Quarterly / Earnings Reports | Third Quarter (3Q) Update | Production Rates | Drilling Program - Wells

Journey Reports 10.1 MBOEPD Production in Q3

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   |    Wednesday,November 22,2017

[Summary: Journey Energy announced its Q3 results. Highlights include:

• Average daily production in Q3 was 10,088 boe/d, an increase of 23% YOY
• Drilled 5 (5 net) wells in Q3 2017, up from 1 in Q3 2016

Journey Energy Inc. Reports its Third Quarter 2017 Financial Results

November 6, 2017

CALGARY, Nov. 6, 2017 /CNW/ - Journey Energy Inc. (JOY – TSX) ("Journey" or the "Company") announces its financial and operating results for the three and nine month periods ending September 30, 2017.  The complete set of financial statements and management discussion and analysis are posted on www.sedar.com and on the Company's website 

THIRD QUARTER 2017 HIGHLIGHTS

Highlights for the third quarter and to date are as follows:

• Achieved production of 10,088 boe/d, a 23% increase from the third quarter of 2016. Liquids (oil and natural gas liquids) production accounted for 4,505 boe/d or 45% of total production during the quarter.
  
  
• Generated $4.8 million of funds flow, which was a 36% decrease from the third quarter of 2016. One time operating expenditures relating to turnarounds and pipeline integrity programs contributed to reduced funds flow in the quarter.
  
  
• Realized a loss of $6.1 million in the quarter, compared to the $18.4 million of net income in the third quarter of 2016.
  
  
• Received a corporate average commodity price of $27.76/boe (including hedging gains), an 11% decrease from the third quarter of 2016. Liquids production accounted for 82% of total sales revenues as compared to 79% in 2016.
  
  
• Conducted tests on 47 key pipelines (96% pass rate) to provide confidence in the integrity of Journey's infrastructure moving forward.
  
  
• Reaffirmed the Company's $125 million credit facility during its mid-year review. Journey was drawn approximately $63 million on this facility as at September 30, 2017.

Financial and Operating Highlights

OPERATIONS

Journey achieved production of 10,088 boe/d in the third quarter, a 23% increase from the third quarter of 2016.  Liquids (oil and natural gas liquids) production accounted for 4,505 boe/d or 45% of total production during the quarter.  Production was lower than the 10,194 boe/d (46% liquids) reported in the second quarter and lower than originally forecasted.  The following factors contributed to lower than forecast production levels:

• Downtime in our Crystal field associated with a pipeline release (previously disclosed) but extended due to preventative maintenance associated with Journey's Pipeline Integrity Program ("PIP").
• Downtime in Cherhill associated with both the PIP program and dew point issues associated with Journey's sales gas.  Journey anticipates minor issues continuing into the fourth quarter, until the process modifications are completed.
• Roll out of the PIP program to other fields resulting in downtime to test integrity of all key pipelines, and to perform key repairs prior to returning lines to service.
• Extended turnarounds in two recently acquired facilities.
• Capital project phasing.
• Shut in production associated with wells processed through third party facilities due to low gas pricing. Shut in production continued through October. Journey has switched the majority of our gas production from daily index to monthly index effective November 1, 2017 and has subsequently brought all shut-in volumes back on-production.

Journey achieved production of approximately 10,500 boe/d in October.  With the restart of shut-in production (November 1); the start-up of a new compression project in Gilby (mid October); the completion of 2017 turnarounds and PIP projects; a pipeline replacement in Niton (early November); and ongoing additions from Journey's capital program, production has now returned to forecasted levels of 10,800 boe/d and is currently forecast to remain at or above this level until the end of 2017.

Journey's operating expenses for the third quarter were $13.5 million or $14.54/boe. These expenditures were significantly higher than originally budgeted for. Journey management had forecasted operating expenses of $12/boe under normal operating conditions, and forecasts a return to these levels for 2018. Operating costs were significantly impacted by a number of extraordinary unbudgeted costs including:

1.  PIP program ($0.8 million additional operating expense in the third quarter)
In response to pipeline integrity issues arising from pipeline spills in the Crystal field, Journey management determined it best to increase scrutiny and test the integrity of many lines deemed high risk.  Journey has an extensive gathering network consisting of over 1,900 kilometers of gathering, processing and sales lines.  Pipelines are identified as high risk if they cross water bodies, cross major roads, have significant segments located in low lying areas or carry significant daily volumes of well effluents.  In this quarter Journey conducted 47 pipeline inspections on high risk lines consisting of 11 "Smart" pig runs, 13 pressure tests, and 23 camera runs.  Out of the 47 tests, 45 lines were deemed acceptable and 2 were considered unacceptable.  Both unacceptable lines were removed from service.  As a precautionary measure, Journey upgraded 11 lines that showed moderate wear by installing 8 new composite liners inside of the existing steel lines and replacing 3 existing liners.  In addition Journey removed 114 lines from service.  All lines removed from service were de-pressured, pigged clean and suspended. Journey considers its existing network of facilities, and gathering infrastructure to be a key asset and these efforts, while costly, provide comfort in the integrity of the infrastructure moving forward.

2.  Turnarounds ($0.6 million in additional operating expenses in the third quarter)
A budgeted turnaround was conducted on a battery that was acquired in 2016 in the Brooks area.  However, during the scheduled work, significant operational issues were encountered which needed to be addressed.  These issues included a new crank shaft on the main compressor; a new crank shaft on the injection pump; redoing the internal coating on a treater; and the replacement of the dehydration skid.  In addition to the work on the Brooks facility, a previously unbudgeted turnaround was conducted at our Niton facility, which was acquired in April.  A significant compressor overhaul was carried out along with other minor issues being addressed.  In 2017 Journey conducted turnarounds on all of its major facilities, at a cost of $1.7 million.  These costs are forecast to return to historical levels of approximately $1.0 million in 2018.

CAPITAL SPENDING

During the third quarter Journey continued to implement its budgeted capital program resulting in new production volumes being added in Crystal, Gilby, Niton, and Berrymoor.  Journey has drilled a third horizontal well in Crystal which will be completed in early November and is currently drilling one well in Herronton.  The initiation of a 4 well drilling program in program in Skiff is being deferred until January 2017.  However, two horizontal injector conversions in Skiff were completed during the third quarter.  Injector conversions are also budgeted for the Westerose field prior to the end of the year.  Journey continues to combine secondary recovery projects with development drilling allowing it to maintain top quartile corporate decline rates.

FINANCIAL

Production volumes grew by 23% in the third quarter of 2017 as compared to the same quarter in 2016.  The significant acquisition at the end of April was the main driver behind the increase in volumes as the third quarter was the first full quarter of operations which were included in Journey's results.  The volumes associated with the acquisition contributed approximately 2,000 boe/d (72% natural gas) during the quarter.  The average commodity price received in the third quarter of $25.29 per boe (before hedging) was 16% lower than what was realized in the third quarter of 2016 and 21% lower than the $31.92/boe realized in the second quarter of 2017.  Commodity prices deteriorated in the third quarter, and in particular for natural gas, which decreased 51% from the second quarter.  In addition, Journey experienced higher operating costs in the third quarter that were attributed to one-time costs for the aforementioned preventative maintenance and turnarounds.  As a result of the low commodity prices and higher than expected operating expenses, funds flow was $4.8 million for the third quarter, which was 50% lower than the $9.7 million realized in the second quarter of 2017.  Helping to mitigate the decline in funds flow during the quarter was a $2.3 millionpositive contribution from hedging gains.  Cash expenses (excluding operating expense) which include: royalties, transportation, interest and general and administrative costs were very stable quarter over quarter.  On an aggregate basis these cash costs decreased by 2.6% from the second quarter. 

Primarily as a result of the challenging commodity price environment experienced in the third quarter, Journey realized a $6.1 million loss as compared to $18.4 million in net income in the same quarter of 2016 and $8.0 million of net income in the second quarter of this year.  The loss per share for the third quarter was $0.12 (basic and diluted) bringing the year to date income per share to $0.12, basic and diluted.

Funds flow per share was $0.10 per basic share and $0.09 per diluted share.  For the nine months ended September 30, 2017 the funds flow of $21.3 million yielded per share amounts of $0.44 and $0.43 respectively. 

Journey's production mix shifted towards more of a natural gas weighting after the acquisition with natural gas becoming the predominant commodity at 55% of total volumes.  However, as a percentage of revenue, the mix still favors liquids (oil and NGL's) as they comprised 82% of Journey's total revenues in the third quarter.  Comparatively, liquids revenues were 79% in the third quarter of 2016.

As planned, Journey increased its exploration and development spending to $9.7 million for the third quarter from $2.9 million during the same quarter in 2016.  Third quarter spending was primarily focused on the drilling of 5 (5.0 net) wells but also included several facility and exploitation expenditures. 

Journey exited the quarter with net debt of $103 million which was 19% higher than at the end of 2016 and 7% higher than at the end of the second quarter.  Net debt was comprised of $63 million of bank borrowings; $30 million of term debt; and $10 million of a working capital deficit.  The increase in net debt during the quarter was the result of Journey's capital spending being approximately $5 million more than its funds flow, but also included an additional $2.2 million spent on Journey's normal course issuer bid on September 27.  On this day, Journey purchased 1.3 million shares at a price of $1.70 per share. 

Journey concluded a private placement for 1.02 million CDE flow through common shares on October 11 for gross proceeds of $2.2 million.  The proceeds from this private placement will be used to partially fund the Company's fourth quarter developmental drilling program.

The Company has concluded its mid-year review of its $125 million, syndicated credit facility.  As a result of this review there are no changes being made to the existing facility.  The next scheduled review is due to conclude by the end of April, 2018.  Journey believes it currently has ample liquidity to execute its remaining drilling program for 2017 and into 2018 while continuing to pursue accretive acquisition opportunities as they arise.

Outlook

Journey is currently projecting to have average production of approximately 10,000 boe/d for 2017.  As of today's date Journey's production has now returned to 10,800 boe/d.  Journey forecasts production levels to remain between 10,700 and 10,900 boe/d until the end of 2017.  Capital spending will be balanced with forecasted funds flow for the fourth quarter. Journey currently forecasts year-end net debt to be approximately $101 million.

The exceptionally low natural gas prices in the third quarter, which continued into October, have caused Journey to reduce its realized price outlook for 2017.  This has resulted in a change to annual projected funds flow to now be in the range of $30-32 million, with $10-12 millionprojected for the fourth quarter.

Journey's updated guidance is presented in the table below:

Journey's 2017 forecasted funds flow from operations is based upon the following revised, pre-hedging, average prices: WTI of USD $50/bbl; AECO gas of CAD$2.38/mcf; and a foreign exchange rate of $0.77 US$/CDN.

Journey's preliminary guidance for 2018 is presented in the table below:

Journey's 2018 forecasted funds flow from operations is based upon the following pre-hedging, average prices: WTI of USD $54/bbl; AECO gas of CAD$2.25/mcf; and a foreign exchange rate of $0.78 US$/CDN$. 

Hedging Update

Journey currently has 69% of its oil and 58% of its natural gas volumes hedged for the fourth quarter of 2017.  For 2018 Journey has approximately 47% of its currently forecast volumes hedged while 17% of its natural gas volumes are hedged. 

On behalf of Journey's management team and directors we would like to thank our shareholders for their continued support.  Journey's balanced approach to growth which uses a combination of acquisitions as well as drilling provides a sustainable growth platform while expanding its inventory of opportunities. 

About the Company

Journey is a Canadian exploration and production company focused on conventional, oil-weighted operations in western Canada. Journey's strategy is to grow its production base by drilling on its existing core lands, implementing water flood projects, executing on accretive acquisitions.  Journey seeks to optimize its legacy oil pools on existing lands through the application of best practices in horizontal drilling and, where feasible, with water floods.