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Chinook Energy Deferring Montney Wells Until Services Drop

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   |    Monday,May 11,2015

Chinook Energy Inc. has announced its first quarter financial and operating results.

Highlights for the three months ended March 31, 2015

• We closed the quarter with a working capital surplus of $48.6 million, including $60.3 million in cash. Our current financial strength provides us with the optionality and flexibility to pursue strategic acquisitions and/or growth opportunities from our current drilling inventory.
• We implemented cost saving initiatives and deferred certain discretionary capital spending as a result of the decrease in commodity prices. For the first quarter, our net production cost of $17.04/boe was ten percent lower than the fourth quarter of 2014. Our first quarter, G&A expense was $4.00/boe ($3.38/boe excluding one-time personnel costs), six percent lower than the fourth quarter of 2014 and 38% lower than the first quarter of 2014. We remain focused on cost reductions.
• We completed the disposition of 485 boe/d of production from our non-operated Karr property for proceeds of $41.1 million.
• Our first quarter capital expenditures of $22.1 million were focused primarily on drilling three (2.75 net) wells and completing one (0.75 net) well at Birley/Umbach in northeastern British Columbia. We have also purchased or fabricated all the equipment needed to expand our Birley facility from approximately nine mmcf/d to 35 mmcf/d late in the fourth quarter of 2015 or the first quarter of 2016, subject to economic conditions.
• Our natural gas production during the first quarter of 2015 of 33,007 mcf/d increased 12% from the same quarter of 2014, driven by our successful Birley/Umbach drilling program and a strategic acquisition in the same area late in the fourth quarter of 2014. Production from the completed well (0.75 net) at a-73-L was brought onto production on March 26, 2015 at a rate of 815 boe/d (21% liquids) over the first 30 days and is currently producing at 625 boe/d (16% liquids).

First Quarter 2015 Financial Results

• Our production in the first quarter of 2015 averaged 7,668 boe/d, down three percent from the same period in 2014 and down almost 11% from the fourth quarter of 2014. We have been managing the timing of new production in response to the current decrease in commodity prices. As previously announced, we are delaying the drilling and/or completion of certain wells during this time of depressed commodity pricing while investigating lower service and supplier pricing. As a result, our first quarter production of 1,100 boe/d from our drilling program at Birley/Umbach and Gold Creek, was not sufficient to offset other production decreases and dispositions. These decreases were primarily attributable to non-core property dispositions throughout 2014 and in the first quarter of 2015, of approximately 1,450 boe/d, as well as the voluntary shut-in of lower netback production, and third party volume constraints at facilities and on flowlines. To date, these voluntary shut-ins total approximately 550 boe/d of production. These decreases were also partially offset by a full quarter of production from the acquisition of strategic producing assets in the Martin Creek area that we completed in early November 2014.
• Our first quarter revenue was down almost 59% from the first quarter of 2014 and down 40% from the fourth quarter of 2014 as a result of weakening commodity prices and lower volumes. Crude oil prices began to decrease significantly late in 2014 as a result of an oversupply in the crude oil market. Despite strong demand for natural gas driven by cold winter temperatures, an increase in natural gas supply and western Canadian domestic repairs and maintenance on pipelines contributed to natural gas price fluctuations, particularly in British Columbia through Station 2, where approximately 2,400 boe/d of our volumes flow through.
• Our net production expense (operating costs) decreased by almost three percent to $11.8 million from $12.1 million in the first quarter of 2014 notwithstanding that on a per boe basis our net production expense was higher by just under one percent as a result of lower production volumes. Our net production expense decreased by 21% from the fourth quarter of 2014 as we focused on cost control and enhanced our efficiency measures. We will remain focused on our cost structure and proactively adjust our operations to the economic environment.
• Our funds from operations for the quarter of $1.2 million decreased compared to the same quarter in 2014 mainly as a result of lower commodity prices and lower netbacks. These were offset by an increase in realized gains on our derivative contract as a result of the falling commodity prices, lower financing charges as a result of no outstanding debt and lower general and administrative expenses.

First Quarter 2015 Operational Results

• The rapid drop in commodity prices beginning late in 2014 prompted us to defer certain projects and materially reduce our 2015 capital program from $135 million (announced October 29, 2014) to $45 million (announced January 19, 2015).
• We drilled a total of three horizontal wells (2.75 net) in the quarter all of which targeted Montney gas at Birley/Umbach. We completed one of these wells (0.75 net) at a-73-L which was brought on production on March 26, 2015 at a rate of 815 boe/d (21% liquids) over the first 30 days and is currently producing at 625 boe/d (16% liquids). However, as a result of facility constraints at our owned and operated nine mmcf/d compression facility, bringing this well on production required us to shut-in the a-60-K well (0.75 net), the first of the two horizontal wells that we drilled in the Birley/Umbach area in 2014. To date, the a-60-K well averaged approximately 734 boe/d over a 256 day period and has outperformed our internal type curve estimates by approximately 30%. We have delayed the completion of a further three (2.75 net) wells in our Birley/Umbach area, two from this quarter and one from the fourth quarter of 2014, subject to a combination of commodity pricing improvements and/or lower completion costs.
• In the Gold Creek area, we received formal approval of our water disposal application late in the quarter. This is expected to significantly reduce the relatively higher operating costs associated with the trucking and disposal of the water produced during production from our first mid-Montney horizontal well in this area and improve the economics of our future wells in this area.

Outlook

• We are currently well positioned with a strong balance sheet providing us the flexibility and optionality to evaluate potential corporate or asset-based acquisitions. Balance sheet strength is an important determinant of share price performance, more so during periods such as now, and maintaining financial strength is a clear component of our 2015 strategy. We anticipate that if weak commodity prices continue to persist that the opportunities to acquire quality assets at attractive economics will increase throughout the remainder of the year. We will evaluate these opportunities as they present themselves and will look to complete acquisitions that serve to complement our core assets and reduce our overall cost structure by exploiting synergies with our current operations and improving our operational efficiencies. There are generally more reasons to see improvements in our business than weakness from this point forward.
• We maintain our guidance for 2015 as previously released on March 9, 2015 and will continue to review cost savings and optimization initiatives which may include the further shut-in of lower netback production if pricing and economics do not improve.