Quarterly / Earnings Reports | First Quarter (1Q) Update

Journey Talks Q1 2019 Results, Duvernay JV Drilling Update

Share Print Bookmark    |    Tuesday,May 07,2019

 Journey Energy Inc. reported its Q1 2019 results.

Highlights:

• Achieved a production level of 9,330 boe/d in the first quarter. Liquids (oil and natural gas liquids) production accounted for 4,440 Boe/d or 48% of total production during the quarter;
• Generated $7.7 million of funds flow in the quarter of $0.20 per basic and $0.19 per diluted share;
• Realized commodity prices (before hedging) of $33.94/boe in the quarter with liquids production accounting for 77% of total sales revenues;
• Commenced the 2019 drilling program with the spudding of the 16-32-23-13-W4 well in Matziwin on May 2.

Duvernay Joint Venture Update

• Journey’s Duvernay joint venture partner Kiwetinohk Resources Corp. ("Kiwetinohk"), completed production test flow-back operations on the two Commitment Wells at 16-15-042-03W5 and 15-31-042-3W5 respectively, details of which were presented in our April 15, 2019 press release.  Kiwetinohk has tied in the first two Commitment wells to the Tidewater operated 1-4-42-3W5 Gilby Gas Plant, of which Journey owns a 43.3% working interest;
• Kiwetinohk is currently tie-ing in Option Well #1 11-9-44-3W5 well with production start-up anticipated in the second quarter;
• Kiwetinohk has completed the drilling of Option Well #2 at 13-02-042-04W5 with completion and testing operations expected to commence in the second quarter;
• Kiwetinohk has initiated drilling Option Well #3 at 16-12-044-04W5; and
• Kiwetinohk has licensed Option Well #4 at 12-07-042-03W5.

Operations

Journey achieved production of 9,330 boe/d (48% liquids) in the first quarter of 2019, representing an eight percent decrease from the 10,117 Boe/d (47% liquids) recorded in the first quarter of 2018. The majority of the volume decrease is attributed to natural declines in natural gas production. Because of abnormally low realized crude oil prices in the fourth quarter, and the corresponding impact on our balance sheet, Journey delayed the initiation of our 2019 capital program until May of 2019.  For 2019, Journey’s capital program is focused on opportunities with a higher oil weighting than our corporate average.

Journey was able to reduce net debt by approximately $6.5 million in the first quarter of 2019.  With this additional financial flexibility, Journey has initiated a three well program in Matziwin.  In 2018, Journey discovered an undrained lobe in East Matziwin, which will be further delineated in 2019.  The current three well program will be followed by another three wells in Matziwin and additional drilling in Skiff.  Capital throughout 2019 will be deployed in a careful and measured manner, and remain at or below funds flow.  All 2019 projects remain economically viable at today’s strip prices based upon risked type curves, which are considerably lower than the actual well results achieved in 2018 for similar wells.

Even though Journey did not drill any wells in the first quarter, our Duvernay joint venture partner, Kiwetinohk, was actively deploying capital on Journey’s land base to test the productivity of the Duvernay formation.   On April 15, 2019, Journey issued a press release highlighting encouraging results for the first two Commitment Wells.  Daily test rates for the final 48 hours of flow were:

Both of these wells share the same surface lease and have now been connected to the same multi-well oil battery.  The natural gas has been tied into Journey’s existing gas gathering system and will be processed at the Tidewater operated 1-4-42-3W5 Gilby Gas Plant, of which Journey owns a 43.3% working interest.  Journey anticipates these wells to be on-production within the next week.  Journey has a 3.75% convertible GORR on 100% of the production from these two Commitment Wells with an option to convert the GORR to a 29.17% working interest in each well after Kiwetinohk has recovered 58.33% payout of the capital from each well.

In addition to these Commitment wells, Kiwetinohk was also active in drilling, completing and testing the first two of five option wells. All Option Wells convert to a 29.17% working interest net to Journey after Kiwetinohk has recovered 33.33% of its capital spent in each Option Well.   Journey receives no GORR prior to conversion in the Options wells.

Kiwetinohk has re-entered, extended, completed and tested a short well at 11-9-44-3W5 drilled by a previous operator (Option Well #1).  Results from this well are typical for a well of this length.  We anticipate the well to be on production sometime in the second quarter of 2019. 

Kiwetinohk also drilled Option Well #2 at 13-02-042-04W5.  This well was spud on February 26^th with a rig release date of March 31^st.   Prior to drilling the horizontal portion of the well, the vertical portion of the well at 8-16-042-04W5 was logged through the Duvernay.  This well is 10 kilometers away from the 6-28-042-03W5 stratigraphic test well at the heel of the Commitment Wells.  The well logs confirmed the presence of a Duvernay zone in excess of 30 meters in thickness, and has significantly higher interpreted porosity than the 6-28 stratigraphic well.  The horizontal lateral length in the Duvernay is approximately 3,056 meters and Journey anticipates completion and flow-testing operations to commence in the second quarter.

Kiwetinohk spud Option Well #3 at 16-12-044-04W5 on April 26, 2019 which is adjacent to Option Well #1. Kiwetinohk has recently licensed Option Well #4 at 12-07-042-03W5.   Following the drilling and completion of Option Well #4, Kiwetinohk will have one remaining Option well to drill and complete to satisfy the earning obligations under the terms of our Joint Venture.  After the Option well phase, Journey and Kiwetinohk will hold working interests of 37.5% and 62.5%, respectively, in approximately 165 sections of contiguous joint venture lands.

Assuming Kiwetinohk completes the earning obligations under the Joint Venture prior to the end of 2019, Journey, and Kiwetinohk will then enter the early development phase of the lands over the next two years.  During this two year development phase, Journey anticipates receiving notices to drill on up to ten wells per year.  On an individual well basis Journey will have the option to elect to participate for its 37.5% working interest or automatically farm-out its working interest for a non-convertible, 5% GORR on 100% of production in the well.   This election is available on the twenty early development wells, and the election is specific to the wellbore with the balance of lands remaining at 37.5% Journey and 62.5% Kiwetinohk.

Financials

A significant element of stability returned to oil prices, which greatly assisted Journey in achieving funds flow of $7.7 million in the first quarter of 2019.  Realized oil prices went from $31.53/bbl in the fourth quarter to $57.90/bbl in the first quarter of 2019.  The extremely wide oil differentials in November and December came back into line in late December and continuing through the first quarter.  However, the challenging oil pricing environment took its toll on Journey’s planned capital program for the fourth quarter.  Journey took the unprecedented step of reducing its capital spending to minimal levels and as a result no new wells were drilled in the fourth quarter of 2018 or first quarter of 2019.   With no new drilling, production levels declined from 9,921 boe/d in the fourth quarter to 9,330 boe/d in the first quarter of 2019.

Realized commodity prices were 52% higher in the first quarter with oil increasing by 84%.  Natural gas prices increased by 4% and natural gas liquids increased by 3%.   Journey’s production mix was similar for both 2019 and 2018 with natural gas volumes accounting for 52% (53% in 2018) of total volumes while liquids volumes were 48% (47% in 2018).  Liquids (oil and NGL’s) revenues comprise 77% of total revenues for Journey.  Crude oil differentials ranged from over $19 USD/bbl in September, to $32 USD/bbl in November and then returned to $4–$5 USD/bbl during the first quarter of 2019.   These wide ranging differentials over the last four months of 2018 created uncertainty around Journey’s capital spending.  With the consistency in differentials that the industry has experienced in the first quarter of 2019, we resumed our capital spending in May.  

Cash operating expenses in the field (royalties, operating expenses, and transportation expenses) were $17.69/boe in the first quarter of 2019 as compared to $18.85/boe in the first quarter of 2018.  The average royalty rate improved from 13.8% in 2018 to 11.5% in 2019. 

Office related cash costs (general and administrative, and cash interest expense) were higher in 2019 at $5.0 million versus $4.5 million in 2018.  Almost all of this increase was attributable to higher interest expense due to the combination of 13% higher borrowings as well as an 11% increase in effective interest rates on Journey’s term debt and bank borrowings.   Journey’s term debt borrowings carry an interest rate of 7.65% per annum while the credit facility had an effective rate of 7.2%.

On a per share basis, funds flow was $0.20 per basic share and $0.19 per diluted share, which was 67% and 58% higher than the $0.12 per basic and diluted share, respectively, in the first quarter of 2018.  Journey recorded a net loss of $4.1 million or $0.10 per basic and diluted share in the first quarter of 2019 compared to a net loss of $9.1 million ($0.21 per basic and diluted share) in the same quarter of 2018.  Better commodity pricing, a lower cost structure and reduced hedging losses were the reasons for the reduction in the loss. 

The Company spent $960 thousand in total capital during the first quarter and used the excess funds flow over its capital spending to reduce debt.   Attributable to the limited spending, Journey exited the first quarter with net debt of $127.8 million which was 5% lower than at December 31, 2018.  The decrease was primarily driven the desire to repair the balance sheet.  The Company’s annual review of its bank credit facility is currently in progress and is anticipated to be complete by May 31.  The Company is currently drawn approximately $73 million on the existing $100 million credit facility and anticipates sufficient liquidity from the facility to accommodate our capital program throughout 2019.

Outlook

On May 2, Journey initiated our 2019 capital program with a three well program in Matziwin. Journey’s 2019 guidance is presented in the table below:

Journey’s 2019 forecasted funds flow is based upon the following assumed annual, average prices: WTI of $60/bbl USD; Company oil differentials of $5.50/bbl USD for oil from Edmonton light sweet prices; realized natural gas price of CDN$1.90/mcf CDN; and a foreign exchange rate of $0.75 US$/CDN$.

Journey’s President and CEO, Alex Verge, commented that "There are few companies within our peer group that share the same upside leverage to rising commodity prices that Journey has, and there are even fewer companies that have the optionality to tailor their investment in an emerging and exciting opportunity like the East Duvernay, to their capital availability while continuing to preserve significant upside in the long term commercial development. Over the course of 2019, we look forward to updating you on the results of the Duvernay wells as well as reporting on all other significant corporate developments."