Mr. Dale Shwed reports
CREW ENERGY INC. ANNOUNCES FIRST QUARTER 2020 FINANCIAL AND OPERATING RESULTS
Crew Energy Inc. has released its operating and financial results for the three-month period ended March 31, 2020. Crew's financial statements and notes, as well as management's discussion and analysis, for the three-month period ended March 31, 2020, are available on Crew's website and filed on SEDAR.
First quarter 2020 highlights:
Production of 23,894 barrels of oil equivalent per day: Volumes were 6 per cent higher than fourth quarter 2019 and 3 per cent higher than first quarter 2019, due to well performance that exceeded expectations. Production volumes consisted of 69 per cent natural gas, 14 per cent condensate (1), 10 per cent natural gas liquids and 7 per cent oil.
Strong liquidity: Quarter-end net debt (2) of $337.7-million was 3 per cent lower than fourth quarter 2019, which includes $300-million of senior unsecured term debt due in 2024 with no financial maintenance covenants and 13 per cent drawn on a $235-million credit facility.
$35-million cash inflow: The first closing of a strategic debt and cost reduction transaction resulted in $35-million of proceeds that were applied to reduce credit facility borrowings and enables Crew to capture efficiencies and further strengthen the balance sheet. See the company's
Feb. 27, 2020,
press releases for complete transaction details:
After the second closing of this transaction, anticipated to occur in fourth quarter 2020, net debt will ultimately be reduced by $58.3-million with Crew realizing $2.1-million of annual cost savings going forward.
Commencing in 2021, Crew can exercise an option to dispose of an additional interest in its Greater Septimus facilities, which would result in incremental cash consideration of up to $37.5-million.
Cost reduction and efficiency optimizations: Year over year, net operating and general and administrative (G&A) costs decreased 8 per cent and 24 per cent per boe, respectively, reflecting successful streamlining and optimization of field operations, as well as reduced compensation costs and lower head office lease costs. As a result of these streamlining efforts, Crew is forecasting a reduction in G&A expenses of approximately 25 per cent in 2020 compared with 2019.
Adjusted funds flow (AFF) (2) reflects commodity prices: AFF of $12.4-million (eight cents per fully diluted share) was 27 per cent and 53 per cent lower than fourth quarter 2019 and first quarter 2019, respectively, reflecting the impact of weak commodity prices.
Condensate contribution: Condensate (1) production averaged 3,340 barrels per day, 36 per cent and 28 per cent higher than fourth quarter 2019 and first quarter 2019, respectively, reflecting the focus on Crew's ultracondensate-rich (UCR) (3) area at Septimus and West Septimus (Greater Septimus).
Capital expenditures focused on reducing costs and driving sustainability: Exploration and development expenditures totalled $18.0-million, with $5.7-million directed to cost reduction and sustainability initiatives that are expected to reduce operating costs and greenhouse gas (GHG) and carbon dioxide emissions by 3,350 tonnes per year. Crew's commitment to the environmental, social and governance (ESG) pillars has remained paramount, with social importance coming into sharper focus given the impact of COVID-19.
(1) Condensate is defined as a mixture of pentanes and heavier hydrocarbons recovered as a liquid at the inlet of a gas processing plant before the gas is processed and pentanes and heavier hydrocarbons are obtained from the processing of raw natural gas.
(2) Non-international financial reporting standard measure. Net debt, adjusted funds flow and net capital expenditures do not have standardized measures prescribed by international financial reporting standards (IFRS) and, therefore, may not be comparable with the calculations of similar measures for other companies. See "Information Regarding Disclosure on Oil and Gas Reserves, Operational Information and Non-IFRS Measures" within the company's management's discussion and analysis for details including reasons for use.
(3) Ultracondensate rich is not defined in National Instrument 51-101 and means a fairway of land at Crew's Greater Septimus area of operations, where productive zones have high condensate rates (initial 30-day condensate to gas ratio rates of greater than 75 barrels per million cubic feet).
Financial and operating highlights
($ thousands, except per-share amounts)
Three months ended March 31, 2020 Three months ended March 31, 2019
Petroleum and natural gas sales $38,094 $55,451
Adjusted funds flow (1) 12,400 25,771
Basic 0.08 0.17
Diluted 0.08 0.17
Net (loss) income (191,909) 6,186
Basic (1.27) 0.04
Diluted (1.27) 0.04
Exploration and development expenditures 18,029 55,241
Property acquisitions (net of dispositions) (34,940) (15,924)
Net capital expenditures (16,911) 39,317
(1) Non-IFRS measure. AFF is calculated as cash provided by operating activities, adding the change in non-cash
working capital and decommissioning obligation expenditures and accretion of deferred financing costs on the
senior unsecured notes. AFF does not have a standardized measure prescribed by international financial reporting
standards and, therefore, may not be comparable with the calculations of similar measures for other companies.
See "Non-IFRS Measures" contained within Crew's management's discussion and analysis for details, including a
reconciliation of AFF to its most closely related IFRS measure.
Three months ended March 31, 2020 Three months ended March 31, 2019
Light crude oil (bbl/d) 215 226
Heavy crude oil (bbl/d) 1,527 1,608
Natural gas liquids (NGL) (1) (bbl/d) 2,288 2,014
Condensate (bbl/d) 3,340 2,617
Natural gas (Mcf/d) 99,144 100,542
Total (boe/d at 6:1) 23,894 23,222
Average prices (2)
Light crude oil ($/bbl) $44.81 $61.04
Heavy crude oil ($/bbl) 20.06 44.25
Natural gas liquids ($/bbl) 4.86 10.89
Condensate ($/bbl) 54.83 62.17
Natural gas ($/Mcf) 1.86 3.45
Oil equivalent ($/boe) 17.52 26.53
(1) Throughout this news release, natural gas liquids comprise all natural gas liquids as defined by
National Instrument 51-101 other than condensate, which is disclosed separately.
(2) Average prices are before deduction of transportation costs and do not include realized gains
and losses on financial instruments.
NETBACK AND DRILLING ACTIVITY
Three months ended March 31, 2020 Three months ended March 31, 2019
Petroleum and natural gas sales $17.52 $26.53
Royalties (1.00) (1.85)
Realized commodity hedging gain/(loss) 1.75 (0.88)
Marketing income (1) 0.11 1.40
Net operating costs (2) (5.74) (6.25)
Transportation costs (3.21) (2.26)
Operating netback (3) 9.43 16.69
G&A (1.15) (1.51)
Other income - -
Financing costs on long-term debt (2.58) (2.86)
Adjusted funds flow 5.70 12.32
Gross wells 2 7
Working interest wells 2.0 7.0
Success rate, net wells (%) 100% 100%
(1) Marketing income was recognized from the monetization of forward physical sales contracts offset
by the cost of committed natural gas transportation that was not available during the period.
(2) Net operating costs are calculated as gross operating costs less processing revenue.
(3) Non-IFRS measure. Operating netback equals petroleum and natural gas sales, including realized
hedging gains and losses on commodity contracts, marketing income, less royalties, net operating
costs, and transportation costs calculated on a barrel of oil equivalent basis. Operating netback
does not have a standardized measure prescribed by IFRS and, therefore, may not be comparable with
the calculations of similar measures for other companies. See "Non-IFRS Measures" contained within
Commitment to ESG: Crew's rapid response to COVID-19
Crew is dedicated to ensuring the health, safety and security of employees, contractors, partners and residents within all of its operating areas and communities. In response to the COVID-19 pandemic, it mobilized quickly to implement response plans and procedures that would protect the health and well-being of all stakeholders. It established work-from-home protocols in mid-March, including training programs specifically designed to ensure home working environments are effective, and rolled out new technologies and programs to facilitate remote working across the organization. Due to Crew's rapid and effective mitigation actions, 100 per cent of the company's head office employees were able to work remotely within days of local schools closing, having minimal impact on operations or productivity. The company also implemented social distancing protocols throughout its field operations that help to protect field staff and contractors while new work force efficiencies have been implemented to streamline costs. As a result of the actions taken and the diligence of staff in following prescribed social distancing measures, the company is pleased to report that Crew has not had any lost time as a result of COVID-19.
The company has taken a measured and calculated approach to shutting in production to ensure that it not only minimizes costs and maximizes AFF, but also defers flush production in its UCR area to enhance returns. Crew continues to actively engage with government regulatory bodies both corporately and through its membership in EPAC. Due to its strong relationships, Crew has maintained open communication with these entities regarding industry challenges and the impacts on employees and the economy. In addition, the health and safety of the Crew family remain paramount, and Crew is pleased to report that its strong safety record is continuing with zero recordable injuries in first quarter 2020.
Over the summer of 2020, Crew planned to offer educational work experience to four new students through its annual summer student program, which, over the past five years, has provided valuable work experience for 17 students. However, to protect the health and safety of all employees and students, this program has been placed on hold pending easing of restrictions related to COVID-19.
In the current challenging financial and operating environment, Crew's board has taken pro-active steps to reduce general and administrative expenses, including a 20-per-cent reduction in cash compensation for the chief executive officer and the board of directors, a 15-per-cent compensation reduction for the executive team, and a 10-per-cent reduction for all other staff. In addition, the company implemented a shareholder engagement policy during first quarter 2020, which reflects Crew's commitment to transparency, communications and active stakeholder engagement throughout all markets.
Production exceeds expectations:
Volumes for the quarter averaged 23,894 barrels of oil equivalent per day, above the company's first half 2020 projected range of 22,000 to 23,000 boe per day, stemming from stronger condensate and NGL volumes from the West Septimus UCR wells completed late in fourth quarter 2019.
Greater Septimus production averaged 19,894 boe per day in first quarter 2019, an increase of 6 per cent over the 18,720 boe per day in fourth quarter 2019 and 2 per cent above first quarter 2019.
Exploration and development expenditures totalled $18.0-million during the period, with $10.8-million allocated to the drilling and completion of one (1.0 net) water disposal well in the West Septimus area and two (2.0 net) lease-preserving multilateral heavy oil wells drilled at Lloydminster, $4.9-million to well sites, facilities and pipelines, and $2.3-million to land, seismic and other miscellaneous items.
Crew continues to work with service providers to reduce capital and operating costs and has been pleased with the collaborative approach taken by its partners.
AFF driven by pricing:
Petroleum and natural gas sales of $38.1-million were 15 per cent lower than fourth quarter 2019 and 31 per cent less than first quarter 2019, primarily due to a 19-per-cent and 34-per-cent decline in Crew's per boe realized price over the same respective periods, slightly offset by higher production.
Commodity prices remained under pressure through first quarter 2020 as benchmark prices for all products declined quarter over quarter and year over year. In particular, oil and condensate prices decreased significantly in the last half of March in response to events on the global stage, including a price war among OPEC+ members and the demand destruction caused by the impact of the COVID-19 pandemic.
The benchmarks for Crew's realized pricing declined relative to the same period in 2019 and to the previous quarter:
Crew's realized light crude oil price was 27 per cent and 29 per cent lower than in first quarter 2019 and fourth quarter 2019, respectively, while the Canadian-dollar-denominated West Texas Intermediate (WTI) benchmark price in first quarter 2020 declined 16 per cent and 18 per cent over the same respective periods. The larger decline in the company's light oil pricing compared with the WTI-based benchmark is primarily due to wider pricing differentials between Canadian and U.S. crude caused by the lack of Canadian egress.
The heavy crude oil benchmark, Western Canada Select (WCS), declined 40 per cent from first quarter 2019 and 37 per cent from fourth quarter 2019 while Crew's heavy oil realized price declined 55 per cent relative to both periods, with the weakness driven by the above mentioned lack of Canadian egress and a seasonal increase in diluent required to blend with the heavy crude oil, combined with weaker spot price sales.
Realized pricing for Crew's NGL production decreased 55 per cent in the first quarter as compared with the same period in 2019, and 44 per cent relative to the previous quarter, primarily due to a decrease in component pricing.
Realized condensate prices decreased 12 per cent and 13 per cent over first quarter 2019 and fourth quarter 2019, respectively, approximating the same decreases as the Edmonton benchmark condensate price over the same periods.
Crew's first quarter 2020 natural gas sales continued to be exposed to diversified markets, a feature that has benefited the company significantly in the past, particularly the company's higher exposure to U.S. markets. For the first time in over four years, the Chicago City Gate net at ATP average quarterly benchmark price traded lower than prices at Alberta Energy Company 5A or Alliance, impacting Crew's realized natural gas price, which decreased 46 per cent and 21 per cent relative to first quarter 2019 and fourth quarter 2019, respectively. Through 2020 and into 2021, the company's relative exposure to Canadian AECO and Alliance pricing will increase while exposure to U.S. prices will decrease proportionately.
Crew generated $12.4-million of AFF in first quarter 2020 (eight cents per fully diluted share), 52 per cent lower than the comparable period of 2019 and 23 per cent less than fourth quarter 2019, reflecting the impact of weak commodity prices and increased transportation costs per boe.
Condensate continued to meaningfully impact the company's financial results. Condensate volumes in first quarter 2020 represented 14 per cent of total production compared with 11 per cent in each of first quarter 2019 and fourth quarter 2019 while condensate revenue represented a significant share of total revenue at 44 per cent compared with 26 per cent in first quarter 2019 and 32 per cent in fourth quarter 2019.
During the quarter, the COVID-19 outbreak and subsequent measures taken to limit the pandemic's spread, along with increased global oil supply, led to a significant decline in the company's independent reserve engineers' commodity price forecasts. As a result, the company conducted impairment tests on its cash generating units that resulted in a $267-million non-cash impairment charge against Crew's property, plant and equipment. Additional information is provided in the March 31, 2020, management's discussion and analysis, under the heading "Impairment."
Controlling cash costs:
Crew's focus remains on controlling costs across all facets of the organization. Relative to the same period in 2019, first quarter 2020 net operating costs of $5.74 per boe declined 8 per cent while transportation costs of $3.21 per boe were higher due to incremental costs associated with Crew's natural gas market diversification strategy that came on stream during 2019.
General and administrative costs of $1.15 per boe were 24 per cent lower in first quarter 2020 compared with first quarter 2019 and 14 per cent lower than fourth quarter 2019. This reflects the impact of lower head office lease costs and continuing streamlining of G&A expenses, which are expected to be reduced by 25 per cent year over year.
Net debt of $337.7-million at March 31, 2020, was 7 per cent lower than first quarter 2019 and 3 per cent lower than year-end 2019, and reflects the application of $35-million of proceeds from the first closing of the company's strategic infrastructure transactions to outstanding draws on the company's credit facility, which totalled $31.0-million at March 31, 2020.
The infrastructure transactions allow Crew to capture efficiencies and strengthen the balance sheet, ultimately reducing net debt by $58.3-million in 2020, with the added benefit of $2.1-million of annual cost savings following the second closing. In addition, commencing in 2021, Crew can elect to exercise an option for a further disposition of the facility working interests, which would result in additional cash consideration of up to $37.5-million, providing added liquidity in an uncertain environment.
Crew's debt is composed of $300-million of senior unsecured term debt with no financial maintenance covenants or repayment required until 2024, and a $235-million credit facility that was 13 per cent drawn at quarter-end. The company is currently working with its banking partners on the annual renewal of its credit facility, which is expected to be completed in May.
Transportation, marketing and hedging
Diversified market access and risk management:
A key differentiator for Crew is access to multiple natural gas pipeline systems, a highly diversified portfolio and an active marketing team, whose efforts have afforded the company significant exposure to more attractive U.S. price points over the past several years.
TC Energy's mainline protocol change in third quarter 2019 that helped stabilize and elevate Canadian natural gas prices to levels more aligned with U.S. sales hubs has impacted Crew's premium natural gas pricing. As a result of Crew's active portfolio approach and transportation flexibility, Crew will rebalance the company's marketing portfolio over the near term to reduce transportation commitments and realign its natural gas portfolio to the markets that provide the best natural gas prices available.
In first quarter 2020, Crew's average natural gas sales exposure was weighted approximately 58 per cent to Chicago, 16 per cent to Henry Hub, 19 per cent to Alliance 5A and 7 per cent to Station 2.
The company's 2020 sales portfolio is estimated to be weighted 59 per cent to Chicago, 16 per cent to Henry Hub, 13 per cent to Alliance 5A, 9 per cent to Station 2 and 3 per cent to Malin.
As the company moves toward 2021, its estimated weighting will shift to approximately 49 per cent to Chicago, 20 per cent to Alliance 5A, 20 per cent to AECO 5A and 11 per cent to Station 2.
See the MD&A for a complete list of all hedges in place as at March 31, 2020, along with incremental contracts secured subsequent to quarter-end.
Operations and area overview
Northeast B.C. Montney -- Greater Septimus:
All four of Crew's 3-32 wells were flowing through permanent producing facilities in February and continue to exceed expectations with aggregate production of approximately 180,000 barrels of sales condensate in the first four months of production. At the end of first quarter 2020, per-well production rates averaged approximately 3.25 million cubic feet per day of raw gas and 360 bbl per day of wellhead condensate.
The twinning of a pipeline in West Septimus was completed and came on stream in first quarter 2020, reducing line pressure in the company's UCR area. This enabled an increase in production and reduced gas lift compression requirements from high-value wells, and is expected to lead to a reduction of 1,550 tonnes of CO2 emissions annually.
A water disposal well that was drilled and completed in West Septimus during the quarter is expected to significantly reduce water-handling costs and remove 6,100 truckloads annually from roads, which are equivalent to 2,800 tonnes of CO2 emissions. Tie-in and pipeline work are scheduled to commence after spring breakup with the commissioning of the disposal well anticipated in early fourth quarter 2020.
Other northeast B.C. Montney:
Tower: Production from this area averaged 691 boe per day in first quarter 2020, composed of 185 bbl per day of oil, 19 bbl per day of condensate, 52 bbl per day of NGL and 2,609,000 cubic feet per day of natural gas. Crew is evaluating options to reduce operating costs through optimization of existing pipeline infrastructure and is expected to result in improved netbacks.
Attachie: Approximately 44 of the company's 90 net sections in this area are located within the liquids-rich hydrocarbon window. Given the positive results generated by offsetting operators, a lease retention well is currently planned and would conclude the lease preservation program at Attachie.
Oak/Flatrock: In this liquids-rich gas area, Crew has more than 60 (52 net) sections of land, and the company plans to continue monitoring industry activity and offsetting well results, which have been encouraging.
Alberta/Saskatchewan heavy oil -- Lloydminster:
Two heavy oil multilateral lease retention wells were drilled in first quarter 2020, which, in combination, have retained 11 additional multilateral drilling locations. These wells came in under budget, with completions and facility tie-in work anticipated in early second quarter 2020.
Crew began to scale back production of the heavy oil operations at Lloydminster during the quarter to preserve value and minimize operating costs. The company had approximately 400 bbl of oil per day shut in in April, with that number expected to increase to 750 bbl of oil per day in May.
In light of the severely weak commodity price environment, the company plans to commence shutting in additional production in May, 2020, designed to preserve well economics, optimize pricing and further reduce costs. With the current pricing volatility, decisions related to producing volumes will be a fluid and dynamic process. Crew currently anticipates shut-ins of approximately 750 boe per day at Lloydminster and approximately 3,500 boe per day of recently completed UCR production in northeast British Columbia in May, with all production to be carefully and continuously monitored for relative and incremental returns.
Notwithstanding the company's plans to shut in over 4,000 boe per day of productive capacity in May and June, Crew's strong first quarter production performance has allowed the company to maintain annual production guidance of 20,000 to 22,000 boe per day. Crew's annual capital budget range has been reduced to $35-million to $40-million with second quarter 2020 capital spending projected to be $6-million to $8-million.
Crew remains well positioned from a liquidity perspective with 13 per cent drawn on its $235-million credit facility at quarter-end, and an additional net $23-million cash payment expected to be realized during fourth quarter 2020 associated with the strategic infrastructure transactions. With $300-million of senior notes termed out to 2024, Crew does not face any near-term maturities or repayment requirements, affording financial flexibility to weather continued market weakness.
Crew has identified material cost savings associated with shutting in low-margin production, reduced water-handling and trucking costs related to its new water disposal well, lower processing fees, and lower G&A. The company continues to diligently implement plans to reduce expenses and improve netbacks.
The company's strategic asset base, which offers access to three natural gas export pipelines and an active, diversified marketing portfolio, enables Crew to leverage transportation arrangements to access natural gas markets offering the strongest pricing. With its 2020 gas weighting expected to be approximately 72 per cent, the company is encouraged by the constructive supply-demand fundamentals and futures price outlook. the company is prepared to capitalize on changing price environments and seek to produce the commodity offering the highest potential returns into favourably priced markets.
Crew is actively reviewing its eligibility for all government of Canada and provincial programs and subsidies that have been offered due to the COVID-19 pandemic. While these programs may assist to cushion the company from financial losses over the short term, Crew's dedicated team and strong liquidity position are critical to the company's survival and success in this challenging yet opportunity-rich environment.
The crisis caused by the COVID-19 pandemic has resulted in unprecedented economic challenges facing the world and, in particular, the company's business. Crew appreciates the tireless efforts of employees and directors, whose commitment and dedication are critical to the success of the company. It thanks all of its shareholders and bondholders for their continuing support.
Stay safe and be well.
We seek Safe Harbor.
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