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Journey Energy Third Quarter 2020 Results

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   |    Wednesday,November 11,2020

Journey Energy Inc. reported its Q2 2020 results.

Highlights:

• Achieved production of 8,311 boe/d in the third quarter. Liquids (oil and natural gas liquids) accounted for 3,823 Boe/d or 46% of total production during the quarter. All of the 1,500 boe/d of production that was shut-in at the beginning of the second quarter, was brought back on-line at various times during the third quarter.
• Journey successfully commissioned its 4.2 megawatt power generation project in Countess on September 29.
• On October 30, Journey successfully completed the restructuring of its debt and ended the debt security forbearance with its banking syndicate. The Company’s $75 million syndicated bank debt was eliminated and replaced with $43.3 million of term debt obtained from its largest shareholder.
• As of November 2, Journey had entered into purchase and sale agreements to sell assets (including the power project along with associated natural gas production) for proceeds of $15 million (before closing adjustments). The disposition is currently anticipated to close on or before December 15, 2020.
• The proceeds from the asset sales will be used to retire a portion of the debt incurred to purchase the syndicated bank debt. The combination of the asset sales and debt restructuring will save the company approximately $4 million per year in interest costs.
• Achieved significant reductions in controllable costs in both the field and head office. Field operating expenses decreased 10% in the third quarter of 2020 to $12.42 per boe from $13.75/boe in the third quarter of 2019. G&A expenses were 6% lower at $1.54 per boe compared to $1.63/boe in 2019 as numerous cost-cutting measures were implemented.
• From July to October 2020, Journey took steps to right-size its work force, in order to improve financial sustainability moving forward. These initiatives are forecast to reduce corporate G&A expenses by approximately $1.2 million per year, although the full effect of this will not be fully realized until the second quarter of 2021.
• Journey renegotiated its head office lease resulting in approximately one-third of the space being given back to the landlord as well as a base rental rate reduction. The new leasing arrangement is effective November 1, 2020 and this initiative is anticipated to save the Company approximately $1.5 million per year.

Debt Restructuring

Journey’s most significant achievements for 2020 were consummated subsequent to the quarter end. After lengthy negotiations spanning six months, on October 30 Journey entered into a three-way agreement between the Company, its syndicate of lenders, and its term debt provider, Alberta Investment Management Corporation (“AIMCo“). The Company obtained a series of loans totaling $38 million, which was used to repay $75 million of outstanding bank debt. In addition to the initial $38 million payment to the banking syndicate, Journey will also be contingently liable to pay the banking syndicate a maximum of $5.75 million over a three-year period with any potential payments tied to annual average, daily, mixed, sweet, blended oil prices at the Edmonton, Alberta hub (“MSW“) as reported by Natural Resources Canada. The maximum payment for 2021 is capped at $750 thousand; for 2022 the cap is $2.25 million and for 2023 there is no maximum except for the overall, aggregate maximum of $5.75 million. In all three years, there are graduated payments between zero and the capped maximum based on average MSW prices for the respective years.

AIMCo’s $38 million secured term debt facility has been provided in three tranches. The first tranche is for a principal amount of $15 million, bears interest at 11.5% per annum, and matures on December 31, 2020. The second tranche is for a principal amount of $10 million, matures on October 31, 2021, and bears interest at the rate of 9.0% per annum. The third tranche is for a principal amount of $13 million, matures October 31, 2024, and bears interest at 9.0% for the first year; 9.85% for the second year; and 12.95% for years three and four. In connection with the term debt advances, Journey issued 5.0 million share-purchase warrants to AIMCo with each warrant entitling AIMCo to purchase one common share of Journey at an exercise price of $0.16 per warrant, reflecting a 25% premium to the ten-day weighted average trading price of the common shares of the Company leading up to October 30. These warrants will have a term of four years. In addition, Journey has provided AIMCo with a commitment fee of $5.35 million. This fee is payable on October 30, 2024 and bears interest at zero if MSW prices are at or below $65/bbl; 5.0% per annum if MSW prices are between $65/bbl and $80/bbl; and 10.0% per annum if MSW prices exceed $80/bbl.

This restructuring is a milestone for Journey and represents the culmination of six months’ work from all parties. Journey emerged from a state of forbearance and now has all of our borrowings held by its largest shareholder, AIMCo. This provides Journey with the much needed credit stability and financial flexibility needed to control its own destiny.

Operations

Journey achieved production of 8,311 boe/d (46% liquids) in the third quarter of 2020. In mid-March of this year, with the onset of the COVID-19 pandemic and systematic shutdowns of global economies, world oil prices experienced a severe decline. WTI oil prices declined below USD $20/bbl making several of Journey’s oil 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 restarted the majority of shut in production early in the third quarter and therefore this quarter is more fully representative of the company’s production capability.

Journey’s third quarter capital expenditures were limited to maintenance capital where deemed necessary, as well as the completion and commissioning of our power generation project. As a result, the Company spent $1.9 million during the third quarter of 2020. The power project commenced operations in late September. 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 maximum capacity of 4.2 megawatts, with the addition of one additional power generation unit. The flexibility associated with the power project and associated gas production proved attractive to third party power generation companies. As a result, Journey was able to take advantage of the near term recovery in natural gas prices and monetize the power project providing Journey with a significant portion of the capital that was required to purchase our syndicated bank debt. Although Journey has entered into a binding agreement to sell the power project, it has also identified at least two additional locations where its expertise can be utilized to reproduce this type of project in the future.

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 has significant production history for the three wells drilled by its joint venture partner, Kiwetinohk Resources Corp. (“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. For 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, including allowing us to preserve the future opportunity value of this world class resource. The joint venture currently controls approximately 116 gross sections where Journey has a working interest of 37.5% (43.5 net sections). Since KRC did not fully complete all possible earning during the option phase of the farm-out agreement, which ended in late August 2020, Journey retained its 100% interest in 31 unearned sections. This, plus an additional 6 gross sections Journey previously acquired, results in the Company controlling 80.5 net sections or approximately 53% of the total acreage within the total Duvernay land block.

Financial

While oil prices recovered somewhat in the third quarter, the COVID-19 pandemic continued to wreak havoc on world economies and in turn, the oil and gas industry as worldwide consumption continued to be challenged. Journey’s realized oil prices during the third quarter averaged $42.36/bbl as compared to $24.22/bbl in the second quarter. Natural gas prices were relatively stable over the quarter with Journey’s realized prices averaging $2.08/mcf. Journey’s average realized commodity prices were 19% lower during the third quarter of 2020 as compared to the same quarter in 2019. More specifically, the overall 19% decline was comprised of: natural gas prices increasing by 148%; oil prices decreased by 30%; and NGL prices increased 5% from those realized during the same quarter in 2019. Journey’s production mix shifted more towards natural gas as the uneconomic, oil production that was shut-in at the beginning of the second quarter was brought back on-line in stages during the third quarter and therefore the full impact was not realized during the quarter. Natural gas volumes accounted for 54% (2019 – 51%) of total volumes produced in the third quarter while oil production dropped to 38% in 2020 from 43% in 2019. On the revenue side, liquids (oil and NGL’s) comprised 72% of total revenues for the third quarter while for the same quarter in 2019 they were 92%. Journey’s oil-hedge position yielded a realized gain of $0.8 million during the third quarter, bringing the year-to-date amount to $7.5 million. The Company continued to pursue cost control initiatives during the quarter in both the field and head office. Field operating expenses (royalties, operating expenses, and transportation expenses) were 19% lower at $14.82/boe during the third quarter of 2020 as compared to $18.29/boe in the third quarter of 2019. During this extremely challenging quarter, Journey ensured that all controllable costs were minimized, while continuing to operate its wells in a very safe manner. General and administrative costs were 17% lower in the third quarter at $1,179 thousand as compared to $1,418 thousand in the third quarter of 2019. The G&A cost reduction initiatives implemented in the second quarter had a direct bearing on this result. 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 its 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 $1.54 for the third quarter of 2020, or 6% lower than the $1.63 realized in 2019.

Finance expense related to borrowings increased by 16% to $2.6 million in 2020 from $2.3 million in 2019 While average, interest-bearing debt decreased by 3% in the third 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 continued to take their toll on corporate earnings. The net loss for the third quarter was $8.0 million or $0.19 per share (basic and diluted). For the year to date the net loss was $89.0 million ($2.06 per basic and diluted share), of which $60.9 million was attributable to asset impairments taken in the first quarter and resulting from the severe decline in oil prices due to the pandemic.

The Company spent $1.9 million in its capital program during the third quarter with almost all of this spending directed to the ongoing work of Journey’s power generation project. The power project was commissioned on September 29 and is now the subject of a sale that is expected to close on November 30.  Journey exited the third quarter with net debt of $124.6 million, which was virtually the same as at December 31, 2019, but lower than at the $126.6 million at the end of the second quarter. This number will be significantly lower by year-end taking into account the debt restructuring and asset sales mentioned previously.

Outlook

In addition to the successful debt restructuring, Journey made significant strides to position itself for a more promising future. Shortly after the debt restructuring, the Company was successful in monetizing its power generation asset. On November 2 the Company executed a purchase and sale agreement for its power generation asset in Countess, along with the associated producing assets that provide the fuel for the generators. In addition, Journey is proceeding to close another agreement to sell a non-core asset in Telforforville. Production from all assets being sold is approximately 8,900 mcf/d and 90 bbl/d of liquids (oil and natural gas liquids). Both sales include 455 gross (439 net) wells, representing almost one-third of Journey’s total net wellbores. In addition, the assets have associated asset retirement obligations of approximately $30 million (uninflated and undiscounted). Closings for both sales are expected to occur on or before December 15, 2020.

The disruptions and challenges from the COVID-19 pandemic, deferral of capital spending (except for the power generation project), the work-from-home protocols, and the asset sales have afforded Journey the opportunity to focus on cost efficiencies. The Company has been active in sharpening its focus on reducing its cost structure to be more representative of the size of the business moving forward. Current staffing levels have been reduced by ten employees since April of 2020, and this is expected to reduce corporate general and administrative costs by approximately $1.2 million per year. The full impact of these savings will be felt after the first quarter of 2021. The Company has also worked closely with its landlord to renegotiate the head office lease. In addition to a reduction in rent the landlord agreed to take back approximately one-third of current office space. This new agreement is effective on November 1, 2020 and will allow Journey to realize approximately $5 million in overall savings (for both base rent and operating cost recoveries) between November 1, 2020 and the expiry of the original lease in February of 2024. These cost reduction initiatives, along with a reduction in ongoing interest costs, largely offsets the reduction in cash flow from the asset sales.

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