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

Cequence Energy Details Q3 2019 Results

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Cequence Energy Ltd. reported its Q3 2019 results.

Highlights:

• Production was 5,238 boe/d, 22% of which was comprised of crude oil and liquids in the third quarter 2019 compared to 6,734 boe/d, 27% of which was comprised of crude oil and liquids for the same period in 2018.
• Completed scheduled turnarounds at two facilities during the three months ended September 30, 2019 reducing third quarter production by approximately 365 boe/d.
• Shut in approximately 3,000 Mcf/d (500 boe/d) from June to September 1^st, 2019 of non-core natural gas production in Northeastern British Columbia due to low prices.
• Capital expenditures of $3.6 million focused on Simonette natural gas lift optimization projects expecting to add approximately 500 boe/d in the fourth quarter 2019.

For the nine months ended September 30, 2019 funds flow from operations was $9.2 million, $1.9 million lower than the same prior year period. Production was 5,778 boe/d compared to 6,679 boe/d for the same prior year period. Lower funds flow from operations was due to production declines and higher transportation expenses. Lower royalty, operating and financing expenses year over year partially offset the declines.

Volatile and weak natural gas prices remain below thresholds where investment in natural gas wells is economically beneficial. AECO prices averaged $0.91/Mcf for the three months ended September 30, 2019 compared to $1.28/Mcf for the same prior year period. Oil prices were also volatile and lower in the third quarter 2019, compared with the same prior year period as increased U.S. supply and concerns of a slowing global economy limiting demand growth created an uncertain pricing environment.

Operations

Production for the three months ended September 30, 2019 averaged 5,238 boe/d compared to 6,734 boe/d for the same prior year period. The decrease was due to the natural decline of the 3.0 gross (2.0 net) Dunvegan horizontal oil wells that were completed in the first quarter 2018, turnarounds completed at two facilities in September 2019 and shutting in non-core production in Northeastern British Columbia that was not economical. Crude oil and liquids production as a percentage of total production decreased to 22 percent in the three months ended September 30, 2019 from 27 percent for the same prior year period.

Operating netback⁽¹⁾ was $7.83 per boe for the three months ended September 30, 2019 compared to $14.28 per boe for the same prior year period. The decrease was due to lower realized prices and lower crude oil and natural gas production partially offset by lower royalty and operating expenses.

Operating expenses were lower for the three months ended September 30, 2019 compared to same prior year period due to lower than expected facility equalizations from prior periods partially offset by turnaround costs for the Simonette and George facilities in 2019 of approximately $0.7 million.

Production for the nine months ended September 30, 2019 averaged 5,778 boe/d compared to production of 6,679 boe/d for the same prior year period.

Operating netback⁽¹⁾ was $9.81 per boe for the nine months ended September 30, 2019 compared to $10.87 per boe for the same prior year period. The decrease was primarily due to higher transportation expenses as the Company entered into transportation agreements for crude oil and natural gas. Crude oil transportation costs prior to entering into the oil transport agreement were included as part of realized price on the crude oil sale whereby previously the costs offset price. The natural gas marketing arrangement provided diversification away from volatile AECO prices for approximately 40 percent of the Company’s gas production to the Dawn, Ontario market. The toll on the Empress to Dawn hub is contracted at a cost of U.S.$0.77 per GJ for a period of 10 years expiring in 2028 with an early termination right that can be exercised following the initial five years of service.

Operating expenses for the nine months ended September 30, 2019 were $10.17 per boe compared to $10.22 per boe for the same prior year period. Lower water handling costs with the completion of a water disposal well in 2018 and reduced long-term field rentals expenses were partially offset in 2019 by workover, swabbing and chemical expenses to optimize and reactivate production and facility turnaround costs.

Finance expenses for the three and nine months ended September 30, 2019 were lower compared to the same prior year periods due to restructuring the senior loan in 2018 and replacing it with the Term Loan which reduced the interest rate on the debt from 9.7% to 5.0%.

Capital Expenditures

   (i)  Represent the cash proceeds from the sale of assets.

Capital expenditures for the nine months ended September 30, 2019 focused on Simonette. The Company completed and tied in the 2.0 gross (2.0 net) Dunvegan horizontal oil wells drilled in the fourth quarter of 2018 and in early 2019 and has invested in enhancing and optimizing existing well performance using gas lift solutions. The production volume increases from the gas lift investment are expected to be approximately 500 boe per day in the fourth quarter 2019.

During the three months ended September 30, 2019 the Company acquired a water disposal pipeline for $1.5 million. This allows the Company to operate and control the pipeline providing greater flexibility over water handling at Simonette and reducing future operating costs.

Cequence’s 2019 capital budget is approximately $12.0 million comprised of expenditures to enhance and optimize existing well performance using gas lift solutions. The capital budget will be funded from funds flow from operations⁽¹⁾ and proceeds from the Private Placement completed on June 27, 2019.

Outlook

Cequence continues to monitor commodity price volatility and plans to spend within funds flow from operations⁽¹⁾ in executing its 2019 capital program and meeting its debt maintenance requirements.

Key guidance metrics for 2019 are as follows:

1. Average production estimates on a per boe basis are comprised of approximately 75% natural gas and 25% oil, condensate and natural gas liquids in 2019.