Mr. Michael Kabanuk reports
GRANITE OIL CORP. ANNOUNCES RECORD 2016 YEAR END RESERVE METRICS AND OPERATIONAL UPDATE
Granite Oil Corp. has presented the summary results of the independent reserves report prepared by Sproule Associates Ltd. with an effective date of Dec. 31, 2016.
During 2016, Granite invested approximately $21.5-million of estimated capital expenditures (unaudited), all organically, into its 100-per-cent-owned Bakken asset. This represents a 48-per-cent decrease in year-over-year capital expenditures as the company's highly effective gas injection enhanced oil recovery (EOR) scheme continues to drive efficiency gains. Material improvements in oil recoveries, combined with significant reductions in capital costs, resulted in the company achieving the lowest finding and development costs and highest recycle ratios in the company's history. As well, producing and proven reserves continue to account for an increasing portion of the company's total reserve base. As the company injects its natural gas back into its Bakken oil pool, reserve adds are primarily attributed to oil.
In 2016, Granite drilled and completed 10 100-per-cent-working-interest horizontal wells with a 100-per-cent success rate, converted three producing oil wells to gas injection wells, and built up its EOR infrastructure. The company also increased its strategic land position, adding key priority acreage within the Bakken oil fairway that will be the focus of a 2017 exploration program. Granite took advantage of seasonally low gas prices late in the second and early in the third quarters of 2016, purchasing gas to repressurize significant portions of the pool.
2016 reserves highlights:
- Proven developed producing (PDP) F&D (finding and development) costs were $12.95 per barrel of oil equivalent resulting in a PDP recycle ratio of 2.1 times (1) (2).
- Total proven (TP) F&D costs were $4.91 per boe, including the change in future development capital (FDC), resulting in a TP recycle ratio of 5.5 times (1) (2). Total proven F&D costs, excluding the change in FDC, were $9.09 per boe.
- Proven plus probable (2P) F&D costs were $4.55 per boe, including the change in FDC, resulting in a 2P recycle ratio of 5.9 times (1) (2). Proven plus probable F&D costs, excluding the change in FDC, were $10.76 per boe.
- PDP reserves increased by 11 per cent to 6,178,000 boe and went from 31 per cent to 33 per cent of the company's total 2P reserves, a 6-per-cent increase year over year.
- TP reserves increased by 12 per cent to 12,483,000 boe and went from 63 per cent to 67 per cent of the company's total 2P reserves, a 6-per-cent increase year over year.
- Proven plus probable reserves increased by 5.4 per cent to 18,653,000 boe.
- Reserve additions in all categories of reserves were primarily attributed to oil.
- Granite's 2016 drilling program resulted in PDP, TP and 2P reserve additions replacing 158 per cent, 225 per cent and 190 per cent of production, respectively.
- Costs associated with drilling future wells as provided for in the Sproule report dropped by 27 per cent to an average of $1.55-million per well, reflecting the significant cost improvements achieved in 2016. The company believes this to be conservative, with realized all-in costs for wells in the second half of 2016 averaging approximately $1.25-million.
- Granite remains conservative with only 30 undeveloped Bakken locations booked as of Dec. 31, 2016, versus 28 booked at year-end 2015, leaving approximately 70 per cent of its potential infill Bakken locations within its EOR area unbooked. The company will continue to focus on adding reserves per well as the development and performance of the EOR progress.
- The net present value of future net revenues discounted at 10 per cent (PV10) before taxes of Granite's 2P reserves, as set out in the Sproule report, plus an internally estimated undeveloped land value of $30-million, and net of estimated net debt of $31.5-million at Dec. 31, 2016, is $8.37 per fully diluted common share (3).
Notes:
(1) Financial information is based on the company's preliminary 2016 unaudited financial statements and is therefore subject to audit.
(2) Recycle ratio is calculated as operating netback divided by F&D costs. In the case of recycle ratios calculated on TP and 2P reserves, the F&D cost includes changes in FDC. Calculation is based on estimated 2016 operating netback of $27 per boe, which is calculated as revenue (including realized hedging gains) less royalties and production costs.
(3) The calculation of the net present value of future net revenue per share includes an estimated undeveloped land value of $30-million and is net of estimated net debt of approximately $31.5-million (unaudited).
Operations update
Granite's Bakken property produced an average of approximately 2,866 barrels of oil equivalent per day (99 per cent oil) during 2016, with an estimated fourth quarter average production rate of 2,978 boe per day (98 per cent oil). During 2016, Granite's averaged realized operating netback is estimated to be $27 per boe.
The company is pleased it has drilled and completed its first three wells of 2017 for an average estimated all-in cost of $1.25-million per well, representing only a very minor increase over its lowest-cost wells of 2016. Despite general escalation in costs, as well as delays in equipment availability, the company, with help from its service providers, has continued to make permanent improvements in well design to offset this trend. Furthermore, with all-season access, the company is confident it has an advantage in its ability to access services at opportune times.
Granite reiterates its previously announced 2017 capital budget of $16.5-million, continuing a trend of decreasing year-over-year capital requirements driven by the efficiency of its EOR scheme. This growth budget targets a 6-per-cent year-over-year increase in average production, includes a $3.0-million high-impact exploration program and finances a sustainable 42-cent-per-year per-share dividend, giving a current yield of over 7 per cent. With major efficiency gains in recoveries and capital costs realized in 2016, as highlighted by its reserve metrics, the company is excited about 2017. The company will continue to maximize shareholder value and returns from its Bakken property by prioritizing its free cash flow generating pool, building an increasing base of highly efficient EOR wells and exploring its large Bakken oil fairway.
Year-end 2016 reserves
The evaluation of Granite's petroleum and natural gas reserves prepared by independent reserves evaluator Sproule in accordance with definitions, standards and procedures contained in National Instrument 51-101 (standards of disclosure for oil and gas activities) and the Canadian oil and gas evaluation handbook. The reserves evaluation is based on forecast prices and costs and applies Sproule's forecast-escalated commodity price deck, foreign exchange rate and inflation rate assumptions as at Dec. 31, 2016, as outlined in the attached pricing assumptions table. Additional reserve information as required under NI 51-101 will be included in the company's annual information form, which will be filed on SEDAR on March 22, 2017. Financial information presented herein is based on management-prepared financial statements for the year ended Dec. 31, 2016, which are in the process of being audited by Granite's independent auditor, and, accordingly, such financial information is subject to change based on the results of the audit.
Summary of reserves
The attached summary of reserves table contains a summary of the company's estimated reserves as of Dec. 31, 2016, based on the Sproule report.
SUMMARY OF COMPANY GROSS OIL AND GAS RESERVES AS AT DEC. 31, 2016
(1) (2) (3) (4) (5) (6)
Reserves category Oil Gas Oil equivalent BTAX PV 10% Future development Recycle Net undeveloped
(Mbbl) (MMcf) (Mboe) ($000s) capital ($000s) ratio wells booked
Proven developed
producing 5,659 3,117 6,178 131,452 - 2.1
Proven developed
non-producing 155 7,376 1,507 9,121 1,231
Proven undeveloped 4,587 1,263 4,798 63,480 51,524 33
Total proven 10,400 11,757 12,483 204,053 52,755 5.4 33
------ ------ ------ ------- ------ --- --
Probable developed
producing 2,057 1,327 2,278 34,242 -
Probable developed
non-producing 98 3,753 794 4,070 -
Probable
undeveloped 3,015 500 3,099 49,828 8,272 5
Total probable 5,170 5,579 6,170 88,140 8,272 5
------ ------ ------ -------- ------ --- --
Total proven +
probable 15,570 17,336 18,653 292,193 61,027 6.0 38
------ ------ ------ -------- ------ --- --
Notes:
(1) The table summarizes data set out in the Sproule report and may not add due to
rounding.
(2) Reserves have been presented on a gross basis, which is the company's total working
interest share before the deduction of any royalties and without including any royalty
interests of the company.
(3) Based on Sproule's Dec. 31, 2016, escalated price forecast.
(4) The net present value of future net revenues attributable to the company's reserves
is stated prior to provision for interest and general and administrative expenses and after
deduction of royalties, operating costs, estimated well abandonment and reclamation costs,
and estimated future capital expenditures. Future net revenues have been presented on a
before-tax basis. It should not be assumed that the present worth of estimated future net
revenue presented in the attached table represents 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 reserve estimates of Granite's crude oil
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.
(5) The company's reserves are developed with horizontal wells completed with multistage
fracturing techniques.
(6) Oil volumes include all light, medium and heavy crude oil volumes.
Net present values of future net revenue
The attached net present values of future net revenue table contains a summary of the estimated net present values of future net revenue (before income taxes) associated with the company's reserves as at Dec. 31, 2016, based on the Sproule report. The calculated NPVs include a deduction for estimated future well abandonment and reclamation, but do not include a provision for interest, debt service charges, and general and administrative expenses. It should not be assumed that the NPV estimates represent the fair market value of the reserves.
SUMMARY OF NPV OF FUTURE NET REVENUE AS AT DEC. 31, 2016
(1) (2) (3) (4) (5)
($M)
Reserves category Net present value before income taxes discounted at (%/year)
0% 5% 10% 15% 20%
Proven developed producing $215,224 $163,805 $131,452 $110,005 $94,997
Proven developed non-producing 35,072 16,680 9,121 5,731 4,051
Proven undeveloped 145,417 92,418 63,480 46,080 34,739
Total proven 395,713 272,903 204,053 161,816 133,787
------- ------- ------- ------- -------
Total probable 258,628 138,511 88,140 62,855 48,246
------- ------- ------- ------- -------
Total proven + probable 654,341 411,414 292,193 224,671 182,033
------- ------- ------- ------- -------
Notes:
(1) The table summarizes data set out in the Sproule report and may not add
due to rounding.
(2) Reserves have been presented on a gross basis, which is the company's
total working interest share before the deduction of any royalties and
without including any royalty interests of the company.
(3) Based on Sproule's Dec. 31, 2016, escalated price forecast.
(4) The net present value of future net revenues attributable to the
company's reserves is stated prior to provision for interest and general and
administrative expenses and after deduction of royalties, operating costs,
estimated well abandonment and reclamation costs, and estimated future
capital expenditures. Future net revenues have been presented on a before-
tax basis. It should not be assumed that the present worth of estimated
future net revenue presented in the attached table represents the fair market
value of the reserves. There is no assurance that the forecast prices and
costs assumptions will be attained, and variances could be material. The
recovery and reserve estimates of Granite's crude oil 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.
(5) The company's reserves are developed with horizontal wells completed
with multistage fracturing techniques.
Net asset value
Based on Sproule's Dec. 31, 2016, forecast pricing, Granite's net asset value calculation is set out herein. This net asset value determination is a point-in-time measurement and does not take into account the possibility of the company being able to recognize additional reserves through successful future capital investment in its existing properties beyond those included in the Sproule report.
Net asset value as at Dec. 31, 2016 (1):
Proven plus probable reserves NPV 10 before tax: $292,193,000,000
Net undeveloped land value (internal valuation): $30-billion
Estimate net debt (unaudited): ($31.5-billion)
Proceeds from dilutive securities: $346-million
Net asset value: $291,039,000,000
Fully diluted shares outstanding: 34,778,000
Estimate NAV per fully diluted share: $8.37 per share
Note:
Numbers may not add due to rounding.
Future development capital (FDC)
The attached future development costs of undeveloped reserves table provides a summary of the estimated FDC required to bring the company's undeveloped reserves to production, which have been deducted in the estimation of future net revenue attributable to such reserves. Changes in forecast FDC occur annually as a result of development activities, acquisition and disposition activities, and capital cost estimates that reflect the independent evaluator's best estimate of what it will cost to bring the proven undeveloped and probable reserves on production using forecast prices and costs.
FUTURE DEVELOPMENT COSTS OF UNDEVELOPED RESERVES (1)
($M)
Year Total proven Total proven + probable
2017 $14,150 $14,150
2018 14,493 15,654
2019 12,362 14,113
2020 10,770 16,129
2034 980 980
------ ------
Total undiscounted FDC 52,755 61,027
Total discounted FDC
at 10%/year 43,812 50,047
------ ------
Notes:
(1) Numbers may not add due to rounding.
Pricing assumptions
The attached pricing assumptions table summarizes Sproule's commodity price forecast, foreign exchange rate and inflation rate assumptions as at Dec. 31, 2016, as applied in the Sproule report. When compared with the Dec. 31, 2015, pricing assumptions, commodity pricing for the year 2017 has increased for oil and gas by 22 per cent and 63 per cent, respectively. However, the longer-term oil price forecast decreased on average over the following 10 years by 7 per cent, and increased on average for the following 10 years by 1 per cent for gas.
FORECAST PRICING AND FOREIGN EXCHANGE RATES
(1) (2) (3) (4) (5)
Western
Canada
Select Alberta
20.5- AECO-C Exchange Edmonton
degree Spot rate Edmonton Edmonton Pentanes
API ($Cdn/ (2) propane butane Plus
(bbl) MMBtu) ($U.S./ ($Cdn/ ($Cdn/ ($Cdn/
(4) (5) $Cdn) bbl) bbl) bbl)
Forecast (3)
2017 $53.12 $3.44 $0.78 $22.74 $47.60 $67.95
2018 61.85 3.27 0.82 28.04 55.49 75.61
2019 64.94 3.22 0.85 30.64 57.65 78.82
2020 66.93 3.91 0.85 32.27 58.80 80.47
2021 68.27 4.00 0.85 33.95 59.98 82.15
2022 69.64 4.10 0.85 35.68 61.18 83.86
Thereafter escalation rate of 2 per cent
Notes:
(1) This summary table identifies benchmark reference pricing schedules
that might apply to a reporting issuer.
(2) The exchange rate used to generate the benchmark reference prices
in this table.
(3) As at Dec. 31, 2016.
(4) The price received for the company's oil, which is considered to be
medium crude oil, has historically corresponded very closely to Western
Canada Select 20.5-degree API (Canadian dollars per barrel), plus
associated quality adjustments.
(5) The price received for the company's natural gas has historically
corresponded to AECO-C Spot pricing (Canadian dollars per million British
thermal units), adjusted for heat value and transportation.
Year-end 2016 reporting
The company will report its year-end 2016 results on March 22, 2017.
We seek Safe Harbor.
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