Quarterly / Earnings Reports | First Quarter (1Q) Update

Crew Energy Details Q1 2019 Results

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   |    Thursday,May 02,2019

Crew Energy Inc. reported its Q1 2019 results.

Q1 2019 Highlights:

• Production of 23,222 boe per day: Volumes were 4% higher than the previous quarter supported by stronger Greater Septimus production of 19,535 boe per day that was 6% higher than the previous quarter due to robust production from newly completed Ultra Condensate Rich ("UCR") wells. 
  
  
• Stable Adjusted Funds Flow ("AFF"): Q1 AFF totaled $25.8 million or $0.17 per fully diluted share, compared to Q4 2018 AFF of $23.7 million or $0.16 per fully diluted share, reflecting increased liquids production, including condensate growth and stronger overall liquids pricing.
  
  
• Continued Focus on Montney Condensate Growth: Q1 condensate volumes averaged 2,617 bbls per day, an increase of 7% over Q4 2018. Total liquids represented 28% of average quarterly volumes and contributed 44% to Crew's petroleum and natural gas sales for the quarter. 
  
  
• Strong UCR Well Results from 15-20 Pad: Early results from four "B" zone wells and one "C" zone well on our 15-20 pad at Greater Septimus continue to support further development and capital allocation in the UCR area. After 45 days of production, the four "B" zone wells produced an average of 1,211 boe per day comprised of 3,336 mcf per day of sales gas, 538 bbls per day of condensate and 117 bbls per day of propane and butane. 
  
  
• Positive Early Results from 4-21 Pad in UCR Transition Zone: After 20 days of flow back, the six (6.0 net) "B" zone wells were producing at restricted rates averaging 1,374 boe per day comprised of 4,830 mcf per day of sales gas, 400 bbls per day of condensate and 169 bbls per day of propane and butane at an average flowing casing pressure of approximately 8,900 kPa. 
  
  
• Strong Operational Execution with Capital Spending Below Guidance: Exploration and development capital expenditures in the quarter totaled $55.2 million, lower than our forecast guidance of between $60 and $70 million. Crew drilled seven (7.0 net) and completed eight (8.0 net) wells in our UCR area at West Septimus and recompleted six (6.0 net) heavy oil wells at Lloydminster. After incorporating $17.5 million in proceeds from a disposition and minor acquisition during the period, net capital expenditures were $39.3 million. 
  
  
• Longest Laterals Drilled in Company History: Four extended reach horizontal ("ERH") UCR wells were drilled in Q1 with lateral lengths over 3,000 metres and per lateral metre drilling costs that were 35% lower than costs realized in 2017.
  
  
• Realized Natural Gas Prices Again Outperformed Benchmark: Q1 average realized natural gas prices of $3.45 per mcf were 21% higher than Q1 2018 and outperformed the AECO 5A benchmark of $2.62 per mcf by 32%, driven by Crew's high heat content natural gas and exposure to diversified sales hubs and markets. 
  
  
• Financial Flexibility Maintained: Quarter end net debt of $361.5 million includes $300 million of term debt due in 2024 with no financial maintenance covenants and 17% drawn on the Company's $235 million credit facility (excluding working capital deficiency).

Financial & Operating Highlights:

Financials

Production Above Guidance

• Volumes for the quarter averaged 23,222 boe per day, above our projected volume range for the period of 22,000 to 23,000 boe per day, as a result of strong early performance from the eight West Septimus UCR wells completed during the quarter. 
  
  
• Greater Septimus production averaged 19,535 boe per day in Q1 2019, an increase of 6% over the 18,447 boe per day in Q4 2018. 
  
  
• Production for the quarter was impacted by several wells at West Septimus being shut-in for the majority of January and February to accommodate the completion of the final two wells on the 15-20 pad and six wells on the 4-21 pad. Production was also negatively impacted due to the 17 day unplanned shut down of the McMahon gas plant which processes the Company's non-Montney gas in northeast British Columbia. 
  
  
• The addition of the eight newly completed wells described above showed strong results in March, which helped to offset lower production volumes in January and February.

Pricing Environment Impacts Revenue

• First quarter 2019 petroleum and natural gas sales increased 9% over the previous quarter as a result of higher quarter-over-quarter liquids production, led by a 7% increase in condensate production. First quarter revenue was also bolstered by stronger liquids pricing, which reflects higher prices for condensate and heavy crude oil offset by weaker natural gas and natural gas liquids ("ngl") pricing. 
  
  
• Liquids prices for the quarter benefited from the Alberta Government's mandated oil production curtailment that took 325,000 bbls per day of Alberta supply out of the market, effective January 1, 2019. Despite slightly weaker benchmark pricing for Canadian dollar denominated WTI, which declined 6% compared to the fourth quarter of 2018, pricing for Western Canadian Select ("WCS") and Canadian condensate delivered at Edmonton increased 126% and 13% respectively, over the prior quarter. 
  
  
• Crew's realized natural gas price decreased by 9% compared to the previous quarter, as the Company's weighting of natural gas sold into the US Chicago and NYMEX markets increased from 55% to 61% in Q1 2019 compared to Q4 2018, while the prices received for delivering into those markets declined 18% and 13%, respectively. 
  
  
• Marketing income for the quarter increased to $2.9 million or $1.40 per boe from $2.1 million or $1.03 per boe in Q4 2018 and reflects the net revenue received for monetarization of the Company's Dawn transport contract and Malin sales contract, offset by unutilized demand charges for natural gas pipeline capacity that was not accessed until March 2019.

Liquids Production and Prices Improve AFF

• Crew's AFF in Q1 2019 totaled $25.8 million ($0.17 per diluted share), an increase of 9% over the prior quarter, attributable to higher liquids production and pricing, combined with higher marketing income. These were partially offset by higher net operating and transportation costs and a larger hedging loss. Crew's AFF declined 2% compared to the same period in 2018, mainly due to lower production. 
  
  
• Corporate operating netbacks in Q1 2019 averaged $16.69 per boe, a 14% improvement over the same period in 2018 and 5% over the prior quarter. Improvements relative to Q1 2018 and Q4 2018 reflect a higher liquids weighting, stronger commodity pricing and higher marketing income, offset by higher cash costs and relative to Q4 2018, an increased hedging loss. 
  
  
• Cash costs and cash costs per boe increased in Q1 2019 compared to the prior quarter, mainly due to increased royalties, net operating and transportation costs, offset by lower G&A costs. Relative to Q1 2018, cash costs declined due to lower overall production while on a per boe basis, cash costs increased due to higher royalties and transportation costs, offset by lower net operating and G&A costs. 
  
  
• Net operating cost and net operating costs per boe in the first quarter increased over the previous quarter as a result of the re-activation of higher cost heavy crude oil production that had been shut-in during Q4 2018 due to extremely low WCS pricing. Additionally, extremely cold weather experienced in Western Canada early in 2019 contributed to higher first quarter net operating costs. 
  
  
• With higher natural gas production from the Greater Septimus area in Q1 2019 relative to Q4 2018, Crew moved more volumes to higher priced markets which incur a higher per unit cost. This resulted in increased transportation costs in the first quarter of 2019 relative to the prior quarter.

Q1 Capital Expenditures Below Guidance

• Q1 2019 net capital expenditures totaled $39.3 million, including $55.2 million in exploration and development expenditures and $17.5 million of gross proceeds related to the sale of non-core land with no associated reserves or production, which was partially offset by a tuck-in acquisition for approximately $1.6 million. 
  
  
• Approximately $49.0 million of our Q1 capital was allocated to drilling and completion activities, with $3.4 millionspent on Montney well site development, facilities and pipelines and $2.8 million directed to land, seismic and other miscellaneous items. 
  
  
• In the first quarter of 2019, Crew drilled seven (7.0 net) and completed eight (8.0 net) wells in our UCR area at West Septimus and recompleted six (6.0 net) heavy crude oil wells at Lloydminster.

Net Debt Reflects Modest Draws on Bank Facility and Working Capital Deficiency

• March 31, 2019 net debt of $361.5 million was 5% higher than year end 2018 due to the Company's 2019 capital expenditure program being weighted to higher first quarter spending. Annual capital spending is forecast to approximate AFF resulting in minimal expected change to year over year net debt. 
  
  
• The Company's debt is comprised of $300 million of term debt with no financial maintenance covenants or repayment required until 2024, as well as a $235 million credit facility that was 28% drawn after adjusting for a working capital deficiency of approximately $26.3 million at quarter end.

Transportation, Marketing & Hedging

Diversified Market Access Provides Strategic Benefit

• Crew strategically chose to monetize the inherent value in our Dawn and Malin market exposure in Q1 2019, realizing marketing income of $3.3 million. The Company has further elected to monetize the value inherent in these contracts for Q2 2019 and will recognize approximately $2.5 million of associated marketing income for the second quarter. 
  
  
• For 2019, our average natural gas sales exposure is currently expected to be approximately 54% to Chicago, 17% to NYMEX, 7% to Dawn, 8% to Alliance ATP, 5% to Malin, 4% to Station 2 and 5% to AECO 5A. 
  
  
• During Q1 2019, Crew began shipping natural gas through the Company's new West Septimus to TCPL Saturn meter station sales pipeline system. This allowed Crew to benefit from the spike in AECO pricing that occurred during the quarter due to the extreme cold weather experienced across Western Canada.

Natural Gas & Liquids Hedging

• Crew's natural gas hedges currently include:
• 25,000 mmbtu per day of Chicago gas at C$3.53 per mmbtu
• 7,500 mmbtu per day of Dawn gas at C$3.55 per mmbtu
• 10,000 mmbtu per day of NYMEX gas at US$2.95 per mmbtu

• For liquids, Crew has the following hedges in place:
• 1,874 bbls per day of WTI at an average price of C$75.99 per bbl for 2019
• 500 bbls per day of WCS for the first half of 2019 at an average price of C$52.93 per bbl
• 250 bbls per day of WCS for Q4 2019 at C$56.20 per bbl
• 250 bbls per day of WCS differential at C$25.75 per bbl for the first half of 2019
• 500 bbls per day of WCS differential at C$25.23 per bbl for the second half of 2019
• 250 bbls per day of differentials at US$12.25 per bbl for Q2 2019
• 250 bbls per day of differentials at US$17.25 per bbl for Q3 2019

Ops & Area Overview

NE BC Montney - Greater Septimus

• Development drilling continued in the UCR region at West Septimus with five wells rig released in Q1. Four of the wells were ERH wells with lateral lengths over 3,000 metres. Progressive changes to fluid systems, drill bits, and downhole assemblies has enabled a 35% reduction in the cost per lateral metre drilled relative to the same costs incurred in 2017.
  
  
• As Crew's focus continues to be directed largely to our West Septimus area, reduced capital and activity levels at Septimus have allowed the Company to better understand our base decline profile, which is forecast to be moving towards 12%, enhancing the sustainability of our business model. 
  
  
• The final two wells on our 15-20 UCR pad at Greater Septimus and all six wells on our 4-21 pad were completed during Q1 2019. Two completions on the 4-21 pad were accelerated into Q1 to minimize downtime and offset the impact of inter-well communication. Early results indicate this strategy was effective as the 15-20 wells have returned to similar productivity levels that were realized prior to the offset completion operations. Cost efficiencies were also captured by simultaneously executing all six of the 4-21 well completions
  
  
• Better than forecasted production rates indicate well design enhancements, are effectively delivering positive results. Early results from wells on our 15-20 pad at Greater Septimus continue to support further development and capital allocation in the UCR area, and after 45 days of production, demonstrated the following: 
• Four "B" zone wells produced average sales of 1,211 boe per day comprised of 3,336 mcf per day of gas, 538 bbls per day of condensate and 117 bbls per day of propane and butane.
• After 45 days of production, one "C" zone delineation well confirmed increasing condensate/gas ratios ("CGR") trending east over our acreage, and produced an average of 923 boe per day comprised of 3,969 mcf per day gas, 162 bbls per day condensate and 99 bbls per day of propane and butane, which represents approximately three times the CGR relative to a "C" zone well drilled 1,000 metres to the west. 
• Early results from Crew's 4-21 pad in the UCR transition zone are also encouraging.  After 20 days of flow back, the six (6.0 net) "B" zone wells were producing at restricted rates averaging 1,374 boe per day of sales, comprised of 4,830 mcf per day of gas, 400 bbls per day of condensate and 169 bbls per day of propane and butane at an average flowing casing pressure of approximately 8,900 kPa.

Greater Septimus

Other NE BC Montney

• Tower: Production at Tower averaged 787 boe per day in Q1 2019. Crew continues to evaluate the relative economics of Tower development as well as encouraging nearby Lower Montney well results. 
  
  
• Monias: One horizontal Montney delineation well was drilled in Q1 in the Monias area, located approximately 18 km to the northwest of our West Septimus UCR core area.
  
  
• Attachie: Of Crew's 97 sections of land in this area, approximately 45 sections are situated within the liquids-rich hydrocarbon window. Given the positive results generated by offsetting operators, a lease retention well was drilled in January. 
  
  
• Oak / Flatrock: Drilling activity is gaining momentum for liquids-rich gas in this area where Crew has over 60 sections of land. We will continue to monitor industry activity and offsetting well results from this area.

AB / SK Heavy Oil - Lloydminster

• Q1 heavy oil activity at Lloydminster included the recompletion of six (6.0 net) heavy oil wells, resulting in average production volumes of 1,614 boe per day for the quarter. Production volumes were approximately 8% lower than Q1 2018 due to minimal capital investment in 2018 and shutting in lower margin production in Q4 2018 in response to extremely wide differentials. 
  
  
• WCS pricing differentials contracted significantly in the first quarter with Q1 2019 operating netbacks at Lloydminster averaging $13.48 per boe in the period. 
  
  
• Crew plans on drilling three (3.0 net) multi-lateral horizontal wells in this area in 2019 should prices be supportive.

Outlook

Value Creation Strategy Intact

• Crew has assembled an attractive land base with over 280,000 net acres of highly prospective Montney rights in northeast B.C., with proved plus probable reserves of over 401 million boe assigned by Crew's independent reserves evaluator at year end 2018 on only 13% of our Upper Montney lands and less than 1% of our Lower Montney lands¹. 
  
  
• Our strategic investment in infrastructure has resulted in Crew having the capacity to produce over 40,000 boe per day through existing facilities, which can significantly reduce future on-stream costs. We remain committed to high grading our portfolio of assets to enhance shareholder value while preserving the material upside in our vast resource base.

Increasing Condensate Production and Margin Expansion

• Crew's focus will continue to reflect our ongoing goal of increasing condensate in our production mix, which is expected to contribute to further improvements in realized pricing and operating netbacks. Under current strip pricing, the UCR wells being drilled by Crew are expected to generate robust internal rates of return ("IRR") of over 70% with over $6.0 million per well of before tax net present value discounted at 10% (NPV10)¹. With over 135 potential drilling opportunities² at Crew's current pace of development, this represents over ten years of highly economic future growth.

Balancing Capital Expenditures with AFF

• Crew is committed to capital discipline with a 2019 capital expenditure budget that is forecast to range between $95 and $105 million and designed to approximate annual AFF. This budget has been structured to support the Company's ability to effectively manage our balance sheet and retain the flexibility to produce average volumes of 22,000 to 23,000 boe per day, while increasing our exposure to higher valued condensate. Net proceeds from the sale of non-core assets in Q1 2019 of $15.9 million were used to reduce net debt, strengthening our financial position.
  
  
• Our Q2 2019 production is expected to range between 22,000 and 23,000 boe per day on capital expenditures between $12 and $18 million, although Crew's productive capacity is higher. The quarterly forecast reflects the Company's planned deferral of dry gas production which is exposed to spot gas prices in Western Canada which are currently very low. Our Q2 activity will largely be directed to continued Montney development, including the equip and tie-in of eight (8.0 net) UCR wells and the workover and recompletion of heavy oil wells which are attracting a wellhead oil price of over C$65 per bbl based on current oil prices. 
  
  
• Based on our first half capital program, Crew anticipates directing approximately $28 to $32 million to the second half program, which anticipates two net Montney completions, drilling three multi-lateral heavy oil wells and other minor expenditures.