Mr. Michael Kabanuk reports
GRANITE OIL CORP. PROVIDES OPERATIONAL UPDATE AND REPORTS SECOND QUARTER 2018 FINANCIAL RESULTS, EXECUTIVE APPOINTMENT AND DIRECTOR RETIREMENT
Granite Oil Corp. has provided an operational update and released its financial and operational results for the three months and six months ended June 30, 2018.
Executive appointment and director retirement
The company is pleased to announce that Devon Griffiths has been promoted to chief operating officer. Mr. Griffiths joined Granite (formerly DeeThree Exploration Ltd.) in early 2014. Mr. Griffiths is a professional geologist and has a broad operational background, including drilling, completions, production and reserves. Mr. Griffiths holds a bachelor of science degree in geology and is a member of the Association of Professional Engineers and Geoscientists of Alberta. Granite's chief executive officer, Michael Kabanuk, added: "We would like to congratulate Devon on this well-deserved promotion, and we are proud to recognize his continued efforts towards the company's success and our goal of adding value for shareholders."
Henry Hamm has retired as a director of the company effective Aug. 9, 2018. The company would like to thank Mr. Hamm for his significant contributions and wish him every success in his future endeavours. The company's board of director now comprises Brendan Carrigy (chair), Mr. Kabanuk, Kevin Andrus, Martin Cheyne, Brad Porter and Kathy Turgeon.
Granite drilled and completed two wells in the second quarter. The first well was drilled in April on 400-metre offset spacing and brought on stream in May, and was located on the company's Crown lands on the western side of its core Bakken producing pool (in EOR (enhanced oil recovery) pod 4). This marks the first well to be completed in this area since commencing EOR-focused development in 2015. The second well was drilled on 200-metre offset spacing and was brought on stream in late June. Granite tested increased propent loading and tighter frac spacing in both wells and has observed positive results in production performance.
To date, the 2018 wells, including the company's first well of 2018 brought on stream in January, have compared favourably with wells completed in 2015 and 2016. This marks a positive return in production performance since the company observed pressure interference and decreased performance associated with the 100-metre spacing wells tested during the first half of 2017. Granite has taken a number of steps to optimize pool performance and EOR efficiency associated with these 2017 wells to mitigate pressure interference and continues to repressurize affected portions of the pool. These steps included abandoning one well and shutting in production from a number of others, with estimated reduced total volumes of 80 barrels per day (bbl/d).
Granite's continued focus is on operational and cost-efficiencies. Steps taken to reduce operating expenses include the recent shut-in of the company's gas plant in conjunction with a shallow gas well abandonment program to reduce associated property taxes and further increase the company's industry-leading liability management rating (LMR) of 8.62.
Second quarter of 2018
Production during the second quarter averaged 2,217 barrels of oil equivalent per day (boe/d) (99 per cent oil), resulting in funds from operations of $4.1-million. Capital expenditures for the quarter were $5.8-million, which included the drilling and completion of two wells, the first of which was drilled in unfavourable breakup conditions and the second of which was originally planned for the third quarter. Granite made the decision to accelerate the timing of this well due to better availability of services and associated capital efficiencies.
The company's net debt at the end of the second quarter was higher than forecast primarily due to the acceleration of Granite's third quarter well into the second quarter, hedging losses and the deferred disposition of a minor property referred to in the Granite's news release dated Dec. 18, 2017. Net debt at the end of the quarter was $47.1-million, consisting of bank debt of $44.9-million and negative working capital of $2.2-million.
Granite's cash flow and corporate netbacks continue to be negatively impacted by the combination of widening Western Canada Select (WCS) differentials and the company's hedging losses. Hedging losses in the quarter were $2.0-million, totalling $3.4-million for the six months ended June 30, 2018. The company continues to aggressively pursue various differential mitigation opportunities to protect its go-forward pricing and the balance sheet.
The company began delivering a portion of its oil production directly to a U.S. refinery in June and has received an average net price increase of approximately $1.25 (Canadian) per barrel (bbl) for these volumes. The company is delivering increased volumes to the refinery, with commitments through September, and is working toward a long-term strategic contract with a view toward an improved net pricing increase. Granite continues to pursue other differential mitigation opportunities to protect its go-forward pricing and the balance sheet.
For the second half of 2018, Granite has 1,200 bbl/d hedged, including 800 bbl/d hedged at an average price of $55.09 (U.S.) and 400 bbl/d hedged at an average price of $74.94 (Canadian).
Currently, Granite has 800 bbl/d hedged for the first quarter of 2019 (100 bbl/d at $65.72 (U.S.) and 700 bbl/d at an average price of $85.86 (Canadian)) and 400 bbl/d hedged for the second quarter at an average price of $85.04 (Canadian).
With the current WCS differential outlook, the company is setting forth a calculated, more moderated pace of development of its 100-per-cent-owned, early-life-cycle Bakken oil pool, with the focus on: (1) sustainable production for the long-term; (2) minimizing costs and reducing debt levels; and (3) minimizing exposure to Canadian pricing risks through the implementation of WCS differential mitigation strategies.
With the continued uncertainty surrounding differentials, Granite is forecasting a budget ranging from 1,900 to 2,100 bbl/d of oil production for the second half of 2018, with capital spending of approximately $1.5-million to $3.5-million. The company will determine whether or not to proceed with drilling and completing a well in the fourth quarter based on prevailing price differentials and/or the success of its differential mitigation strategies. Moving forward, Granite has an inventory of 85 potential well locations with a plan to drill approximately five wells per year, in conjunction with the expansion of the EOR scheme, to ensure the most efficient, long-term recovery from the pool. At this pace, Granite has many years of future drilling, with forecast annual capital spending averaging between $10-million and $12-million, and average annual production of 2,000 to 2,300 bbl/d.
FINANCIAL AND OPERATING HIGHLIGHTS
(in thousands of dollars, except per-share amounts)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2018 2017 2018 2017
Oil and natural gas revenues 14,094 13,788 24,769 28,239
Funds from operations (1) 4,089 6,743 6,800 13,303
Per share -- basic 0.12 0.2 0.2 0.39
Per share -- diluted (2) 0.12 0.2 0.19 0.39
Net income (loss) (361) (116) (3,714) 2,384
Per share -- basic (0.01) 0 (0.11) 0.07
Per share -- diluted (2) (0.01) 0 (0.11) 0.07
Capital expenditures (3) 5,841 5,846 9,302 10,637
Net debt (4) 47,072 35,985 47,072 35,985
Shareholders' equity 192,730 212,735 192,730 212,735
Natural gas (mcf/d) 121 448 204 588
Crude oil (bbl/d) 2,197 2,784 2,177 2,835
Total (boe/d) 2,217 2,859 2,211 2,933
Average wellhead prices
Natural gas ($/mcf) 0.88 3.24 1.8 2.75
Crude oil and natural gas
liquids (NGLs) ($/bbl) 70.45 53.91 62.69 54.46
Combined average ($/boe) 69.87 53.01 61.9 53.19
Operating netback ($/boe) (7) 28.83 30.37 24.51 29.05
Gross (net) wells drilled
Oil (number) 2 (2.0) 3 (3.0) 3 (3.0) 6 (6.0)
Total (number) 2 (2.0) 3 (3.0) 3 (3.0) 6 (6.0)
Average working interest (%) 100 100 100 100
(1) Funds from operations and funds from operations per share are not recognized
measures under international financial reporting standards (IFRS). Refer to the
commentary in the management's discussion and analysis under non-GAAP (generally
accepted accounting principles) measurements for further discussion.
(2) The company uses the weighted average common shares (basic) when there is a
net loss for the period and the weighted average common shares (diluted) when
there is net income in the period to calculate net income (loss) per share
diluted. The company uses the weighted average common shares (diluted) to
calculate the funds from operations diluted.
(3) Total capital expenditures, excluding acquisitions and excluding non-cash
transactions. Refer to commentary in the management's discussion and analysis
under capital expenditures and acquisitions for further information.
(4) Net debt, which is calculated as current liabilities (excluding derivative
financial instruments) and bank debt less current assets (excluding derivative
financial instruments), is not a recognized measure under IFRS. Please refer to
the commentary under non-GAAP measurements for further discussion.
(5) For a description of the boe conversion ratio, refer to the commentary in
the management's discussion and analysis under other measurements.
(6) Combined average realized prices includes all oil, gas and NGL sales
revenue, excluding other income.
(7) Operating netback, which is calculated by deducting royalties, operating
expenses and transportation expenses from oil and gas revenue, and adjusting
for any realized hedging on financial instruments, is not a recognized measure
under IFRS. Please refer to the commentary under non-GAAP measurements for
Strategic alternatives update
On March 20, 2018, Granite announced the initiation of a process to review potential strategic alternatives available to it and the engagement of Cormark Securities Inc. and National Bank Financial Inc. as financial advisers in respect of this process. Granite has not set a definitive schedule for the process and does not intend to provide updates or otherwise disclose developments with respect to the process until the board has approved a definitive transaction or strategic alternative, or otherwise determines that disclosure is necessary or appropriate.
This news release contains the terms funds from operations and funds from operations per share, which should not be considered an alternative to or more meaningful than cash flow from (used in) operating activities as determined in accordance with IFRS. These terms do not have any standardized meaning under IFRS. Granite's determination of funds from operations and funds from operations per share may not be comparable with that reported by other companies. Management uses funds from operations to analyze operating performance and leverage, and considers funds from operations to be a key measure as it demonstrates the company's ability to generate cash necessary to finance future capital investments and to repay debt, if applicable. Funds from operations is calculated using cash flow from operating activities as presented in the statement of cash flows, before changes in non-cash working capital. Granite presents funds from operations per share whereby per-share amounts are calculated using weighted average shares outstanding, consistent with the calculation of earnings per share.
The company considers corporate netbacks to be a key measure as they demonstrate Granite's profitability relative to current commodity prices. Corporate netbacks comprise operating and funds flow netbacks. Operating netback is calculated as the average sales price of the company's commodities, less royalties, operating costs and transportation expenses. Funds flow netback starts with the operating netback and further deducts general and administrative costs, finance expense, and unrealized gains on financial instruments, and then adds any finance income and realized gains on financial instruments, if applicable. No IFRS measure is reasonably comparable with netbacks. See netbacks (per unit) in the company's management's discussion and analysis for the year ended Dec. 31, 2017, filed on SEDAR, for the netback calculations.
Net debt, which represents current assets less current liabilities, excluding current derivative financial instruments, is used to assess efficiency, liquidity and the company's general financial strength. No IFRS measure is reasonably comparable with working capital deficit.
References herein to boe mean barrels of oil equivalent derived by converting gas to oil in the ratio of 6,000 cubic feet (mcf) of gas to one barrel of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6,000 cubic feet to one barrel is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, given that the value ratio based on the current price of crude oil as compared with natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
Test rates are not necessarily indicative of long-term performance or of ultimate recovery. Neither a pressure transient analysis nor a well test interpretation has been carried out, and the data should be considered to be preliminary until such analysis or interpretation has been done.
We seek Safe Harbor.
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