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Crew Energy Third Quarter 2020 Results

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   |    Monday,November 09,2020

Crew Energy Inc. reported its Q3 2020 results.

Q3 Highlights:

  • Production Guidance Increased: Q3 production averaged 20,207 boe (121.2 mmcfe) per day, beating our quarterly guidance range of 18,000 to 19,000 boe per day, while volumes for the first nine months of 2020 averaged 22,052 boe per day, 4% lower than the same period of 2019. Strong well performance has allowed the Company to increase Q4/20 guidance from 19,500 to 20,500 boe per day to 20,000 to 21,000 boe per day and refine annual production guidance to 21,000 to 22,000 boe per day.
  • Adjusted Funds Flow (“AFF”)1 Improves From Q2/20: AFF totaled $8.5 million ($0.06 per fully diluted share) in Q3/20, an 85% improvement, sequentially, over Q2/20 due to improved commodity pricing and operating cost reductions.
  • Operating Costs Reduced: General and administrative (“G&A”) costs per boe declined 42% and 36% in Q3/20 and the first nine months of 2020 over the same periods of 2019, respectively, averaging $0.79 per boe in Q3, while net operating costs per boe declined 3% and 6% compared to the same respective 2019 periods, averaging $5.74 per boe in Q3. These efforts have allowed the Company to reduce 2020 annual operating cost guidance from $6.00 to $6.50 per boe to $5.75 to $6.00 per boe.
  • Capital Allocated to Drive Returns: Net capital expenditures1 totaled $21.8 million, $13.4 million of which was primarily directed to drilling activities, including the drilling of the first six wells on the seven well West Septimus 9-5 pad, which is expected to be on production prior to year-end.
  • Strong Drilling Performance: The Company realized further cost and operational improvements on the West Septimus 9-5 pad, including reducing drill times by over 20% relative to our performance on the previously drilled 3-32 pad, which is expected to contribute to strong capital efficiencies and enhanced returns.
  • Retaining Financial Flexibility: Quarter end net debt1 of $353.7 million positions the Company well from a liquidity perspective, with 28% drawn on our $150 million credit facility, reconfirmed until June 2021, and an additional net $23 million of proceeds received during the fourth quarter related to the strategic infrastructure transactions previously disclosed in Q1/20. With $300 million of senior notes termed out until 2024, Crew has no near-term maturities or repayment requirements.
  • Advancing Environmental, Social and Governance (“ESG”) Principles: With meaningful support received through various provincial and federal government stimulus programs, Crew is reducing our environmental footprint by directing capital to ongoing abandonment, reclamation and restoration activities at inactive well sites, pipelines and facilities, positively impacting our asset decommissioning obligation liabilities and ESG performance.

Corporate Summary

As the global economy continued to manage through the broad-reaching effects of COVID-19 during Q3/20, the energy sector began to see some optimism with improving commodity prices, particularly for natural gas, and a slow return of industry activity. These factors contributed to Crew exceeding our previous quarterly production guidance range and delivering AFF per share which improved as the quarter progressed. The stronger forward curve for natural gas prices gave us an opportunity to continue adding to the Company’s robust 2020 and 2021 hedge positions, which we have continued into the fourth quarter. Operationally, we remained active in Q3/20, focusing on the drilling of the first six wells on our seven-well 9-5 pad at West Septimus. With the combination of improved natural gas prices, a solid hedge position and favorable geology at West Septimus, Crew expects this project to generate compelling returns, with capital cost recoveries in approximately 12 to 14 months.

Crew’s large proved plus probable reserve base of 2.46 TCFE1,2 provides low risk development and our uniquely positioned Montney asset base provides diversity of commodity types, as well as exposure to market diversification opportunities. The Company’s proactive marketing strategy is centered on maintaining the flexibility to react quickly when markets dictate, allowing the Company to enhance AFF. This process has resulted in an active rebalancing of Crew’s marketing portfolio to align our transportation commitments and processing capacity, while redirecting natural gas to markets that support stronger price realizations.

Advancing Crew’s ESG goals and conducting our operations to the highest standards has always been part of our corporate identity. Our team of employees and contractors remained safe during the quarter, with zero recordable or lost time injuries and no reported incidents of COVID-19. Our environmental performance was exemplary as the Company had no reportable spills in Q3/20. The twinning and start-up of a pipeline at West Septimus earlier in the year continues to support production volumes, while reducing gas lift compression requirements. This proactive initiative facilitates an expected reduction of 1,550 tonnes of CO2 emissions annually, having the equivalent impact of removing 337 cars from the road each year3. In addition, a West Septimus water disposal well that began operating in Q2/20 is expected to handle all produced water from the West Septimus processing facility, ultimately reducing annual costs by up to $6.0 million, while eliminating 2,800 tonnes of CO2 emissions, equivalent to removing 609 cars off the road annually3.

Financials

Production Higher as Prices Improve

  • Third quarter production averaged 20,207 boe per day, while volumes for the nine months ended September 30, 2020 were 22,052 boe per day, in-line with Crew’s projected annual range of 20,000 to 22,000 boe per day for 2020. Production for the period exceeded guidance, a result of gathering system improvements in the ultra-condensate rich (“UCR”) area and better than expected well performance from both our 3-32 pad and from our two new Lloydminster heavy oil wells that were drilled in Q1/20. Production in Q3/20 reflects 41% lower exploration and development spending over the past twelve months compared to the same period of 2019, the planned ten-day turnaround at our Septimus processing facility which was completed in five days, and a 29-day turnaround at the McMahon gas processing facility which was completed on time.
  • Production from Crew’s Septimus and West Septimus areas (“Greater Septimus”) averaged 17,119 boe per day in Q3/20, 13% and 8% lower than Q3/19 and Q2/20, respectively, reflecting reduced exploration and development spending over the past 12 months and production that was offline for the five day Septimus facility turnaround during the quarter.
  • Exploration and development expenditures in Q3/20 totaled $21.8 million, within the previously established guidance range of $20 to $25 million. This amount included $13.4 million that was directed primarily to drilling activities, $6.6 million to well sites, facilities and pipelines and $1.9 million to land, seismic and other miscellaneous items.
Positive AFF
  • Crew generated $8.5 million of AFF in Q3/20 ($0.06 per fully diluted share), an 85% increase over Q2/20 and a 49% decrease compared to the same period of 2019, with AFF of $25.6 million ($0.17 per fully diluted share) in the nine months ended September 30, 2020, as AFF continued to be impacted by a challenging commodity price environment.
  • Commodity prices recovered through Q3/20 as benchmark prices for all products increased quarter-over-quarter. Improved commodity prices reflect increased global demand as restrictions related to COVID-19 were eased. Despite this improvement, benchmark prices remain below prior year levels due to the ongoing global impact of COVID-19.
    • Crew’s realized light crude oil price was 83% higher than Q2/20 and 31% lower than in Q3/19, compared to an increase of 42% and a decrease of 27% in the Canadian dollar denominated West Texas Intermediate (“WTI”) benchmark price over the same respective periods. The Company’s Q3/20 realized price improvement was more pronounced than the WTI benchmark due to improved pricing differentials between Canadian and US crude benchmark pricing as egress to US markets was more abundant given lower production moving out of Canada during the third quarter.
    • The Western Canada Select (“WCS”) heavy crude oil benchmark increased 89% from Q2/20 and decreased 27% from Q3/19, with Crew’s realized heavy crude oil price increasing 109% and decreasing 28% relative to both periods, respectively. Crew’s heavy crude oil price outperformance relative to the Q2/20 benchmark was the result of the above-mentioned improvement in Canadian oil differentials.
    • Pricing for the Company’s ngl production in Q3/20 increased 43% and 1,844% over Q2/20 and Q3/19, respectively, largely due to increases in propane and butane pricing across North America. Higher ngl component prices can have a significant impact on Crew’s realized ngl price as the increased component pricing disproportionately offsets the imbedded cost of processing and fractionation netted into Crew’s realized price.
    • Crew’s realized condensate prices increased by 84% in Q3/20 compared to Q2/20, and decreased 30% from Q3/19, compared to an increase of 63% and a decrease of 27% in the Canadian dollar denominated Edmonton condensate benchmark price over the same periods, with the relative difference being the result of fixed transportation costs netted into the price Crew receives for delivering condensate to market at our plant gate.
    • Crew’s Q3/20 natural gas sales continued to be exposed to diversified markets, a feature that has benefited the Company significantly in the past, particularly our greater exposure to US markets. During 2020, the Company, through legacy contracts, continues to expose a large percentage of our natural gas production to the Chicago City Gate market delivered at ATP. This market has underperformed Canadian markets year-to-date, and has impacted Crew’s realized gas price. Based on this pricing exposure in Q3/20, Crew’s realized natural gas price increased 12% and 1% relative to Q2/20 and Q3/19, respectively. As we move into Q4/20, Crew expects improved pricing for our natural gas portfolio with a greater percentage of production directed to Canada’s AECO market, while the forward price for Crew’s US markets is forecasted to trade in-line or above Canadian prices.
Costs Trending Lower
  • A focused effort by the Company to reduce operating costs has led to the lower realized charges. In Q3/20, net operating costs of $5.74 per boe were 3% lower than Q3/19, and were 6% lower for the first nine months of 2020 compared to the same period of 2019. These efforts have allowed the Company to reduce 2020 annual operating cost guidance from $6.00 to $6.50 per boe to $5.75 to $6.00 per boe.
  • G&A costs of $0.79 per boe in Q3/20 and $0.91 per boe in the first nine months of 2020 declined 42% and 36% from the comparable periods in 2019, respectively, and were comparable to Q2/20, reflecting administrative cost reductions, lower compensation costs, lower head office operating costs and property taxes, and the impact of government grants received under the Canada Emergency Wage Subsidy.
Liquidity Remains Strong
  • Q3/20 ending net debt of $353.7 million was similar to the same period in 2019 and approximately 4% higher than the previous quarter, reflecting increased capital spending activities directed to drilling our 9-5 multi-well pad at West Septimus.
  • Crew’s debt is comprised of $300 million of senior unsecured term debt with no financial maintenance covenants or repayment required until 2024, and a $150 million credit facility drawn 28% at quarter-end. In early November, the facility’s borrowing base was reconfirmed at $150 million until June 2021.
  • The second phase of the previously disclosed infrastructure transactions closed in early November, netting Crew approximately $23 million of proceeds that have been applied against the Company’s outstanding bank debt. The Company also has the option to transact on a further disposition of Crew’s ownership interest in the Greater Septimus gas processing complex, which, if exercised, would generate up to an incremental $37.5 million between January 2021 and June 2023.

Transport, Marketing & Hedging

Market Access Diversification and Increased Risk Management Focus

  • As natural gas prices have strengthened across sales hubs in western Canada in 2020, Crew has taken steps to rebalance the Company’s marketing portfolio to reduce transportation commitments and their associated costs, as well as redirect our natural gas portfolio to those markets across North American that offer the best prices to support stronger netbacks.
  • At the beginning of November 2020, Crew’s commitments on the Alliance pipeline have been reduced from 100 mmcf per day to 65 mmcf per day with the Company retaining annual renewal rights.
  • Crew’s average natural gas sales exposure in Q3/20 was weighted approximately 54% to Chicago (up from 49% in Q2/20), 18% to Henry Hub (up from 16% in Q2/20), 22% to Alliance 5A (down from 24% in Q2/20), 5% to Station 2 (down from 8% in Q2/20) and 1% to AECO 5A (down from 3% in Q2/20).
  • For Q4/20, the Company’s sales portfolio is estimated to be weighted 47% to Chicago, 6% to Henry Hub, 17% to Alliance 5A, 9% to Station 2, and 21% to AECO 5A.
  • Into 2021, based on current forward pricing, our estimated natural gas market weighting is expected to shift to approximately 26% to Chicago, 15% to Alliance 5A, 50% to AECO 5A and 9% to Station 2.
  • Stronger forward prices for natural gas have provided an opportunity to add hedges for 2021 and 2022 to secure attractive returns on our incremental gas production from our planned drilling and completion program. Crew’s Q3/20 MD&A contains a complete list of all hedges in place as at September 30, 2020 along with contracts secured subsequent to quarter end.

Ops & Asset Overview

Sustainability and ESG Initiatives

  • The Company reported zero recordable or lost time injuries and no reported incidents of COVID-19 through Q3/20 or the nine months ending September 30, 2020. In addition, no spills of significance were reported in either Q3/20 or year to date 2020, continuing Crew’s strong track record of minimizing our impact on the environment.
  • In keeping with our continued efforts to enhance the Company’s long-term sustainability, Crew has planned the installation of a waste heat recovery system for our West Septimus gas plant.
    • This waste heat recovery system is expected to enable Crew to reduce greenhouse gas emissions by an estimated 7,700 tonnes per year, while expanding condensate stabilization capacity by 30%.
  • Crew continues to successfully coordinate with three provincial regulatory bodies to fund and coordinate site abandonment, reclamation and restoration programs. The deployment and execution of this important abandonment and reclamation work is currently underway with a majority of Crew’s work expected to be completed by H1/21.
NE BC Montney – Greater Septimus
  • Through Q3/20, Crew’s 3-32 UCR wells continued to meet expectations for proved plus probable type wells derived from Crew’s independent reserves evaluation at year end 2019.
  • The development of natural gas in Greater Septimus is supported by favorable geology, a low operating cost structure, reduced capital costs and an active hedging program.
    • Drilling operations continued on the first six of seven wells at the 9-5 pad at West Septimus.
    • The development area benefits from the low variable operating costs at West Septimus, which average approximately $1 per boe, as well as available capacity from recent area plant and pipeline expansions.
Other NE BC Montney
  • Tower: Production averaged 627 boe per day in this area during Q3/20, comprised of 159 bbls per day of oil, 18 bbls per day of condensate, 46 bbls per day of ngl and 2,419 mcf per day of natural gas. Crew continues to evaluate the potential in the Lower Montney where development has experienced considerable success.
  • Attachie: This area represents an attractive mid-to longer term development opportunity with approximately 36 of our 76 net sections at Attachie situated within the liquids-rich hydrocarbon window. Given the positive results generated by offsetting operators, a lease retention well is planned to be drilled in 2021 which would conclude the lease preservation program in the area.
  • Oak / Flatrock: In this liquids-rich gas area, Crew has more than 60 (52 net) sections of land. The Company plans to continue monitoring industry activity and offsetting well results for potential future development.
  • Groundbirch: This area is ideally situated for future development with approximately 112 sections adjacent to acreage planned to be developed for a west coast LNG project, and existing pipeline infrastructure proximal to the Coastal GasLink pipeline inlet.

AB / SK Heavy Oil Lloydminster

  • During Q3/20, Crew continued to take steps for the preservation of value and to minimize costs, including realizing benefits from certain infrastructure capital investments during the downturn which featured short-payouts and contributed to an improved heavy oil operating cost structure, further advancing our long-term sustainability.
  • Production averaged 1,477 bbls per day of oil in Q3/20 reflecting the performance of two wells that were drilled in Q1/20 and completed in Q2/20, as well as the successful reactivation of shut-in wells.

Outlook

  • Despite an unprecedented global pandemic collapsing demand for oil and gas, and six years of low natural gas prices, Crew has been conditioned to doing more with less and has significantly improved operating, cost and capital efficiencies. We have continued to look forward and plan for the future, with several strategic initiatives designed to enhance our long-term financial and operational sustainability. We believe a proactive strategy will help “right size” the Company through optimizing processing and transportation capacity leading to margin expansion and improved debt metrics in an improved natural gas price environment.
  • As our exposure to AECO 5A prices increases to over 45% in 2021, Crew has successfully protected a meaningful level of our estimated 2021 gas production from the new 9-5 pad at West Septimus, supporting our ability to generate attractive returns. With the continued strength of natural gas prices in 2021 and 2022, Crew is positioned to realize even greater returns on the capital invested.
  • Drilling and completion of the seven wells on the 9-5 pad will continue through the fourth quarter of 2020 with production anticipated to begin before year-end 2020.
  • Crew forecasts annual 2020 exploration and development expenditures of $85 to $90 million ($27 to $37 million net of dispositions), with Q4/20 capital spending projected to be $40 to $45 million as the Company continues to advance our plan to improve margins by increasing production to match processing and transportation capacity, with the drilling of five wells at the West Septimus 3-32 UCR pad. As a result of our strong underlying production base, we are pleased to be able to increase our forecasted Q4 2020 average production guidance to 20,000 to 21,000 boe per day from 19,500 to 20,500 boe per day, and refine our 2020 annual average production guidance to 21,000 to 22,000 boe per day from 20,000 to 22,000 boe per day.
  • The Company’s liquidity remains strong with 28% drawn on our $150 million credit facility at quarter-end. We have received an additional net $23 million net cash proceeds in Q4/20 associated with the previously disclosed strategic infrastructure transactions, and have the option to convert another working interest tranche for $37.5 million beginning in January 2021, which, if exercised, would be anticipated to be directed to further debt repayment. Importantly, with $300 million of senior notes termed out until 2024, Crew does not face any near-term maturities or repayment requirements which affords financial flexibility to weather market weaknesses.
  • Crew plans on releasing the Company’s 2021 capital expenditure budget and production guidance in December 2020.

 

 


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