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NuVista Energy Third Quarter 2020 Results, 2021 Guidance

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   |    Wednesday,November 11,2020

NuVista Energy Ltd. reported its Q3 2020 results and an update on future business plans.

NuVista continued its decisive action in the face of a challenging year for all of industry, through the progression of our COVID-19 safe operating plan, and the significant reduction of capital, operating, and G&A spending to ensure liquidity and balance sheet protection remain the top priority. We have continued to limit overall production to approximately 50,000 Boe/d for the present period in order to minimize natural production declines and to minimize the capital investment required to maintain flat production.  We have generated free adjusted funds flow which is right on track with our debt reduction targets.

2021 Guidance

We are living in uncertain times, and flexibility is required.  NuVista is committed to maintaining a balance between debt reduction and prudent growth. Guidance for 2021 includes a capital program of $180 – $200 million which will generate annual average production of 50,000 to 52,000 Boe/d. Assuming a flat WTI oil price of US$45/Bbl (1) for 2021 this plan is expected to be achieved within adjusted funds flow and maintain our path toward 10% compounded annual growth rate (“CAGR”) in production as per our previously communicated 5 year outlook. This trajectory exceeds our minimum volume commitments while generating 25% CAGR in adjusted funds flow per share. At oil prices above US$45/Bbl WTI, additional free adjusted funds flow will be allocated to the reduction of net debt.  Should prices retreat below US$40/Bbl WTI, we will reduce 2021 capital spending to approximately $140 million in order to maintain flat production of approximately 50,000 Boe/d while spending within adjusted funds flow at that price level.

During the first half of the year, production is expected to average approximately 50,000 Boe/d while capital expenditures will range from $95 – $110 million depending on commodity price strength. Spending will be directed to 14 drilled but uncompleted wells from 2020 and 8 additional new wells, all of which will be brought on-stream in the second quarter.

NuVista’s COVID-19 business continuity plan is in place and is operating very well.  All staff have work-from-home technology capability, and a backup plan is in place to ensure minimum crews for safe field and facility operations in the event of an escalation of COVID-19.

Financial and Operational Performance

  • Produced at a restricted daily average rate of 49,400 Boe/d, slightly less than the prior quarter, attesting to the strength and stability of our wells as no new capital activity was executed during the third quarter;
  • Announced the successful reduction of approximately 20% in our near-term minimum volume commitments (“MVCs”);
  • Achieved adjusted funds flow of $41.5 million ($0.18/share, basic);
  • Limited capital spending to $7.1 million, resulting in free adjusted funds flow of $34.4 million;
  • Reduced net debt by $34 million to $623 million, reducing bank drawings from $429 million to $393 million in line with our goal to reduce net debt by $50 – $60 million during the second half of 2020;
  • Successfully increased our total credit availability to $480 million by redetermining our credit facility with a capacity of $440 million, welcoming Export Development Canada (“EDC”) to our lending syndicate, and adding a $40 million EDC letter of credit support facility;
  • Realized operating expenses of $9.80/Boe; and
  • Achieved a net G&A expense of $0.65/Boe, a reduction of 25% from the prior period, due to cost reduction efforts, executive, board and staff salary reductions, and the benefit of the federal government CEWS program.

Safe and Steady Operational Execution

In response to the poor market conditions, NuVista continued to limit capital spending, with only minor infrastructure spending to complete projects already in flight. We have a total of 14 Montney wells that are drilled but uncompleted (“DUC”) and two successful Charlie Lake wells that are completed and awaiting tie-in.

In addition to the capital reductions, production was deliberately restricted over the quarter in anticipation of stronger prices in future quarters. We continued to manage production from the 15 wells that were completed in the first quarter to maintain a flat production profile at approximately 50,000 Boe/d. The quarter also included approximately 1,000 Boe/d of planned production downtime for a two week maintenance turnaround at the NuVista Wembley gas plant which occurs every four years. All producing wells are now online, and as expected we now have a modest production decline until the new Montney DUCs are expected to be completed and brought online early in the second quarter of 2021. With the further benefit of base production declines which are moderating to approximately 30% for 2021, our confidence is high in being able to manage production levels with minimal capital spending should oil prices remain low.

The construction of the new Pipestone North compressor station, ultimately capable of production capacity of 25,000 Boe/d, and the associated Veresen Hythe gas plant expansion, are progressing on schedule and under budget. They are anticipated to be ready for production well in advance of the commencement of production from the first 12-well Pipestone North pad early in the second quarter of 2021.

ESG – Environment, Social & Governance

We are pleased to announce that we have updated our website with our 2019 full year ESG results, with a number of areas progressing positively. We look forward to issuing a fully updated 2020 ESG report in mid 2021.

Focusing on the Balance Sheet

At September 30, 2020, NuVista had drawn $393 million on its credit facility. Additionally, NuVista has $220 million in senior unsecured notes that mature March 2, 2023, providing financial flexibility and certainty with a competitive fixed coupon and remaining 2.5 year term.   NuVista’s debt to adjusted funds flow ratio (trailing 12 months) was 3.5x at the end of the third quarter. This is temporarily above our target of 1.5x, hence the focus upon significant debt reduction via limiting capital spending and maximizing free adjusted funds flow.

We are pleased to announce that subsequent to the end of the third quarter, NuVista’s combined available credit was increased to $480 million, which is comprised of a recently completed semi-annual credit facility redetermination at $440 million and the previously announced separate $40 million unsecured letter of credit facility under EDC’s Account Performance Security Guarantee (“APSG”) program. Additionally, NuVista is pleased to welcome EDC to the credit facility syndicate. These combined facilities provide us more than sufficient liquidity to continue to execute our capital plans to maximize value. For the fourth quarter, our net debt is expected to further decrease by approximately $25-$30 million, resulting in year end estimated credit facility drawings of $370 to $380 million.

Significant Commodity Price Diversification and Risk Management

The onset of COVID-19 and the commodity price war of early 2020 have caused unprecedented reduction and volatility in the demand and prices for WTI oil, condensate, and natural gas. The worldwide and North American industry response has included massive cuts to capital programs, leading to significant destruction of future anticipated supply volumes. Worldwide production supply declines are expected to continue while demand recovers. As such, we anticipate that strip prices for WTI oil, condensate, and NYMEX natural gas will continue to improve with time.   NYMEX and AECO natural gas prices have already seen a significant increase during the fall of 2020, and this is expected to continue. WTI crude oil price recovery is more directly linked to post COVID-19 demand and as such continued volatility is expected in the near term.

NuVista is well hedged for the remainder of 2020 in accordance with our normal practices. In aggregate, approximately 70% of forecast condensate & oil production is protected for the remainder of 2020, utilizing 40% swaps at a WTI floor price of C$76.12/Bbl and a further 30% has protection by three way collars. Approximately 53% of forecasted natural gas production is hedged for the rest of 2020 at C$2.22/Mcf (hedged and exported volumes converted to an AECO equivalent price). All volume percentages refer to NuVista production net of royalty volumes. We note the positive revenue impact of the condensate & oil and natural gas hedges, both physical and financial, is approximately $11.6 million for the rest of the year using September 30, 2020 strip prices.

We have begun to hedge short term pricing cautiously, with 69% of first quarter 2021 oil & condensate production hedged utilizing swaps at a WTI floor price of C$54.57/Bbl.  Approximately 28% of forecast first quarter 2021 gas production is hedged utilizing a combination of swaps and costless collars with a NYMEX floor price of US$2.64/MMbtu and a ceiling price of US$3.11/MMbtu.  19% of summer 2021 gas prices are hedged utilizing a combination of swaps and costless collars with a NYMEX floor price of US$2.54/MMbtu and a ceiling price of US$2.62/MMbtu.

2020 Guidance

In light of the weak and volatile oil price environment, NuVista continues to significantly limit capital spending. Maintaining liquidity and balance sheet strength is our top priority during these unprecedented times. We remain on target to achieve free adjusted funds flow of $50 – $60 million during the second half of 2020, and this amount is being directed towards the reduction of debt. Capital spending guidance for 2020 has been rounded up slightly to the top of the $165 – $175 million guidance range, including fourth quarter spending guidance of $20 – $25 million. This has been done to accommodate the mobilization of one drilling rig and one frac crew late in the fourth quarter. The early mobilization of 2021 capital will reduce spring breakup risks for first quarter 2021 “stay flat” activities, and will ensure we secure premium crews and equipment.

Production guidance for 2020 is unchanged but tightened to 49,750 to 50,250 Boe/d, and production for the fourth quarter is expected in the range of 47,000 to 48,000 Boe/d.

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