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

Delphi Energy Details Q2 Operations, Results

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Delphi Energy Corp. reported its Q2 2019 results.

Q2 Highlights:

• Successfully concluded completion and tie-in operations on the 13-34-059-24W5 four-well pad (2.6 net) which was brought on-stream throughout the second quarter;

• Reduced bank debt plus working capital deficiency by $7.1 million from the first quarter of 2019;

• Entered into a binding agreement to sell and permanently assign approximately 35 percent of its firm full-path

• Field condensate production decreased three percent to 2,762 barrels per day (“bbls/d) compared to the second quarter of 2018. In comparison to the first quarter of 2019, field condensate production increased 19 percent. During the second quarter of 2019, the liquids yield averaged 130 barrels per million cubic feet (“bbls/mmcf”), up nine percent from the 119 bbls/mmcf in the second quarter of 2018. Of the 130 bbls/mmcf, 99 bbls/mmcf were the higher valued condensate and pentane products.

• Average production in the quarter of 9,157 barrels of oil equivalent per day (“boe/d”) was down 14 percent from the 10,623 boe/d in the comparative quarter of 2018;

• Completed construction of a 14 kilometre dedicated pipeline connecting West Bigstone to the 07-11 compression and dehydration facility in East Bigstone;

• Delphi’s realized natural gas price, including marketing income and excluding realized gains on risk management, averaged $2.87 per thousand cubic feet (“mcf”) comparing favourably to the average daily AECO benchmark which averaged $1.04 per mcf. Approximately 55 percent of the Company’s natural gas was sold in the Chicago natural gas market;

• Operating expenses decreased $0.9 million and $2.0 million in the three and six months ended June 30, 2019 compared to the same periods in 2018 primarily reflecting the reduction in third-party processing fees as the Company is able to process a portion of Montney natural gas volumes at its 25 percent owned Bigstone sweet natural gas plant;

• Transportation expenses per boe decreased nine percent over the comparative quarter in 2018 as a greater portion of the Company’s natural gas was shipped on the less costly NGTL system;

• The cash netback before risk management, decreased 36 percent in the second quarter of 2019 compared to the same period in 2018 primarily due to continued commodity price weakness, in particular for natural gas and natural gas liquids; and

• Realized $2.1 million and $4.2 million on risk management contracts in the three and six months ended June 30, 2019.

Ops Update

Throughout the second quarter of 2019, the Company brought on production the four wells from its multi-well pad with a surface location of 13-34-59-24W5 (“13-34”), directly offsetting the Company’s delineation wells drilled in West Bigstone at 16-10-60-24W5 and 15-10-60-24W5 (“16-10” and “15-10”). Delphi has a 65 percent working interest in the 13-34 pad and the 16-10 and 15-10 wells. The four extended-reach wells on the 13-34 pad were drilled in the fourth quarter of 2018 and the first quarter of 2019 with an average horizontal length in the Montney of 2,850 metres, efficiently developing two full sections at a time. Delphi successfully finished fracturing operations on the four-well pad at West Bigstone in the first quarter. The two eastern-most wells on the 13-34 pad were completed with a hybrid completion consisting of 50 fracs pumped using a ball-drop liner, and 30 individual fracs placed using plug and perf for a total of 80 discrete fracs. This is a similar design as was used at 16-10 and 15-10 where 65 fracs were placed. On the two western-most wells on the pad, an extreme limited entry fracturing technique was used consisting of 40 stages with five clusters per stage for a total of 200 clusters or fracture initiations. Observing the 13-34 pad’s well performance over the first 90 to 180 days will be important to determining the impacts of the increased fracture intensity and number of fracture initiations compared to the 65 stages placed in the two offset wells.

Over the first 90 days on production, the four wells on the 13-34 pad flowed at an average rate of 1.9 mmcf/d of raw natural gas and 413 bbls/d of 42 degree API field condensate (246 bbls/mmcf of sales gas). Total sales production rate over this time period averaged approximately 763 boe/d (63 percent liquids) including current estimated plant natural gas liquids yield of 42 bbls/mmcf of sales gas. Although natural gas production from the pad wells has been less the further west the well is, field condensate production has been more consistent. Compared to the average of the original 16-10 and 15-10 wells, the average field condensate rate of the 13-34 pad was 71% over the first 30 days on production, 75% over the first 90 days on production and approximately 81% at day 90. Continuing to monitor the production profiles of the pad wells will be important in optimizing overall capital efficiencies on the future multi-well pads.

Management Commentary

The impact of the Company’s condensate growth, product marketing advantages, cost reductions and hedging strategy continue to demonstrate a sustainable cash generating business model in a volatile commodity price environment. Strong well economics support a second half drilling program commencing in the fourth quarter, while utilizing free cash flow generated in excess of its capital program and non-core asset dispositions to reduce year-end 2019 net bank debt by approximately 20-25 percent from year-end 2018 levels.

Given the operational success of the drilling and completion operations on the 13-34-59-24W5 four-well pad, Delphi has identified significant potential cost savings on its future multi-well pad operations. With increasing condensate yields and lower sour content of the natural gas volumes, operating costs are expected to trend downward. The Company continues to evaluate its various natural gas processing options to further reduce costs, as well as reducing condensate transportation costs by shipping via pipeline rather than trucking.

In the second quarter, the cash netback remained robust, despite revenue decreasing 14 percent largely on lower realized pricing and lower natural gas and natural gas liquid volumes relative to the comparative quarter in 2018.

Delphi has benefited from a significant long position on its Alliance natural gas transportation service to Chicago over the past three years, and views a lower corporate natural gas production growth profile relative to its condensate production as a strategic advantage to increasing profitability. The Company’s realized natural gas price continues to benefit from its exposure to the Chicago market, as well as from marketing income on its excess Alliance transportation service. The closing of the sale and permanent assignment of approximately 35 percent of its firm full-path service to the Chicago area on the Alliance pipeline system in September 2019 for $11.9 million will be used to repay bank indebtedness and increase liquidity by approximately $13.3 million.

Delphi remains well positioned with a high quality resource base supported by a significant infrastructure footprint and a large drilling inventory combined with a strategic natural gas marketing strategy and a strong commodity hedge position.

Operating / Financial Highlights

With a modest capital program in the second quarter of 2019 and adjusted funds flow of $12.0 million, Delphi was able to reduce net bank debt by $7.1 million from the first quarter of 2019.

Delphi wrapped up its winter capital program, successfully executing the development of a four-well pad in West Bigstone. During the quarter, capital spending totaled $4.4 million primarily on completing fracturing and tie-in operations on the four- well pad and a 14 kilometre dedicated pipeline connecting West Bigstone to the 07-11 compression and dehydration facility. Capital spending in the first six months of 2019 amounted to $26.9 million.

Production in the quarter averaged 9,157 boe/d, up five percent from the first quarter of 2019 and down 14 percent from the comparative quarter in 2018. The four-well pad was brought on-stream throughout the second quarter, contributing to a liquids yield of 130 bbls/mmcf, up twelve percent from the 116 bbls/mmcf in the first quarter of 2019. Delphi’s production portfolio was weighted 30 percent to field condensate, 14 percent to natural gas liquids and 56 percent to natural gas.

Crude oil and natural gas revenues were $27.0 million, up three percent from the first quarter of 2019. Field condensate revenue increased by $5.8 million from the first quarter of 2019 as a result of an 18 percent increase in production and improved benchmark prices. The increase in revenue from field condensate was largely offset by weak prices for natural gas and natural gas liquids. In comparison, crude oil and natural gas revenues in the second quarter of 2019 were 26 percent lower than the second quarter of 2018 due to a weaker commodity price environment and lower production volumes.

Operating and transportation costs combined are $2.0 million or 14 percent lower than in the second quarter of 2018 primarily due to the commissioning of the amine facility in May 2018 and the corresponding shift of natural gas volumes onto the NGTL system. The operating netback before risk management in the quarter was $18.29 per boe compared to $23.45 per boe in the comparative quarter of 2018 and $20.19 per boe in the first quarter of 2019. Although weak commodity prices have placed downward pressure on the operating netback, the composition of Delphi’s production and efforts to reduce operating and transportation costs continue to support a healthy operating netback in this depressed commodity price environment.

The cash netback in the quarter was $14.36 per boe, a decrease of six percent over the comparative quarter in 2018 principally due to lower realized prices and higher finance costs partially offset by a realized gain on risk management.