Mr. Jason Skehar reports
BONAVISTA ENERGY CORPORATION ANNOUNCES 2019 SECOND QUARTER RESULTS
Bonavista Energy Corp. has released its financial and operating results for the three and six months ended June 30, 2019. In the second quarter of 2019, the company generated adjusted funds flow of $40.5-million, allocating $35.3-million to Bonavista's exploration and development program. The financial statements and notes, as well as management's discussion and analysis (MD&A), are available on SEDAR and on Bonavista's website.
Message to shareholders
Inadequate pipeline capacity and regulatory uncertainty in the Canadian energy sector continue to overshadow the operational success Bonavista has experienced as a sector in the first six months of the year.
Bonavista's second quarter reported adjusted funds flow of $40.5-million was ahead of plan while production for the quarter averaged 61,186 barrels of oil equivalent per day (boe/d) with facility turnaround activity meaningfully curtailing production throughout the quarter.
Capital expenditures, net of acquisition and divestiture activity in the quarter, were 15 per cent below budget, resulting from above-average rainfall restricting access to numerous development projects. Notwithstanding these challenges, Bonavista remained focused on its liquids-rich development opportunities in the west-central region, drilling six wells and completing four. The majority of the company's second quarter activity was brought on stream late June and July.
Notwithstanding abrupt and unpredictable movements in AECO daily natural gas prices throughout the quarter, Bonavista mitigated price volatility with 68 per cent of its natural gas production hedged and 29 per cent diversified to alternative markets. Unfortunately though, Bonavista's natural gas liquids (NGLs) revenues have eroded by 30 per cent in the quarter relative to the first quarter, resulting from turnaround-induced recovery inefficiency and heavily discounted NGL purchase contracts coming into effect April 1. Bonavista remains well hedged and diversified for the balance of the year, with less than 24 per cent of H2 (second half) 2019 natural gas production exposed to spot AECO pricing volatility.
Operational and financial accomplishments for the second quarter of 2019:
Generated adjusted funds flow of $40.5-million (15 cents per share), equivalent to $7.28 per boe, modestly ahead of expectations but burdened by discounted NGL pricing;
- Produced 61,186 boe/d with approximately 2,000 boe/, curtailed due to turnaround activity and approximately 2,000 boe/d curtailed due to delays in development caused by excessive rainfall and shut-ins due to uneconomic natural gas prices. Current production is approximately 64,000 boe/d;
- Executed a successful exploration and development (E&D) program, spending $35.3-million to drill six (5.9 net) and completing four (4.0 net) wells;
- Directed 21 per cent of Bonavista's exploration and development program or $7.3-million to infrastructure projects designed to redirect current and future production to lower-cost, more efficient processing facilities;
- Realized natural gas sales price of $2.24 per thousand cubic feet (mcf), a 91-per-cent premium to the average AECO monthly index price;
- Protected 2019 adjusted funds flow by limiting exposure to AECO through remainder of the year, with 76 per cent of Bonavista's natural gas production hedged at an average price of $1.94 per mcf.
Three months ended
March 31, 2019 June 30, 2019 June 30, 2018
(in thousands of dollars, except
Production revenues $ 120,636 $ 81,485 $ 121,102
Net income (loss) (40,135) 1,828 (49,564)
Per share (1) $ (0.15) $ 0.01 $ (0.19)
Cash flow from operating activities 54,485 56,186 63,842
Per share (1) $ 0.21 $ 0.21 $ 0.25
Adjusted funds flow (2) 58,181 40,524 65,704
Per share (1) $ 0.22 $ 0.15 $ 0.25
Dividends declared 2,558 - 2,536
Per share $ 0.01 - $ 0.01
Total assets 2,867,965 2,896,501 2,889,457
Shareholders' equity 1,512,870 1,518,210 1,490,460
Long-term debt 781,168 763,376 809,099
Net debt (2) 811,440 795,987 826,552
Exploration and development 49,023 35,277 33,148
Acquisitions, net of dispositions (3) (5,378) (37) 725
Corporate 119 309 337
(boe conversion -- 6:1 basis)
Natural gas (mmcf/day) 282 264 301
Natural gas liquids (bbl/d) 17,945 15,387 15,950
Oil (bbl/d) (4) 1,988 1,830 2,091
Total oil equivalent (boe/d) 66,937 61,186 68,214
Product prices (5)
Natural gas ($/mcf) 2.61 2.24 2.62
Natural gas liquids ($/bbl) 28.95 23.22 32.56
Oil ($/bbl) (4) 60.21 61.93 64.15
Total oil equivalent ($/boe) 20.54 17.36 21.16
Operating expenses ($/boe) 5.85 5.86 5.78
Transportation expenses ($/boe) 1.44 1.43 1.32
General and administrative
expenses ($/boe) 0.84 0.96 0.96
Cash costs ($/boe) (2) 9.55 9.78 9.47
Operating netback ($/boe) (2) 11.92 9.82 12.95
(1) Basic-per-share calculations include exchangeable shares that are convertible
into common shares on certain terms and conditions.
(2) Non-GAAP (generally accepted accounting principles) measure that does not have
any standardized meaning under IFRS (international financial reporting standards)
and therefore may not be comparable with similar measures presented by other
entities. Reference should be made to the section entitled non-GAAP measures.
(3) Expenditures on property acquisitions, net of property dispositions.
(4) Oil includes light, medium and heavy oil.
(5) Product prices include realized gains and losses on financial instrument
Q2 2019 capital, operations and financial update
Q2 2019 operational update
Operations in the second quarter were concentrated in the company's west-central core area, where it drilled four wells in the Strachan area and two wells in the Hoadley Glauconite trend. The company completed four wells near the end of the second quarter with these wells coming on stream late June and July.
Of the $35.3-million E&D expenditures, 66 per cent or $23.3-million was allocated to value capital and 34 per cent or $12-million was allocated to support capital. Of the support capital, $7.3-million was allocated to facility projects, which included the installation of nine miles of six-inch pipe to connect the company's recently acquired assets and undeveloped acreage in Willesden Green to Bonavista's operated infrastructure. Bonavista also commenced work on the expansion of a compression facility at Strachan that will increase capacity from 35 million cubic feet per day (mmcf/d) to 60 million cubic feet per day. This project is scheduled to be completed in the third quarter.
Lastly, Bonavista acquired approximately 10,000 acres of Duvernay in the second quarter and solidified its plans to drill its first Duvernay well in the third quarter. The company remain encouraged with the recent results in and around its planned drilling location.
Q2 2019 production
Production volumes for the quarter averaged 61,186 boe/d, comprising 264 million cubic feet per day of natural gas, 15,387 barrels per day (bbl/d) of natural gas liquids and 1,830 bbl/d of oil. This production rate represents a 9-per-cent decrease over the prior quarter, resulting from production curtailments related to facility turnarounds, excessive rainfall, less efficient NGL recovery and uneconomic natural gas prices.
Q2 2019 production revenue, marketing and risk management
Production revenues for the second quarter, inclusive of $15.2-million of realized gains on financial instrument commodity contracts, were $96.7-million or $17.36 per boe, a 15-per-cent decrease from the prior quarter. Production revenues, excluding realized gains on financial instrument commodity contracts, were $81.5-million or $14.64 per boe. Realized pricing for natural gas was $2.24 per mcf, a 14-per-cent reduction from the previous quarter but ahead of the average AECO daily spot price for the quarter of 98 cents per gigajoule (GJ) and a 91-per-cent premium to the average AECO monthly index price of $1.11 per GJ. Financial hedging accounted for a premium of 64 cents per mcf and 58 cents per barrel for natural gas and natural gas liquids respectively, and a discount of $6.51 per barrel on realized oil pricing.
Q2 2019 operating and transportation expenses
Operating expenses in the quarter were 7 per cent lower at $32.6-million compared with $35.2-million in the previous quarter, however, on a per-barrel-of-oil-equivalent basis, operating expenses of $5.86 were similar to the first quarter and in line with the company's forecast. Typically, Bonavista would see lower per-barrel-of-oil-equivalent operating expenses in the second quarter as compared with the first quarter, but this current quarter, Bonavista experienced significant planned and unplanned third party turnaround activity that impacted these results.
Transportation expenses were 8 per cent lower in the quarter at $8.0-million compared with $8.7-million in the previous quarter, due mostly to the 9-per-cent decrease in production volumes, due largely to turnaround activity mentioned above. Transportation expenses were $1.43 per boe as compared with $1.44 per boe in the prior quarter; in addition, natural gas, natural gas liquids and oil all had very similar per-unit expenses as compared with the previous quarter.
Q2 2019 general and administrative and interest expenses
Second quarter general and administrative expenses were $5.4-million or 96 cents per boe, 5 per cent higher on an absolute basis compared with the first quarter of $5.1-million. A significant reduction of overhead recoveries contributed to the increase in general and administrative expenses as exploration and development expenditures were 28 per cent lower than in the previous quarter.
Interest expenses in the second quarter were $8.5-million, in line with the company's budget and similar to the first quarter of 2019.
Q2 2019 cash flow from operating activities and adjusted funds flow
Cash flow from operating activities was 3 per cent higher in the second quarter relative to the previous quarter at $56.2-million from $54.5-million. Adjusted funds flow of $40.5-million for the quarter was 30 per cent lower than the $58.2-million generated in the first quarter of 2019, due to a 15-per-cent decline in production revenues per boe and a 9-per-cent decrease in production volumes.
Q2 2019 long-term debt
Long-term debt was $763.4-million in the second quarter, a reduction of $17.8-million over the first quarter results. This reduction resulted from debt repayment of $3.6-million and the revaluation of the company's U.S.-dollar-denominated debt as the Canadian dollar strengthened in the second quarter of 2019 as compared with the first quarter.
Signs of perpetual growth in natural gas demand are being observed around the globe. Chinese demand for natural gas is expected to grow by double digits in the coming years, resulting from the government's strong initiatives to improve air quality. India is the second-fastest-growing gas market globally with over $30-billion allocated for pipelines, city infrastructure, fuelling infrastructure and doubling its import LNG facilities. Canada's leadership in environmental stewardship and the short shipping distances to these markets perfectly position the company to support these countries in their transition to a low-carbon energy system.
As Canadians, Bonavista is grateful that Shell has chosen to proceed with LNG Canada, the largest private-sector infrastructure project in Canadian history, in support of reducing global emissions by making Canadian natural resources available to the rest of the world. As well, the proposed Canadian Kitimat LNG facility recently announced expansion plans to nearly double export capacity, double the term of the export licence and stake claim to the lowest emission LNG plant in the world. This speaks volumes to the quality of Canadian natural resources and represents a significant opportunity for Canada to build relationships with developing countries in need of its abundant natural gas resources.
Finally, with increased export commitments to Mexico and other LNG markets, U.S. domestic supply could become challenged to meet growing domestic demand, largely due to continued growth in natural gas fired power generation. This will create the opportunity for Canadian natural gas supply to support this growing North American demand as incremental export infrastructure in Western Canada is constructed over the coming two years.
Notwithstanding robust global demand fundamentals for natural gas, Canadian natural gas pricing remains heavily discounted in the short term, resulting from inadequate infrastructure and egress to these markets in need. With incremental egress and export solutions on their way, the company remains practical and value oriented with the management of its excess adjusted funds flow and its future development inventory. Bonavista believes preserving its drilling inventory via a moderate and thoughtful development program to be the most prudent option available given the volatile and unpredictable short-term pricing it is currently experiencing. For the remainder of the year, Bonavista intends to deliver on its previously announced guidance. However, if natural gas prices do not improve from current levels, the company will remain prudent and target capital spending and production at the low end of this range. Bonavista will remain persistent on creating incremental financial flexibility by allocating excess adjusted funds flow to its balance sheet.
As demonstrated over the past few years, Bonavista is committed to the philosophy of strengthening its foundation for the future as it invests in land and its infrastructure, enhances its asset quality, and reduces cost. The company has continuously engaged in strategic acquisition and divestiture activities to support this philosophy as it fully expects these transactions to create long-term value for its shareholders.
With regard to its financial flexibility, at the beginning of May, Bonavista engaged in formal covenant relief negotiations with its lenders. Although significant progress has been made to date, no agreements have been reached with the lenders as of the date of this report. The company does, however, expect that this negotiation process will be successful and suitable terms for covenant relief reached.
Bonavista is a proud Canadian company with a 22-year history of providing energy to Canadians on their journey to continuously improve their way of life. Since the company's inception in 1997, Bonavista's operations have supported its economy spanning from job creation across the nation to local and provincial community investment. The company has invested over $5.3-billion in drilling and producing over 3,000 wells in Canada; it has paid over $2.2-billion in royalties and over $200-million in property taxes to government bodies. Bonavista believes it can have a healthy, vibrant economy in Canada that includes the economic benefits from resource development for all citizens while reducing global greenhouse gas emissions. The company believes that regulation certainty and a patriotic commitment to infrastructure will accomplish this in positioning Canada to responsibly energize the globe for years to come.
Bonavista would like to once again thank Michael Kanovsky for serving for over 21 years on the board of directors, having retired at the company's annual general meeting in May, 2019 . As one of the company's founders and lead director, Mr. Kanovsky's vision was instrumental in the early-stage growth, the evolution, and ultimately the responsible and sustainable energy provider the company is today. Bonavista is grateful for his service and dedication to Bonavista, and it wishes Mr. Kanovsky all the best with the next chapter of his life.
Bonavista would also like to welcome Mary Hemmingsen to its board of directors. Ms. Hemmingsen brings more than 25 years of energy and infrastructure experience across many aspects of both the North American and global energy sector. Ms. Hemmingsen currently serves on a number of publicly listed and private company boards in the energy, energy services and infrastructure sector, including Stuart Olson and InstarAGF Asset Management, and is executive chair of Trace Water Solutions. Ms. Hemmingsen's previous executive roles included executive vice-president and chief financial officer of North West Innovation Works, a cleantech natural gas to methanol development platform, KPMG partner, and industry lead of power and utilities for Canada, as well as global head of gas and LNG, and senior vice-president of business development for Brookfield Power and Utilities. Ms. Hemmingsen is a chartered professional accountant of British Columbia who holds a bachelor of business administration degree from Simon Fraser University and has completed the Harvard Business School executive management program.
David Carey has succeeded Mr. Kanovsky in the position of lead director on the company's board. Mr. Carey joined Bonavista in November, 2017, bringing with him more than 35 years of diverse Canadian and international energy experience. A full listing of the composition of the company's board committees can be found on the Bonavista website.
Bonavista is grateful for the continued support of its stakeholders and thanks its employees for their consistent efforts in finding better ways to drive the company's business forward.
We seek Safe Harbor.
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