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PetroShale Second Quarter 2021 Results

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   |    Wednesday,September 01,2021

PetroShale Inc. reported its Q2 2021 results.

Highlights:

• Production averaged 9,341 and 9,722 barrels of oil equivalent per day ("Boe/d") in the second quarter of 2021 and the first six months of the year, respectively, 30% lower than the same periods in 2020, reflecting the impact of limited capital investments, natural declines, and temporary production shut-ins following operated and non-operated well workover activity.
• Revenue from petroleum and natural gas sales totaled $44.9 million during the second quarter, representing an 85% increase over the same period in 2020, and increased 20% in the first half of 2021 over the same period in 2020 to $88.3 million. Significantly higher realized prices across all product types supported the revenue increases.
• Adjusted EBITDA[1] grew 67% to $13.9 million ($0.034 per fully diluted share) in the second quarter of 2021 as compared to the same period in 2020, largely due to improved commodity prices. Adjusted EBITDA¹ totalled $28.9 million ($0.08 per fully diluted share) in the first half of the year.
• Net income totaled $3.6 million ($0.01 per fully diluted share) in the second quarter of 2021 compared to a net loss of $23.2 million ($0.12 per fully diluted share) during the same period of the prior year, reflecting increased petroleum and natural gas sales, reduced expenses, and a $22.1 million impairment recovery, offset by realized and unrealized losses on financial derivatives. In the first six months of 2021, PetroShale recorded a net loss of $40.8 million compared to a $40.4 million net loss in the same period of 2020.
• Operating netback prior to hedging¹ increased 365% to $29.87 per Boe in the second quarter of 2021 and was $28.19 per Boe in the first six months of the year; the increases are attributable to higher revenue per Boe, partially offset by increased royalties, and higher production taxes.
• Net debt¹ of $182.4 million at June 30, 2021 declined approximately $144.6 million relative to year end 2020, primarily due to the closing of the transformative recapitalization transaction (the "Transaction") in the second quarter which reduced net debt and enhanced financial flexibility, as described more fully in PetroShale's MD&A.
• Net capital expenditures in the period were $10.6 million, fully funded from operating cash flows, and were largely directed to the completion of operated and non-operated wells, workover activities on operated and non-operated wells, and facility expansions. With the strengthening commodity markets to date in 2021, the Company anticipates resuming capital activity but at a level considerably lower than in 2019. The Company recently completed two operated wells (1.24 net) in late June, and has plans to participate in further completions of non-operated wells and new drilling activities in the second half of 2021.
• Operating expenses per Boe, net of production taxes, totalled $7.28 and $7.03 in the second quarter of 2021 and the first half of the year, respectively. These unit cost increases reflect the Company's lower capital activity levels in the past 18 months and the resulting decline in production per well, and are expected to improve with the increased completion and drilling levels planned. Transportation expenses of $1.85 per Boe in the second quarter declined by 25% over the same period of 2020 as a result of lower production volumes.

Message to Shareholders

In the second quarter of 2021, PetroShale benefitted from positive momentum in both short and long-term fundamentals for crude oil and natural gas, with continued stability returning to global commodity markets as worldwide COVID-19 vaccination efforts facilitated a partial return to normality. Improved benchmark prices supported the generation of higher petroleum and natural gas revenue for PetroShale, which increased 85% over the second quarter of 2020, while operating netbacks before hedging² improved 365% to average $29.87 per Boe.

Our Q2 2021 production averaged 9,341 Boe/d and 9,722 Boe/d in the first half of the year which supported cash flow from operating activities of $15.0 million and $30.9 million for the same respective periods. The majority of new wells brought online in the second quarter of 2021 did not commence production until the end of the period, resulting in only a partial contribution to the period average. These new volumes along with new wells successfully completed in July 2021 will support production moving into the second half of 2021.

We continued to prudently invest capital during the quarter, with net expenditures of $10.6 million fully funded by internal cash flows. PetroShale successfully brought onstream two (1.2 net) operated wells that were drilled and uncompleted ("DUCs"), with production from those wells exceeding expectations. In addition, late in the quarter through early July, PetroShale commenced completion activities on 4.2 net non-operated wells which are anticipated to commence production later in the third quarter.

The closing of our Transaction, combined with the financial and operating successes we realized during the second quarter of this year, have enabled PetroShale to reduce net debt2 by approximately $144.6 million relative to year end 2020, resulting in net debt² of $182.4 million at June 30, 2021. The significantly improved and simplified balance sheet allows for superior financial flexibility as we emerge from a period of extreme volatility linked to the COVID-19 pandemic.

Consistent with our historical practices, PetroShale remains committed to upholding our responsible environmental, social and governance ("ESG") principles, which contribute to a strong safety track record and have helped to drive improved environmental performance. We will actively identify and apply new operational efficiencies as we develop our high-quality asset base while constantly evaluating opportunities that can further strengthen the balance sheet.

Outlook

Over the past 12 months, PetroShale has strategically repositioned the Company to capture value from our assets while building for long-term sustainability. When combined with our proven North Dakota Bakken strategy, lean corporate structure and efficient operations, the Company is entering a highly opportunistic period for our strategy that is focused in the heart of the North Dakota Bakken light oil play. Looking ahead to the second half of 2021, in light of current strong commodity prices, we are targeting continued development through the prudent allocation of additional capital based on project economics, payback and the potential for free cash flow generation.

To facilitate the allocation of additional capital and certain operational logistics, management has opted to accelerate $20 million of capital spending from 2022 into the latter part of 2021, resulting in a revision of our prior guidance of 2021 capital from $50-$60 million to $70-$75 million. As part of the expanded capital program, preparation is underway for the drilling of 4.9 net operated wells at our Anderson and Explorer properties, which are expected to bolster production volumes through the fourth quarter of 2021 and the first quarter of 2022.

This acceleration of capital will result in increased production in early 2022 than previously planned, setting the stage for new volumes to come on-stream into a favourable forecast pricing environment, and will support our long-term strategy of building shareholder value by enhancing free cash flow and increasing asset value. This timing results in expected average annual 2021 production remaining between 10,500 Boe/d and 11,500 Boe/d³, but increases our 2021 exit rate and production in 2022. Management anticipates the increase in capital spending to be largely within operating cash flow for 2021, but the increased production will significantly enhance free cash flow in 2022.

As part of our ongoing efforts to protect future cash flows, we had previously entered into hedging contracts designed to provide stability and further mitigate the effects of potential market volatility during 2021 and 2022. We currently have crude oil hedges on a total of 5,500 Bbls/d of production through to the fourth quarter of 2021 in the form of three-way collars, and on an average of 2,000 Bbls/d of production from the first quarter of 2022 to the fourth quarter of 2022 between various swaps and collar contracts. A complete list of volumes by contract type can be found within our second quarter 2021 MD&A. We will continue to look for opportunities to further secure our financial structure with additional hedging.

Building on the operational momentum generated in the first six months of this year, we look forward to reporting to our stakeholders on the continued execution of our strategy.  We wish to thank all of PetroShale's employees, directors and shareholders for their continued support.