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Cequence Energy announces first quarter financial results


CALGARY, Alberta – Cequence Energy Ltd. (“Cequence” or the “Company”) (TSX: CQE) is pleased to announce its operating and financial results for the three months ended March 31, 2020. The Company’s Management’s Discussion and Analysis (“MD&A”) and Condensed Consolidated Financial Statements are available at cequence-energy.com and on SEDAR at www.sedar.com.

HIGHLIGHTS

  • Production was 5,669 boe/d for the three months ended March 31, 2020 compared to 5,964 boe/d for the same period in 2019, 25% which was comprised of crude oil and liquids for both periods.
  • The Company entered into a farm-in agreement in December 2019 and equipped and brought onto production two shut-in Simonette Montney horizontal crude oil wells in the three months ended March 31, 2020. The wells produced a combined 532 bbls/d and 417 bbls/d of crude oil on a producing day basis in February and March, respectively. Capital expenditures for the three months ended March 31, 2020 were $3.3 million primarily to bring these two wells back on production.
  • Cost reductions were implemented in response to the collapse in oil prices in March 2020 including shutting in uneconomic production, negotiating price reductions with vendors, rolling back compensation and laying off certain employees and contract staff. The Company has shut in approximately 1,050 boe/d of uneconomic production as at April 30, 2020 and expects to realize approximately $5.0 million in cost reductions in 2020.

SELECTED INFORMATION

(in thousands of dollars except production volumes, per share and $/boe amounts)   Three months
ended March 31,
    2020 2019
Financial
Total revenue(1)     $11,762 $16,637
Net loss and comprehensive loss     (111,160 ) (3,814 )
Per share – basic and diluted     (2.66 ) (0.16 )
Net loss and comprehensive loss before impairment     (1,290 ) (3,814 )
Funds flow from operations(1)     997 5,364
Per share – basic and diluted     0.02 0.22
Capital expenditures, before acquisitions (dispositions)     3,264 2,184
Total assets     159,796 277,898
Net debt(1)(i)     56,780 62,269
Production volumes      
Natural gas (mcf/d)     25,425 26,689
Crude oil (bbls/d)     663 916
Natural gas liquids (bbls/d)     269 183
Condensate (bbls/d)     500 417
Total (boe/d)     5,669 5,964
Netback ($/boe)      
Price, including realized hedges     $22.80 $31.00
Operating netback(1)     $5.30 $13.56

(i) Certain accrued liabilities relating to operating expenses for periods prior to January 1, 2018 were overstated by an aggregate $9.6 million. Net debt for the period ended March 31, 2019 was reduced by $9.6 million as a result of this restatement.  Please see the “Restatement of Previously Issued Financial Statements” section in the Company’s December 31, 2019 MD&A and Audited Consolidated Financial Statements.

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

Funds flow from operations(1) was $1.0 million for the three months ended March 31, 2020, $4.4 million lower than the same prior year period. The decrease in funds flow from operations(1) compared to the prior year period was due primarily to lower realized prices for all products and reduced crude oil volumes, mainly as a result of the effects of the COVID-19 pandemic on the domestic and global economy.

Crude oil prices declined significantly through the three months ended March 31, 2020 driven by excess supply and reduced demand. Significant demand destruction was caused by the COVID-19 pandemic and the resulting global economic shutdown. The supply/demand imbalance has resulted in lower forecast future commodity prices. As a result of lower prices and the related economic value decline of the Company’s oil and gas reserves, the Company incurred a non-cash impairment charge of $109.9 million for the three months ended March 31, 2020. The impairment charge does not impact the Company’s funds flow and is reversible in future periods should there be indications of an impairment reversal, including higher forecast commodity prices.

Benchmark pricing

Three months ended
March 31,

  2020 2019
AECO-C spot gas (CDN$/mcf)   $2.03 $2.62
Ontario Dawn gas (CDN$/mcf)   2.36 3.87
WTI crude oil (US$/bbl)   46.17 54.90
Edmonton City Gate oil (CDN$/bbl)   51.62 66.43
US$/CDN$ exchange rate   0.74 0.75

Crude oil prices declined through the first three months of 2020 with West Texas Intermediate (“WTI”) averaging US$57.53 in January and US$30.45 in March.  The significant decline was due to the expiry of the supply agreement between OPEC and Russia at the end of March 2020 compounded by the World Health Organization declaring COVID-19 a pandemic global health risk. Governments around the world responded to the declaration by implementing measures restricting population movement to limit the spread of the disease, in the process shutting down significant pieces of the global economy and resulting in a significant decline in world oil demand. The increased supply with the expiry of the OPEC plus Russia agreement and reduced oil demand put downward pressure on prices.

Natural gas prices remained below thresholds where investment in natural gas wells was economically beneficial. AECO prices averaged $2.03/mcf for the three months ended March 31, 2020 compared to $2.62/mcf for the same prior year period.

OPERATIONS

  Three months ended March 31,
  2020 2019
  ($ thousands) ($/boe) ($ thousands) ($/boe)
Sales of natural gas, crude oil and condensate $11,156 $21.62 $15,651 $29.16
Realized gain on commodity contracts 606 1.18 986 1.84
Total revenue(1) 11,762 22.80 16,637 31.00
Royalties expense 1,133 2.20 882 1.64
10,629 20.60 15,755 29.36
Operating expense 5,600 10.86 6,131 11.42
Transportation expense 2,290 4.44 2,350 4.38
Operating netback(1) 2,739 5.30 7,274 13.56
General and administrative expense 1,118 2.17 1,156 2.15
Finance expense 830 1.61 982 1.84
Cash netback(1) 791 $1.52 5,136 $9.57
Unrealized loss (gain) on derivative financial instruments (1,412 )   2,790
Depletion and depreciation expense 4,270   6,076
Impairment 109,870  
Share-based payment expense 51   135
Other income (828 )   (51 )
Net loss and comprehensive loss $(111,160 )   $(3,814 )

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

Production for the three months ended March 31, 2020 averaged 5,669 boe/d compared to 5,964 boe/d for the same prior year period. Higher 2019 oil production was due to the Company’s Dunvegan horizontal oil wells that were completed and tied in, in early 2019. Natural gas production declined for the three months ended March 31, 2020 compared to the same prior year period due to natural declines. Crude oil and liquids production as a percentage of total production was 25 percent in the three months ended March 31, 2020 the same as in the prior year period.

In the three months ended March 31, 2020, the Company brought on to production two shut-in Simonette Montney horizontal crude oil wells under a farm-in agreement entered into in December 2019. In exchange the Company receives a majority interest in the wells until the capital invested is repaid at which time the Company’s working interest will be reduced to 50%. The wells produced a combined 532 bbls and 291 bbls of crude oil per calendar day in February and March, respectively.  With the significant decline in crude oil prices in March 2020, one well was shut-in in the middle of March and the second one at the end of April.

Operating netback(1) was $5.30 per boe for the three months ended March 31, 2020 compared to $13.56 per boe for the same prior year period. The decrease was due to lower realized prices for all products, lower oil and natural gas production and higher royalties expense. These were partially offset by lower operating expenses.

Operating expenses for the three months ended March 31, 2020 were $5.6 million or $10.86 per boe compared to $6.1 million or $11.42 per boe for the same prior year period. Operating expenses decreased for the three months ended March 31, 2020 compared to the same prior year period due to workover, swabbing and chemical expenses incurred in 2019 to optimize and reactivate production. Three (net) Montney wells were reactivated and production from the Dunvegan oil wells completed in the three months ended March 31, 2019 was improved.

In response to declining cashflows and crude oil prices the Company implemented cost reduction measures in the three months ended March 31, 2020 including shutting in uneconomic production, initiating negotiations with vendors for cost savings, compensation reductions for all employees including reductions for executives ranging from 10% to 20%, reduction of contract staff and temporary layoffs for certain employees. In addition, bonus plans were suspended, and Board fees were reduced by 50%.

Capital Expenditures

    Three months ended
March 31,
(in thousands of dollars)   2020 2019
Land   $102 $153
Geological & geophysical and capitalized overhead   184 191
Drilling, completions and workovers   1,785 1,433
Equipment, facilities and tie-ins   1,191 404
Office furniture & equipment   2 3
Capital expenditures   3,264 2,184
Acquisitions  
Dispositions (i)   1
Total capital expenditures   $3,264 $2,185

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

Capital expenditures for the three months ended March 31, 2020 focused on the Company bringing on to production two shut-in Simonette Montney horizontal crude oil wells per the December 2019 farm-in agreement as described above under “Operations”.

OUTLOOK

Cequence is closely monitoring the situation surrounding COVID-19 and taking proactive steps to ensure the safety of its employees, customers and the continuity of its operations. Due to the decrease in crude oil prices, continuing price volatility, the economic effects of COVID-19 and concerns of a global economic slowdown, the Company is not providing an outlook for 2020 at this time.



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