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Seven Generations Continues Lowering its Montney Well Costs

Share Print Bookmark    |    Wednesday,August 12,2015

Seven Generations Energy Ltd. generated second quarter funds from operations of $126.8 million, up 92 percent from the second quarter of 2014, and increased production 126 percent to 54,219 barrels of oil equivalent per day (boe/d).

Second quarter oil and condensate production increased 123 percent to 20,702 barrels per day (bbls/d) compared to a year earlier.

Highlights

• Strong production growth that averaged 54,219 boe/d consisting of 60 percent liquids, with a liquid-gas ratio of approximately 250 barrels per MMcf of sales gas. Production was up 11 percent from the first quarter of 2015, and up 126 percent compared to the second quarter of 2014.
• Innovation and efficiencies have lowered well construction costs by about $1 million per well, compared to the first quarter of 2015. The most recent four Super Pad wells cost about $12 million per well, with an average lateral length of 2,933 metres.
• 7G continues an active hedging program. It has an average of approximately 65,000 MMBtu/d of AECO gas hedged in the second half of 2015 at an average price of $3.96 per MMBtu and an average of 84,000 MMBtu/d of 2016 volumes hedged at approximately $4.00 per MMBtu. The Company has on average 7,350 bbls/d of liquids hedged at a minimum WTI price of $90.00 per barrel (bbl) in the second half of 2015 and 12,000 bbls/d of liquids hedged with collars protecting a minimum $70.00 per bbl price in 2016. (All currency is Canadian dollars unless otherwise noted.)
• During the second quarter, 7G issued US$425 million of senior notes due in 2023 with a coupon of 6.75 percent. Additionally the Company and its lending syndicate have increased the size of 7G's undrawn senior secured revolving credit facilities from $480 million to $650 million. 7G had available funding in excess of $1.3 billion as at June 30, 2015.
• Negotiated additional 107 MMcf/d of firm transportation on TransCanada's NGTL system, under an agreement reached in August 2015, with a start date expected in 2018.

Operations

• Second quarter 2015 production averaged 54,219 boe/d consisting of 60 percent liquids (38 percent condensate and 22 percent NGLs), which is an 11 percent increase in production over the first quarter of 2015 volumes and a 126 percent increase compared to the second quarter of 2014. Production guidance for 2015 remains unchanged at 55,000 – 60,000 boe/d.
• 7G operated an average of nine drilling rigs in the second quarter, with the rig count increasing from a minimum of eight in April to 11 at the end of June. 
• During the second quarter, 7G drilled 17 net wells with 100 percent success rate in the Kakwa River Project's core development area, called the Nest, all targeting the Upper/Middle Montney formation. These wells had an average horizontal length of 2,695 meters, an average spud to rig release time of 46.4 days, and an average drilling cost of $5.2 million.
• We are testing horizontal wells that have 800 metres of displacement. With an 800-metre displacement and a 3,000-metre horizontal length, we will have already demonstrated the Super Pad design that we described while marketing our initial public offering.
• 7G completed 23 wells in the Nest, stimulating 650 stages, averaging 28 stages and 4,200 metric tonnes (9.2 million pounds) per well. Successive wells are generally taking less time to complete as 7G's pumping time has dropped from about 6-7 days at the beginning of the year to about 3-4 days at mid-year. When combined with other optimization efforts, these faster pumping times have reduced completion costs to an average of about $6.5 million per well. Total well construction costs for drilling and completion averaged about $12 million per well for 7G's four most recent 3,000-metre lateral wells on pad 33.
• 7G continues to test innovative ways to improve well construction techniques and well productivity. Second quarter completions included two wells with proppant density of 2.25 tonnes/metre (1,500 pounds/foot) which, based on early test data, have shown promising results when compared to 7G's standard offset wells that inject 1.5 tonnes/metre (1,000 pounds/foot). The Company also continues to test fracture stage spacing and proppant loading with the ultimate goal of maximizing resource recovery and capital efficiency.
• While completion costs per well were lower than budgeted, total capital invested in completions in the second quarter was higher than originally planned due to acceleration of completion operations. Second quarter capital investments of $354 million included the acceleration of tie-in and pad construction activity, plus the engagement of a second pressure pumping spread that stimulated six additional wells and reduced the inventory of uncompleted wells. 7G also purchased high strength ceramic proppant in the second quarter for approximately $8 million for future use in wells in the deep southwest area. About 65 percent of capital was invested in drilling and completions and 35 percent in facilities and well equipment. Capital investment guidance for 2015 is unchanged at $1.3 billion to $1.35 billion.

Lator 2 plant construction on schedule and budget

• The Lator 2 gas plant expansion project, which will increase the combined Lator 1 and Lator 2 capacity to 250 MMcf/d, continues to progress on schedule and budget. With the new combined plants, processing efficiencies and value realizations are expected to rise as liquids removal rates improve to better align with Alliance Pipeline specifications. Pre-commissioning is scheduled to begin in September with first gas scheduled to flow through the plant on December 1, consistent with the commencement of 7G's 250 MMcf/d Alliance and Aux Sable transportation and extraction commitments.
• The 250 MMcf/d Cutbank plant construction is also progressing on schedule and, although early in the construction process, is in line with the Company's cost projections. Site preparation is complete and piles have been driven with approximately 28 percent of the projected total cost invested. Start-up of the Cutbank plant, scheduled for mid-2016, is expected to take the Company's total field processing capacity to 500 MMcf/d.
• Construction of 7G's sixth Super Pad, #23, is 70 percent complete and is on target for commissioning in the third quarter. This pad will bring the Company's total field capacity to 300 MMcf/d and 60,000 bbls/d condensate. A seventh Super Pad is under construction in a fabrication yard in Grande Prairie where modular construction is being applied to the Super Pad concept. Modular construction, combined with utilizing four drilling rigs per pad, is expected to provide a substantial improvement in capital efficiency and reduce downtime.
• Seventeen well tie-ins were completed in the second quarter and, as of June 30, the Company had one satellite pad and 12 well tie-ins under construction. 7G currently has an inventory of approximately 51 wells at various stages of construction between drilling and tie-in.

Marketing

• During the second quarter, 7G and Alliance agreed to the acceleration of a portion of the Company's 2016 Alliance transportation commitments. Concurrent with this acceleration, 7G has engaged a third party marketing firm to take on the additional commitments under a profit sharing arrangement. Seven Generations expects to fill its original 250 MMcf/d of contracted firm transportation and processing commitments with its own production in December 2015.

Financial

• 7G's financial position remains strong with approximately $675 million of adjusted working capital and an undrawn $650 million line of credit, resulting in available funding in excess of $1.3 billion at June 30, 2015. During the second quarter, 7G announced the issuance of US$425 million senior unsecured 6.75 percent notes maturing in 2023. In addition, the Company and its lenders have increased the size of the senior secured revolving credit facilities from $480 million to $650 million.
• The Company generated funds from operations of $126.8 million for the quarter ended June 30, 2015. Benchmark WTI oil and AECO natural gas prices were 44 percent and 43 percent, respectively, lower than in the second quarter of 2014. 7G's increased production offset the lower energy price environment equating to a 92 percent year-over-year increase in funds from operations.
• Operating netbacks for the second quarter of 2015 were $22.07 per boe before hedging and $30.52 per boe after hedging. These post-hedging netbacks showcase the Company's strong financial performance based on improved realizations and cost control, as well as 7G's strong hedge position that has continued to contribute significant revenues during the current low commodity price environment. Second quarter operating netbacks were 49 percent lower than during the second quarter of 2014 due to the significant weakening in North American benchmark energy pricing. Realized pricing for the quarter averaged $31.45 per boe reflecting an increase in benchmark oil pricing, a main driver of condensate pricing, when compared to pricing during the first quarter of 2015. The Alberta condensate market experienced some temporary weakness in pricing during the second quarter as demand softened from local oil sands operations that were taken offline for short periods of time in response to Northern Alberta forest fires. As NGL prices softened during the second quarter, 7G's realized NGL pricing of $9.78 per bbl was $0.63 per bbl lower than the first quarter of 2015. NGL revenues will continue to be exposed to midcontinent benchmark pricing due to the current Aux Sable extraction agreement. Additionally, 7G started shipping approximately 8,800 boe/d of condensate production on its firm Pembina liquids transportation commitment, which helped to reduce overall transportation costs. 7G continues to look for ways to improve transportation costs and optimize realized pricing for the remaining condensate volumes that are not currently being transported by pipeline.