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Chinook Switches Focus to Birley/Umbach, Defers Gold Creek Wells

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   |    Wednesday,August 12,2015

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

Highlights:

  • We ended the quarter with a working capital surplus of $46.7 million, including $50.7 million in cash. We continued to implement cost saving initiatives and deferred certain discretionary capital spending as a result of the decrease in commodity prices. Our second quarter G&A expense was $3.70/boe, eight percent lower than the first quarter of 2015 and 14% lower than the second quarter of 2014.
  • Our second quarter funds from operations were $3.0 million, an increase of 145% over the first quarter of 2015.
  • As scheduled in our 2015 capital program, no new drilling or completion work was undertaken during the second quarter due to spring break up conditions in the field. Our second quarter capital expenditures related to work which commenced in prior quarters for a facility expansion at our Birley/Umbach property in northeastern British Columbia. To date, we have purchased or fabricated all of the equipment required for the first phase expansion of our Birley facility from approximately nine mmcf/d to 35 mmcf/d.
  • Our average production during the second quarter of 6,103 boe/d decreased 23% from the same quarter of 2014 and 20% from the first quarter of 2015, driven primarily by scheduled third party plant restrictions and turnarounds which reduced our second quarter average production by approximately 1,125 boe/d. Relative to 2014, our second quarter production also decreased as a result of non-core property dispositions which had associated production of approximately 1,450 boe/d at the time of their sale. Offsetting our decrease relative to 2014 was production from our successful 2014 and 2015 Birley/Umbach drilling program and a strategic acquisition in the same area late in the fourth quarter of 2014.
  • Our reserve-based revolving credit facility was amended during the quarter to $75.0 million. We remained undrawn on this facility throughout the second quarter and expect to remain undrawn through the balance of 2015.

Outlook

  • We are currently well positioned with a strong balance sheet providing us the flexibility and optionality to accelerate the development of our Montney resource at Birley/Umbach and Gold Creek as well as evaluating potential corporate or asset-based acquisitions. Balance sheet strength is a clear component of our 2015 strategy and we anticipate that the continued weakness of commodity prices may present opportunities to acquire quality assets at attractive economics. 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. We have started to see the effects of improvements made to our cost structure within the organization in the first half of 2015 and will continue to see further improvements as we optimize our operational efficiencies at Birley/Umbach. 
  • We have revised our 2015 capital program from $45.0 million to $55.0 million to accelerate a facility expansion and a completions program at Birley/Umbach, BC, while deferring our originally planned drilling and completions work at Gold Creek, Alberta. By accelerating the timing of our capital activity at Birley/Umbach from early 2016 to the second half of 2015, we anticipate accelerating the realization of operational and seasonal cost efficiencies and taking advantage of lower industry service costs. 
  • Expanding our Birley/Umbach facility will allow us to be well positioned for the expected increase in production volumes from our 2016 drilling program. 
  • We plan to fund this increased 2015 capital program through our existing net surplus position which included $50.7 million of cash on hand at June 30, 2015.

Second Quarter 2015 Operational Results

  • As a result of spring breakup conditions in the field and our planned deferral of capital spending until the second half of 2015, we did not complete any new drilling or completions work during the second quarter.
  • In the Gold Creek area, we received formal approval of our water disposal application late in the first quarter and as a result we recommenced production in April from this property and began to dispose water associated with production from the 16-30 mid- Montney well, into the 04-06 water disposal well that was drilled in the third quarter of 2014. Since commissioning this water disposal well we have realized a $10/boe reduction in our operating costs on this property.

Second Quarter 2015 Financial Results

  • Our production in the second quarter of 2015 averaged 6,103 boe/d, down 23% from the same period in 2014 and down almost 20% from the first quarter of 2015. During the quarter, various scheduled third-party plant restrictions and turnarounds reduced our production by approximately 1,125 boe/d. Non-core property dispositions throughout 2014 and in the first quarter of 2015, with associated production of approximately 1,450 boe/d at the time of their sale, resulted in a further decrease of our second quarter production. In addition, we have voluntarily shut-in approximately 600 boe/d of low netback production. We have been managing the timing of new production in response to the current decrease in commodity prices. As previously announced, we delayed the drilling and/or completion of certain wells during this time of depressed commodity pricing while investigating lower service and supplier pricing.
  • Our second quarter revenue was down 54% from the second quarter of 2014 and down two percent from the first quarter of 2015 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. An increase in natural gas supply and western Canadian domestic repairs and maintenance on pipelines contributed to volatile natural gas price fluctuations.
  • Our net production expense (operating costs) decreased by 17% to $10.2 million from $12.3 million in the second quarter of 2014 notwithstanding that on a per boe basis our net production expense was higher by just under eight percent as a result of lower production volumes. Our net production expense decreased by 13% from the first quarter of 2015 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.

Recent Development

  • On the evening of August 6, 2015, Alliance Pipeline (Alliance) advised natural gas suppliers on its pipeline that an amount of hydrogen sulphide entered its mainline pipeline system as a result of complications experienced by an upstream operator. Alliance has declared this to be a force majeure event. As a result, we were directed to suspend injection into the Alliance Pipeline on the morning of Friday, August 7, 2015. This suspension has resulted in the shut-in of approximately 1,800-2,000 boe/d of our production, with this production expected to be back on-stream later in the week.

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