Quarterly / Earnings Reports | Second Quarter (2Q) Update

Paramount Resources Talks Q2 Well IPs in the Duvernay, Montney

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   |    Thursday,August 08,2019

Paramount Resources has detailed its Q2 2019 results.

Highlights:

• Sales volumes averaged 81,793 Boe/d (37 percent liquids) in the second quarter of 2019.
  
  
• Paramount's second quarter netback was $82.1 million compared to $115.7 million in the first quarter of 2019, primarily as a result of weaker natural gas and NGLs prices. Second quarter 2019 operating costs of $86.8 million ($11.66 per Boe) were lower than first quarter operating costs of $90.4 million ($12.35 per Boe). 
  
  
• The liquids-rich Karr and Wapiti Montney developments accounted for $46.1 million (56 percent) of the Company's total netback in the second quarter. 
  
  
• Cash from operating activities was $48.1 million in the second quarter of 2019. Adjusted funds flow was $54.2 million ($0.41 per share). 
  
  
• The Company commenced production from the Wapiti 9-3 pad on an intermittent basis in May and June 2019 as the start-up and commissioning of the new third-party Wapiti gas plant progressed. Estimated Wapiti sales volumes for July averaged approximately 6,300 Boe/d, including approximately 10.5 MMcf/d of natural gas and 4,500 Bbl/d of liquids, as runtime at the plant increased. 
  
  
• The five wells started-up on the Wapiti 9-3 pad that have produced for at least 60 days had an average wellhead CGR of 376 Bbl/MMcf over their first 60 producing days, significantly exceeding internal type curves.⁽¹⁾ 
  
  
• On August 1, 2019, Paramount closed the sale of its Karr 6-18 natural gas facility (the ʺ6-18 Facilityʺ) for total cash proceeds of approximately $330 million (the ʺMidstream Transactionʺ). The cash proceeds included the reimbursement of approximately $75 million of capital expenditures related to the expansion of the 6-18 Facility (ʺD2ʺ), which is scheduled to be commissioned in the second half of 2020. As a consequence of the Midstream Transaction, operating costs at Karr will increase in the second half of 2019 due to incremental processing fees.
  
  
• Paramount's June 30, 2019 long-term debt balance, pro forma the closing of the Midstream Transaction, was approximately $585 million. The Company has a $1.5 billion bank credit facility that matures in November 2022.
  
  
• Paramount's sales volumes averaged 81,546 Boe/d in the first half of 2019. Sales volumes are expected to increase in the second half of the year at Wapiti, Karr and Kaybob South Duvernay, with fourth quarter sales volumes expected to average between 85,000 Boe/d and 90,000 Boe/d. The Company is reaffirming its annual average production guidance of between 81,000 Boe/d and 85,000 Boe/d.
  
  
• Base capital spending totaled $86.0 million for the second quarter and $154.6 million for the first half of 2019, primarily related to the Wapiti, Karr and Kaybob South Duvernay developments. The Company continues to expect 2019 annual spending to be in line with its $350 million base capital budget

Ops Review / Well Results

Paramount's sales volumes averaged 81,793 Boe/d in the second quarter of 2019. Cash from operating activities was $48.1 million compared to $88.5 million in the first quarter of 2019. Second quarter revenues were reduced by $45.4 million due to weaker AECO and US natural gas prices. NGLs prices were also lower in the second quarter of 2019, resulting in a 57 percent decrease in NGLs revenue despite higher sales volumes. Second quarter adjusted funds flow was $54.2 million($0.41 per share) compared to $100.5 million ($0.77 per share) in the first quarter of 2019. Operating costs were $86.8 million ($11.66 per Boe) in the second quarter of 2019, four percent lower than first quarter operating costs of $90.4 million ($12.35 per Boe).

In response to seasonally weak natural gas prices, the Company temporarily shut-in approximately 600 Boe/d of dry gas production in the Kaybob Region in June 2019. Paramount permanently shut-in its Hawkeye property in late-2018 and its Zama property in the first half of 2019 due to challenging economics. In total, the Company has shut-in approximately 2,100 Boe/d of uneconomic production since the fourth quarter of 2018 as it focuses on operating profitably and reducing operating costs. 

Base capital spending totaled $86.0 million in the second quarter of 2019, primarily related to drilling and completion programs at Wapiti and Karr in the Grande Prairie Region and at South Duvernay in the Kaybob Region. The Company also incurred $11.0 million of capital spending in the second quarter related to the D2 expansion project at the 6-18 Facility, which was reimbursed on closing of the Midstream Transaction. Second quarter 2019 field activities also included $2.0 million of asset retirement obligation settlements. Paramount plans to increase production, including a higher proportion of liquids, in the second half of the year as new liquids-rich Montneyand Duvernay wells from the 2019 capital program are brought-on production.

GRANDE PRAIRIE REGION

Karr

Second quarter 2019 sales volumes at Karr averaged 21,782 Boe/d compared to 24,786 Boe/d in the first quarter of 2019. The decrease in the netback at Karr in the second quarter was primarily caused by lower natural gas prices and lower production.

Production levels at Karr in the second quarter were impacted by natural declines and the temporary shut-in of certain wells due to offsetting completion activities at the 4-24 pad and drilling operations at the 1-19 pad. The Company scheduled completion operations for the 5 (5.0 net) Montney wells on the 4-24 pad after spring breakup to capture cost savings from operating in warmer conditions. The 4-24 pad is scheduled to start-up in the third quarter.

Paramount is drilling 3 (3.0 net) new Montney wells on the 1-19 pad, which are scheduled to be completed in the third quarter and onstream in the fourth quarter of 2019.  Karr area sales volumes are expected to increase through the second half of the year as new production is added from these two new pads. Production levels in July were impacted by a previously scheduled 10-day turnaround at the 6-18 Facility.

The Company drilled its initial Lower Montney well (the 00/4-25 well in the table below) in 2018 and two additional wells in the current year development program are also targeting the Lower Montney. The 4-24 and 1-19 pads each include one Lower Montney well, and these wells are scheduled to be brought-on production in the third and fourth quarters, respectively. To date, no Lower Montney locations have been included in the reserves recognized for Karr. The results of these three wells will be incorporated in Paramount's reserves evaluations at the end of the year and will be used to determine the Company's inventory of potential Lower Montney drilling locations.

Producing Montney wells at Karr continue to exhibit strong production rates and condensate yields. The following table summarizes the performance of the five wells on the 1-2 pad brought on-stream in the third quarter of 2018 and the 27 wells drilled in the 2016/2017 Karr capital program:

Wapiti

Sales volumes at Wapiti averaged 3,903 Boe/d in the second quarter of 2019, including 5.5 MMcf/d of natural gas and 2,982 Bbl/d of liquids, and generated a netback of $9.2 million ($25.94 per Boe). Paramount began flowing test volumes from up to nine of the 11 (11.0 net) new wells on the 9-3 pad in May 2019 as part of the commissioning program at the new third-party Wapiti natural gas processing plant (the ʺWapiti Plantʺ). The start-up of the two remaining wells were intentionally delayed due to completion activities at Paramount's offsetting 5-3 pad. Production was intermittent as the commissioning program progressed, and fuel gas and shrink losses were higher through the start-up period. Shrink losses are expected to diminish as operations at the Wapiti Plant continue to stabilize and throughput increases.

Estimated sales volumes at Wapiti in July averaged approximately 6,300 Boe/d, including approximately 10.5 MMcf/d of natural gas and 4,500 Bbl/d of liquids, as production from the 9-3 pad increased due to higher runtime at the Wapiti Plant. Wells at Wapiti continue to be produced at restricted rates.

The wells on the 9-3 pad are the Company's first Wapiti wells fracked with the same completion design as utilized at Karr. This 11-well pad consists of a six-well block drilled to the south and a five-well block drilled to the north. The north and south blocks are specifically designed to test landing zone and spacing patterns. Initial well results have indicated significantly higher CGR's than third-party offsetting wells which were completed with a different completion design. The five wells started-up on the Wapiti 9-3 pad that have produced for at least 60 days had an average wellhead CGR of 376 Bbl/MMcf over their first 60 producing days.⁽¹⁾

Second quarter 2019 capital spending at Wapiti was $21.3 million, focused on completion operations for 12 (12.0 net) wells on the new 5-3 pad, which were drilled in the first quarter of 2019. All 12 wells are scheduled to be completed by the end of the third quarter. This pad is scheduled to be equipped and brought-on production in the fourth quarter.      

KAYBOB REGION

Kaybob Region sales volumes averaged 37,127 Boe/d (31 percent liquids) in the second quarter of 2019 compared to 37,143 Boe/d (32 percent liquids) in the first quarter of the year. Capital spending totaled $29.2 million in the second quarter, with development activities focused on well completions and tie-ins of new Duvernay and Montney wells.

Kaybob South Duvernay

At Kaybob South Duvernay, 5 (2.5 net) new wells on the 2-28 pad were drilled between September 2018 and January 2019 and completed in the spring of 2019. These wells were tied-in and brought-on production in late-June 2019. These five wells averaged 1,104 Boe/d of production per well over their first 30 days of production, with an average wellhead CGR of 179 Bbl/MMcf.⁽²⁾

Kaybob Smoky Duvernay

In November 2018, the Company brought 4 (4.0 net) new wells on production on the 10-35 pad at Kaybob Smoky Duvernay through Paramount's Smoky 06-16 gas plant. The Company is continuing to monitor the performance of these wells and optimize processes at the 06-16 plant as a full field development strategy is evaluated for this play. These wells have exceeded previous type curve estimates for this play in this area. The following table summarizes the performance of the four wells on the 10-35 pad:

Kaybob Montney

At the Montney Oil development, 4 (4.0 net) new wells have been brought-on production in 2019. The Kaybob Region drilling program for 2019 also included an initial appraisal well at the Ante Creek Montney property. This well has been completed and is scheduled to be brought-on production in the third quarter.   

CENTRAL ALBERTA AND OTHER REGION

Central Alberta and Other Region sales volumes averaged 18,862 Boe/d in the second quarter of 2019 compared to 18,623 Boe/d in the first quarter of 2019. The Company participated in drilling operations for one (0.5 net) well at Birch in northeast British Columbia, which was completed and brought-on production in the second quarter of 2019.

At the Zama property in northern Alberta, the Company took advantage of dry weather conditions and completed the full shut-down of area production by the end of June 2019, three months ahead of schedule. The closure program will continue through the balance of the year to permanently abandon over 1,000 kilometers of pipelines and suspend all facilities. The closure of Zama is anticipated to cost $13.4 million and will result in a material reduction in the Company's future operating expenses.

Greenhouse Gas Reduction Initiative

As part of Paramount's commitment to responsible energy development, the Company is participating in Alberta's Carbon Competitiveness Incentive Program and investing in new equipment to reduce the emission of greenhouse gases (ʺGHGʺ) from its operations.

Paramount has recently completed a project in the Kaybob and Central Alberta and Other Regions, under budget and ahead of schedule, which included the replacement of approximately 1,700 high-bleed controllers with modern low-bleed units at a total cost of $3.0 million. These low-bleed controllers are expected to eliminate approximately 120,000 tonnes of GHG emissions annually. The project is anticipated to generate approximately $9.0 million in GHG credits through 2022.

Planning has also commenced for upgrades to the Company's remaining high-bleed controllers and other equipment to reduce emissions of GHGs, including methane, carbon dioxide, and nitrogen oxides.

Corporate

Paramount has 16,000 Bbl/d of liquids hedged for the remainder of 2019 at an average price of $78.05/Bbl and 4,000 Bbl/d hedged for 2020 at an average price of $80.11/Bbl.

As at June 30, 2019, the Company had a $1.5 billion bank credit facility with a maturity date of November 16, 2022.

The Company's June 30, 2019 long-term debt balance, pro forma the closing of the Midstream Transaction, was approximately $585 million.

In January 2019, Paramount implemented a normal course issuer bid program under which the Company may purchase up to 7.1 million Paramount common shares for cancellation. In July 2019, the Company purchased 33,100 shares for cancellation at a total cost of $0.2 million.

As a result of a reduction in Alberta income tax rates enacted in the second quarter of 2019, the carrying value of the Company's deferred tax asset was reduced by approximately $106 millionwith a corresponding charge to deferred tax expense.