a 10% discount rate.

2019 ($/boe)(3)

PDP

1P

2P

FD&A Cost(1)

13.06

7.95

8.62

FD&A Recycle Ratio(2)

1.6x

2.6x

2.4x

1)

FD&A costs include the year over year change in future development capital to convert reserves into production.

2)

Recycle Ratio is operating netback prior to hedging and marketing income, divided by FD&A costs per boe. See “Non-GAAP Financial Measures” in the Reader Advisory in this news release for additional information.

3)

See “Note Regarding Oil and Gas Metrics” in the Reader Advisory in this news release for additional information.

Relative to year end 2018, based on the reports prepared by McDaniel, total undiscounted future development capital costs expected to be required to develop the company’s 2P reserves were reduced by $940 million, or approximately $2.80 per share, due to improved capital efficiencies throughout the Nest. These improvements in future development capital costs, along with the successful 2019 development program, resulted in a recycle ratio of 1.6x on a PDP reserves basis, 2.6x on a 1P reserves basis and 2.4x on a 2P reserves basis, based on operating netbacks before the effect of hedging and marketing income.

Based on total produced volumes for full year 2019, the company’s reserve life index was 11.4 years on a 1P basis and 21.6 years on a 2P basis.

Total PDP reserve volumes increased by 8% as the company has been successful at converting undeveloped reserves, while seeing reductions in overall corporate decline rates, consistent with prior expectations. Based on the McDaniel Reports, 1P NGL reserves decreased by 0.7% and 2P NGL reserves increased by 0.8% at year end 2019, compared to the prior year; however, condensate and pentanes plus, which combined represented 59% of the 1P NGL reserves and 63% of the 2P NGL reserves, evaluated at December 31, 2019, increased by 2.2% and 6.9% relative to the prior year.

Relative to 2018, the pre-tax NPV of 1P reserves and 2P reserves, using a 10% discount rate, increased by $212 million and $320 million, respectively, despite reductions to reserve evaluator price decks. These improvements have been driven by the combination of favorable changes in product mix and improvements to capital efficiency.

NORMAL COURSE ISSUER BID

During 2019, the company repurchased 22.1 million shares at a volume weighted average price of $7.61 per share, representing 6.3% of shares outstanding at the beginning of the year. The company has repurchased 31.8 million shares, equivalent to 8.8% of its share count since the commencement of the company’s first NCIB effective November 5, 2018. The company continues to view the allocation of free cash flow towards a share buy-back program as a competitive investment opportunity. The company plans to allocate free cash flow generated during 2020 towards its share buy-back program and net debt reduction.

ESG UPDATE

A commitment to differentiated stakeholder service and responsible development is key to 7G’s strategy. With a prudent risk-management mindset of “what gets measured, gets managed”, the company is pleased to report several key successes in advancing its sustainability profile:

  • 7G’s responsible energy development practices and commitment to stakeholder service have been recognized through Equitable Origins’ EO100™ certification, following a comprehensive, independent, assurance process that verified 7G’s ESG performance through site-level assessments. As a result of the certification, 7G has successfully commercialized its sustainability profile through an agreement to supply responsibly produced natural gas to Québec’s main natural gas distributor, Énergir. Globally, this is the first transaction executed under the EO100™ framework, which establishes a new standard in terms of responsible development and transparency across the value chain and, ultimately, recognizes 7G’s commitment to continuous improvement of its sustainable development practices.
  • In January, the company received an A- ranking from CDP, positioning 7G as the top-ranked energy producer in Canada for its emissions measurement, management and disclosure. The company aims to maintain its top-decile emissions and disclosure profile in future years.
  • Also in January, 7G was included as one of 325 companies globally in the 2020 Bloomberg Gender-Equality Index (“GEI”). Through disclosure of gender-related metrics using the GEI framework, the firms included in the 2020 index have provided a comprehensive look at their investment in workplace gender equality and the communities in which they operate. 7G was included in this year’s index for scoring at or above a global threshold established by Bloomberg to reflect a high level of disclosure and overall performance across the framework’s five pillars.

These initiatives, and a broader discussion of 7G’s ESG practices, will be discussed in 7G’s sustainability report to be released in March 2020. The report will highlight 7G’s commitment to differentiated stakeholder service, responsible energy development and stakeholder engagement, including simplified reporting and statistical data for decision making by investors and rating agencies.

MIDSTREAM UPDATE

Subsequent to year end, 7G concluded its review of multiple proposals to monetize some or all of the company’s midstream investments. The company has decided that, at this time, it is in its best interest to retain full ownership of these assets and that maintaining its low cost structure, enhanced flexibility, operatorship and reserve processing capacity, will continue to drive strategic benefits.

2020 OUTLOOK

The company’s 2020 capital budget and guidance are unchanged from previously disclosed metrics, including $1.0 billion of production and supporting infrastructure capital primarily to sustain annual production levels at 200,000 to 205,000 boe/d and a further $100 million for value enhancement projects and delineation. At the midpoint of guidance, full year production is anticipated to average 202,500 boe/d.

Consistent with prior guidance, the company anticipates production volumes in the first half of the year to be lower than the second half, primarily as offset wells are routinely shut-in during adjacent completion operations. The resumption of production from these wells, and volumes from newly completed wells, are anticipated to bring production to the 205,000 to 215,000 boe/d range for the second half of the year.

Condensate volumes in 2020 are approximately 55% hedged with WTI contracts within a range of US$52/bbl to US$57/bbl, while natural gas is approximately 39% hedged at a level of US$2.65/MMBtu.

2020 Capital Budget & Guidance

Production & Supporting Infrastructure

$1.0 billion

Value Enhancement Projects and Delineation

$0.1 billion

Total Capital Investment

$1.1 billion

Average Production(1)

200 – 205 Mboe/d

H1 Production(1)

190 – 200 Mboe/d

H2 Production(1)

205 – 215 Mboe/d

Development Wells On-Stream (#)

75 – 80

Percent Liquids(1)

56 – 60%

Percent Condensate(1)

34 – 38%

Royalty Rate at US$50 WTI

5 – 7%

Royalty Rate at US$60 WTI

7 – 9%

Operating Expenses ($/boe)

$4.75 – $5.25

Transportation ($/boe)

$6.75 – $7.25

G&A ($/boe)

$0.85 – $0.95

Interest ($/boe)

$1.80 – $1.90

1)

See “Note Regarding Product Types” and “Forward-Looking Information Advisory” in the Reader Advisory in this news release.

CONFERENCE CALL

7G management will hold a conference call to discuss results and address investor questions today, February 27, 2020, at 9 a.m. MST (11 a.m. EST).

Seven Generations Energy

Seven Generations 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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