Quarterly / Earnings Reports | Second Quarter (2Q) Update

Cequence Energy Talks Q2 Financials, Ops

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Cequence Energy Ltd. reported its Q2 2019 results.

Highlights:

• Optimization projects implemented in the second quarter 2019 increased production to 6,142 boe/d compared to 5,964 boe/d for the first quarter of 2019.
• Completed the repayment of $10.0 million of the $60.0 million Term Loan and amended the Term Loan agreement extending the maturity to October 2023, fixing the interest rate at 5% and cancelling the 1.8 million warrants held by the Term Loan holders.
• Issued 17.2 million common shares at a price of $0.65 per share for gross proceeds of $11.2 million on a Canadian development expense flow-through basis. Issued at a $0.31 per share premium to Cequence’s closing price on June 27, 2019.
• Renewed the credit facility agreement on June 14, 2019 extending it to June 16, 2020 and maintaining the $7.0 million borrowing base.

Q2 Summary

Production for the three months ended June 30, 2019 averaged 6,142 boe/d compared to production of 6,334 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. Crude oil and liquids production as a percentage of total production decreased to 21 percent in the three months ended June 30, 2019 from 25 percent for the same prior year period.

Operating netback⁽¹⁾ was $7.92 per boe for the three months ended June 30, 2019 compared to $8.82 per boe for the same prior year period. The decrease was due to lower realized prices and crude oil and liquids production. Decreased crude oil and liquids production was due to natural decline rates on the Dunvegan horizontal oil wells completed in 2018.

Operating expenses for the three months ended June 30, 2019 were $9.84 per boe compared to $11.72 per boe for the same prior year period. Lower operating expenses per boe were due to reduced use of rental equipment, lower trucking and water disposal costs at Simonette where a water disposal well was completed in 2018 and costs incurred in 2018 to start up the 3 gross (2 net) Dunvegan horizontal oil wells.

Production for the six months ended June 30, 2019 averaged 6,053 boe/d compared to production of 6,651 boe/d for the same prior year period. Crude oil production partially offset natural declines in natural gas, condensate and natural gas liquids production.

Operating netback⁽¹⁾ was $10.67 per boe for the six months ended June 30, 2019 compared to $9.11 per boe for the same prior year period. The increase was due to higher realized natural gas and crude oil prices and increased oil production. Higher realized natural gas prices were due to AECO prices that were supported by cold weather during the first quarter 2019 and the Company entering into a marketing arrangement for fixed transportation effective April 1, 2018, to sell 10,850 GJ/d of gas in the Dawn, Ontario market. Higher oil production for the six months ended June 30, 2019 was due to completing and tying in 5.0 gross (4.0 net) Dunvegan horizontal oil wells in 2018 and early 2019.

Transportation expense for the six months ended June 30, 2019 increased per boe compared to the same prior year period due to the Company entering into agreements to secure service for natural gas and crude oil transportation that are recognized as transportation expense where this was previously included as part of the realized price on the commodity sale.

Operating expenses for the six months ended June 30, 2019 were $10.62 per boe compared to $10.92 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 the first quarter 2019 by workover, swabbing and chemical expenses to optimize and reactivate production.

Finance expenses for the six months ended June 30, 2019 were lower compared to the same prior year period 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%.

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. The Company plans to drill 2.0 gross (2.0 net) Dunvegan horizontal oil wells in 2019 and bring them on to production in early 2020.

Key guidance metrics for 2019 are as follows:

Capital Expenditures

Capital expenditures for the six months ended June 30, 2019 focused on Simonette where 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 completed in early 2019.

Cequence’s 2019 capital budget is approximately $13.0 million comprised of expenditures to enhance and optimize existing well performance using artificial lift solutions and costs to drill 2.0 gross (2.0 net) Dunvegan horizontal oil wells in 2019. The capital budget will be funded from funds flow from operations⁽¹⁾and proceeds from the private placement completed on June 27, 2019.

Loan / Private Placement

On June 27, 2019, the Company completed the repayment of $10.0 million of its $60.0 million term loan facility and certain amendments to the Loan Agreement governing the Term Loan, including extending the maturity date from October 3, 2022 to October 3, 2023, fixing the interest rate at 5%, removing the interest rate escalation to 10% when funds flow from operations⁽¹⁾ is equal to or greater than $40.0 million, and canceling the warrants held by the Term Loan holders. In consideration for the amendments, the Company agreed to pay the holders of the Term Loan fees in the amount of $1.2 million, which included a modification fee and the prepayment of due diligence costs payable in accordance with the Term Loan agreement, eliminating a future obligation of the Company under the agreement.

On June 27, 2019, the Company also completed a private placement (the “Private Placement”) of 17.2 million common shares of the Company at a price of $0.65 per share for aggregate gross proceeds of $11.2 million. The shares were issued on a Canadian development expense “flow-through” basis at a premium of $0.31 per share compared to the closing price on that date. Upon completion of the private placement the Company had 41.8 million common shares outstanding.