RBY Rubellite Energy Corp

CALGARY, AB, Aug. 10, 2022 /CNW/ - (TSX: RBY) – Rubellite Energy Inc. ("Rubellite", or the "Company"), a pure play Clearwater oil exploration and development company, is pleased to report second quarter 2022 financial and operating results and provide an operations and land acquisition update.

Select financial and operational information is outlined below and should be read in conjunction with Rubellite's unaudited condensed interim financial statements and related Management's Discussion and Analysis ("MD&A") for the three and six months ended June 30, 2022, which are available through the Company's website at www.rubelliteenergy.com and SEDAR at www.sedar.com.

This news release contains certain specified financial measures that are not recognized by GAAP and used by management to evaluate the performance of the Company and its business. Since certain specified financial measures may not have a standardized meaning, securities regulations require that specified financial measures are clearly defined, qualified and, where required, reconciled with their nearest GAAP measure. See "Non GAAP and Other Financial Measures" in this news release and in the MD&A for further information on the definition, calculation and reconciliation of these measures. This release also contains forward-looking information. See "Forward-Looking Information". Readers are also referred to the other information under the "Advisories" section in this news release for additional information.

SECOND QUARTER 2022 HIGHLIGHTS

• Capital expenditures⁽¹⁾ totaled $12.7 million in the second quarter of 2022 (Q1 2022 – $35.5 million). Exploration and development spending was $9.5 million (Q1 2022 - $21.8 million) as the Company was able to get an early start on its post breakup drilling program and accelerated some of its Q3 2022 capital into Q2 2022. Land purchases during the second quarter of 2022 were $3.2 million (Q1 2022 – $13.7 million), adding strategic lands within the Clearwater play.
  
  
• Drilling activity for the second quarter of 2022 totaled six (4.8 net) multi-lateral horizontal Clearwater wells, including four (4.0 net) wells at Ukalta and two (0.8 net) wells at Marten Hills that were rig released during the quarter. At the end of June, one (1.0) well at Ukalta was spud on June 27, 2022 and rig released July 10, 2022 and one (0.3 net) well at Marten Hills was spud on June 20, 2022 and rig released July 5, 2022. During the second quarter, the Company drilled an additional vertical water disposal well at Ukalta and began drilling one (1.0 net) exploration well at Alpen to the west of Figure Lake, which rig released July 7, 2022.
  
  
• During the second quarter, the Company executed a definitive farm-in and option agreement (the "Peavine Transaction") with Cavalier Energy Inc. in the Peavine area, in the vicinity of recent industry Clearwater drilling activity and southwest of Rubellite's existing option acreage at West Dawson in northern Alberta. The Peavine Transaction provides exposure to 61.25 gross (34.75 net) sections of land highly prospective for the Clearwater formation, of which Rubellite may earn up to a 60 percent working interest by drilling wells or making certain qualifying capital expenditures.
  
  
• As of June 30, 2022, there were thirty six (33.0 net) wells contributing to sales production, with another three (2.3 net) wells rig released and recovering oil-based drilling mud ("OBM"), as compared to twenty eight (26.0 net) wells on production at the end of the first quarter of 2022. Recoveries of OBM are not recorded as sales production as the OBM is recycled for future drilling operations to the extent possible or sold and credited back to drilling capital.
  
  
• Daily average sales production increased 18% from first quarter 2022 levels to average 1,478 bbl/d of conventional heavy oil in the second quarter of 2022 (Q1 2022 – 1,251 bbl/d) which was just outside of the Company's Q2 2022 production guidance of 1,525 to 1,625 bbl/d. Production progressively ramped up through the first half of 2022 as new wells fully recovered OBM, filled tank inventories and then commenced delivery to sales terminals.
  
  
• Operating netbacks⁽¹⁾ in the second quarter of 2022 were $11.6 million, or $85.97/bbl (Q1 2022 – $8.0 million or $71.02/boe), reflecting strong Western Canadian Select ("WCS") benchmark prices and increased production. Increases were partially offset by higher costs in all areas as a result of increased production, increased fuel prices and fuel surcharges and higher royalties. After realized losses on risk management contracts of $6.2 million or $46.12/boe (Q1 2022 – losses of $3.3 million or $29.04/boe), operating netbacks were $5.4 million or $39.85/boe (Q1 2022 – $4.7 million or $41.98/boe).
  
  
• Adjusted funds flow⁽¹⁾ in the second quarter of 2022 was $4.6 million (Q1 2022 – $3.8 million) up 20% quarter-over-quarter, driven by the growth in sales production. Cash flow from operating activities in the second quarter of 2022 was $6.5 million (Q1 2022 – $3.2 million).
  
  
• Net income for the second quarter of 2022 was $4.7 million (Q1 2022 – $9.3 million net loss) driven by a swing from an unrealized loss on risk management contracts of $10.6 million in the first quarter to an unrealized gain on risk management contracts of $3.6 million in the second quarter.
  
  
• Adjusted working capital surplus⁽¹⁾ at the end of the second quarter of 2022 was $2.7 million, down 51% or $2.7 million from $5.4 million at December 31, 2021 as a result of capital spending being higher than adjusted funds flow.

At Marten Hills, the final eight-leg multi-lateral well of the four (2.0 net) well winter drilling program was rig released in early April. Two of the four winter drilling program wells reached the end of their initial 30-day production periods, recording IP30 rates of 142 bbl/d and 139 bbl/d as compared to the Marten Hills type curve⁽¹⁾ IP30 of 120 bbl/d. The remaining two winter-program wells reached the end of their initial 30-day production periods during May, also performing slightly stronger than the Marten Hills type curve with average IP30 rates of 186 and 179 bbl/d. With the rig racked on location at Marten Hills over spring break up, dry field conditions permitted the spud of two additional horizontal multi-lateral wells in June prior to re-locating the rig to Figure Lake. The two new wells were drilled at the Marten Hills Area's after payout working interest of 30%. The first well was rig released in mid-June, reached full recovery of its oil-based mud load fluid on July 6^th and achieved an average IP30 rate of 188 bbl/d. The second adjacent well rig released in early July, reached full recovery of oil-based mud in late July and is performing positively, commensurate with the neighboring well.

Drilling operations at Ukalta related to the first quarter drilling program continued into early spring as the final Clearwater multi-lateral horizontal well on the 13-35 pad was rig released in April and a vertical water disposal well was subsequently drilled to reduce future water handling costs and enhance field netbacks. Production is now beginning to stabilize on the 13-35 pad, although production rates have been lower than the Ukalta type curve with higher water cuts and gas hampering operations. Following spring break-up, drilling in the Ukalta area re-commenced in early June at a new pad located at 5-26-57-18W4 (the "5-26 pad"), with three new wells drilled and rig released during the second quarter and a fourth well rig released in early July. All four wells have fully recovered their respective load oil and are now producing in their IP30 production periods, targeting to extend the primary Clearwater zone development to the north end of Rubellite's Ukalta area land base. Preliminary results confirm the pool extends to the north, however average production rates from the 5-26 pad appear to be stabilizing below the Ukalta type curve, as the reservoir thins and becomes more variable. Additionally, a vertical delineation well was drilled and cored in early July to evaluate the potential of the northwest portion of Rubellite's exploratory acreage position at Ukalta; however, preliminary log and core analysis results have unfortunately not been encouraging. The Ukalta drilling program has shifted back to the main development area with two of four planned development wells drilled thus far in the third quarter on a new pad located at 16-16-57-18W4 (the "16-16 pad"). Two additional multi-lateral wells at the 16-16 pad and up to four additional development wells planned for the Ukalta area are expected to keep one rig running continuously until mid-way through the fourth quarter.

At Figure Lake, drilling operations recommenced in early July as surface access conditions permitted, with the drilling of a vertical water disposal well to enhance field netbacks and to provide additional reservoir quality information on the prospective Clearwater zone. With positive encouragement from the stratigraphic information obtained in this vertical well, two of up to nine new horizontal multi-lateral wells planned for the remainder of 2022 have been rig released and are recovering oil-based load fluid.

Finally, in late June, Rubellite windowed a third rig to evaluate an exploration prospect at Alpen, approximately ten miles west of Figure Lake. A vertical exploration well was cored and logged, and a six-leg multi-lateral exploratory follow-up well was drilled to evaluate the production capability of the mapped Clearwater heavy oil resource. Preliminary production performance indicates the quality of the oil in the Alpen prospect is heavier than desired. Performance will continue to be monitored to evaluate future follow-up potential.  

The Company has been successful at partially mitigating the impact of inflationary pressures by improving drill bit performance and reducing drilling days, enhancing netbacks for oil-based mud recoveries which are credited back to drilling operations, and employing bulk-purchasing and other capital efficiency strategies.

During the second half of 2022, Rubellite plans to spend approximately $24 to $26 million to continue its two-rig drilling program into the fourth quarter of 2022 to drill, complete, equip and tie-in 20 (17.2 net) multi-lateral horizontal wells planned in its three core operating areas at Ukalta, Figure Lake and Marten Hills. Aside from a modest 10% increase to accommodate ongoing inflationary pressures, Rubellite's 2022 exploration and development capital program remains unchanged, with full year 2022 capital expenditures (see "Non-GAAP and Other Financial Measures") now expected to total $54 to $56 million, relative to previous 2022 capital expenditure guidance of $48 to $50 million.

The table below summarizes Rubellite's forecast exploration and development capital expenditures and anticipated horizontal multi-lateral drilling activities for 2022, excluding expenditures for exploratory drilling activity on its northern Clearwater trend exploratory land blocks, and undeveloped land purchases and acquisitions.

2022 Exploration and Development Forecast Capital Expenditures⁽¹⁾⁽⁶⁾

During the second quarter, Rubellite spent $3.2 million to acquire 79.2 net sections of land through Crown land purchases and other transactions. Including lands acquired since the second quarter of 2022, the Company has grown its land position for exposure to the Clearwater play to 298 net sections, up 187% from the 104 net sections held by Rubellite at its inception in July of 2021. A significant portion of the newly acquired lands are complementary to existing operating areas in Ukalta and Figure Lake on the southern Clearwater trend, while the remainder of the additional new acreage supplements Rubellite's exploratory acreage in the northern Clearwater play fairway and captures land on other Clearwater exploration prospects.

The Company is finalizing its plans to evaluate several of its northern Clearwater trend exploratory land blocks, including lands at West Dawson and Peavine, with the drilling of four to six (3.0 – 4.0 net) exploratory wells prior to April 1, 2023. Exploration capital expenditures are expected to include vertical evaluation and multi-lateral drilling activities on exploration blocks in the Northern Clearwater trend which are dependent on timing of surface access. Exploration and development capital expenditure guidance excludes undeveloped land purchases and additional acquisitions.

Forecast drilling activities are expected to be fully funded from adjusted funds flow (see "Non-GAAP and Other Financial Measures") and the Company's credit facility. The Figure Lake drilling program will be partially funded by the Figure Lake GORR, which is forecast to contribute $1.7 million in 2022.

The 2022 drilling program at Ukalta, Figure Lake and Marten Hills is expected to continue to drive progressive production growth over the remainder of 2022. Third quarter sales volumes are forecast to average between 1,600 and 1,800 bbl/d and will continue to ramp up through the balance of the year. Adjusting for several wells at Ukalta that have performed below the Ukalta area type curve, and the earlier than forecast conversion to the 30% after payout working interest at Marten Hills, Rubellite's full year 2022 forecast average sales production levels are expected to be between 1,700 and 2,000 bbl/d, down from previous guidance of 2,200 to 2,400 bbl/d.

Financial and Operating Highlights

Rubellite is a Canadian energy company engaged in the exploration, development and production of heavy crude oil from the Clearwater formation in Eastern Alberta, utilizing multi-lateral drilling technology. Rubellite has a pure play Clearwater asset base and is pursuing a robust organic growth plan focused on superior corporate returns and funds flow generation while maintaining a conservative capital structure and prioritizing environmental, social and governance ("ESG") excellence. Additional information on Rubellite can be accessed at the Company's website at www.rubelliteenergy.com and on SEDAR at www.sedar.com.

The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.

Barrel of oil equivalent ("boe") may be misleading, particularly if used in isolation. In accordance with NI 51-101, a conversion ratio for conventional natural gas of 6 Mcf:1 bbl has been used, which is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, utilizing a conversion on a 6 Mcf:1 bbl basis may be misleading as an indicator of value as the value ratio between conventional natural gas and heavy crude oil, based on the current prices of natural gas and crude oil, differ significantly from the energy equivalency of 6 Mcf:1 bbl. A conversion ratio of 1 bbl of heavy crude oil to 1 bbl of NGL has also been used throughout this news release.

The following abbreviations used in this news release have the meanings set forth below:

Any references in this news release to initial production rates are useful in confirming the presence of hydrocarbons; however, such rates are not determinative of the rates at which such wells will continue production and decline thereafter and are not necessarily indicative of long-term performance or ultimate recovery. Readers are cautioned not to place reliance on such rates in calculating the aggregate production for the Company. Such rates are based on field estimates and may be based on limited data available at this time.

Throughout this news release and in other materials disclosed by the Company, Rubellite employs certain measures to analyze financial performance, financial position and cash flow. These non-GAAP and other financial measures do not have any standardized meaning prescribed under IFRS and therefore may not be comparable to similar measures presented by other entities. The non-GAAP and other financial measures should not be considered to be more meaningful than GAAP measures which are determined in accordance with IFRS, such as net income (loss), cash flow from operating activities, and cash flow from investing activities, as indicators of Rubellite's performance.

Capital Expenditures: Rubellite uses capital expenditures (or "capital spending") related to exploration and development to measure its capital investments compared to the Company's annual capital budgeted expenditures. Rubellite's capital budget excludes acquisition and disposition activities as well as the accounting impact of any accrual changes.

The most directly comparable GAAP measure for capital expenditures is cash flow used in investing activities. A summary of the reconciliation of cash flow used in investing activities to capital expenditures, is set forth below:

Operating netbacks and total operating netbacks after risk management contracts: Operating netback is calculated by deducting royalties, production and operating expenses, and transportation costs from oil revenue. Operating netback is also calculated on a per boe basis using total production sold in the period. Total operating netbacks after risk management contracts is presented after adjusting for realized gains or losses from risk management contracts. Rubellite considers that operating netbacks is a key industry performance indicator and one that provides investors with information that is also commonly presented by other crude oil and natural gas producers. Rubellite considers operating netback to be an important performance measure to evaluate its operational performance as it demonstrates its profitability relative to current commodity prices. Rubellite considers the presentation after risk management contracts an important measure to evaluate performance after risk management activities. Refer to reconciliations in the MD&A under the "Operating Netbacks" section.

Net debt/asset: Net debt or net asset is calculated by deducting any borrowing from adjusted working capital. Adjusted working capital is current assets less current liabilities, adjusted for the removal of the current portion of risk management contracts. Rubellite uses net debt or net asset as an alternative measure of outstanding debt. Management considers net debt, net asset and adjusted working capital as important measures in assessing the liquidity of the Company. Net debt and net debt to adjusted funds flow ratios are used by management to assess the Company's overall debt position and borrowing capacity. Net debt to adjusted funds flow ratios are calculated on a trailing twelve-month basis. Net debt is not a standardized measure and therefore may not be comparable to similar measures presented by other entities.

Adjusted working capital: Adjusted working capital deficiency or surplus includes total current assets and current liabilities excluding any current portion of risk management contract assets and liabilities related to the Company's risk management activities.

The following table reconciles adjusted working capital and net debt as reported in the Company's statements of financial position:

Adjusted funds flow: Adjusted funds flow is calculated based on net cash flows from operating activities, excluding changes in non-cash working capital and expenditures on decommissioning obligations since the Company believes the timing of collection, payment or incurrence of these items is variable. Expenditures on decommissioning obligations may vary from period to period depending on capital programs and the maturity of Rubellite's operating areas. Expenditures on decommissioning obligations are managed through the capital budgeting process which considers available adjusted funds flow. Management uses adjusted funds flow and adjusted funds flow per boe as key measures to assess the ability of the Company to generate the funds necessary to finance capital expenditures, expenditures on decommissioning obligations and meet its financial obligations.

Adjusted funds flow pre-transaction costs is calculated as adjusted funds flow less transaction costs. Management has excluded transaction costs from the calculation as these are not related to cash flow from operating activities as they relate to the acquisition of the Clearwater assets from Perpetual Energy Inc. ("Perpetual"), in the comparative period.

Adjusted funds flow is not intended to represent net cash flows from operating activities calculated in accordance with IFRS.

The following table reconciles net cash flows from operating activities as reported in the Company's condensed statements of cash flows, to adjusted funds flow and adjusted funds flow - pre transaction costs:

Rubellite calculates certain non-GAAP measures per boe as the measure divided by weighted average daily production. Management believes that per boe ratios are a key industry performance measure of operational efficiency and one that provides investors with information that is also commonly presented by other crude oil and natural gas producers. Rubellite also calculates certain non-GAAP measures per share as the measure divided by outstanding common shares.

Adjusted funds flow per share: adjusted funds flow per share is calculated using the weighted average number of basic and diluted shares outstanding used in calculating net income (loss) per share.

Adjusted funds flow per boe: Adjusted funds flow per boe is calculated as adjusted funds flow divided by total production sold in the period.

"Average realized oil price" is comprised of total oil revenue, as determined in accordance with IFRS, divided by the Company's total sales oil production on a per barrel basis.

"Average realized price after risk management contracts" is comprised of realized gain on risk management contracts, as determined in accordance with IFRS, divided by the Company's total sales oil production.

Certain information in this news release including management's assessment of future plans and operations, and including the information contained under the headings "Operations Update" and "2022 Outlook and Guidance" may constitute forward-looking information or statements (together "forward-looking information") under applicable securities laws. The forward-looking information includes, without limitation, statements with respect to: future capital expenditure and production forecasts; the anticipated sources of funds to be used for capital spending; the number of drilling rigs to be operated over certain time periods; expectations as to drilling activity plans in various areas and the benefits to be derived from such drilling including the production growth; expectations respecting Rubellite's future exploration, development and drilling activities and Rubellite's business plan.

Forward-looking information is based on current expectations, estimates and projections that involve a number of known and unknown risks, which could cause actual results to vary and in some instances to differ materially from those anticipated by Rubellite and described in the forward-looking information contained in this news release. In particular and without limitation of the foregoing, material factors or assumptions on which the forward-looking information in this news release is based include: the successful operation of the Clearwater assets; forecast commodity prices and other pricing assumptions; forecast production volumes based on business and market conditions; foreign exchange and interest rates; near-term pricing and continued volatility of the market including inflationary pressures; accounting estimates and judgments; future use and development of technology and associated expected future results; the ability to obtain regulatory approvals; the successful and timely implementation of capital projects; ability to generate sufficient cash flow to meet current and future obligations; Rubellite's ability to operate under the management of Perpetual pursuant to the management services and operating agreement; the ability of Rubellite to obtain and retain qualified staff and equipment in a timely and cost-efficient manner, as applicable; the retention of key properties; forecast inflation, supply chain access and other assumptions inherent in Rubellite's current guidance and estimates; the continuance of existing tax, royalty, and regulatory regimes; the accuracy of the estimates of reserves volumes; ability to access and implement technology necessary to efficiently and effectively operate assets; and the ongoing and future impact of the coronavirus and Russia's invasion of Ukraine and related sanctions on commodity prices and the global economy, among others.

Undue reliance should not be placed on forward-looking information, which is not a guarantee of performance and is subject to a number of risks or uncertainties, including without limitation those described herein and under "Risk Factors" in Rubellite's Annual Information Form and MD&A for the year ended December 31, 2021 and in other reports on file with Canadian securities regulatory authorities which may be accessed through the SEDAR website (www.sedar.com) and at Rubellite's website (www.rubelliteenergy.com). Readers are cautioned that the foregoing list of risk factors is not exhaustive. Forward-looking information is based on the estimates and opinions of Rubellite's management at the time the information is released, and Rubellite disclaims any intent or obligation to update publicly any such forward-looking information, whether as a result of new information, future events or otherwise, other than as expressly required by applicable securities law.

SOURCE Rubellite Energy Inc.