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Journey Energy Second Quarter 2020 Results

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   |    Tuesday,August 04,2020

Q2 2020 Highlights:

• Achieved production of 7,808 boe/d in the second quarter. Liquids (oil and natural gas liquids) accounted for 3,278 Boe/d or 42% of total production during the quarter. Approximately 1,500 boe/d was shut-in on April 1 due to the severe oil price decline.
• In the first week of July all but 200 boe/d of non-operated production was successfully brought back on-line.
• The generating equipment for the 4.2 megawatt power project in the Countess area has been moved to its site and final installation work is in progress. The projected start-up date is September 2020.
• Achieved significant reductions in controllable costs in both the field and head office. Field operating expenses decreased 22% in the second quarter of 2020 to $11.34 per boe from $14.45/boe in the second quarter of 2019. G&A expenses were 67% lower at $0.66 per boe compared to $1.98/boe in 2019 as numerous cost-cutting measures were implemented.
• Journey completed its third extension to its forbearance agreement with its syndicate of banks on July 31. The current term expires August 7 and Journey is working with its banks on next steps before this expiry. Should the forbearance not be extended, all borrowings would become due and payable.

Operations

Journey achieved production of 7,808 boe/d (42% liquids) in the second quarter of 2020. In mid-March of this year, with the onset of the COVID-19 pandemic and systematic shutdowns of global economies, the world oil price experienced a substantial decline. WTI oil prices declined below USD $20/bbl making several of Journey’s properties uneconomic to operate. Consequently, Journey took the prudent and immediate action to shut-in approximately 1,500 boe/d (73% oil and NGL) of its production effective the first week of April. Journey has continued to maintain production in properties with a high natural gas weighting, resulting in a decrease in liquid weighting for the quarter. In the first week of July all but 200 boe/d of non-operated production was successfully brought back on-line, restoring production to current levels of 8,400 boe/d (46% liquids).

The shut in of these higher cost properties, resulted in a corresponding decrease in per unit operating expenses.

Capital expenditures were reduced to maintenance capital where deemed necessary as well as the completion of its power generation project. As a result, the Company spent $4.3 million for the first half of 2020. Capital expenditures in the second half of the year will be primarily focused on the completion of the power project. This project is due to start up in September of 2020. One key feature of the power project as designed is the ease in which the project can be expanded to over 6 Megawatts from the current level of 4.2 Megawatts, with addition of one additional power generation unit. A decision to expand this project will not be made until early 2021 based upon capital availability.

Journey has a development drilling program ready for Skiff, Cherhill and Crystal. The horizontal development program in south Skiff follows up the three wells drilled there in 2018. During the third quarter of 2019, the central well of the three well pattern was converted to a water injection well, and the offsetting producers have now begun to respond favorably to the injection. Due to the high level of volatility experienced with commodity prices, Journey will continue to monitor broader market forces and adjust its capital plans on an ongoing basis. Journey’s low decline and predictable asset base will help the company maintain our business as we navigate through these difficult days.

The Duvernay drilling program has advanced to the point where Journey now has significant production history on the three wells drilled by its joint venture partner, Kiwetinohk Resources Corporation (“KRC”). These wells rank in the top tier of all wells drilled to date in the East shale Duvernay basin. The success to date in this play highlights the significant development potential of the Duvernay land block. In this play in particular, the recent announcement by the Alberta government, regarding the extension of 2020 expiring mineral leases for an additional year, will provide substantial benefits to Journey allowing us to preserve the future opportunity value of this world class resource.

The joint venture currently controls approximately 112 gross sections where Journey has a working interest of 37.5% (44 net sections). Under the assumption that KRC will not complete all earning by late August 2020, Journey will retain its 100% interest in 31 currently unearned sections plus an additional 10 gross sections resulting in Journey controlling 85 net sections or approximately 53% of the total acreage within the total Duvernay land block.

Financials

The COVID-19 pandemic continued to wreak havoc on world economies and in turn, oil prices plummeted as demand was greatly reduced. Journey’s realized oil prices during the second quarter were within a very wide range from the $7.25/bbl in April to $46.02/bbl in June. Natural gas prices were relatively stable over the quarter with Journey’s realized prices averaging $1.92/mcf. Natural gas prices were within a tight range of $1.81/mcf in April to $1.97/mcf in June. Corporately, realized average commodity prices were 52% lower during the second quarter of 2020 as compared to the same quarter in 2019. During the quarter, natural gas prices increased by 71%, while oil and natural gas liquids decreased by 64% and 57% respectively from those of the same quarter in 2019. Journey’s production mix shifted more towards natural gas as uneconomic oil production was shut-in. During the second quarter as approximately 1,500 boe/d (approximately 72% liquids) was shut-in in early April due to the deeply discounted, uneconomic oil prices. As a result, natural gas volumes became even more dominant at 58% of total volumes produced while oil dropped to 34% of total volumes. On the revenue side, liquids (oil and NGL’s) comprised 57% of total revenues for the second quarter while for the same quarter in 2019 they were 89%.   Journey’s strong, oil-hedge position yielded a realized gain of $4.4 million during the quarter, bringing the year-to-date amount to $6.7 million. Benchmark oil prices dropped below Journey’s hedged floor prices and caused all of the oil hedges to go well into the money. The Company achieved excellent cost control during the quarter in both the field and head office. Field operating expenses (royalties, operating expenses, and transportation expenses) were 32% lower at $12.69/boe during the second quarter of 2020 as compared to $18.71/boe in the second quarter of 2019. During this extremely challenging quarter, Journey ensured that all controllable costs were minimized, while ensuring it continued operating its wells in a very safe manner. General and administrative costs were 72% lower in the second quarter at $471 thousand as compared to $1,669 thousand in the second quarter of 2019. During the second quarter, Journey reduced compensation levels to its staff by approximately 10% on top of the already reduced work week implemented in 2019; temporarily furloughed approximately one-quarter of our workforce; obtained partial rent deferral for its head office lease; and applied for benefits under the Canadian Emergency Wage Subsidy program. On a per boe basis, Journey realized G&A of $0.66 for the second quarter of 2020, or 67% lower than the $1.98 realized in 2019.

Finance expense related to borrowings increased by 19% to $2.8 million in 2020 from $2.4 million in 2019 due mainly to increased borrowing rates. While average, interest-bearing debt decreased by 5% in the second quarter of 2020 compared to 2019, the increased finance costs in 2020 were the result of higher interest rates on both the syndicated bank and term debt, as well as the forbearance fees charged by the syndicate of banks. Despite the costs savings achieved in the field and in the head office, the very low oil prices took its toll on corporate earnings. The net loss for the second quarter was $15.5 million or $0.36 per share (basic and diluted). For the year to date the net loss was $80.9 million ($1.88 per basic and diluted share), of which $60.9 million was attributable to asset impairments taken in the first quarter.

The Company spent $1.0 million in its capital program during the second quarter with almost all of this spending directed to the ongoing work of Journey’s power generation project. Journey exited the second quarter with net debt of $126.6 million. As per Journey’s previous press releases, the Company remains in forbearance on its bank borrowings with its syndicate of lenders. During the forbearance periods, Journey will continue to work with its lenders for an amicable solution to deal with its outstanding borrowings. The current forbearance will expire on August 7 and Journey will provide a new update at that time.

Outlook

At the beginning of April and in response to the rapid decline in oil prices, Journey shut in higher operating cost production and also implemented a number of cost-cutting measures in both the field and in its head office. The majority of this production has been brought back on-line except for an approximately 200 boe/d of non-operated production. All non-essential services were curtailed during the second quarter while preserving the safe operation of Journey wells and facilities. Capital spending has been, and will be restricted to the completion of the power generation project, which is set to begin operations during the third quarter. Journey has refrained from providing operational and financial guidance due to the high degree of volatility in the industry. At current strip prices, Journey expects that the Company can remain Funds Flow positive.

On behalf of Journey’s management team and directors, we would like to thank our shareholders for their continued support through these unprecedented times. We would like to thank all of our stakeholders who are helping the company bridge between today and a better day tomorrow.