Chinook Energy Inc. ("our", "we", or "us") (TSX: CKE) is pleased to
announce our operating and financial results for the three months
ended June 30, 2019 (“Q219”). Our unaudited condensed consolidated
financial statements and management’s discussion and analysis for
the three and six months ended June 30, 2019 are available on our
website (www.chinookenergyinc.com) and filed on SEDAR
(www.sedar.com).
Q219 Highlights
- Additional Q219 egress: We obtained additional
egress during Q219 that limited our exposure to the BC Station 2
benchmark. This increased the ratio of our natural gas production
sold at benchmarks other than Station 2 to 66% compared to 22%
during the three months ended June 30, 2018 (“Q218”). These other
benchmark prices included Chicago City Gate and Alliance Trading
Pool, where we receive a premium to what we would have realized had
we sold our natural gas production at spot Station 2 pricing.
- Preservation of shareholder value: As BC
natural gas price weakness continues related to export capacity
constraints, we voluntary restricted our production to preserve
shareholders’ value.
- $2.0 million of annual cost savings: We signed
a new Calgary office space lease commencing in June 2019.
- Additional $1.6 million of annual gathering revenues
commencing in early 2020 : Construction continues by
a third party who is on schedule to tie into our Aitken Creek
Pipeline.
- New price risk contracts: We continue to layer
in commodity price hedges and diversify our natural gas sales
points with approximately 28% of forecast 2019 natural gas
production currently hedged at Chicago or Station 2 pricing.
Q219 Operating and Financial Highlights
|
|
Three months ended June 30 |
|
Six months ended June 30 |
|
|
|
|
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
|
OPERATIONS |
|
|
|
|
|
|
Production Volumes |
|
|
|
|
|
|
Natural gas liquids
(boe/d) |
|
|
279 |
|
|
680 |
|
|
367 |
|
|
575 |
|
|
Natural gas (mcf/d) |
|
|
8,457 |
|
|
22,253 |
|
|
11,904 |
|
|
18,053 |
|
|
Crude oil (bbl/d) |
|
|
10 |
|
|
23 |
|
|
9 |
|
|
21 |
|
|
Average daily production (boe/d) (1) |
|
|
1,698 |
|
|
4,413 |
|
|
2,360 |
|
|
3,605 |
|
|
Sales Prices |
|
|
|
|
|
|
Average natural gas liquids
price ($/boe) |
|
$ |
43.02 |
|
$ |
66.65 |
|
$ |
47.31 |
|
$ |
63.29 |
|
|
Average natural gas price
($/mcf) |
|
$ |
1.38 |
|
$ |
1.40 |
|
$ |
1.84 |
|
$ |
1.87 |
|
|
Average oil price ($/bbl) |
|
$ |
67.20 |
|
$ |
75.11 |
|
$ |
62.82 |
|
$ |
72.09 |
|
|
Operating Netback (2) |
|
|
|
|
|
|
Average commodity pricing
($/boe) |
|
$ |
14.33 |
|
$ |
17.75 |
|
$ |
16.89 |
|
$ |
19.90 |
|
|
Royalty expense ($/boe) |
|
$ |
(0.22 |
) |
$ |
(0.07 |
) |
$ |
(0.11 |
) |
$ |
(0.11 |
) |
|
Realized (loss) gain on
commodity price contracts ($/boe) |
|
$ |
(0.89 |
) |
$ |
0.17 |
|
$ |
(1.40 |
) |
$ |
(0.35 |
) |
|
Net production expense ($/boe)
(2) |
|
$ |
(17.26 |
) |
$ |
(10.17 |
) |
$ |
(13.44 |
) |
$ |
(11.96 |
) |
|
Operating netback ($/boe) (1) (2) |
|
$ |
(4.04 |
) |
$ |
7.68 |
|
$ |
1.94 |
|
$ |
7.48 |
|
|
Wells Drilled |
|
|
|
|
|
|
Exploratory wells (net) |
|
|
- |
|
|
- |
|
|
- |
|
|
2.00 |
|
|
|
|
|
|
|
|
|
FINANCIAL ($ thousands, except per share
amounts) |
|
|
|
|
|
|
Petroleum & natural gas
revenues, net of royalties |
|
$ |
2,178 |
|
$ |
7,098 |
|
$ |
7,169 |
|
$ |
12,913 |
|
|
Cash (outflow) inflow from
operating activities |
|
$ |
(1,940 |
) |
$ |
1,223 |
|
$ |
(2,097 |
) |
$ |
(499 |
) |
|
Adjusted funds (outflow) flow
(2) |
|
$ |
(1,708 |
) |
$ |
1,836 |
|
$ |
(1,514 |
) |
$ |
2,307 |
|
|
Per share - basic and
diluted ($/share) |
|
$ |
(0.01 |
) |
$ |
0.01 |
|
$ |
(0.01 |
) |
$ |
0.01 |
|
|
Net loss |
|
$ |
(22,242 |
) |
$ |
(2,471 |
) |
$ |
(24,738 |
) |
$ |
(4,569 |
) |
|
Per share - basic and
diluted ($/share) |
|
$ |
(0.10 |
) |
$ |
(0.01 |
) |
$ |
(0.11 |
) |
$ |
(0.02 |
) |
|
Development and exploration
expenditures |
|
$ |
- |
|
$ |
180 |
|
$ |
- |
|
$ |
2,677 |
|
|
Net debt (2) |
|
$ |
5,207 |
|
$ |
2,654 |
|
$ |
5,207 |
|
$ |
2,654 |
|
|
Total
assets |
|
$ |
77,284 |
|
$ |
123,637 |
|
$ |
77,284 |
|
$ |
123,637 |
|
|
Common Shares (thousands) |
|
|
|
|
|
|
Weighted average during
period |
|
|
|
|
|
|
Basic &
diluted |
|
|
223,681 |
|
|
223,603 |
|
|
223,662 |
|
|
223,584 |
|
|
Outstanding at period end |
|
|
223,682 |
|
|
223,605 |
|
|
223,682 |
|
|
223,605 |
|
|
|
|
|
|
|
|
|
- Amounts may not be additive due to rounding.
- Adjusted funds flow, adjusted funds flow per share, net debt,
operating netback and net production expense are non-GAAP measures.
These terms do not have any standardized meanings as prescribed by
IFRS and, therefore, may not be comparable with the calculations of
similar measures presented by other companies. See headings
entitled “Adjusted Funds Flow”, “Net Debt”, “Operational Netback”
and “Net Production Expense” in the Reader Advisory below for
further information on such terms.
President’s Message
Since being repaired following a pipeline
rupture near Prince George, BC, Enbridge has operated its Westcoast
pipeline at reduced pressures which has negatively impacted the
natural gas price at Station 2. This reduced service is likely to
have a continued negative impact on Station 2 gas prices for the
duration of the restriction, understood to be until this October.
Although we responded by acquiring additional egress allowing us to
realize a premium over Station 2 spot pricing, most transport
services are currently fully contracted or are not economically
favourable. We will continue to focus on capital preservation and
optionality until we observe more constructive BC Station 2
benchmark pricing or are otherwise able to secure more favorable
natural gas pricing which would serve to strengthen our balance
sheet and facilitate future drilling activity.
We are not in compliance with one of our
lender’s financial covenants: net debt to cash flow that allows a
maximum ratio of three times due to a cash flow deficit over the
previous 12 months for the reasons set forth below. Cash flows, as
defined by our lender, approximate adjusted funds flow less
provision expenditures and lease payments. Third party outages and
our reaction to depressed BC Station 2 pricing through voluntary
restricting our production combined to reduce our adjusted funds
flow over this previous period. Because this financial covenant is
calculated on a trailing 12 months basis, the effect of these
previous production restrictions are punitive in its calculation
over the next forecasted nine months and outweigh the effect from
expected higher pricing. Our forecast may materially change if the
BC Station 2 benchmark exceeds current strip pricing during the
upcoming winter season resulting from the expected increase in BC
take away capacity anticipated from the expansion of TCPL’s North
Montney Pipeline combined with Westcoast’s pipeline returning to
normal operating pressures.
Although our debt is drawn under a demand
agreement resulting in all such draws always being classified as a
current liability, the noncompliant net debt to cash flow financial
covenant and recent decreases in forward BC natural gas strip
pricing creates uncertainty as to the likelihood that our lender
will provide us a waiver for the noncompliance with this financial
covenant. We expect our lender to reduce the $10 million
availability of our credit facility given recent decreases in
forward natural gas benchmark pricing. While we continue
discussions with our lender, the borrowing base redetermination and
resolution of the financial covenant breach remain outstanding.
These discussions include requesting that our lender provide us a
waiver for the financial covenant breach and/or remove (modify) it
from (within) the terms of our demand credit facility agreement.
While these discussions are ongoing, we are evaluating other
financing options that may inject additional liquidity including
the disposition of natural gas assets, the sale/leaseback of
midstream assets and other alternative sources of debt.
During the second quarter of 2019, we entered
into the following commodity price contracts:
Contractual Term |
Notional Volumes |
Index and Company's Received Price |
|
Natural gas
swap |
|
|
|
January 1, 2020 to March 31, 2020 |
2,000 GJ/d |
Westcoast Station 2 CAD$1.785/GJ |
|
Natural gas
collars |
|
|
|
January 1, 2020 to March 31, 2020 |
4,000 mmbtu/d |
Chicago City Gate Monthly US$2.15/mmbtu to US$4.11/mmbtu |
|
Board of Director Resignation
P.Grant Wierzba resigned from our Board
effective August 8, 2019. “We would like to thank Mr. Wierzba for
the significant contribution he made to our Board since inception
and wish him all the best” stated Jill Angevine, Chairman of
Chinook.
Outlook
We are uncertain about our ability to access
sufficient capital to finance our future operations given the
continued weakness in the BC natural gas price related to export
capacity constraints. Consequently, our development program in 2019
will be minimal until such time as commodity prices improve to
constructive levels. We also expect the following to occur during
2019 or early 2020:
- Production to return to unrestricted levels:
We continued to restrict our production throughout July 2019 but
forecast sufficient natural gas price improvements by this upcoming
September or October for our production to return to unrestricted
levels of approximately 4,000 boe/d. However, we continue to be
hindered by third party outages including Enbridge’s McMahon
processing facility that unexpectedly has shut-in all of our
production since July 30th. This facility is expected to be
operational the week of August 12th.
- $1.6 million of annualized gathering revenues:
We continue to lever our existing assets and recently completed a
transportation agreement for the partial use of our 12” Aitken
Creek pipeline. The agreement will commence on the initial delivery
of gas, anticipated to be early 2020, and will continue for a
minimum period of two years. Minimum gathering charges will total
approximately $1.6 million annually.
- New commodity price contracts: We intend to
layer in additional commodity price risk contracts to guarantee the
price we will receive on our future production.
- Borrowing base redetermination discussions with our
lender: While these discussions are
currently ongoing, we are evaluating other financing options
including the disposition of natural gas assets, the sale/leaseback
of midstream assets and other alternative sources of debt.
About Chinook Energy Inc.
Chinook is a Calgary-based public oil and
natural gas exploration and development company which is focused on
realizing per share growth from its large contiguous Montney
liquids-rich natural gas position at Birley/Umbach, British
Columbia.
For further information please contact:
Walter
Vrataric
President
and Chief Executive
Officer Chinook
Energy Inc.
Telephone: (403)
261-6883
Jason Dranchuk Vice President,
Finance and Chief Financial OfficerChinook Energy Inc.Telephone:
(403) 261-6883
Website: www.chinookenergyinc.com
Reader Advisory
Abbreviations
Oil and
Natural Gas Liquids |
|
Natural
Gas |
|
|
|
|
|
|
|
bblbbl/d |
barrelsbarrels per
day |
|
mcfmmcf |
thousand cubic feetmillion cubic
feet |
|
NGLs |
Natural gas
liquids |
|
mcf/dmmcf/dmmbtummbtu/d |
thousand cubic feet per
daymillion cubic feet per daymillion British Thermal Unitsmillion
British Thermal Units per day |
|
|
|
|
GJ |
gigajoules |
|
|
|
|
GJ/d |
gigajoules per day |
|
|
|
|
|
|
|
Other |
|
|
|
|
|
boe |
barrel of oil
equivalent on the basis of 6 mcf/1 boe for natural gas and 1 bbl/1
boe for crude oil and natural gas liquids (this conversion factor
is an industry accepted norm and is not based on either energy
content or current prices) |
boe/dStation 2Chicago
City Gate |
barrel of oil
equivalent per dayMarket point for BC natural gasMarket point for
eastern US natural gas |
Forward-Looking Statements
In the interest of providing our shareholders
and readers with information regarding our company, including
management's assessment of our future plans and operations, certain
statements contained in this news release constitute
forward-looking statements or information (collectively
"forward-looking statements") within the meaning of applicable
securities legislation. Forward-looking statements are typically
identified by words such as "anticipate", "continue", "estimate",
"expect", "forecast", "may", "will", "project", "could", "plan",
"intend", "should", "believe", "outlook", "potential", "target" and
similar words suggesting future events or future performance. In
particular, this news release contains, without limitation,
forward-looking statements pertaining to: forecasted breaches of a
financial covenant in our credit facility over the next 12 months,
that our new office space lease which commenced in June 2019 will
result in estimated annual cost savings of $2.0 million, our belief
that Station 2 gas prices will be negatively impacted through to
this October due to reduced pressures on the Enbridge Westcoast
pipeline, that thereafter our production will return to
unrestricted levels of approximately 4,000 boe/d, that our capital
plan for 2019 will be minimal, the anticipated initial delivery
date of gas for the purposes of the transportation agreement for
the partial use of our 12” Aitken Creek pipeline, that we expect
our lender to reduce the $10 million availability of our credit
facility given recent decreases in forward natural gas benchmark
pricing and how we intend to manage our company.
With respect to the forward-looking statements
contained in this news release, we have made assumptions regarding,
among other things: that we will continue to conduct our operations
in a manner consistent with that expressed herein, that we will not
make significant future capital expenditures in 2019, future oil
and natural gas prices, anticipated oil and natural gas production
levels, future currency, exchange and interest rates, our ability
to obtain equipment in a timely manner to carry out exploration and
development activities, the ability of the operator of the projects
in which we have an interest in to operate in the field in a safe,
efficient and effective manner, the impact of increasing
competition, field production rates and decline rates, our ability
to replace and expand production and reserves through exploration
and development activities, certain cost assumptions and the
continued availability of adequate debt and cash flow to fund our
planned expenditures. Although we believe that the expectations
reflected in the forward-looking statements contained in this news
release, and the assumptions on which such forward-looking
statements are made, are reasonable, there can be no assurance that
such expectations will prove to be correct. Readers are cautioned
not to place undue reliance on forward-looking statements included
in this news release, as there can be no assurance that the plans,
intentions or expectations upon which the forward-looking
statements are based will occur. By their nature, forward-looking
statements involve numerous assumptions, known and unknown risks
and uncertainties that contribute to the possibility that
predictions, forecasts, projections and other forward-looking
statements will not occur, which may cause our actual performance
and financial results in future periods to differ materially from
any estimates or projections of future performance or results
expressed or implied by such forward-looking statements. These
risks and uncertainties include, without limitation, that our
lender may reduce the availability of our $10.0 million credit
facility or demand repayment of all outstanding debt and undrawn
letters of credit precipitated by a financial covenant breach and
that covenant’s forecasted breaches over the next 12 months, and,
in such event, that no sufficient alternative financing will be
completed, that there are material uncertainties that may cast
significant doubt with respect to our ability to continue as a
going concern, that the budgeted capital program for 2019, which is
subject to the discretion of our Board of Directors, will not be
amended in the future, there is no certainty in the amount of our
borrowing base redetermination, risks associated with oil and gas
exploration, development, exploitation, production, marketing and
transportation, loss of markets, volatility of commodity prices and
currency fluctuations, environmental risks, competition from
other producers, inability to retain drilling rigs and other
services, unanticipated increases in or unforeseen capital
expenditure costs, including drilling, completion and facilities
costs, unexpected decline rates in wells, delays in projects and/or
operations resulting from surface conditions, wells not performing
as expected, delays resulting from or inability to obtain the
required regulatory approvals and inability to access sufficient
capital from internal and external sources. As a consequence,
actual results may differ materially from those anticipated in the
forward-looking statements. Readers are cautioned that the forgoing
list of factors is not exhaustive. Additional information on these
and other factors that could affect our operations and financial
results are included in reports on file with Canadian securities
regulatory authorities and may be accessed through the SEDAR
website (www.sedar.com) and at our website
(www.chinookenergyinc.com). Furthermore, the forward-looking
statements contained in this news release are made as at the date
of this news release and we do not undertake any obligation to
update publicly or to revise any of the forward-looking statements,
whether as a result of new information, future events or otherwise,
except as may be required by applicable securities laws.
Operating Netback
The reader is cautioned that this news release
contains the term operating netback, which is not a recognized
measure under IFRS and is calculated as a period’s sales of
petroleum and natural gas, net of realized gains or losses on
commodity price contracts, royalties and net production expenses,
divided by the period’s sales volumes. We use this non-GAAP measure
to assist us in understanding our production profitability relative
to current and fixed commodity prices and it provides an analytical
tool to benchmark changes in field operational performance against
prior periods. Readers are cautioned, however, that this measure
should not be construed as an alternative to other terms such as
net income determined in accordance with IFRS as a measure of
performance. Our method of calculating this measure may differ from
other companies, and accordingly, it may not be comparable to
measures used by other companies.
Net Production Expense
The reader is cautioned that this news release
contains the term net production expense, which is not a recognized
measure under IFRS and is calculated as production and operating
expense less processing and gathering income. We use net production
expense to determine the current periods' cash cost of operating
expenses and net production and operating expense per boe is used
to measure operating efficiency on a comparative basis. This
measure approximates our operating costs relative to only our
volumes by excluding the approximated operating costs resulting
from third party processing and gathering services. Our method of
calculating this measure may differ from other companies, and
accordingly, it may not be comparable to measures used by other
companies.
Adjusted Funds (Outflow) Flow
The reader is cautioned that this news release
contains the term adjusted funds (outflow) flow, which is not a
recognized measure under IFRS and is calculated from cash (outflow)
inflow from operations adjusted for changes in non-cash working
capital related to operations, exploration and evaluation expenses
related to operations, provision expenditures related to operations
and severance/transaction costs. We believe that adjusted funds
(outflow) flow is a key measure to assess our ability to finance
capital expenditures and when debt is drawn, debt repayments.
Adjusted funds (outflow) flow is not intended to represent cash
(outflow) inflow from operating activities, net earnings or other
measures of financial performance calculated in accordance with
IFRS and should not be construed as an alternative to, or more
meaningful than, cash (outflow) inflow from operating activities as
determined in accordance with IFRS as an indicator of our financial
performance. Our method of calculating this measure may differ from
other companies, and accordingly, it may not be comparable to
measures used by other companies. Adjustments to cash (outflow)
inflow from operations are for changes in non-cash operating
working capital which are expected to reverse and for those costs
that are not directly caused by lifting production volumes.
Net Debt
The reader is cautioned that this news release
contains the term net debt, which is not a recognized measure under
IFRS and is calculated as bank debt adjusted for current assets
less current liabilities as they appear on the balance sheets, both
of which exclude mark-to-market derivative contracts and assets and
liabilities held for sale and current liabilities excludes any
current portion of debt, deferred customer obligations, lease
liabilities and provisions. We use net debt to assist us in
understanding our liquidity at specific points in time. We exclude
the current portion of provisions, lease liabilities and the
deferred customer obligation as they are not financial instruments.
Mark-to-market derivative contracts and assets and liabilities held
for sale are excluded as they are unrealized.
Barrels of Oil Equivalent
Barrels of oil equivalent (boe) is calculated
using the conversion factor of 6 mcf (thousand cubic feet) of
natural gas being equivalent to one barrel of oil. Boes may
be misleading, particularly if used in isolation. A boe conversion
ratio of 6 mcf:1 bbl (barrel) is based on an energy equivalency
conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead. Given that the
value ratio based on the current price of crude oil as compared to
natural gas is significantly different from the energy equivalency
of 6:1, utilizing a conversion on a 6:1 basis may be misleading as
an indication of value.
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