Quarterly / Earnings Reports | Third Quarter (3Q) Update

Bonavista Details Q3 2019 Results

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   |    Tuesday,November 05,2019

Bonavista Energy Corp. reported its Q3 2019 results.

Shareholder Message

Our third quarter results continue to demonstrate our commitment to building a sustainable path forward with our priorities clearly focused on improving financial flexibility and strengthening our asset base. For the quarter, we generated adjusted funds flow of $34.6 million and our net capital expenditures and decommissioning expenditures totaled $30.2 million allowing us to allocate the remaining 13% of adjusted funds flow to net debt reduction. Continued focus on the most prolific and profitable opportunities in our portfolio resulted in a modest increase in total production, with oil and natural gas liquids production up 11% over the second quarter of 2019 which represents 31% of total production volumes. The composition of our production volumes has returned to levels seen prior to the significant turnaround activities experienced in the second quarter, whereby the ratio of oil and natural gas liquids slipped to 28% of total production volumes. Twenty-seven percent, of our exploration and development (“E&D”) spending in the third quarter was allocated to investments in land and infrastructure reinforcing our commitment to building a foundation for a sustainable future.

Notwithstanding natural gas price instability throughout the quarter resulting from limited NGTL access to storage and export beyond western Canada, adjusted funds flow outperformed our expectations by approximately 10%. Fortunately, we were well hedged with 67% of natural gas and 71% of our oil and natural gas liquids revenue secured by a fixed price for the quarter.

Net capital expenditures in the quarter were $27.3 million, considerably lower than initially forecast, due to the disposition of a non-core asset in mid-September. Our E&D program was executed on strategy, with the highlight being the successful drilling of our first Duvernay horizontal well, cased with 3,260 meters of horizontal lateral and scheduled to be completed in the first half of 2020.

Highlights for Q3

• Achieved adjusted funds flow of $34.6 million ($0.13 per share), approximately 10% ahead of plan resulting from a modest improvement in commodity pricing and a reduction in royalty and operating expenses.
• Produced 62,437 boe per day (69% weighted to natural gas), up two percent over the previous quarter and in line with our forecast. Natural gas liquids production increased 12% over the prior period to 17,310 boe per day, re-establishing premium natural gas liquid recovery efficiencies following significant turnaround activity experienced in the second quarter.
• Executed a successful E&D program, spending $43.3 million to drill six (5.5 net) and complete eight (7.8 net) wells, including drilling our first Duvernay horizontal well. Of our third quarter E&D program, 27% of spending was directed to support capital that contributed to the expansion of our operated infrastructure in our West Central core area and our Duvernay land position.
• Cash costs improved over the previous quarter by four percent on a per boe basis, with a five percent decrease in operating expenses being the largest contributor to this reduction.
• Realized natural gas price of $2.02 per mcf, a 106% premium to the average AECO benchmark of $0.93 per GJ for the quarter the result of a prudent hedge and diversification program. We have approximately 15% of our natural gas production exposed to AECO spot prices for the fourth quarter with only 22% of our oil and natural gas liquids subject to daily commodity price volatility

Ops Update

All of our activity for the quarter was in our West Central core area, where we drilled six wells, including our first Duvernay horizontal well. The remaining five liquids rich wells were comprised of three Strachan Glauconite wells and two wells on our Willesden Green Glauconite trend. The two Willesden Green wells were completed at the end of the quarter and came on production mid-October at restricted rates.

The main focus during the quarter was in Strachan where we completed four wells with two of the wells producing above-average free condensate rates of 40 to 60 bbl per mmcf during their first 30 days of production. The other two wells are producing at expected rates. To handle the new well production in the quarter, additional compression was installed that expanded our Strachan capacity by 23 mmcf per day to 60 mmcf per day. The final two wells at Strachan were completed in October and will be on production in November.

Our first Duvernay horizontal well was drilled over a 22-day period with a lateral length of 3,260 meters. This also included a pilot vertical well to log and sample the Duvernay formation. To allow time to analyze the vertical well information and leverage warmer weather to reduce completion costs specific to heating frac water, the plan is to complete this well in the second quarter of 2020.

Financials

Production

Production volumes for the quarter averaged 62,437 boe per day, comprised of 260 mmcf per day of natural gas, 17,310 bbls per day of natural gas liquids and 1,813 bbls per day of oil. This production rate represents a two percent increase over the prior quarter following significant scheduled and unscheduled turnaround activity and was in spite of a loss in production due to the disposition of a non-core asset in mid-September. Notably the composition of production was restored to those levels seen prior to the turnaround activity experienced in the second quarter with oil and natural gas liquids representing 31% of overall production volumes.

Production Revenue, Marketing and Risk Management

Production revenues for the third quarter, including $21.1 million of realized gains on financial instrument commodity contracts, were $90.6 million, or $15.78 per boe, representing a nine percent decrease on a per boe basis from the prior quarter. Production revenues, excluding realized gains on financial instrument commodity contracts, were $69.5 million or $12.11 per boe. Commodity price instability continued to be a trend experienced through the third quarter resulting largely from limited egress off the NGTL system. Realized pricing for natural gas was $2.02 per mcf, a 10% reduction from the previous quarter but ahead of the average AECO daily spot price for the quarter of $0.86 per GJ and a 94% premium to the average AECO monthly index price of $0.99 per GJ. Financial hedging accounted for a pricing premium of $0.70 per mcf, $2.66 per bbl and $0.21 per bbl for natural gas, natural gas liquids and oil respectively.

Operating and Transportation Expenses

Operating expenses for the quarter were lower than the prior quarter and plan at $32.1 million, or $5.59 per boe. The decrease in operating expenses on an absolute and per boe basis was largely due to operating cost efficiencies and cost control within Bonavista’s core areas, resulting in a lower labour, service and utility costs.

Transportation expenses in the second quarter of 2019 were impacted by scheduled and unscheduled third party turnaround activity in addition to incremental trucking costs due to road bans and higher wait times as a result of unseasonably wet spring weather conditions and infrastructure constraints. With turnaround activity having less of an impact on third quarter production and weather conditions returning to normal, we realized a three percent reduction in transportation expenses to $1.38 per boe compared to $1.43 per boe in the prior quarter with absolute transportation expenses relatively unchanged at $7.9 million and $8.0 million respectively.

General and Administrative and Interest Expenses

Third quarter general and administrative expenses were $5.2 million or $0.90 per boe, three percent lower on an absolute basis than compared to the second quarter of $5.4 million. An increase in overhead recoveries contributed to the decrease in general and administrative expenses as E&D expenditures were 23% higher than in the previous quarter.

Interest expenses in the third quarter was $8.9 million or $1.55 per boe which was in line with our budget but represented a four percent increase on an absolute basis from the prior quarter. The increase was primarily a result of a weaker CDN dollar to US dollar exchange rate used to recognize interest expense which is paid on a semi-annual basis.

Net Loss and Comprehensive Loss

For the three months ended September 30, 2019, we reported net loss and comprehensive loss of $307.5 million ($1.16 per share, basic) compared to net income and comprehensive income of $1.8 million ($0.01 per share) reported in the prior quarter. The change from a net income position to a net loss position can be largely attributed to a $278.0 million impairment charge recognized as a result of a sustained decline in the forward commodity benchmark prices for natural gas and natural gas liquids. The benchmark prices referenced in our impairment test were based on the average price forecasts as prepared by four independent reserve evaluators effective on October 1, 2019. The results are sensitive to changes in any of the key estimates of which changes could decrease or increase the recoverable amounts of assets and result in impairment charges or in the recovery of previously recorded impairment charges.

Cash Flow from Operating Activities and Adjusted Funds Flow

Cash flow from operating activities was 34% lower in the third quarter relative to the previous quarter at $37.1 million from $56.2 million. Adjusted funds flow of $34.6 million for the quarter, was 15% lower than the $40.5 million generated in the second quarter of 2019 due to a six percent decline in production revenues, including realized gains on financial instrument commodity contracts.

Long-term Debt

Long-term debt was relatively unchanged at $766.6 million in the third quarter compared to $763.4 million in the second quarter. The slight increase was the result of the revaluation of US denominated debt as the Canadian dollar weakened in the third quarter of 2019 as compared to the second quarter. During the third quarter Bonavista directed $4.4 million towards a reduction of net debt.