Quarterly / Earnings Reports | Third Quarter (3Q) Update

InPlay Oil Reports Q3 2019 Results

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InPlay Oil Corp. reported its Q3 2019 results.

Third Quarter 2019 Financial & Operating Highlights

• Achieved average quarterly production of 5,080 boe/d (66% light oil and liquids) in the third quarter of 2019, an increase of 6% compared to 4,773 boe/d (69% light oil and liquids) in the third quarter of 2018.
• Year to date production growth of 10% was attained with average production of 5,000 boe/d (66% light oil and liquids) in the first nine months of 2019 compared to 4,529 boe/d (70% light oil and liquids) in the first nine months of 2018. Production growth was achieved notwithstanding the sale of approximately 250 boe/d of non-core producing assets in October 2018.
• Generated adjusted funds flow (“AFF”)⁽¹⁾ of $24.7 million ($0.36 per basic and diluted share)  during the first nine months of 2019 compared to $25.3 million ($0.37 per basic and diluted share) generated in the first nine months of 2018. These results were achieved despite a 15% decrease in West Texas Intermediate (“WTI”) prices as well as a 52% decrease in the Company’s realized Natural Gas Liquids (“NGLs”) prices over the same respective periods.
• Continued focus on efficiencies resulted in operating costs decreasing 14% to $13.47/boe in the third quarter of 2019 compared to $15.62/boe in the third quarter of 2018 and decreasing 6% compared to $14.31 in the second quarter of 2019. This decrease, combined with lower royalty rates largely from lower Alberta par prices, resulted in operating netbacks⁽¹⁾ of $23.11/boe for the first nine months of 2019.
• Operating income profit margin⁽¹⁾ of 56% was generated in the first nine months of 2019 compared to 56% in the first nine months of 2018, even with significantly lower realized light oil, natural gas and NGL prices received over the same respective periods.
• The Company has improved its net debt position by 12% over the past year, to $58.1 million at September 30, 2019 compared to $66.0 million at September 30, 2018, despite significantly lower realized light oil, natural gas and NGL prices received during the period and while maintaining an active drilling program resulting in top tier production growth amongst light oil weighted peers.

Fourth Quarter 2019 Update

• The Company is on pace to meet its annual average production guidance while reducing its 2019 capital expenditure program by approximately 11 percent to $32 million (from $36 million).
• Current production based on field estimates is approximately 5,560 boe/d.
• Production growth per basic share is expected to be 8 – 10% year over year with capital spending approximating adjusted funds flow for the year.
• Continued improvement in capital efficiencies were driven by strong well results and lower drilling costs. InPlay recently drilled and completed a three well pad (1.0 mile horizontal lengths) in Pembina which delivered record setting total drilling days for Pembina (as low as 4.1 days/well) leading to average well costs of $1.8 million (drill, complete, equip and tie-in), a 25 percent reduction from $2.4 million spent on our last Pembina program.
• Operating income profit margins⁽¹⁾ are forecasted to remain in the 55 – 56% range for 2019 in light of volatile and lower commodity prices.

Q3 2019 Financial & Operations Overview 

InPlay’s capital program of $8.0 million for the third quarter of 2019 consisted of completing and bringing on production at the end of July two (2.0 net) ERH Cardium wells that were drilled in the second quarter of 2019. Two (0.3 net) non-operated ERH Cardium wells were drilled and completed and were placed on production in September, and one (0.2 net) non-operated ERH Nisku Pembina well was drilled and completed in the third quarter and placed on production early in the fourth quarter.  The two (2.0 net) Willesden Green 1.5 mile ERH wells that were drilled in June and brought on production in late July were among the top five producing Cardium oil wells in Alberta during the quarter with cumulative oil production of 28,876 bbls over the first 65 days and 26,171 bbls over 66 days respectively. Total average drilling, completion and equipping costs of $3.25 million amounted to our lowest realized costs to date. Given recent advances in drilling and completion efficiencies in the Pembina area, a portion of the Company’s capital program in the third quarter of 2019 was allocated to our Central Pembina Cardium assets.  The Company drilled three (3.0 net) one mile Pembina Cardium wells during the third quarter of 2019, setting industry pacesetting drill times of 4.2, 4.1 and 4.8 days respectively.  The first two of these wells were the fastest horizontal Pembina Cardium wells drilled to date.  More importantly, approximately $750,000 was spent per well on drilling operations, which was significantly lower than the Company’s internal expectations and budget. These wells were completed and brought on production in the third week of October 2019.

Production for the quarter of 5,080 boe/d (66% light oil and liquids) resulted in average production for the first nine months of 2019 of 5,000 boe/d (66% light oil and liquids). This results in ten percent production growth for the nine months ended 2019 over 2018.  With current production of 5,560 boe/d (field estimates) and three new Pembina wells in their initial clean-up phase, the Company is well positioned to meet its 2019 annual production guidance of 5,000 – 5,200 boe/d (67% - 70% light oil and liquids). 

Reduced commodity prices weighed on financial results in the third quarter of 2019.  Oil prices were significantly lower over the third quarter with WTI prices averaging $56.45 USD/bbl, compared to $69.46 USD/bbl for the third quarter of 2018. Natural gas and NGL prices were also significantly lower over the third quarter with natural gas AECO daily index prices averaging $0.82 CDN/mcf compared to $1.07 CDN/mcf for the third quarter of 2018. Natural Gas Liquids prices currently are at multi-year lows as the Company’s realized NGL prices averaged $14.60 CDN/bbl in the third quarter of 2019 compared to $42.18 CDN/bbl over the same respective period in 2018 following continued reduced propane and butane pricing.  Offsetting the weakness in commodity prices is a 14% reduction in operating costs ($13.47/boe for the third quarter of 2019 compared to $15.62/boe in the third quarter of 2018). AFF for the third quarter of 2019 decreased to $6.9 million ($0.10 per basic share) compared to $10.0 million ($0.15 per basic share) for the third quarter of 2018 following the reduced commodity prices over the respective periods. To put things in perspective, had third quarter Q3 2019 realized prices remained the same as third quarter 2018 prices, AFF for the quarter would have been approximately $12.0 million ($0.18 per basic share), 73% higher than the $6.9 million realized in the third quarter of 2019.

Outlook

InPlay continues to outperform operationally with production from our drilling results to date exceeding our internal forecasted type curves. Given the strong results achieved year to date, the Company is on pace to achieve its annual average production guidance without drilling any additional wells. Accordingly, InPlay does not plan to drill any additional wells in 2019 thereby reducing its annual capital budget by 11% to $32 million (from $36 million).

The three 100% Pembina wells which were placed on production the third week of October are currently meeting expectations and are still in an early clean up stage.  Over the first seventeen days of production they are averaging 183 boed (96% light oil) per well.  More importantly are the capital efficiencies being achieved at Pembina as we transferred our refined completion operations from Willesden Green and are also utilizing fundamentally refined changes in drilling and equipping practices in Pembina.  This has resulted in costs to drill, complete, equip and tie-in these wells of approximately $1.8 million per well compared to the $2.4 million we previously spent on a drilling operation in Pembina two years ago.  InPlay believes the encouraging initial production results combined with the 25% reduction in capital costs makes Pembina development economically competitive with its industry leading Willesden Green economics.
       
The Company has achieved its exit production guidance of 5,500 – 5,700 boe/d (67 - 70% light oil and liquids) early as current production, based on field estimates, is approximately 5,560 boe/d (66% light oil and liquids).

InPlay now plans to drill 8.2 net horizontal wells in 2019 compared to the 9.0 – 10.0 net horizontal wells originally forecasted.  This results in an 11% reduction in total forecasted 2019 capital expenditures to approximately $32 million compared to our previous forecast of $36 million and production is anticipated to be in the lower half of our annual average production guidance of 5,000 – 5,200 boe/d (66% - 70% light oil and liquids) generating annual average production growth of between 8% - 10%.  This program is forecast to result in 2019 AFF of $31 - $34 million in line with total capital expenditures.  These results are anticipated to result in top tier organic light oil and liquids growth among our light oil peers for 2019.

Volatility in commodity prices continues into the fourth quarter of 2019 with forward WTI prices fluctuating between US$54.00/bbl and US$57.00/bbl with a strong improvement in AECO pricing ranging between $2.25 - $3.00/Mcf.  Edmonton light sweet differentials had returned to historically normal levels over the first nine months of 2019 and started the fourth quarter between a $4.00 - $4.50 USD/bbl discount to WTI but has currently increased to over an $8.00 USD/bbl discount to WTI for December of 2019 with the current shut-in of the Keystone XL pipeline.  InPlay continues to forecast depressed NGL pricing for the remainder of 2019, however we expect to see improved prices in the new year.   

InPlay’s strategy is to leverage management’s strong technical and operational capabilities to deliver top tier production growth, capital efficiencies and returns relative to our light oil peers.  We are focused on running a sustainable junior oil company with a long term view to ensure we maintain a strong financial position during volatile commodity prices and during periods with limited access to capital.  InPlay has reacted to these market factors as we see widening differentials into year-end by reducing development capital while still providing 8 – 10% production growth over 2018.  Our financial and operational flexibility will allow us to react quickly and expand activity as market factors improve.         

We thank our employees and directors for their ongoing commitment and dedication and we thank all of our shareholders for their continued interest and support.  We are excited about the strong operational results we have achieved to date and will continue to adhere to our prudent strategy when facing volatile commodity pricing.  We look forward to issuing our 2020 capital budget in January 2020 which we expect will initially, similar to 2019, approximate AFF based on future commodity pricing at that time.