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Cequence energy announces fourth quarter financial results and 2019 reserves


CALGARY, Alberta – Cequence Energy Ltd. (“Cequence” or the “Company”) (TSX: CQE) is pleased to announce its operating and financial results for the three and twelve months ended December 31, 2019. The Company’s Management’s Discussion and Analysis (“MD&A”) and Consolidated Financial Statements are available at cequence-energy.com and on SEDAR at www.sedar.com.

HIGHLIGHTS

  • Production was 5,892 boe/d, 25% of which was comprised of crude oil and liquids for the three months ended December 31, 2019 compared to 5,997 boe/d, 23% of which was comprised of crude oil and liquids for the same period in 2018.
  • The Company entered into a farm-in agreement in December 2019 committing to equip and operate two shut-in Montney oil wells in Simonette in exchange for a 50% interest in 5 net sections (10 gross) of Montney land surrounding the two wells. February 2020 gross production per calendar day for the two wells was approximately 570 bbls/d of oil and 1,150 mcf/d of natural gas.
  • Capital expenditures for the three months ended December 31, 2019 were $1.9 million to complete natural gas lift optimization projects in Simonette started in the third quarter 2019.

SELECTED INFORMATION

(in thousands of dollars except production volumes, per share and $/boe amounts) Three
months ended December 31,
Twelve
months ended December 31,
  2019 2018 2019 2018
Financial
Total revenue(1) $ 14,859 $ 12,184 $ 55,479 $ 58,921
Net loss and comprehensive loss (1,733 ) (3,802 ) (13,002 ) (9,699 )
Per share – basic and diluted (0.04 ) (0.16 ) (0.39 ) (0.61 )
Funds flow from operations(1) 4,254 2,071 11,844 13,087
Per share – basic and diluted 0.10 0.08 0.35 0.82
Capital expenditures, before acquisitions (dispositions) 1,941 13,397 8,920 23,800
Total assets   267,662 283,640
Net debt(1)   54,778 62,523
Production volumes    
Natural gas (Mcf/d) 26,549 27,645 26,658 30,098
Crude oil (bbls/d) 527 736 679 763
Natural gas liquids (bbls/d) 353 227 230 250
Condensate (bbls/d) 587 427 455 478
Total (boe/d) 5,892 5,997 5,807 6,507
Netback ($/boe)    
Price, including realized hedges $ 27.41 $ 22.08 $ 26.18 $ 24.81
Operating netback(1) $ 11.49 $ 7.05 $ 9.50 $ 9.99

Refer to “Non-IFRS Measures” in this press release for further information.

For the twelve months ended December 31, 2019 funds flow from operations was $11.8 million, $1.2 million lower than the same prior year period. The decrease was due to production declines and higher transportation expenses partially offset by higher realized natural gas and crude oil prices and lower finance expenses. Production was 5,807 boe/d, 23% of which was comprised of crude oil and liquids for the twelve months ended December 31, 2019 compared to 6,507 boe/d, 23% of which was comprised of crude oil and liquids for the same period in 2018.

Benchmark pricing

Three months ended
December 31,

Twelve months ended
December 31,
Benchmark pricing 2019 2018 2019 2018
AECO-C spot gas (CDN$/Mcf) $ 2.48 $ 1.58 $ 1.76 $ 1.52
Ontario Dawn gas (CDN$/Mcf) 2.95 5.74 3.19 4.15
WTI crude oil (US$/bbl) 56.96 60.70 57.03 65.20
Edmonton City Gate oil (CDN$/bbl) 67.99 44.14 69.05 68.89
US$/CDN$ exchange rate 0.76 0.75 0.75 0.77

Volatile and weak natural gas prices remain below thresholds where investment in natural gas wells is economically beneficial. AECO prices averaged $2.48/Mcf for the three months ended December 31, 2019 compared to $1.58/Mcf for the same prior year period. Oil prices were also volatile and lower in the fourth quarter 2019, compared with the same prior year period as increased U.S. supply, trade tensions between the U.S. and China and concerns of a slowing global economy limited demand growth creating an uncertain pricing environment.

OPERATIONS

Three months ended December 31,
  2019
 2018
  ($ thousands) ($/boe) ($ thousands) ($/boe)
Sales of natural gas, crude oil and condensate $ 14,551 $ 26.84 $ 12,591 $ 22.82
Realized gain (loss) on commodity contracts 308 0.57 (407 ) (0.74 )
Total revenue(1) 14,859 27.41 12,184 22.08
Royalties expense 1,051 1.94 736 1.33
13,808 25.47 11,448 20.75
Operating expense 5,177 9.55 5,440 9.86
Transportation expense 2,401 4.43 2,116 3.84
Operating netback(1) 6,230 11.49 3,892 7.05
General and administrative expense 1,349 2.49 1,143 2.07
Finance expense 862 1.59 975 1.77
Cash netback(1) 4,019 $ 7.41 1,774 $ 3.21
Unrealized loss (gain) on derivative financial instruments 836   (4,309 )
Depletion and depreciation expense 4,854   11,322
Share-based payment expense 87   114
Other income (25 )   (1,551 )
Net loss and comprehensive loss $ (1,733 )   $ (3,802 )

Refer to “Non-IFRS Measures” in this press release for further information.

Production for the three months ended December 31, 2019 averaged 5,892 boe/d compared to 5,997 boe/d for the same prior year period. The decrease was due to the natural decline of the natural gas wells and lower crude oil production due to natural decline of the 3.0 (2.0 net) Dunvegan horizontal oil wells that were completed in the first quarter 2018.  Crude oil and liquids production as a percentage of total production increased to 25 percent in the three months ended December 31, 2019 from 23 percent for the same prior year period.

Operating netback(1) was $11.49 per boe for the three months ended December 31, 2019 compared to $7.05 per boe for the same prior year period. The increase was due primarily to higher realized prices for crude oil and condensate partially offset by higher royalty and transportation expenses.

Twelve months ended December 31,
   2019
2018
  ($ thousands) ($/boe) ($ thousands) ($/boe)
Sales of natural gas, crude oil and condensate $ 53,066 $ 25.04 $ 60,196 $ 25.34
Realized gain (loss) on commodity contracts 2,413 1.14 (1,275 ) (0.53 )
Total revenue(1) 55,479 26.18 58,921 24.81
Royalties expense 3,215 1.52 3,969 1.67
52,264 24.66 54,952 23.14
Operating expense 22,786 10.75 24,080 10.14
Transportation expense 9,351 4.41 7,160 3.01
Operating netback(1) 20,127 9.50 23,712 9.99
General and administrative expense 5,532 2.61 5,267 2.22
Finance expense 3,655 1.72 7,874 3.32
Cash netback(1) 10,940 $ 5.17 10,571 $ 4.45
Unrealized loss (gain) on derivative financial instruments 3,523   (3,303 )
Depletion and depreciation expense 20,169   27,480
Share-based payment expense 432   300
Other income (182 )   (4,207 )
Net loss and comprehensive loss $ (13,002 )   $ (9,699 )

Refer to “Non-IFRS Measures” in this press release for further information.

Production for the twelve months ended December 31, 2019 averaged 5,807 boe/d compared to production of 6,507 boe/d for the same prior year period. The decrease was due to natural decline of natural gas wells, shutting in approximately 3,000 Mcf/d of non-core natural gas production in Northeastern British Columbia from June to September 1st, 2019 and non-core dispositions in 2018.

Operating netback(1) was $9.50 per boe for the twelve months ended December 31, 2019 compared to $9.99 per boe for the same prior year period. The decrease was primarily due to higher transportation expenses due to fixed transportation contracts for crude oil and natural gas entered into in 2018 and lower production increasing fixed costs per boe. Crude oil transportation costs prior to entering into the oil transport agreement were included as part of realized price on the crude oil sale whereby the costs offset price. The natural gas marketing arrangement provided diversification away from volatile AECO prices for approximately 40 percent of the Company’s gas production to the Dawn, Ontario market. The toll on the Empress to Dawn hub is contracted at a cost of U.S.$0.77 per GJ for a period of 10 years expiring in 2028 with an early termination right that can be exercised following the initial five years of service.

Operating expenses for the twelve months ended December 31, 2019 were $22.8 million or $10.75 per boe compared to $24.1 million or $10.14 per boe for the same prior year period. Lower water handling costs with the completion of a water disposal well in 2018, purchase of the water disposal line at Simonette in the third quarter 2019 and reduced long-term field rentals expenses were partially offset in 2019 by workover, swabbing and chemical expenses to optimize and reactivate production and facility turnaround costs. The increase in per boe operating costs was due to lower production.

Finance expenses for the twelve months ended December 31, 2019 were lower compared to the same prior year period due to fees to restructure the senior loan in 2018 replacing it with the Term Loan and reducing the interest rate on the debt from 9.7% to 5.0% as part of the restructuring.

Capital Expenditures

  Three months ended
December 31,
Twelve months ended
December 31,
(in thousands of dollars) 2019 2018 2019 2018
Land $ 296 $ 213 $ 898 $ 739
Geological & geophysical and capitalized overhead 163 184 1,044 1,015
Drilling, completions and workovers 725 10,426 2,937 17,209
Equipment, facilities and tie-ins 757 2,573 4,026 4,836
Office furniture & equipment 1 15 1
Capital expenditures 1,941 13,397 8,920 23,800
Acquisitions 4 1,522
Dispositions (i) (934 ) (39 ) (2,863 )
Total capital expenditures $ 1,945 $ 12,463 $ 10,403 $ 20,937

(i) Represent the cash proceeds from the sale of assets.

Capital expenditures for the twelve months ended December 31, 2019 focused on Simonette. The Company completed and tied in the 2.0 gross (2.0 net) Dunvegan horizontal oil wells drilled in the fourth quarter of 2018 and has invested in enhancing and optimizing existing well performance using gas lift solutions.

The Company acquired a water disposal pipeline in the third quarter 2019 for $1.5 million. This allows the Company to operate and control the pipeline providing greater flexibility over water handling at Simonette and reducing future operating costs.

In December 2019 Cequence entered into a farm-in agreement and committed to equip and operate two shut-in Montney Oil wells in the Simonette area. In exchange the Company receives a majority interest in the wells until the capital invested is repaid. After payout the Company’s working interest reverts to 50% and Cequence will earn 5 net sections (10 gross) of Montney land surrounding the two wells. Both wells were brought back on to production in the first quarter 2020. February 2020 gross production per calendar day for the two wells was approximately 570 bbls/d of oil and 1,150 mcf/d of natural gas. The natural gas production is tied into Cequence’s gathering system and the oil and water are currently being trucked to facilities for processing and disposal.

Due to oil price volatility, COVID-19 and concerns of a global economic slowdown, the Company is reviewing its 2020 budget and will not be providing an outlook for 2020 at this time.

RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Following the completion of the 2019 financial year, management determined that as at December 31, 2019 certain accrued liabilities related to operating expenses for periods prior to January 1, 2018 were overstated by an aggregate of $9.6 million. The Company has disclosed in Note 4 of the annual audited consolidated financial statements for the year ended December 31, 2019 the effect of this adjustment. The effects of the restatement on the consolidated statements of financial position as at December 31, 2018 and January 1, 2018 are as follows:

(in thousands of dollars) December 31, 2018 January 1, 2018
Accounts payable and accrued liabilities – As originally reported $ 35,736 $ 33,106
Accrual adjustment (9,580 ) (9,580 )
Accounts payable and accrued liabilities – As restated $ 26,156 $ 23,526
Deficit – As originally reported $ (523,269 ) $ (513,570 )
Accrual adjustment (9,580 ) (9,580 )
Deficit – As restated $ (513,689 ) $ (503,990 )

Management has concluded that a material weakness in its internal controls over financial reporting existed as at December 31, 2019. The material weakness was caused by a failure to effectively operate an internal control to review and assess accrued liabilities related to operating expenses. The weakness and managements remediation plan are described in the “Internal Controls over Financial Reporting” section of the Company’s December 31, 2019 MD&A.

RESERVES

GLJ Petroleum Consultants (“GLJ”), the Company’s independent, qualified reserves evaluator, prepared the Company’s reserves report effective December 31, 2019 (collectively referred to herein as the “GLJ Report”) for the crude oil, natural gas liquids (“NGL”) and natural gas reserves attributable to the properties of Cequence. The GLJ Report was prepared in accordance with the definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook and National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities of the Canadian Securities Administrators (“NI 51-101”).

The tables below are a summary of the crude oil, NGL and natural gas reserves attributable to the properties of Cequence and the net present value of future net revenue attributable to such reserves as evaluated in the GLJ Report based on forecast price and cost assumptions. The reserves attributable to the Company’s properties have been estimated assuming that development of each property in respect of which the estimate has been made will occur, regardless of the likely availability to the Company of funding required for such development. The calculated net present values include a deduction for estimated future well abandonment and reclamation costs. It should not be assumed that the estimates of future net revenues presented in the tables below represent the fair market value of the reserves. There is no assurance that the forecast prices and cost assumptions will be attained, and variances could be material. The recovery and reserves estimates of Cequence’s crude oil, natural gas liquids and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual crude oil, natural gas and natural gas liquids reserves may be greater than or less than the estimates provided herein.

Summary of Oil, Natural Gas and NGL Reserves

Light and Medium Crude Oil Tight Oil Conventional Natural Gas Shale Gas NGL Total Oil Equivalent
Reserves Category Gross(2) Net(3) Gross(2) Net(3) Gross(2) Net(3) Gross(2) Net(3) Gross(2) Net(3) Gross(2) Net(3)
(Mbbl) (Mbbl) (Mbbl) (Mbbl) (MMcf) (MMcf) MMcf MMcf (Mbbl) (Mbbl) (MBOE) (MBOE)
Proved
Developed Producing 506 408 5 4 22,886 21,245 29,238 24,735 1,344 890 10,541 9,966
Developed Non-Producing 13 10 256 204 3,276 2,927 4,000 3,551 242 175 1,723 1,467
Undeveloped 629 540 37 33 4,135 3,763 191,475 167,273 5,987 4,982 39,255 34,062
Total Proved 1,148 958 298 241 30,297 27,935 224,712 195,559 7,572 6,047 51,518 44,495
Probable 1,001 798 100 73 21,044 19,278 263,838 222,255 8,032 5,822 56,613 46,948
Total Proved plus Probable 2,149 1756 398 314 51,340 47,212 488,549 417,815 15,603 11,869 108,132 91,443

Notes:

  1. Columns may not add due to rounding.
  2. “Gross” reserves means the Company’s working interest (operated and non‐operated) share before deduction of royalties payable to others and without including any royalty interests of the Company.
  3. “Net” reserves means the Company’s working interest (operated and non-operated) share after deduction of royalty obligations plus the Company’s royalty interest in reserves.

Summary of Net Present Value of Future Net Revenue

Reserves Category Before Future Income Tax Expenses Discounted at (%/year)
0 5 10 15 20 10
(M$) (M$) (M$) (M$) (M$) ($/mcfe)
Proved
Developed Producing 39,165 39,801 38,521 36,661 34,717 0.72
Developed Non-Producing 17,765 14,404 11,803 9,850 8,371 1.34
Undeveloped 218,092 129,002 74,971 41,325 19,727 0.37
Total Proved 275,022 183,207 125,296 87,836 62,815 0.47
Probable 535,761 300,928 183,935 119,851 81,799 0.65
Total Proved plus Probable 810,783 484,135 309,230 207,687 144,614 0.56

 

Reserves Category After Future Income Tax Expenses Discounted at (%/year)
0 5 10 15 20
(M$) (M$) (M$) (M$) (M$)
Proved
Developed Producing 39,165 39,801 38,521 36,661 34,717
Developed Non-Producing 17,765 14,404 11,803 9,850 8,371
Undeveloped 218,092 129,002 74,971 41,325 19,727
Total Proved 275,022 183,207 125,296 87,836 62,815
Probable 482,688 280,269 175,199 115,898 79,907
Total Proved plus Probable 757,709 463,476 300,494 203,733 142,721

OUTLOOK

Due to oil price volatility, COVID-19 and concerns of a global economic slowdown, the Company is reviewing its 2020 budget and will not be providing an outlook for 2020 at this time.



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