Mr. Walter Vrataric reports
CHINOOK ENERGY INC. ANNOUNCES THIRD QUARTER 2017 RESULTS AND INCREASED CREDIT FACILITY
Chinook Energy Inc. has released its third quarter 2017 financial and operating results.
The company's operational and financial highlights for the three and nine months ended Sept. 30, 2017, are noted in the attached table and should be read in conjunction with its condensed consolidated financial statements for the three and nine months ended Sept. 30, 2017, and Sept. 30, 2016, and its related management's discussion and analysis, which have been posted on SEDAR and Chinook's website.
THIRD QUARTER 2017 FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended Nine months ended
Sept. 30 Sept. 30
2017 2016 2017 2016
Operations
Production volumes
Natural gas liquids (boe/d) 405 599 442 645
Natural gas (mcf/d) 14,109 28,972 17,051 25,666
Crude oil (bbl/d) 19 1,036 22 874
Average daily production (boe/d) 2,776 6,464 3,306 5,798
Sales prices
Average natural gas liquids price ($/boe) $ 42.07 $ 10.67 $ 46.22 $ 21.78
Average natural gas price ($/mcf) $ 1.20 $ 2.22 $ 2.31 $ 1.71
Average oil price ($/bbl) $ 51.49 $ 57.31 $ 57.52 $ 48.55
Netback (1)
Average commodity pricing ($/boe) $ 12.61 $ 20.14 $ 18.49 $ 17.31
Royalty recovery (expense) ($/boe) $ 0.52 $ (0.77) $ 0.09 $ (0.74)
Realized gains on derivative contracts ($/boe) $ 6.54 $ 1.84 $ 2.70 $ 0.72
Net production expense ($/boe) (1) $ (12.32) $ (12.61) $ (11.77) $ (14.07)
Operating netback ($/boe) (1) $ 7.35 $ 8.60 $ 9.51 $ 3.22
Wells drilled (net)
Total natural gas wells drilled (net) - - 3.63 -
Three months ended Nine months ended
Sept. 30 Sept. 30
2017 2016 2017 2016
Financial ($ thousands, except per share amounts)
Petroleum and natural gas revenues,
net of royalties $ 3,351 $ 11,518 $ 16,772 $ 26,312
Adjusted funds (outflow) from operations (1) $ 647 $ 1,894 $ 3,878 $ (2,717)
Per share -- basic and diluted ($/share) $ - $ 0.01 $ 0.02 $ (0.01)
Net (loss) income $ (3,923) $ (35,905) $ 4,246 $ (61,200)
Per share -- basic and diluted ($/share) $ (0.02) $ (0.17) $ 0.02 $ (0.28)
Capital expenditures $ 14,733 $ 661 $ 31,791 $ 5,034
Net surplus (1) $ 3,616 $ 7,217 $ 3,616 $ 7,217
Total assets $ 155,799 $ 274,674 $ 155,799 $ 274,674
(1) Adjusted funds (outflow) from operations, adjusted funds (outflow) from operations per
share, net surplus (debt), operating netback and net production expense are non-GAAP (generally
accepted accounting principles) measures. These terms do not have any standardized meanings as
prescribed by IFRS (international financial reporting standards and, therefore, may not be
comparable with the calculations of similar measures presented by other companies.
Highlights for the three months ended Sept. 30, 2017:
- Chinook ended the third quarter of 2017 with a net surplus of $3.6-million.
- Subsequent to quarter-end, it secured an increased credit facility to $18.0-million from the previous $8.0-million which provides the company with further financial flexibility. Chinook remains undrawn on this facility.
- Chinook incurred $14.7-million of capital expenditures during the third quarter which included the completion and tie-in of Chinook's four (3.63 net) horizontal wells at Birley/Umbach that were drilled in the second quarter of 2017 as well as $2.5-million related to its Birley/Umbach facility expansion.
- Upon completion of the four new Birley/Umbach wells, the final 24-hour test rates per well averaged 1,800 barrels of oil equivalent per day (boe/d) including 300 barrels per day of condensate. Two of these wells (1.63 net) came on-stream at the beginning of October, 2017; however, due to Chinook's existing 25-million-cubic-foot-per-day raw natural gas Birley/Umbach facility being full, these new wells are currently flowing at restricted rates.
- Chinook's Birley/Umbach facility expansion is continuing and is expected to be on-stream late in the fourth quarter. Upon the completion of this facility's expansion to 50 million cubic feet per day, the company plans on releasing the flow restrictions on its two newly producing Birley/Umbach wells and bringing the other two (2.0 net) wells on-stream. At that point, Chinook expects to have production from all 13 (11.27 net) Birley/Umbach wells.
- A longer-than-expected third party plant turnaround and other third party restrictions, coupled with a decrease in Chinook's realized price driven by significantly lower B.C. natural gas benchmark pricing, has resulted in an update to the company's 2017 guidance, which is outlined in the outlook section of this news release. Chinook's current production is approximately 4,700 boe/d.
Third quarter 2017 financial results
Chinook's production during the third quarter of 2017 averaged 2,776 boe/d, a decrease of 24 per cent from the previous quarter primarily due to a longer-than-scheduled turnaround at the Enbridge McMahon gas plant that restricted July volumes. This turnaround, which began in June, resulted in July's production being 3,160 boe/d lower than May. Chinook's Montney production was back on-stream in mid-July immediately following the completion of the McMahon Plant turnaround. The company averaged 4,850 boe/d from July 18 to July 24, 2017, but these volumes were subsequently impacted by further McMahon plant and other third party restrictions.
Chinook's production in the third quarter of 2017 decreased 57 per cent from the same quarter of 2016 primarily due to the absence of the legacy assets of a subsidiary that the company acquired late in the second quarter of 2016, in addition to the majority of its Alberta assets that it conveyed to that subsidiary, as a result of the distribution of that subsidiary's shares to Chinook's shareholders late 2016 and various other property dispositions.
For the third quarter of 2017, Chinook's operating netback decreased 15 per cent to $7.35 per barrel of oil equivalent, compared with the same quarter of 2016. This decrease was driven by decreases in Chinook's realized commodity pricing despite improvements in each of the other components of the operating netback. The company's realized commodity price decreases generally trended with the decreases in benchmark pricing resulting in a realized price of $12.61 per barrel of oil equivalent for the third quarter. Chinook realized a record low third quarter Station 2 benchmark price not observed in over two decades as attributable to temporary third party pipeline restrictions which are causing an increase in the overall pressure on the B.C. system and a surplus of natural gas at Station 2. During the third quarter of 2017, Chinook sold over 70 per cent of its natural gas production at Station 2 and approximately 28 per cent at the comparably higher Chicago City Gate benchmark. It realized a recovery of royalties during the third quarter of 52 cents per barrel of oil equivalent due to B.C. government royalty grants and a gas cost allowance adjustment. Chinook's net production expense of $12.32 per barrel of oil equivalent during the third quarter decreased from the same period of 2016, despite significantly lower volumes, primarily due to the divestiture of higher cost properties and the signing of a new B.C. gas handling agreement late in the third quarter of 2016. However, Chinook's net production expense was higher than its expectations due in part to lower production volumes relative to its fixed operating costs. The company expects its continuing operations to incur production costs under $10 per barrel of oil equivalent once production volumes from its most recent 2017 four-well drilling campaign are brought on-stream at full capacity and subject to Chinook's ability to maintain its production volumes.
Chinook's adjusted funds from operations for third quarter of 2017 of $600,000 decreased from $1.9-million during the third quarter of 2016, as realized gains on commodity price contracts and a lower cash-based cost structure for Chinook's Montney-focused operations were more than offset by lower realized natural gas pricing and restricted production volumes. Despite historically low Station 2 benchmark pricing and restricted production volumes, Chinook's third quarter adjusted funds from operations is the fifth consecutive quarter the company has reported positive adjusted funds flow which corresponds with when it started its transition to a pure Montney play.
Chinook reported a net loss for the third quarter of 2017 of $3.9-million compared with a net loss of $35.9-million during the same quarter of 2016. This improvement reflects a lower cost structure associated with Chinook's transition to a pure Montney play in addition to a $1.7-million gain on commodity price contracts. The comparative quarter of 2016 was also impacted by net losses from Chinook's previous subsidiary's operations, the shares of which were included in the share distribution. These net losses included $52.0-million of impairment charged against the subsidiary's assets but as partially offset by $14.2-million of net losses attributable to the non-controlling interest.
Third quarter 2017 operational results
During the third quarter, Chinook successfully completed and tied in its four (3.63 net) horizontal Montney gas wells at Birley/Umbach (the a-81-F, b-90-G, 02/d-5-K and b-14-K wells). These wells were drilled during the second quarter of 2017 with various downhole locations on the company's D-93-F pad. On average, each well cost $4.24-million gross to drill and complete. The higher average total cost per well incurred on Chinook's most recent drilling program, compared with the previous 2016 three-well (2.64 net) program, resulted from each well, on average, having 200-metre-longer lateral lengths and eight additional completion stages. These four (3.63 net) new wells had comparable drilling costs per metre of lateral and a 19-per-cent reduction in completion costs per stage.
Also included in Chinook's year-to-date capital expenditures is $4.7-million for the expansion of its Birley/Umbach facility to 50 million cubic feet per day. The company budgeted $10-million net for the total cost of this expansion in its capital program. Two (1.63 net) of the four (3.63 net) most recently drilled, completed and equipped Birley/Umbach wells are currently on restricted production as Chinook's existing 25-million-cubic-foot-per-day facility is producing at maximum capacity. On commissioning of this facility's expanded capacity to 50 million cubic feet per day (net 41.76 million cubic feet per day) expected during the fourth quarter of 2017, these restrictions will be released and Chinook's remaining two (2.00 net) standing wells are expected to be brought on-stream, bringing the company's exit production to its 2017 revised guidance of 6,300 to 6,500 boe/d.
Increased credit facility
Subsequent to Sept. 30, 2017, Chinook's credit facility was amended to increase the availability to $18.0-million from its previous $8.0-million, with the next semi-annual review scheduled for May 31, 2018. This availability increase was secured upon submitting to the lender the test results from Chinook's recently drilled and completed wells. The company remains undrawn on this facility and exited the third quarter of 2017 with a net surplus of $3.6-million.
This amended credit facility provides the company with financial flexibility as it assesses its capital program for the coming year. Chinook continues to be well positioned to advance the development of its existing core assets at Birley/Umbach at a practical pace given the current economic environment.
Financial commodity price contracts
Chinook uses financial commodity price contracts to support its capital investment and growth by providing more certainty regarding its adjusted funds from operations and balance sheet management, and also when required to comply with its credit facility covenants. The company's current financial commodity price contracts in place are shown in the attached table.
Indexed price Notional volumes Company's received price Remaining contractual term
AECO 7,500 gj/d $3.205/gj Oct. 1, 2017, to Dec. 31, 2017
AECO 4,000 gj/d $2.50/gj Oct. 1, 2017, to Oct. 31, 2017
Outlook
Chinook continues to execute on its $40-million 2017 capital program and remains excited about the growth it will provide. As the company implements this capital program, it will continue to closely monitor its balance sheet and commodity prices.
Chinook has made great strides over the past 12 months to improve its cost structure, including completing the share distribution and executing a new gas handling agreement in British Columbia. On a per-barrel-of-oil-equivalent basis, for fourth quarter of 2017, Chinook's net production expense is expected to approximate $10 per barrel of oil equivalent. As Chinook begins to increase its production at Birley/Umbach, its cost structure and profitability should significantly improve.
The company forecasted the McMahon plant outages during the second quarter of 2017, resulting in Chinook achieving production guidance for the quarter. However, the McMahon plant turnaround unexpectedly continued in July. Additionally, high pipeline pressure and further third party restrictions caused restricted flow rates in Chinook's August production. As a result of this lower-than-expected production, in addition to historically low natural gas benchmark prices during the third quarter, Chinook is issuing the 2017 revised guidance as shown in the attached table.
(in millions of dollars, except boe/d) Previous 2017 guidance (1) 2017 revised guidance (2)
Average production (boe/d) 4,200 to 4,300 3,600 to 3,700
Exit production (boe/d) (3) 6,300 to 6,500 6,300 to 6,500
Capital expenditures (4) $40 $40
Net surplus (debt) as at Dec. 31, 2017 $2 $(2.7)
(1) Previous 2017 guidance assumptions: AECO natural gas price of $2.64 per million British
thermal units; Station 2 natural gas price of $2.11 per million British thermal units; and
Chicago Alliance natural gas price of $2.92 per million British thermal units.
(2) Revised 2017 guidance assumptions: AECO natural gas price of $2.15 million British thermal
units; Station 2 natural gas price of $1.79 million British thermal units; and Chicago Alliance
natural gas price of $2.59 million British thermal units.
(3) Exit production may be negatively impacted should Chinook choose to voluntarily shut in
production in the event of low commodity prices.
(4) Includes decommissioning obligation expenditures and capitalized general and
administrative costs.
Chinook is currently assessing its 2018 capital program in order to remain prudent in how it deploys its capital. The company anticipates releasing its 2018 capital budget around mid-January, 2018.
About Chinook Energy Inc.
Chinook is a Calgary-based public oil and natural gas exploration and development company which is focused on realizing per-share growth from its large contiguous Montney liquids-rich natural gas position at Birley/Umbach in British Columbia.
We seek Safe Harbor.
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