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Prairie Provident Resources announces second quarter 2020 financial and operating results


CALGARY, Alberta – Prairie Provident Resources Inc. (“Prairie Provident”, “PPR” or the “Company”) today announces our financial and operating results for the three and six months ended June 30, 2020. PPR’s unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2020 (“Interim Financial Statements”) and related Management’s Discussion and Analysis (“MD&A”) for the three and six months ended June 30, 2020 are available on our website at www.ppr.ca and filed on SEDAR.

PPR’s second-quarter financial results reflect the significant decline in global energy demand and resultant impact on crude oil pricing caused by the COVID-19 pandemic. While the health and safety of our employees, partners and communities remains a priority, the Company has proactively taken steps to maintain our liquidity and financial resilience during this unprecedented time. Initiatives undertaken include suspending the capital program; identifying immediate and targeted operating cost reductions; reducing compensation across the organization; and reaching an agreement with our lenders to defer the Company’s borrowing base re-determination and to suspend cash interest payments on our 15% subordinated unsecured notes due October 31, 2021 (“Senior Notes”). As a result of these initiatives, the Company expects to realize adjusted funds flowsavings of approximately $8.0 million – $10.0 million for 2020. In addition, PPR has WTI hedges on over 80% of our 2020 forecast base oil production (net of royalties), which protect our operating cash flows and provide further resiliency amid continued volatility.  At June 30, 2020, our hedges were fair valued at over $8.6 million.

Q2 2020 HIGHLIGHTS

  • Due to the impacts of the COVID-19 pandemic and OPEC+ supply issues, oil prices experienced significant downturns during the second quarter of 2020. PPR’s Q2 2020 cash flows were partially mitigated by our hedging program, which brought in $8.1 million of realized gains for the quarter.
  • Production averaged 4,879 boe/d (68% liquids) in the second quarter of 2020, a 24% decrease from the same period in 2019, primarily driven by natural declines and gas production shut-in, partially offset by production from our 2019/2020 drilling program. Furthermore, in light of weak oil prices, during the second quarter of 2020 PPR permanently shut-in approximately 130 boe/d of uneconomic oil production. Workover activities were also suspended resulting in approximately 150 bbl/d of temporary lost production across the quarter. As oil prices have partially recovered, PPR has resumed workover activities in the third quarter of 2020 on selected projects that meet our current economic thresholds of less than one-year payout.
  • Combined with shutting in uneconomic production and reducing workover activities, PPR implemented various other cost reduction initiatives, which resulted in over $1.0 million of operating expense savings for the second quarter of 2020. Together with lower production, operating expense decreased by $3.8 million compared to the second quarter of 2019.
  • Operating netback1 after the impact of realized gains on derivatives was $7.4 million ($16.56/boe) for the second quarter of 2020, reflecting a decrease of $3.6 million or 33% from the same period in 2019. Our hedging program provided $8.1 million of realized gains in the second quarter of 2020 which partially mitigated a 66% drop in realized oil prices from the corresponding period in 2019.
  • The Michichi well drilled and completed in late March 2020 produced 220 boe/d (79% liquids) during the first 30 days and averaged 172 boe/d (79% liquids) for the second quarter of 2020. Net capital expenditures1 during the second quarter of 2020 were $0.4 million, primarily directed to the Michichi water injection facility.
  • Effective April 2020, annual salaries for all executives and non-executives have been reduced. Certain employee benefit programs have also been suspended. Collectively, these measures are expected to result in $2.0 million of gross G&A reductions for 2020.
  • Adjusted funds flow (“AFF”)1, excluding $0.7 million of decommissioning settlements, was $5.2 million ($0.03 per basic and diluted share) for the second quarter of 2020, a 21% or $1.4 million decrease from the same quarter in 2019. Primary contributors to the decrease were lower production volumes and realized commodity prices, which were partially offset by a reduction in operating expenses, royalties, G&A expenses and cash interest expenses.
  • Net loss totaled $17.6 million in the second quarter of 2020 compared to net earnings of $3.2 million in the same period last year, driven primarily by a non-cash unrealized loss on derivative instruments of $15.0 million. The unrealized loss on derivative instruments was due to a decrease in derivative asset value between March 31, 2020 and June 30, 2020. The decrease in derivative asset value was partially due to realizing $8.1 million of gains from contracts settled during the second quarter of 2020. In addition, as the forward commodity prices at June 30, 2020 improved from March 31, 2020, the marked-to-market value of the open hedges decreased accordingly.
  • Net debt1 at June 30, 2020 totaled $119.8 million, up $8.4 million from December 31, 2019. The increase from year end was attributed to an unrealized foreign exchange loss of $3.5 million which, was driven by a weaker Canadian dollar relative to the US dollar on the Company’s US-dollar denominated debt, an increase of $3.3 million related to deferred interest on the Company’s bank debt, in addition to the combination of capital expenditures and lease payments exceeding AFF during the first half of 2020.
  • During the second quarter of 2020, a lender redetermination of the borrowing base on our senior secured revolving note facility (“Revolving Facility”), originally scheduled for the spring of 2020, was temporarily deferred. The Company agreed to direct excess funds, after payment of all operating, G&A and other costs of conducting our business, to the repayment of borrowings on the Revolving Facility and to not make further advances under that facility. PPR also agreed to a 200 basis point payment-in-kind margin increase on outstanding advances.  The lenders under both the Revolving Facility and the Senior Notes agreed to waive application of all financial covenants for June 30, 2020.
  • In addition, the holders of our outstanding USD$28,500,000 original principal amount of Senior Notes agreed to in-kind quarterly interest payments, rather than a portion payable in cash as had been done previously, for the payment date of April 30, 2020 and thereafter.
  • The maturity date of the Revolving Facility is April 30, 2021. As the maturity date is within 12 months from June 30, 2020, the total outstanding amount under the Revolving Facility has been reclassified to current liabilities as at June 30, 2020. The Company and its lenders continue to work towards a long‐term solution on the credit facilities.
  • At June 30, 2020, PPR had US$57.0 million of borrowings drawn against the US$60.0 million Revolving Facility, comprised of US$30.2 million (C$40.5 million equivalent using the exchange rate at the time of borrowing, plus C$0.2 million equivalent of deferred interest, using the June 30, 2020 exchange rate of $1.00 USD to $1.36 CAD) of CAD-denominated borrowing and US$26.9 million of USD-denominated borrowing (C$$36.5 million, plus C$0.2 million of deferred interest equivalent using the June 30, 2020 exchange rate). In addition, US$33.0 million (C$38.6 million, plus C$6.3 million of deferred interest  equivalent using the June 30, 2020 exchange rate) of Senior Notes were outstanding at June 30, 2020, for total borrowings of US$90.0 million (C$122.3 million using the June 30, 2020 exchange rate).

1  Non-IFRS measure – see below under “Non-IFRS Measures”

 

FINANCIAL AND OPERATING SUMMARY

Three Months Ended
June 30,
Six Months Ended
June 30,
($000s except per unit amounts) 2020
2019 2020
2019
Production Volumes
Crude oil (bbl/d) 3,179 4,230 3,318 4,062
Natural gas (Mcf/d) 9,351 11,709 9,768 11,639
Natural gas liquids (bbl/d) 141 204 134 173
Total (boe/d) 4,879 6,386 5,080 6,175
% Liquids 68 % 69 % 68 % 69 %
Average Realized Prices
Crude oil ($/bbl) 22.45 66.44 32.29 61.80
Natural gas ($/Mcf) 1.93 1.15 2.02 1.79
Natural gas liquids ($/bbl) 15.35 28.60 21.12 32.73
Total ($/boe) 18.77 47.03 25.53 44.94
Operating Netback ($/boe)1
Realized price 18.77 47.03 25.53 44.94
Royalties (2.33) (5.42) (2.51) (4.43)
Operating costs (18.09) (20.36) (20.35) (21.85)
Operating netback (1.65) 21.25 2.67 18.66
Realized gains (losses) on derivatives 18.21 (2.46) 10.90 (1.39)
Operating netback, after realized gains (losses) on
derivatives
16.56 18.79 13.57 17.27

1   Operating netback is a Non-IFRS measure (see “Non-IFRS Measures” below).

 

Capital Structure
($000s)
June 30, 2020 December 31, 2019
Working capital1 0.3 2.2
Bank debt2 (120.1 ) (113.6 )
Total net debt3 (119.8 ) (111.4 )
Common shares outstanding (in millions) 172.1 171.4

1  Working capital (deficit) is a Non-IFRS measure (see “Non-IFRS Measures” below) calculated as current assets less current portion of derivative instruments, minus accounts payable and accrued liabilities.
2   Bank debt includes the Revolving Facility and the Senior Notes.
3   Net debt is a Non-IFRS measure (see “Non-IFRS Measures” below), calculated by adding working capital (deficit) and bank debt.

Three Months Ended
June 30,
Six Months Ended
June 30,
Drilling Activity 2020 2019 2020 2019
Gross wells 0.0 0.0 1.0 1.0
Net (working interest) wells n/a n/a 1.0 1.0
Success rate, net wells (%)1 n/a n/a 100% 100%

1 For the six months ended June 30, 2020, the Company drilled one development well with a 100% success rate.

OUTLOOK

The COVID-19 pandemic has resulted in a sharp decline in global economic activity, and consequently, a significant drop in energy demand. Although a number of countries around the world have started to ease physical distancing requirements and reopen their economies, there is a recent resurgence of COVID-19 cases in certain areas and the timing and extent of economic recovery remains highly uncertain.

The downturn in oil prices has adversely affected PPR’s operating results and financial position, although the impact has been somewhat muted given that 80% of our 2020 forecast base oil production (net of royalties) is protected by hedges. Our hedges have shielded the Company against the severe price deterioration that has occurred during these unprecedented times, underpinning the importance of maintaining liquidity and financial resilience. After completing the Michichi well in March 2020, PPR has suspended our capital program to preserve liquidity and protect development economics.

Operationally, PPR has conducted a bottom-up review of all of our operating expenses and has identified immediate reduction opportunities totaling $2.9 million for 2020. Cost reductions are expected to be realized through rate negotiations, workforce optimizations, shutting-in uneconomic production and the deferral of activities.

In addition, effective April 2020, annual salaries for all executives and non-executives have been reduced, while the Board of Directors’ annual remuneration has also been adjusted. Certain employee benefit programs have also been suspended. These measures are expected to result in approximately $2.0 million of gross G&A reductions for 2020.

PPR continues to actively pursue various COVID-19 relief programs announced by the Government of Canada and the Government of Alberta, including the Canada Emergency Wage Subsidy, the Business Credit Availability Program administered through Export Development Canada and the Business Development Bank of Canada, and the Site Rehabilitation Program (SRP) for funding abandonment and reclamation work. With respect to the SRP, PPR will assess the cost and benefits of directing spending towards decommissioning activities, with our participation decision dependent upon the incentives available and capital requirements from PPR.

As a result of the impacts caused by COVID-19, the Company expects the remainder of 2020 to be a challenging time for our industry and for the global economy in general. While PPR cannot control or influence the macro environment, we are committed to maintaining our balance sheet and liquidity through active cost reduction efforts and will continue to work closely with our lenders.

ABOUT PRAIRIE PROVIDENT

Prairie Provident is a Calgary-based company engaged in the exploration and development of oil and natural gas properties in Alberta. The Company’s strategy is to grow organically in combination with accretive acquisitions of conventional oil prospects, which can be efficiently developed. Prairie Provident’s operations are primarily focused at the Michichi and Princess areas in Southern Alberta targeting the Banff, the Ellerslie and the Lithic Glauconite formations, along with an established and proven waterflood project at our Evi area in the Peace River Arch. Prairie Provident protects its balance sheet through an active hedging program and manages risk by allocating capital to opportunities offering maximum shareholder returns.



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