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InPlay Oil Corp. Fourth Quarter, Full Year 2020 Results

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   |    Wednesday,March 17,2021

InPlay Oil Corp. reported its Q4 / full year 2020 results.

Message to Shareholders

InPlay’s mandate of operating a prudent and adaptable junior light oil focused Company could not have been more critical than in 2020. The Company’s strong foundation of assets and our ability to react quickly to the commodity price volatility as a result of the global COVID-19 pandemic enabled InPlay to endure a year which had the most significant challenges faced by our industry in recent memory. Immediate efforts were taken to halt capital spending, implement cost reduction initiatives, defer well servicing programs, and shut in and curtail production from wells that were uneconomic at distressed prices. These efforts enabled the Company to rebound from 2020 with a solid financial footing and remain well positioned to pursue our development program within the much improved commodity price environment while maintaining our mandate to generate significant Free Adjusted Funds Flow to pay down debt while also delivering measured, top-tier production growth per share amongst our light oil peers for our shareholders.

Given the improvements to West Texas Intermediate prices since the announcement of our 2021 capital budget and associated guidance in January, InPlay’s 2021 adjusted funds flow forecast has increased by over 25% to $39 – $42 million (from prior guidance of $30.5 – $33.5 million) which results in forecasted FAFF of $15.0 to $18.0 million (from prior guidance of $7.5 to $10.5 million). This results in a significant improvement to our forecasted 2021 year end net debt level, which is now forecasted to be $58.0 – $61.0 million (from prior guidance of $65 – $68 million). Net debt to earnings before interest, taxes and depletion for 2021 is now forecast to be 1.3 – 1.5 times with the 2021 operating income profit margin forecast to be approximately 64%. Refer to the Outlook section for further details of our 2021 guidance.

During a period of significant hardship for the energy industry, the Company improved its liquidity position considerably during 2020. InPlay was able to secure a $25 million senior second lien four-year term loan facility with the Business Development Bank of Canada and our lending syndicate in October. This significant injection of liquidity not only allowed InPlay to re-activate its development program in the fourth quarter of 2020, but also allowed the Company to complete a strategic $1.9 million asset acquisition in our core Pembina area. As a result, the Company achieved record reserves generating significant reserve growth across all reserve categories compared to 2019: Proved Developed Producing reserves increased by 11% in 2020 to 9,677 mboe, Total Proved reserves increased by 16% to 21,624 mboe and Total Proved and Probable reserves increased by 20% to 32,816 mboe. The price forecast used to value the Company’s reserves was based on four independent reserve evaluator’s average price and foreign exchange rates forecasts as at December 31, 2020. The before-tax net present value of reserves discounted at 10% was $95 million on a PDP basis ($1.38 per basic share), $157 million on a TP basis ($2.30 per basic share) and $264 million ($3.86 per basic share) on a TPP basis. Current WTI strip pricing for 2021 and 2022 is approximately 34% and 13% higher, respectively, than the four evaluator average price forecasts for 2021 and 2022.

Annual average production was 3,985⁽¹⁾ boe/d for 2020 was a result of efforts to preserve PDP and TP reserves through a significant halt in capital spending, production curtailments and shut-in of wells. These actions enabled us to avoid selling our reserves at a loss. The Company began re-activating wells and then resumed our capital spending program as commodity prices recovered through the second half of 2020. Management of our asset base in this manner has allowed InPlay to achieve production rates in the first quarter of 2021 similar to our pre-COVID (2019) production, with the benefit of selling this 2021 production at significantly higher commodity prices than in 2020.

With the restart of our capital development program in the fourth quarter of 2020, InPlay continued to deliver on our track record of drilling efficiency and operational expertise, setting industry standard pacesetting drilling times for three horizontal wells in Willesden Green. Continued innovation in well design has resulted in capital costs on these new wells to be better than expectations with our 2020 capital program providing top tier efficiencies including finding and development (“F&D”)⁽⁴⁾ costs of $10.29 and $12.62 in TP and TPP reserve categories respectively. The strategic $1.9 million asset acquisition provided significant reserve additions and is expected to generate considerable future value for the Company through drilling activity, all within our control given the Company’s 100% ownership of these assets. This capital and Acquisition and Disposition (A&D) activity resulted in the Company achieving finding, development and acquisition (“FD&A”)⁽⁴⁾ costs of $9.85, $5.86 and $8.21 in the PDP, TP and TPP reserve categories respectively. This equates to recycle ratios⁽⁴⁾ of 1.2, 2.0 and 1.4 in the respective categories.

The increase in reserves has been a remarkable achievement given the economic environment during 2020. Most importantly, the Company generated sizable increases in PDP and TP reserves which form the basis of lending valuations. Also, the strong increase in reserves without stock dilution is an accomplishment very few light oil peers have achieved and will benefit our shareholders significantly with the recent uptick in crude oil pricing.

2020 Highlights:

• Record reserves and significant growth in an extremely challenging environment
  • PDP reserves increased 11% to 9,677 mboe (63% light and medium crude oil & NGLs)
  • TP reserves increased 16% to 21,624 mboe (67% light and medium crude oil & NGLs)
  • TPP reserves increased 20% to 32,816 mboe (68% light and medium crude oil & NGLs)
• Successful development and A&D activity resulted in top-tier reserve replacement⁽⁴⁾of 2020 production
  • PDP replacement of 166% (2019 – 120%)
  • TP replacement of 309% (2019 – 84%)
  • TPP replacement of 479% (2019 – 113%)
• Exceptional FD&A costs and associated recycle ratios (in a very low operating netback environment) in developing new reserves, in addition to strong capital efficiencies in adding new producing barrels.
  • Improved FD&A costs of $9.85/boe (PDP), $5.86/boe (TP) and $8.21/boe (TPP) compared to $11.08/boe (PDP), $9.95/boe (TP) and $9.92 (TPP) average for the last three years.
  • Strong recycle ratios of 1.2 (PDP), 2.0 (TP) and 1.4 (TPP) compared to 1.6 (PDP), 2.9 (TP) and 2.9 (TPP) in 2019.
  • Capital efficiencies⁽⁴⁾ of $19,949 per boe/d in 2020
• Improvements to the sustainability of the Company’s reserves
  • PDP reserve life index⁽⁴⁾ of 6.6 years compared to 4.8 years in 2019
  • TP reserve life index of 14.8 years compared to 10.2 years in 2019
  • TPP reserve life index of 22.5 years compared to 15.0 years in 2019
• Significantly improved the Company’s liquidity position through securing the $25 million, four-year BDC Term Loan.
• Successfully closed a strategic acquisition in our core Pembina Cardium area for $1.9 million (net of adjustments) providing strong reserves additions and a sizeable drilling inventory to significantly contribute to the future growth of the Company.
• $1.8 million in total grants received to date from the Alberta Site Rehabilitation Program (“ASRP”) to be directed towards reclamation and abandonment efforts.
• Continued focus on efficiencies resulted in operating cost rates remaining flat at $14.43/boe in 2020 compared to $14.36/boe in 2019 despite the presence of fixed operating costs being incurred over a significantly lower production base and incurring costs associated with servicing wells that were shut-in or curtailed in response to COVID-19.
• Reduced general and administrative costs by $2.0 million in comparison to 2019 as a result of cost cutting measures implemented by the Company in response to the COVID-19 pandemic.

2020 Reserves Overview

As a result of the Company’s efficient execution in 2020, strategic A&D activity and the high quality nature of our assets, significant reserve growth was generated in all reserve categories compared to 2019. PDP reserves increased by 11% in 2020 to 9,677 mboe, TP reserves increased by 16% to 21,624 mboe and TPP reserves increased by 20% to 32,816 mboe. This reserve based growth easily replaced our 2020 production, with 166% of production being replaced on a PDP basis, 309% on a TP basis and 479% on a TPP basis.

Despite this significant reserve growth, 2020 year-end reserve net present values of future net revenues (“NPV”) and net asset values per basic share (“NAVPS”) decreased in comparison to the prior year as a result of the significantly reduced price decks used in the Reserve Report, being an average of four external reserve evaluators at December 31, 2020. InPlay believes the four independent reserve evaluators over corrected in reducing their pricing, working towards a new mandate to be more comparable to future pricing as a result of updates to the Canadian Oil and Gas Evaluation Handbook (the “COGE Handbook”) with an effective date of April 1, 2021. The price forecasts are extremely conservative in our view as the WTI prices used in the Reserve Report are approximately 34% and 13% less than current strip pricing in 2021 and 2022 respectively. Despite this conservatism, the Company has provided shareholders with solid NAVPS with NPV 10BT at $95 million on a PDP basis, $157 million on a TP basis and $264 million on a TPP basis using a four independent reserve evaluators average pricing forecast and foreign exchange rates as at December 31, 2020. This equates to NAVPS of $1.02 on a PDP basis, $1.94 on a TP basis and $3.50 on a TPP basis⁽¹⁾.

The reduction in NPV 10BT and NAVPS from the 2019 year end Reserve Report is primarily due to substantial decreases in pricing assumptions incorporated in the Reserve Report which are summarized below.

• WTI prices dropping 28%, 24% and 20% in years 1, 2 and 3 respectively and 19% for the remaining years.
• Propane prices dropping 43% and 28% in years 1 and 2 respectively and 21-23% for the remaining years.
• Butane prices dropping 41% and 30% in years 1 and 2 respectively and 16% for the remaining years.
• AECO spot gas prices increasing 21% in year 1, decreasing 4% in year 2 and decreasing 10-13% for the remaining years.

To provide perspective on the impact of these price reductions, had pricing assumptions remained consistent with those used in the December 31, 2019 Reserve Report, NPV 10BT would have amounted to $141 million on a PDP basis, $266 million on a TP basis and $416 million on a TPP basis. These NPV 10BT values would have equated to NAVPS of $1.71 on a PDP basis, $3.53 on a TP basis and $5.73 on a TPP basis. Also, pricing changes year over year equated to reserve losses of 1,971 mboe on a TP basis and 1,692 mboe on a TPP basis based on the 2019 price deck. InPlay believes that a significant portion of these losses could be added back to future reserve results with continued gains in pricing.

2020 Financial & Operations Overview

Production averaged 3,985 boe/d (68% light oil & liquids) in 2020 compared to 5,000 boe/d in 2019 (66% light oil & liquids)⁽¹⁾. As commodity prices began to recover during the third quarter of 2020 the Company gradually eased temporary production curtailments and shut-ins implemented as a response to the commodity price volatility due to the COVID-19 pandemic. This resulted in average production of 4,259 boe/d⁽¹⁾ (68% light oil & liquids) in the fourth quarter of 2020.

InPlay’s 2020 capital program consisted of $23.1 million of development capital, focused on drilling wells in our Willesden Green and Pembina Cardium areas. The Company drilled four (4.0 net) extended reach horizontal (“ERH”) wells in Willesden Green (three of which came on production in the last week of December 2020), three (3.0 net) one-mile horizontal wells in Pembina and participated in one (0.2 net) non-op Nisku ERH well during the year ended December 31, 2020, amounting to an equivalent of 11 gross horizontal miles (9.4 net horizontal miles).

InPlay delivered a year of strong operational results while successfully maneuvering through the pandemic and the commodity price challenges that faced the industry. As a result of initiatives in response to COVID-19 to reduce costs and scale back discretionary expenditures, the Company achieved lower total operating and general and administrative (“G&A”) costs during 2020 of $21.0 million and $4.5 million compared to $26.2 million and $6.5 million respectively during 2019. The Company started incurring costs associated with servicing wells that went down and despite the presence of fixed costs being incurred over a significantly lower production base, InPlay’s aggressive cost cutting campaign resulted in only a minor increase in operating expenses per boe ($14.43 in 2020 vs. $14.36 in 2019) and a reduction in G&A per boe of $3.08 in 2020 compared to $3.52 in 2019.