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Seven Generations’ second quarter funds flow of $138.8 million and capital investments of $69.4 million drive $69.4 million of free cash flow


Development activities have resumed and the company remains firmly on-track to achieve 2020 revised guidance with continuous cost management and improving commodity prices

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

“When the COVID-19 pandemic impacted the world in March, our 7G team rapidly adapted to a new way of working that prioritized the health and safety of our workforce. We also responded quickly and decisively to protect our balance sheet from the pandemic-related plunge in oil prices. With nearly 100% working interest in our assets and critical infrastructure, we have flexibility and control over our pace of development. We reduced our 2020 capital program by 41% which led to an 11% reduction in our 2020 production guidance. I’m proud of the exceptional performance of our 7G team during this challenging time.

Seven Generations began to transition our strategic focus from production growth to free cash flow generation in 2018. We focused our efforts on enhancing our scientific knowledge of our high-quality asset base and improving our execution. Innovations in our drilling and completion practices, structural cost reductions and decline rate moderation, culminated in free cash flow in 2019 and the first half of 2020. With the economic recovery now in its early stages, condensate demand and oil pricing has improved, and we have reinstated our drilling and completion program in accordance with our revised 2020 budget that was released on May 7, 2020. We recognize that we can grow free cash flow on a per share basis in the current commodity price environment while maintaining our production profile. For the time being, our priority for free cash flow will be debt reduction.”

Marty Proctor
President and CEO

SECOND QUARTER 2020 HIGHLIGHTS

  • Second quarter 2020 funds flow totaled $138.8 million with capital investments of $69.4 million. Free cash flow of $69.4 million and Canadian dollar strength contributed to a net debt reduction of $161 million compared to the first quarter of 2020. Available funding is currently $1.1 billion.
  • While drilling and completions activities were paused early in the quarter to preserve capital during the period of commodity price weakness, second quarter drilling and completion costs averaged $7.1 million per well for the 3 rig released and 7 completed wells. This represents a further 3% reduction in per well costs relative to the company’s revised guidance for 2020.
  • Sales volumes were 183,200 boe/d (43% natural gas, 35% condensate, 22% other NGLs).
  • The company’s consistent hedging program drove realized hedging gains of $107 million during the second quarter. The company now has 49,500 bbl/d of production, or more than 85% of condensate volumes (net of royalties) forecast for the second half of 2020, hedged at an average price of US$45.53/bbl, and 165 MMcf/d of natural gas, or 36% of the second half of 2020 forecast production, hedged at an average price of US$2.57/Mcf.
  • Condensate realizations averaged $26.59/bbl, equivalent to a US$6.00/bbl discount to WTI. Subsequent to the quarter, Edmonton differentials improved to a US$3.00-$5.00/bbl discount relative to WTI. NGL price realizations increased to $12.01/bbl during the second quarter, a 36% improvement versus the first quarter of 2020, driven by the renewed NGL contract cycle commencing in April and stronger AECO linked ethane sales.

OPERATIONAL AND FINANCIAL HIGHLIGHTS

$ millions, except per share and unit of production amounts

Three months ended
June 30

 

Three months ended
March 31

 

Six months ended
June 30

 

2020

 

2019

 

%
Change

 

2020

 

%
Change

 

2020

 

2019

 

%
Change

Financial Results

 

 

Funds flow ($)(1)

138.8

355.3

(61)

275.0

(50)

413.8

694.1

(40)

Per share – diluted ($)

0.42

1.00

(58)

0.82

(49)

1.24

1.96

(37)

Free cash flow ($)(1)

69.4

44.2

57

9.2

nm

78.6

(17.9)

nm

Net income (loss) ($)

(116.9)

295.3

nm

(1,009.2)

(88)

(1,126.1)

306.1

nm

Per share – diluted ($)

(0.35)

0.83

nm

(3.03)

(88)

(3.38)

0.86

nm

Adjusted net income ($)(1)

(43.1)

96.8

nm

34.0

nm

(9.1)

181.4

nm

Per share – diluted ($)

(0.13)

0.27

nm

0.10

nm

(0.03)

0.51

nm

Revenue ($)(2)

306.0

795.5

(62)

989.4

(69)

1,295.4

1,341.8

(3)

CROIC (%)(1)

10.7

16.2

(34)

12.9

(17)

10.7

16.2

(34)

ROCE (%)(1)

5.6

11.1

(50)

8.3

(33)

5.6

11.1

(50)

Sales volumes(3)(4)

 

 

Condensate (mbbl/d)

64.3

 

75.9

(15)

69.0

(7)

66.6

74.3

(10)

Natural gas (MMcf/d)

467.9

489.6

(4)

489.1

(4)

478.5

486.6

(2)

Other NGLs (mbbl/d)

40.9

44.3

(8)

43.0

(5)

42.0

44.2

(5)

Total sales volumes (mboe/d)

183.2

201.8

(9)

193.5

(5)

188.4

199.6

(6)

Liquids (%)

57

60

(5)

58

(2)

58

59

(2)

Realized prices(4)

 

 

Condensate ($/bbl)

26.59

71.91

(63)

56.84

(53)

42.28

67.58

(37)

Natural gas ($/Mcf)

2.49

3.29

(24)

2.65

(6)

2.57

3.80

(32)

Other NGLs ($/bbl)

12.01

4.19

187

8.84

36

10.37

5.81

78

Total ($/boe)

18.38

35.95

(49)

28.93

(36)

23.80

35.70

(33)

Royalty expense ($/boe)

(0.97)

(2.19)

(56)

(2.29)

(58)

(1.64)

(2.24)

(27)

Operating expenses ($/boe)

(4.16)

(5.00)

(17)

(4.54)

(8)

(4.36)

(4.96)

(12)

Transportation, processing and other ($/boe)

(7.53)

(6.64)

13

(7.03)

7

(7.27)

(6.64)

9

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

5.72

22.12

(74)

15.07

(62)

10.53

21.86

(52)

Realized hedging gains (losses) ($/boe)

6.44

0.04

nm

3.54

82

4.95

(0.14)

nm

Marketing income (loss) ($/boe)(1)

(0.80)

0.07

nm

(0.45)

78

(0.62)

0.41

nm

Operating netback ($/boe)(1)

11.36

22.23

(49)

18.16

(37)

14.86

22.13

(33)

Funds flow ($/boe)(1)

8.33

19.33

(57)

15.62

(47)

12.07

19.20

(37)

Balance sheet

 

 

Capital investments ($)

69.4

311.1

(78)

265.8

(74)

335.2

712.0

(53)

Available funding ($)(1)

1,110.7

1,288.3

(14)

1,030.4

8

1,110.7

1,288.3

(14)

Net debt ($)(1)

2,224.9

2,178.6

2

2,385.6

(7)

2,224.9

2,178.6

2

Purchase of common shares ($)

44.1

(100)

15.6

(100)

15.6

44.1

(65)

Common shares outstanding

333.2

353.1

(6)

333.1

333.2

348.2

(4)

Weighted average shares outstanding – basic

333.1

351.9

(5)

333.4

333.3

352.5

(5)

Weighted average shares outstanding – diluted

333.8

353.9

(6)

334.4

334.0

354.8

(6)

(1)

Refer to the Reader Advisory section at the end of this news release for additional information regarding the company’s GAAP and non-GAAP measures.

(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 section at the end of this news release.

(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
June 30

Six months ended
June 30

Nest Activity

2020

2019

% Change

2020

2019

% Change

Drilling(1)

 

 

 

 

 

Horizontal wells rig released

3

19

(84)

26

37

(30)

Average measured depth (m)

6,447

6,216

4

6,019

6,069

(1)

Average horizontal length (m)

3,213

2,962

8

2,856

2,786

3

Average drilling days per well

30

29

3

28

30

(7)

Average drill cost per metre ($)(2)

487

540

(10)

513

577

(11)

Average well cost ($ millions)(2)

3.1

3.4

(9)

3.1

3.5

(11)

Completion(1)

 

 

Wells completed

7

18

(61)

27

37

(27)

Average tonnes pumped per metre

2.0

2.0

1.9

2.0

(5)

Average cost per tonne ($)(2)

813

1,167

(30)

918

1,190

(23)

Average cost per lateral metre ($)(2)

1,666

2,320

(28)

1,756

2,557

(31)

Average well cost ($ millions)(2)

4.0

6.6

(39)

4.2

6.2

(32)

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

7.1

10.0

(29)

7.3

9.7

(25)

Wells brought on production

7

24

(71)

26

42

(38)

 (1)

The metrics include all horizontal Montney wells that are tied in for production. Excluded from the metrics are vertical wells re-drilled, abandoned wells, water disposal wells as well as any delineated and expiring wells not tied in for production. 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 completed 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 AND RESOURCE DEVELOPMENT

Seven Generations completed the wind-down of its 8 drilling rig and 2 completion spread program early in the second quarter, and commenced an operational pause to adapt to the new commodity price uncertainties brought about by supply and demand impacts resulting from OPEC decision-making and the COVID-19 pandemic. During the wind-down, several wells were drilled and left uncompleted, while other wells were completed and once tested, held back from production. Total well costs averaged $7.1 million per well, a further 3% reduction compared to both the first quarter of 2020 and the revised 2020 budget. The company continues to evaluate methods to improve capital efficiencies through continued innovation and collaborative efforts with its service providers and restarted development activity in early July with an initial 4 drilling rig and 2 completion spread program. Second half development activity will be weighted towards the Nest 3 region.

Operating costs in the second quarter averaged $4.16/boe, which were significantly lower than prior quarters and below the company’s 2020 revised guidance range of $4.50 – $5.00/boe. The company anticipates operating costs to be temporarily elevated during the third quarter due to the planned Karr condensate stabilizer turnaround and upgrade. Operating costs are expected to normalize in the fourth quarter with full-year expectations within 2020 guidance.

The lower Montney well on the 10-16-62-4 pad in Nest 3 continues to exceed expectations, with the well continuing to be the best condensate producer on the pad. Overall IP270 volumes of 1,934 boe/d are 12% above the average upper/middle Montney locations on the pad, and condensate rates over the same time frame averaged 506 bbl/d, 39% above the average upper/middle Montney location on the pad. The encouraging results from the first Nest 3 lower Montney well drove the decision to add two additional lower Montney wells in the area in 2020. Both wells are forecast to come on stream in mid-September 2020.

2020 OUTLOOK

The company remains confident in its ability to meet its revised guidance issued on May 7, 2020. The details of its 2020 revised guidance remain unchanged, and are shown below:

Revised Budget (May 7, 2020)

Total Capital Investment

 

$650 million

 

 

Average Production(1)

 

175 – 185 Mboe/d

Development Wells On-Stream (#)

65 – 70

Percent Natural Gas(1)

42 – 44%

Percent Condensate(1)

32 – 36%

Percent Other NGLs(1)

22 – 24%

Royalty Rate(2)

4 – 6%

Operating Expenses ($/boe)

$4.50 – $5.00

Transportation ($/boe)

$7.50 – $8.25

G&A ($/boe)

$0.85 – $0.95

Interest ($/boe)

$1.80 – $2.00

1)

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

2)

Original 2020 royalty guidance shown at US$50/bbl WTI assumption, revised 2020 royalty guidance assumes Q1 actuals and balance of the year at strip pricing averaging approximately US$29/bbl WTI.

While managing escalated volatility in global energy prices, the company’s improvements in decline rates, capital efficiencies and cash operating costs continue to enhance 7G’s financial resilience. As the company moves to formalize initial 2021 plans, it retains multiple capital allocation options, and currently forecasts it can hold annual production flat at current strip prices, with capital investments at or below forecast cash flows.

RISK MANAGEMENT AND MARKET PRICING DYNAMICS

The reduction in revenues resulting from the material decline in second quarter condensate prices were offset by gains from 7G’s corporate hedging program. The company’s consistent approach to risk management helps reduce cash flow volatility and ensures a minimum level of cash flow. 7G currently has approximately 85% of second half condensate exposure hedged at a floor price of US$45.53/bbl. Details of the company’s liquids and natural gas hedges at the end of the second quarter are shown below:

Second Half 2020

 

2021

 

2022

WTI Hedges – bbl/d(1)

49,500

17,000

5,750

Floor Price – US$/bbl

$45.53

$45.70

$43.32

Natural Gas Hedges – MMbtu/d(2)

164,478

192,500

125,000

Floor Price – US$/MMbtu

$2.57

$2.53

$2.50

1)

Combined USD and CAD WTI instruments. 7G has the following sold puts in place within its hedging portfolio: 6,000 bbl/d at US$36.20 for Q3 2020, 4,000 bbl/d for Q4 at US$40 and 1,750 bbl/d for 2021 at US$40.

2)

Combined Henry Hub, Chicago Citygate and AECO fixed price instruments.

3)

Complete details of 7G’s hedging program including FX hedges are available in the company’s corporate presentation and MD&A.

Alberta condensate differentials temporarily widened for May deliveries, before significantly tightening for June as imports and reduced domestic production helped balance local markets. Seven Generations continues to forecast a strong local condensate market which responds to short-term supply and demand dislocations through a combination of reduced import volumes, supply discipline, access to storage and access to other liquids streams. Third quarter Alberta condensate differentials are currently trading in line with the normalized seasonal price range of a US$3.00 – $5.00/bbl discount to WTI. The recent strength in WCS prices coupled with the resumption of production from oilsands projects should continue to support demand for western Canadian condensate through the balance of the year. Seven Generations continues its constructive long-term view for Canadian condensate with growth in the oilsands and momentum in Canadian pipeline development all contributing to higher levels of demand and continued premium pricing.

Seven Generations’ mix of NGL products saw material improvements to NGL pricing during the second quarter, despite the weakness in benchmark oil prices. Realized pricing of $12.01/bbl represented an increase of 36% relative to the prior quarter, primarily due to the renewed NGL contract cycle commencing in April and stronger AECO linked ethane sales.

ESG UPDATE

Following its recent responsible gas supply partnership with Quebec-based utility Énergir, 7G continues to pursue additional arrangements with other like-minded counterparties. The company’s commitment to delivering responsibly developed natural gas to consumer markets is an evolution of its market access strategy that is enabled by its diverse, continent-wide natural gas transportation portfolio.

With the onset of COVID-19, 7G has directed its efforts to various local initiatives to support community health and well-being. The company has made donations to several local food banks and communities to assist with food security, initiated an employee volunteer pilot program – the 7G Seniors Chat Program – in partnership with Alberta Health Services and the Grande Prairie Regional Hospital Foundation to support senior citizens, and donated face coverings and personal protective equipment to emergency women’s shelters in Grande Prairie and Calgary. Learn more about Seven Generations’ response to the COVID-19 pandemic.

CONFERENCE CALL

7G management will hold a conference call to discuss results and address investor questions today, July 29, 2020, at 9 a.m. MDT (11 a.m. EDT).

Participant Dial-In Numbers

Dial in – toll-free:

1-888-664-6392

Dial in – toll:

416-764-8659

Webcast link:

https://produceredition.webcasts.com/starthere.jsp?ei=1340543&tp_key=73e3eace2e

Replay dial in toll-free:

1-888-390-0541

Replay dial in toll:

416-764-8677

Conference ID:

928341 #

Available until:

August 5, 2020

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.



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