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Chinook Finalizes Transition to Pure-Play Montney E&P in Q2

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   |    Thursday,August 18,2016

Chinook Energy Inc. reported its second quarter financial and operating results.

Second Quarter 2016 Operational Results

Amid continued depressed commodity prices, we remain focused on cost savings and strategic management. During the second quarter of 2016, our capital expenditures mostly related to a non-operated facility turnaround. We have continued to focus on reducing our costs including the ongoing review and re-bid of third party contracts and agreements, the shut-in of wells and the optimization of field staff.

Highlights:

• Our recently announced transaction with Tournament Exploration Ltd. completes our transformation into a well-capitalized pure play Montney liquids rich natural gas story.
• We ended the second quarter of 2016 with a strong balance sheet including a net surplus of $6.2 million (including cash of $27.3 million). On an unconsolidated basis Chinook Energy Inc. had a net surplus of approximately $20.8 million at June 30, 2016.
• We continued to implement cost saving initiatives as a result of the decrease in commodity prices. Net production expenses were $75 per boe in the second quarter, a decrease of almost 20% from the same quarter of 2015.
• Subsequent to the end of the second quarter and as announced on August 2, 2016, we have initiated a review of strategic alternatives. This review of strategic alternatives may include, but is not limited to, a review of acquisition opportunities in either the Montney or a new core area of operations, merger, sale, joint venture or other opportunities that will result in a well-capitalized entity that can best develop our emerging Montney assets.
• Subsequent to the end of the second quarter, we executed a gas handling agreement impacting the majority of our British Columbia natural gas production. It will significantly improve go-forward drilling economics, bring base production back online and provide gas handling capacity for growth volumes as well as reduce operating costs by approximately $2.70/boe on Chinook properties not held by Tournament.

Strategic Transaction

As previously announced, on June 10, 2016, we completed the divestiture of the majority of our Alberta oil and natural gas assets and the associated decommissioning obligations to Tournament, a private Calgary-based petroleum and natural gas production company, for 70% of the issued and outstanding common shares of Tournament pursuant to an asset purchase and sale agreement dated and effective May 1, 2016 (the “PSA”). In connection with the PSA, we also made a payment of $0.9 million to Tournament (collectively, the “Subject Assets”). Chinook’s Alberta assets not divested to Tournament are primarily prospective for Montney and focused in the Gold Creek and Knopcik areas near Grande Prairie.

All of the common shares of Tournament we received are expected to be distributed to our shareholders and we anticipate holding a shareholder meeting before the end of 2016, to approve the proposed share distribution. The date for determining the shareholders of record who will be entitled to the distribution will be confirmed at a later date. The share distribution will be subject to, among other things, shareholder approval at the meeting. Until the share distribution is approved and completed, our consolidated financial statements will include the accounts of Tournament since June 10, 2016.

Our management and Board of Directors continuously reviews options available to maximize shareholder value. As part of this review, we determined that consolidating the Subject Assets within Tournament would allow two companies to focus on a concentrated grouping of properties and would result in us being well positioned for a review of strategic alternatives. After the distribution of the Tournament shares to our shareholders, Chinook can focus on the emerging Montney assets at Birley/Umbach, British Columbia and at Gold Creek and Knopcik, Alberta. Through the proposed share distribution, our shareholders are expected to benefit from the direct ownership of Tournament shares and the continued participation in the growth and future value creation of our existing Chinook shares. Based on these and other factors, our Board of Directors unanimously approved the Tournament transaction and commencement of a formal review of strategic alternatives.

Second Quarter 2016 Financial Results

Once again this quarter, the overall driver of our financial results was the impact of falling commodity prices. These lower prices drove decreases in our production volumes through the voluntary shut-in of wells and impacted our decreased revenues during the second quarter of 2016.

Production in the second quarter of 2016 averaged 5,169 boe/d, down 15% from the same period in 2015. The decrease from the second quarter of 2015 is attributed to natural declines, property dispositions, voluntary shut-ins and a third party plant restriction; however, this was partially offset by the completion of our Birley compressor expansion during the first quarter of 2016, resulting in increased production during the second quarter compared to the fourth quarter of 2015. In addition, since June 10, 2016, Tournament’s properties, excluding the Subject Assets, added an additional 2,000 boe/d of production. However, as a result of continued depressed pricing, by the end of the second quarter, we had temporarily shut-in approximately 2,550 boe/d of production volumes that were not tied to firm processing or transportation commitments, which are price dependent to come back on-stream.

Our second quarter petroleum and natural gas revenues were down approximately 50% from the same period of 2015 as a result of lower realized weighted average commodity prices and lower volumes. Crude oil prices continued to decrease throughout 2015 as a result of an oversupply in the crude oil market. An increase in natural gas supply, ongoing pipeline service restrictions and reduced system capacity in northeastern British Columbia and the May wildfires which affected oil sands production in Fort McMurray contributed to volatile natural gas price fluctuations. However, pricing began to recover by the end of the second quarter.

Our second quarter net production expense (operating costs) decreased by approximately 32% to $6.9 million from $10.2 million in the second quarter of 2015. In addition to our on-going review of our cost structure, production costs have decreased as a result of our 2015 property dispositions, the voluntary shut-in of relatively higher operating costs/lower netback wells and the impact of the temporary and voluntary shut-in of natural gas production due to lower commodity prices in British Columbia. Since June 10, 2016, operating costs for the consolidated Tournament volumes were estimated at $16.84/boe. On a go forward basis, we expect Chinook operating costs, excluding the consolidated volumes from Tournament, to average $12.50/boe to $13.50/boe.

We have continued to focus on improving our G&A cost structure and implement cost cutting initiatives. Although our G&A expense of $2.1 million was consistent with the second quarter of 2015, the current quarter’s G&A included $0.2 million of Tournament’s G&A expense since June 10, 2016. Expensed transaction costs incurred on the Tournament transaction are estimated at $1.6 million and include legal and other professional fees in addition to severance costs. We anticipate that our salary costs will decrease upon completion of the distribution of the Tournament shares to our shareholders.

Our netback for the second quarter decreased significantly compared to the same quarter of 2015. This decrease was caused by lower commodity benchmark prices, despite a decrease in our overall and per boe royalties and net production expense.

We reported a funds outflow from operations of $1.7 million during the second quarter of 2016, a decrease compared to funds from operations of $3.0 million in the same quarter of 2015; however, an improvement from the funds outflow of $2.9 million in the first quarter of 2016. The second quarter outflow mostly resulted from lower petroleum and natural gas revenues which were approximately one-half compared to the same quarter of 2015 due to significantly lower realized commodity prices and to a lesser extent sales volumes.

At June 30, 2016, we had provisions of $112.2 million primarily related to the future abandonment and reclamation of our properties. The provision associated with assets owned by Tournament, including those transferred to it as part of the transaction with Tournament was $80.0 million.

Board of Director Change

After serving Chinook and our predecessor companies’ shareholders for almost ten years, Mr. Robert C. Cook resigned from our Board of Directors effective August 10, 2016. As a result of the departure of Mr. Cook, our Board has reconstituted our Audit Committee and our Reserves, Safety and Environmental Committee with the addition of Robert J. Iverach and Jill T. Angevine, respectively. On behalf of Chinook and our shareholders, we would like to thank Mr. Cook for his insightful input and diligence in serving as a Director.

Outlook

As previously announced on August 2, 2016, we have initiated a review of strategic alternatives, which may include, among other things, a review of acquisition opportunities to expand our core Montney asset base, or establish a new core area of operations. We will also entertain merger, sale, joint venture or other opportunities that will result in a well-capitalized entity that can best develop our emerging Montney assets at Birley/Umbach, British Columbia and at Gold Creek and Knopcik, Alberta.