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Pipestone Energy First Quarter 2020 Results

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   |    Wednesday,May 13,2020

Pipestone Energy Corp. reported its Q1 2020 results.

The company also provided an update to our business plan in response to the dramatic drop in commodity prices related to the worldwide COVID-19 crisis which resulted in an unprecedented short term collapse in oil demand. This will also include an operations update with encouraging initial production results from the 6-24 pad; 2020 production management strategy; continued improved well cost performance realized on the 6-30 pad-site; G&A cost savings initiatives, and an update on its commodity risk management program.

Paul Wanklyn, President and CEO said, “I am extremely proud of the performance of our team, particularly through these difficult times. We have reacted swiftly to cut costs to survive this crisis with the appropriate level of liquidity for the Company. We have demonstrated once again that we are executing capital programs within the top decile of Montney operators. I am confident that a recovery in oil prices will take place as the world emerges from the current demand-driven crisis and that Pipestone will be positioned to react quickly to positive changes as they come.”

Q1 Highlights

• Generated revenues, adjusted funds flow and net income of $32.0 million, $11.8 million and $15.5 million, respectively, during the three months ended March 31, 2020;
• Despite unplanned third-party processing facility outages that lasted for approximately 22 days or 24% of the operating days during the quarter, production averaged 14,066 boe/d (comprised of 28% condensate and 38% total liquids) and;
• Invested $29.2 million in Q1 2020 to further advance the development of its Pipestone project by bringing on production from 3 of 6 new wells at the 6-24 pad-site; drilling 6 wells at the 6-30 pad-site; and completion of additional in-field infrastructure to support future production. The Company’s forecasted 2020 spend is trending to the mid-point of its revised capital budget of $55 – $65 million, as it continued to realize efficiency gains and cost savings from drilling, completion, equipping and tie-in operations. The company estimates that approximately 95% of its forecast capital spending program has been completed by April 30, 2020.

2020 Capital Program / Ops Update

6-24 Well Results & Corporate Production Management:

As previously disclosed, Pipestone Energy initiated production on 6 new wells from two separate producing benches on its 6-24 pad in early March. By the end of April all six wells have produced for approximately 30 days.

The Company is very pleased with the production results thus far with average IP30 production results included in the table below:

Also, in Q1, the 9-14 pad was flow tested in line and achieved encouraging test rates with the pad CGR averaging 105 bbl/MMcf. Permanent well site equipment will be installed this summer to allow for additional evaluation.

However, in response to the current commodity price weakness, Pipestone Energy has halted its 2020 capital spending program and is now also suspending forward 2020 production guidance. Production in 2020 will be prudently managed to maximize cash flow, satisfy take-or-pay commitments, and reserve as much condensate production for future realization in what is expected to be an improved pricing environment. To achieve this outcome the Company shut-in production from the 6-24 pad-site at the end of April and expects to bring it on stream again in Q3 2020. In addition, the recently completed 6-30 pad-site is expected to be available for production in July but is planned to be reserved for start-up until October 2020.

With both the 6-24 and 6-30 pad-sites currently shut-in, the Company has significant productive capacity behind pipe. Current estimated corporate production rates in May are 58 mmcf/d and 5,700 bbls/d liquids or 15,500 boe/d with the majority of the production from the 19 wells on the 15-14 and 3-1 pad sites.

Continued Capital Cost Improvements

Pipestone Energy continued to execute and improve on its drilling, completion, and equip & tie in costs through its 2020 capital program. During the quarter, the wells on the 6-30 pad-site were drilled in an average of 15.1 days for an average cost of approximately $2.1 million per well. In April 2020, the Company successfully executed completion operations at its 6-30 pad using two frac spreads with an average completion cost of approximately $2.9 million per well. All-in DCE&T costs for the 6-30 pad are expected to be approximately $5.5 million. These realized efficiency gains are substantial and will significantly impact the sustainability of our future growth plan. The Company’s all-in future DCE&T cost estimates have decreased from $7.1 million to $6.0 million for our 2,500 meter type curve well. The successful deployment of dual frac spreads will allow us to plan future pad development with the potential to lower cycle times to a target of 100 days for a six well pad. Further, the Company continues to advance its ESG initiatives through fuel switching to natural gas for completion and drilling operations, and handling all water through Pipestone-owned pipelines and facilities without the need for additional truck traffic. The Company continues to engage with community residents who remain supportive of Pipestone Energy and its operations.

G&A Cost Reductions

In light of the low commodity price environment the Company has identified and implemented a combination of measures which it expects will lower 2020 annual gross G&A before capitalization, from an original 2020 budget of $13 million to a revised forecast total of approximately $10 million. This translates to an expected annual reduction of 23%.

Risk Management

Pipestone Energy anticipates the near term cash flow volatility in 2020, due to the recent collapse in global crude prices, to be partially mitigated through its hedging program with approximately 4,800 bbls/day of oil sold forward at a price of C$59.05/bbl in Q2 and Q3, and 2,000 bbls/day sold forward at C$58.25/bbl in Q4. Approximately 34 mmcf/d of natural gas production has been hedged for the balance of 2020 at C$1.70/Mcf. For 2021, the Company has approximately 26 mmcf/d of natural gas production hedged at C$2.39/Mcf.

As of April 30, 2020, the Company has recognized realized hedging gains of approximately $12 million in 2020 ($6.2 million in Q1), and had an additional mark-to-market position on forward hedges of approximately $14 million.

Outlook

In response to the current commodity price weakness, as a result of the spread of the COVID-19 virus, which has slowed the world economy and drastically reduced demand for oil, Pipestone Energy has halted its 2020 capital spending program. Furthermore, given the uncertain magnitude, duration, and potential ongoing impacts of the COVID-19 virus, the Company is withdrawing its previous guidance for production and cash flow.

The year-to-date development expenditures were concentrated around what are the most condensate-rich well results realized to date and were focused approximately 85% to half-cycle DCE&T expenditures. With 12 new 2020 vintage wells available to the Company on the 6-24 and 6-30 pad-sites, 2020 production will be dynamically managed to maximize cash flow, satisfy take-or-pay commitments, and reserve as much condensate production as possible for future realization.

When market conditions improve, the Company will return to delivering a balanced combination of high production growth coupled with a focus on generating top decile returns on capital employed. In the meantime, Pipestone Energy is well positioned to survive these unprecedented times with a solid balance sheet and sufficient available liquidity.