Cequence Energy Ltd. ("Cequence" or the "Company") (TSX: CQE) is pleased to provide an update on its recent operational activities and to announce its year-end reserve evaluation as prepared by its qualified independent reserve evaluator as well as its operating and financial results for the fourth quarter and year ended December 31, 2016. The Company's Consolidated Financial Statements and Management's Discussion and Analysis are available at www.cequence-energy.com and on SEDAR at www.sedar.com.
Recent Operational Highlights
In 2016, the Company restructured the management team with a focus on achieving repeatable, operational successes and efficiencies with financial discipline that protected its balance sheet. Through 2016, the Company executed on implementing various cost savings initiatives which exceeded its financial objectives.
More recently in Q4 2016 and Q1 2017, the Company has continued the execution of its strategic business plan, by demonstrating strong operational successes, with recent operational highlights including:
Montney Operations Update
The 16-33-61-27W5 west Simonette Montney well has performed strongly over its first year of operation with a field IP 365 of 897 boe/d (22% total liquids) and a 2016 exit rate of 660 boe/d (20% liquids). This well was the longest Cequence Montney well at 6,100 total meters and a completed lateral length of 3,050 meters utilizing a 71 stage cemented coil shift frac system. Two follow-up Montney wells, located at 1-36 and 8-36-61-1W6M, were recently drilled with lateral lengths of 2,700 meters (76 frac ports) and 3,020 meters (91 frac ports), respectively. Both wells were drilled on budget, with drilling costs of $4.0 million per well, including drilling equipment mobilization costs. The new 8-36-61-1W6 well now represents Cequence's longest Montney well at 6,209 total meters. The completion for the 8-36 well commenced on March 4, 2017 with 3,640 metric tonnes of sand (8 MM lbs) placed in 5.3 days. Completion operations at the 1-36 well began on March 10th and is forecast to take 4 to 5 days. Flow rate information is expected to be released on these wells once they have produced for 30 days.
The western Simonette Montney lands are characterized as having low average gross overriding royalties (1-3%) with higher liquid yields thereby increasing the economics of wells drilled on those lands. Cequence estimates a total of approximately 50 net Montney locations(1) exist in the West Simonette lands.
Simonette Dunvegan Oil
Two gross (50% WI) Dunvegan oil wells were drilled in Q4 2016 and brought on production in January 2017. The average drilling, completion, and tie-in cost of the wells was $4.0 million gross or 11% under budget. Since being tied into permanent facilities, the gross IP 30 for the 10-11-62-26W5 well was 645 bbls/d of oil (990 boe/d) while 15-11-62-26W5 well was 372 bbls/d of oil (675 boe/d). Both wells are above the Cequence IP 30 model of 300 bbls/d of oil (550 boe/d), and both wells are identified as two of top 15 performing oil wells in Alberta for the month of January 2017 (based on publicly available producing day rate information).
A total of 24 net Dunvegan oil wells have been identified on Cequence lands.
2016 Financial and Reserves Highlights
Financial and reserves highlights of the Company for 2016 include:
2016 was a challenging year for natural gas prices as AECO averaged $2.18/mcf, representing the lowest annual average natural gas price in over 10 years. The Company responded by reducing capital expenditures, periodically curtailing uneconomic production and pursuing initiatives to reduce both operating and general and administrative expenses. Through the reduction of staff and office space, as well as other cost-saving initiatives, the Company achieved a 22% reduction in general and administrative expenses prior to restructuring in 2016 as compared to 2015. Cequence undertook several operating cost efficiency projects at Simonette, resulting in annual operating expenses of $8.49/boe representing a decrease of 7% from 2015.
For the twelve months ended December 31, 2016, the Company's natural gas price including realized hedging averaged $2.27/mcf, down $1.00/mcf from $3.27/mcf in 2015. Reference prices remained low throughout most of 2016 as an unseasonably warm North American winter in 2015 and 2016 resulted in record high North American natural gas inventories. Prices increased during the second half of 2016 through a combination of lower North American natural gas drilling activity, increased natural gas usage for power generation and U.S. exports that resulted in an improvement of supply/demand fundamentals and alleviated the large gas storage surplus. For the fourth quarter of 2016, natural gas price including realized hedging improved significantly to average $2.92/mcf.
As a result of improved commodity prices and lower than expected costs, funds flow from operations for the twelve months ended December 31, 2016 was $11.3 million compared to the Company's revised guidance of $8 million. Fourth quarter funds flow from operations were $6.6 million compared to $4.9 million in the fourth quarter of 2015. For the twelve months ended December 31, 2016, the Company recorded a comprehensive loss of $28.1 million compared to a loss of $250.1 million for the twelve months ended December 31, 2015 when the Company recorded impairments of $230.4 million as a result of a lower outlook for crude oil and natural gas prices.
Capital expenditures, prior to dispositions, were $22.6 million for the twelve months ended December 31, 2016, a decrease of 64% from 2015. Consistent with 2015, the Company's 2016 capital expenditures were focused on its Simonette property. The Simonette gas plant (50% WI) was completed during the first quarter of 2016, which is expected to provide the Company with improved long term market access for its natural gas production. During the twelve months ended December 31, 2016, Cequence drilled two Montney wells, completed one Montney well and drilled and completed two (one net) Dunvegan wells. The Company's drilling program commenced in the fourth quarter of 2016 and was partly funded by the Company's $10 million flow-through common share financing in October 2016.
The Company continued to prudently manage its balance sheet in 2016. As at December 31, 2016, the Company's senior credit facility remained undrawn, and the Company had net debt of $64 million. The Company has hedged approximately 50% of its expected 2017 natural gas production (net of royalties) at an average price of $3.02/mcf.
2016 Operational and Production Matters
In 2016, the Company spent $22.6 million of capital before divestitures ($17.3 million net of divestitures), with approximately $9.1 million (40%) weighted toward netback improvement projects including commissioning the Simonette 13-11 refrigeration plant, adding a connection to the Nova Gas Transmission system, reducing field rentals, and initiating an infield water disposal solution. For the year ended December 31, 2016, operating costs averaged $8.49 per boe in 2016, down 7% from 2015, while the Company's operating costs for the fourth quarter of 2016 were $7.81, down 16% from the same period in 2015.
Corporate production for the three and twelve months ended December 31, 2016 averaged 8,609 boe/d and 8,826 boe/d, respectively, compared to production of 8,213 boe/d and 9,485 boe/d in 2015. In November, Cequence began a program to drill two gross (one net) Dunvegan oil wells and two gross (two net) Montney wells. This drilling program saw $9.0 million spent in the fourth quarter of 2016 with the wells scheduled to come on production during the first quarter of 2017. As these wells did not contribute to production in 2016, they are not included in the proved developed producing reserve category in the GLJ Report.
For the first quarter of 2017, Cequence has contracts on Alliance and TCPL that average 40,366 GJ/d at a blended discount to AECO of $0.31/GJ. Beginning April 1, 2017 the Company's contracted volume on these pipelines drops down to 20,000 GJ/d, and on November 1, 2017, the Company's contracted volume reduces to 10,000 GJ/d. The Company is pursuing additional firm service but currently will be relying on interruptible service on both the Alliance and TCPL pipeline systems. Interruptible transportation service may be more volatile than firm service and may result in higher transportation charges or inconsistent production times until additional firm service is contracted. Beginning, April 1, 2018 the Company will have 35,000 GJ/d of firm service with TCPL from its Simonette property.
The Company has entered into a binding contract to ship 10,850 GJ/d of natural gas on the TransCanada mainline system from the Empress receipt point to the Dawn hub in Ontario subject to regulatory approval with the National Energy Board and financial assurances. The term of the contract is 10 years and has early termination rights that can be exercised following the initial five years of service. The toll for this service is $0.77/GJ. The Company currently expects to begin shipping gas under these arrangements on April 1, 2018. The contract provides Cequence with pricing diversification for approximately 20 percent of its natural gas production.
2016 Independent Reserve Evaluation Matters
GLJ Petroleum Consultants ("GLJ") prepared the reserves report effective December 31, 2016 (collectively referred to herein as the "GLJ Report") for the oil, natural gas liquids and natural gas reserves attributable to the properties of Cequence. The GLJ Report was prepared in accordance with the definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook and National Instrument 51-101 ("NI 51-101"). Reserves highlights of the Company include:
Cequence is a publicly traded Canadian energy company involved in the acquisition, exploitation, exploration, development and production of natural gas and crude oil in western Canada. Further information about Cequence may be found in its continuous disclosure documents filed with Canadian securities regulators at www.sedar.com.
SOURCE: Cequence Energy Ltd.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.