Mr. Dale Shwed reports
CREW ENERGY INC. ANNOUNCES SECOND QUARTER 2020 FINANCIAL AND OPERATING RESULTS
Crew Energy Inc. has released its operating and financial results for the three- and six-month periods ended June 30, 2020. Crew's financial statements and notes, as well as management's discussion and analysis, for the three- and six-month periods ended June 30, 2020, are available on Crew's website and filed on SEDAR.
Second quarter 2020 highlights:
Production increased as pricing improved in June: Q2 production averaged 22,074 barrels of oil equivalent per day while first half 2020 volumes averaged 22,985 boe per day, in line with the same period the prior year, as an average of approximately 2,100 boe per day were shut in during second quarter 2020 for value preservation due to the unprecedented decline in commodity prices.
Adjusted funds flow supported by lower costs (AFF) (1): AFF totalled $4.6-million and $17.0-million (three cents and 11 cents per fully diluted share) in second quarter 2020 and first half 2020, respectively, indicative of weak global commodity prices stemming from the COVID-19 pandemic. Crew's AFF benefited from lower royalties, net operating costs, and general and administrative (G&A) costs, along with strong realized hedging gains in second quarter 2020, which helped partially offset the impact of challenging commodity prices.
Focus on cost reductions: G&A costs per boe declined 45 per cent and 34 per cent in second quarter 2020 and first half 2020 over the same periods of 2019, respectively, and averaged 76 cents per boe in Q2, while net operating costs per boe declined 5 per cent and 7 per cent compared with the same periods in 2019 and averaged $5.68 per boe in Q2, reflecting Crew's efforts to streamline administrative expenses and optimize field operations.
Strong liquidity profile: Quarter-end net debt (1) of $339.2-million gives Crew ample financial flexibility and includes $300-million of senior unsecured term debt due in 2024 with no financial maintenance covenants and a draw of 24 per cent on the company's $150-million bank facility, which was extended to June, 2021, and has a contractual maturity in 2022 if not extended further.
Modest capital expenditures: Net capital expenditures (1) in second quarter 2020 totalled $5.4-million, $2.7-million of which was directed to drilling and completion activities, including preparations for pad development at West Septimus that is planned for the second half of 2020.
Active hedging underpins increased activity: With structural improvements in the forward curve for natural gas prices, Crew has hedged a meaningful portion of production through 2021, which further enhances the robust well economics and underpins support for the drilling of a seven-well pad planned at West Septimus.
(1) Non-international financial reporting standard measure. Adjusted funds flow, net debt and net capital expenditures do not have standardized measures prescribed by international financial reporting standards (IFRS), and therefore may not be comparable with the calculations of similar measures for other companies. See "Information Regarding Disclosure on Oil and Gas Reserves, Operational Information, and Non-IFRS Measures" within the company's management's discussion and analysis for details, including reasons for use.
FINANCIAL AND OPERATING HIGHLIGHTS
($ thousands, except per-share amounts)
Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Petroleum and natural gas sales $24,889 $51,543 $62,983 $106,994
Adjusted funds flow (1) 4,633 22,513 17,033 48,284
Per share -- basic 0.03 0.15 0.11 0.32
Diluted 0.03 0.15 0.11 0.32
Net (loss) income (24,803) 15,375 (216,712) 21,561
Per share -- basic (0.16) 0.10 (1.42) 0.14
Diluted (0.16) 0.10 (1.42) 0.14
Exploration and development expenditures 5,348 13,997 23,377 69,238
Property acquisitions (net of dispositions) 44 (3,249) (34,896) (19,173)
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Net capital expenditures 5,392 10,748 (11,519) 50,065
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(1) Non-international financial reporting standard measure. AFF is calculated as cash provided by
operating activities, adding the change in non-cash working capital, decommissioning obligation
expenditures and accretion of deferred financing costs on the senior unsecured notes. AFF does not
have a standardized measure prescribed by international financial reporting standards and
therefore may not be comparable with the calculations of similar measures for other companies. See
"Non-IFRS Measures" contained within Crew's management's discussion and analysis for details,
including a reconciliation of AFF to its most closely related IFRS measure.
Three months ended Six months ended
June 30, June 30,
2020 2019 2020 2019
Light crude oil (bbl/d) 191 155 203 190
Heavy crude oil (bbl/d) 1,175 1,722 1,351 1,666
Natural gas liquids (NGL) (1) (bbl/d) 2,147 2,049 2,218 2,031
Condensate (bbl/d) 2,634 3,127 2,987 2,873
Natural gas (Mcf/d) 95,564 94,873 97,354 97,692
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Total (boe/d at 6:1) 22,074 22,865 22,985 23,042
Average prices (2)
Light crude oil ($/bbl) $24.04 $66.15 $35.05 $63.14
Heavy crude oil ($/bbl) 18.08 60.00 19.20 52.44
Natural gas liquids ($/bbl) 7.74 7.50 6.26 9.17
Condensate ($/bbl) 23.69 68.96 41.10 65.88
Natural gas ($/Mcf) 1.76 2.34 1.81 2.91
Oil equivalent ($/boe) 12.39 24.77 15.06 25.65
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(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 derivative financial instruments.
The Crew advantage
While the second quarter of 2020 continued to present challenges for the broader energy industry, Crew maintained its focus on both value preservation and value creation opportunities. This was achieved while prioritizing the continuing health and safety of the company's team, partners and community amid the COVID-19 pandemic. To preserve asset value given extremely weak oil and liquids prices through Q2, Crew chose to shut in a portion of the high-quality, high-margin production from its ultracondensate-rich (UCR) (1) area, along with some higher-cost heavy oil production at Lloydminster. As prices improved in June, the company was able to respond quickly and start bringing some production back on-line, capturing value within a strengthening price environment with no negative impacts to well or reservoir performance. It will continue to monitor pricing and economics and can pivot quickly to further support AFF and control costs.
The company is encouraged to see a more constructive futures market for natural gas and has taken the opportunity to significantly increase its hedge protection while actively targeting higher-priced sales hubs to continue benefiting from market diversification. Part of the company's longer-term planning includes the continuing evaluation of the company's forecast AFF for the next few years based on targeted capital spending, future prices, and fixed and variable costs. Based on this analysis, it became clear that Crew could benefit by capturing the opportunity to hedge gas and condensate volumes at attractive prices for 2021 to underpin a natural gas drilling program, which is expected to keep production levels in 2021 comparable with 2020 while improving leverage metrics. These factors, coupled with the company's strong liquidity position, contributed to the decision to increase the company's planned capital spending in the last half of 2020 to provide for the drilling, completion and tie-in of a seven-well pad at West Septimus. This project features attractive economics with the company budgeting, based on current forward commodity prices, a recovery of associated capital costs within approximately 12 to 14 months.
Within the current challenging yet opportunity-rich landscape, Crew remains very well positioned to create long-term value for stakeholders. It has assembled a large, contiguous Montney asset base that offers diverse exposure to natural gas, oil, condensate and natural gas liquids, and has structured its balance sheet with the majority of its debt termed out to 2024. The company has ample liquidity to be opportunistic in the current environment and has seen an improvement in sustainability with the base decline rate falling at its liquids-rich Septimus and West Septimus areas, a result of extended reach horizontal (ERH) drilling and lower activity. While addressing the continuing challenges presented by COVID-19, the company has maintained its unwavering commitment to health and safety and is pleased to report no recordable or lost-time injuries or spills in second quarter 2020.
The company's core ESG principles also remain a high priority for Crew. The successful twinning and start-up of a pipeline at West Septimus in first quarter 2020 reduced line pressure in the company's UCR area. This has supported production and reduced gas lift compression requirements from high-value wells, and is expected to lead to a reduction of 1,550 tonnes of carbon dioxide emissions annually, the equivalent of 337 cars per year (2). In addition, a water disposal well in West Septimus that was drilled in first quarter 2020 began operation ahead of schedule early in the second quarter. Based on current performance, it is expected that the well will be able to handle all of the produced water from the West Septimus facility, ultimately reducing costs by $6.0-million annually and eliminating 2,800 tonnes of CO2 emissions, the equivalent of 609 cars per year.
(1) Ultracondensate rich or UCR 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/gas ratio rates of greater than 75 barrels per million cubic feet).
(2) The average North American car emits 4.6 tonnes of CO2 per year (source: EPA/Natural Resources Canada).
Production higher as prices improve:
Second quarter production averaged 22,074 boe per day, while volumes for the six months ended June 30, 2020, were 22,985 boe per day, both in line with Crew's projected range of 22,000 to 23,000 boe per day for the first half of 2020. With approximately 2,100 boe per day shut in through second quarter 2020, production for the period exceeded internal forecasts as the company was able to bring volumes back on-line in June, given price improvements.
Production from the Greater Septimus area averaged 18,565 boe per day in second quarter 2020, 5 per cent and 7 per cent lower than second quarter 2019 and first quarter 2020, respectively, reflecting minimal capital investment, given prevailing commodity prices and an average of approximately 1,700 boe per day of shut-in production for the quarter.
Crew's second quarter 2020 exploration and development expenditures totalled $5.3-million, slightly lower than guidance of $6.0-million to $8.0-million, with $2.7-million directed to drilling and completion activities, including certain preparations for the drilling of a seven-well pad in West Septimus and the completion of two heavy oil wells drilled in first quarter 2020. In addition, $900,000 was allocated to well sites, facilities and pipelines and $1.8-million to land, seismic and other miscellaneous items.
Crew generated $4.6-million of AFF in second quarter 2020 (three cents per fully diluted share) and $17.0-million (11 cents per fully diluted share) in the first half of 2020, 79 per cent and 65 per cent lower than the comparable periods of 2019 and 63 per cent less than first quarter 2020, primarily due to the impact of severely depressed commodity prices.
Petroleum and natural gas sales totalled $24.9-million in second quarter 2020, 35 per cent lower than first quarter 2020 and 52 per cent lower than second quarter 2019 and were $63.0-million for the first half of the year, 41 per cent lower than the same period of 2019. This reflects a decline in Crew's second quarter 2020 per boe realized price of 29 per cent and 50 per cent over first quarter 2020 and second quarter 2019, and the impact of lower production.
Commodity prices remained under pressure through second 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 between OPEC+ (Organization of the Petroleum Exporting Countries plus Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan and Sudan) 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 64 per cent and 46 per cent lower than in second quarter 2019 and first quarter 2020, respectively, compared with declines of 52 per cent and 38 per cent in the Canadian-dollar-denominated West Texas Intermediate (WTI) benchmark price over the same respective periods. The company's second quarter 2020 realized price decline was more pronounced than the WTI benchmark due to wider pricing differentials between Canadian and U.S. crude benchmarks stemming from a continued lack of Canadian egress.
The Western Canada Select (WCS) heavy crude oil benchmark declined 66 per cent from second quarter 2019 and 34 per cent from first quarter 2020, with Crew's realized heavy crude oil price declining 70 per cent and 10 per cent relative to both periods.
Pricing for the company's NGL production in second quarter 2020 increased 3 per cent and 59 per cent over second quarter 2019 and first quarter 2020, respectively, largely due to increases in component pricing across North America, particularly increased realized prices for ethane.
Relative to the condensate at Edmonton benchmark price, which declined 59 per cent and 50 per cent over second quarter 2019 and first quarter 2020, Crew's realized condensate prices over the same respective periods decreased 66 per cent and 57 per cent, directionally in line with benchmarks with the relative difference being the result of fixed transportation costs.
Crew's second 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. Consistent with first quarter 2020, the Chicago City Gate net at ATP average quarterly benchmark price again traded below prices at AECO 5A (Alberta Energy Company) or Alliance, impacting Crew's realized natural gas price, which declined 25 per cent and 5 per cent relative to second quarter 2019 and first quarter 2020, respectively. Through 2020 and into 2021, the company's relative exposure to Canadian AECO and Alliance pricing will increase, with a proportionate decrease in U.S. price exposure.
Focus on cost control:
The company's focus remains on controlling and reducing costs throughout the organization. Net operating costs in second quarter 2020 of $5.68 per boe declined 5 per cent and 1 per cent relative to the same period in 2019 and to the preceding quarter.
General and administrative costs of 76 cents per boe in second quarter 2020 were 45 per cent and 34 per cent lower than second quarter 2019 and first quarter 2020, respectively. This reflects Crew's continued focus on administrative cost reductions, lower compensation costs, lower head office operating costs and property taxes stemming from a condensed office footprint, and the impact of government grants received under the Canada emergency wage subsidy.
Strong liquidity position:
Net debt of $339.2-million at June 30, 2020, was 4 per cent lower than June 30, 2019, 2 per cent lower than year-end 2019 and in line with the previous quarter. During first quarter 2020, Crew announced strategic debt and infrastructure transactions, with $35-million of proceeds from the first closing applied to outstanding draws on the company's credit facility, which totalled $35.5-million at June 30, 2020.
As a result of the previously disclosed infrastructure transactions, Crew expects to capture efficiencies through 2020 with net proceeds totalling $58.3-million, and an anticipated annual net savings of processing fees and interest of approximately $3.0-million following the second closing in fourth quarter 2020. 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 incremental liquidity.
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 $150-million credit facility that was 24 per cent drawn at quarter-end. The company's facility was reviewed and extended for another 365 days to June, 2021, and has a contractual maturity in 2022 if not extended. The amended borrowing base of $150-million is reflective of the severe decline in commodity prices due to COVID-19 and other macromarket factors. The revised facility is structured to better align with the company's anticipated capital spending plans and to control the overall cost of the facility to the company.
Transportation, marketing and hedging
Market access diversification and risk management:
Over the past several years, Crew has focused on diversifying the company's sales portfolio, which has resulted in significant exposure to U.S. sales hubs and has offered more attractive pricing for the last 4-1/2 years. As a result of certain sales contracts expiring, Crew is in an advantageous position to materially reposition its natural gas sales portfolio over the next 18 months.
In third quarter 2019, TC Energy's service protocol change caused Canadian natural gas prices to increase to levels more aligned with U.S. sales hubs, muting Crew's premium natural gas pricing advantage. To offset this, the company is actively rebalancing the company's marketing portfolio to reduce transportation commitments and redirect its natural gas portfolio to those North American markets that offer optimal natural gas netbacks.
Crew's average natural gas sales exposure in second quarter 2020 was weighted approximately 49 per cent to Chicago (down from 58 per cent in first quarter 2020), 16 per cent to Henry Hub (on par with first quarter 2020), 24 per cent to Alliance 5A (up from 19 per cent in first quarter 2020), 8 per cent to Station 2 (up from 7 per cent in first quarter 2020) and 3 per cent to AECO 5A (up from 0 per cent in first quarter 2020).
For 2020, the company's sales portfolio is estimated to be weighted 57 per cent to Chicago, 15 per cent to Henry Hub, 14 per cent to Alliance 5A, 9 per cent to Station 2 and 5 per cent to AECO 5A.
Into 2021, based on current forward pricing, the company's estimated weighting is expected to shift to approximately 32 per cent to Chicago, 15 per cent to Alliance 5A, 46 per cent to AECO 5A and 7 per cent to Station 2.
Crew's second quarter 2020 management's discussion and analysis contains a complete list of all hedges in place as at June 30, 2020, along with incremental contracts secured subsequent to quarter-end.
Crew was able to utilize part of the 20,000-barrel installed storage capacity to help improve oil netbacks in second quarter 2020.
The company is very pleased to see a more constructive market for AECO natural gas and has taken the opportunity to significantly increase its hedge protection while actively targeting higher-priced sales hubs to continue to benefit from marketing diversification.
To underpin a natural gas drilling program planned to improve leverage metrics and maintain 2021 production levels and unit costs comparable with 2020, Crew has pro-actively hedged natural gas and condensate volumes in 2021 at attractive prices. its decision to increase planned investment in the last half of 2020, including the drilling and completion of a seven-well pad at West Septimus, along with associated infrastructure, was supported by:
Crew's strong liquidity position;
Focus on improving leverage metrics;
Reduced drilling and completion costs;
Ability to add natural gas volumes into a low-variable-cost structure;
Sustainability improving as base decline rates decrease in Greater Septimus, a function of maturing production and the adoption of ERH wells;
Timing of the company's capital investment to bring new production volumes on stream into higher-priced markets;
Access to, and take-away capacity on, multiple natural gas take-away pipelines, providing flexibility to direct sales to the highest priced markets;
Strong projected returns.
With the company's exposure to AECO 5A prices increasing from 5 per cent in 2020 to 46 per cent in 2021, the company has hedged a portion of the estimated forecast 2021 gas production from the new wells to minimize commodity risk and contribute to compelling returns with quick potential well payouts. Should the very recent improvement in natural gas future prices in 2021 be realized, the returns on this investment would be enhanced.
Drilling of the first of seven wells commenced in late July, with production from all seven wells anticipated to come on stream by first quarter 2021.
With the new pad development, Crew's annual exploration and development expenditure budget range has been increased to $75-million to $85-million ($17-million to $27-million net of dispositions), with third quarter 2020 capital spending projected to be $20-million to $25-million and third quarter average production forecasted to be 18,000 to 19,000 boe per day, reflecting an anticipated 10-day turnaround at its Septimus processing facility and a 30-day turnaround at the McMahon gas processing facility. The company is forecasting fourth quarter average production of 19,500 to 20,500 boe per day and is pleased to maintain its annual average production guidance of 20,000 to 22,000 boe per day.
Crew has continued to participate in the various government incentive programs that have been offered and submitted applications for the various provincial reclamation and remediation stimulus programs. Crew has been awarded funding and will be initiating fieldwork as outlined within the program.
The company remains well positioned from a liquidity perspective with 24 per cent drawn on its $150-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 previously disclosed strategic infrastructure transactions. Importantly, with $300-million of senior notes termed out until 2024, Crew does not face any near-term maturities or repayment requirements, which afford financial flexibility to weather market weaknesses.
The COVID-19 pandemic continues to cause negative repercussions throughout the global economy. While Crew's focus remains on the health and safety of its staff and community, the company is striving to capture opportunities to generate meaningful long-term value for all stakeholders and appreciate the trust you have placed in the company. The company commends the tireless efforts of Crew's employees and directors, whose commitment and dedication are critical to its continuing success. The company thanks all of its shareholders and bondholders for their continuing support and hope they and their families remain safe.
Crew is a growth-oriented oil and natural gas producer, committed to pursuing sustainable per-share growth through a balanced mix of financially and socially responsible exploration and development complemented by strategic acquisitions. The company's operations are primarily focused in the vast Montney resource, situated in northeast British Columbia, and include a large contiguous land base. Crew's ultracondensate-rich Septimus and West Septimus areas, along with Groundbirch and the light oil area at Tower in British Columbia, offer significant development potential over the long term. The company has access to diversified markets with operated infrastructure and access to multiple pipeline egress options. Crew's common shares are listed for trading on the Toronto Stock Exchange under the symbol CR.
We seek Safe Harbor.
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