Chinook Energy Inc. ("our", "we", or "us") (TSX:CKE) is pleased to announce its fourth quarter 2016 financial and operating results and provide an operations update, including in respect of its most recent three well Birley/Umbach drilling program.
Our operational and financial highlights for the three months and year ended December 31, 2016 are noted below and should be read in conjunction with our consolidated financial statements for the years ended December 31, 2016 and 2015 and our related management's discussion and analysis which have been posted on the SEDAR website (www.sedar.com) and our website (www.chinookenergyinc.com).
2016 Highlights (Exclusive of assets disposed to Craft Oil Ltd.)
2017 Recent Operations Highlights
On June 10, 2016, we completed the conveyance of the majority of our Alberta oil and natural gas assets, excluding our Montney assets, and the associated decommissioning obligations in addition to $0.9 million cash (collectively, the "Subject Assets") to a predecessor of Craft Oil Ltd. ("Craft"), a private Calgary-based petroleum and natural gas production company, for 70% of its issued and outstanding common shares pursuant to an asset purchase and sale agreement dated and effective May 1, 2016. On December 12, 2016 we completed the distribution of all of the Craft shares held by us to our shareholders as at the close of business pursuant to a plan of arrangement under the Business Corporations Act (Alberta) (the "Craft Share Distribution"). Following the Craft Share Distribution, we no longer had any ownership in Craft and, as a result, for subsequent reporting periods, the results of Craft are no longer required to be consolidated into our results.
2017 Non-Core Asset Dispositions
Effective January 23, 2017, we completed the sale of certain of our non-core assets located in the Knopcik/Pipestone area of Alberta for net consideration of approximately $7.5 million, subject to customary closing adjustments.
Effective February 1, 2017, we completed the disposition of certain of our non-core assets located in the Gold Creek area of Alberta for net consideration of approximately $10.5 million, subject to customary closing adjustments.
The foregoing dispositions further strengthened our company to pursue a more aggressive drilling program on our core Birley/Umbach acreage.
2016 Financial Results
Our production in the fourth quarter of 2016 averaged 4,655 boe/d, up almost 19% from the same period in 2015. This increase is attributed to the completion of our Birley/Umbach compressor expansion during the first quarter of 2016, in addition to improved commodity pricing and a new gas handling agreement which enabled us to reactivate wells in the Martin Creek and Black Conroy areas of northeastern British Columbia, adding 1,100 boe/d of production during the fourth quarter. These increases were partially offset by Craft's disposition of certain Alberta assets in October 2016 followed by our completion of the Craft Share Distribution in December 2016, in addition to natural declines, additional property dispositions and voluntary shut-ins. On an unconsolidated basis (excluding results from Craft), our fourth quarter 2016 production averaged 2,593 boe/d.
Our 2016 petroleum and natural gas revenues were down approximately 23% from 2015 primarily as a result of both decreased volumes and realized commodity prices. However, our fourth quarter petroleum and natural gas revenues increased almost 46% from the same period of 2015 primarily as a result of increased natural gas and natural gas liquids volumes and increased realized commodity prices. On an unconsolidated basis, our fourth quarter petroleum and natural gas revenues were down approximately 41% from the same period of 2015 primarily as a result of decreased crude oil production. On an unconsolidated basis, we had lower natural gas and natural gas liquids production during the fourth quarter; however, these production decreases were offset by higher commodity prices which led to an increase of approximately 11% and 23% in our natural gas and natural gas liquids revenues, respectively, during the fourth quarter compared to the same quarter of 2015, despite the decrease in volumes.
Our 2016 net production expense (operating costs net of processing income) decreased by approximately 16% to $27.4 million from $32.8 million in the same period of 2015. This decrease primarily resulted from disposing or shutting-in high operating cost/lower netback properties during the year. On an unconsolidated basis, our fourth quarter net production expense of $9.39/boe benefited from the disposition of higher operating cost assets and a new gas handling agreement which we entered into during the third quarter of 2016. For 2017 we forecast our operating costs to be approximately $10.00/boe ($9.50/boe net of processing income.)
We have focused on improving our G&A cost structure and implementing cost cutting initiatives. Our year over year G&A costs decreased by approximately 6% despite including $1.6 million of Craft G&A costs. Although personnel were transferred to Craft on conveyances of the Subject Assets, we will not report this significant G&A cost reduction until the first quarter of 2017. During 2016, $2.4 million of our total G&A costs related to rent expense incurred on our head office lease which expires June 30, 2019. Assuming current rental market conditions remain the same or similar, we expect a favourable rent adjustment commencing in 2019 upon our lease expiration, based on our anticipated office space requirements.
Our fourth quarter funds from operations were $1.7 million an increase of approximately 13% compared to the same quarter of 2015 as a result of increases in our production volumes and corporate netbacks. On an unconsolidated basis, our fourth quarter funds from operations were $0.2 million. For the year ended 2016, we reported an outflow from operations of $1.0 million compared to funds from operations of $9.0 million during the year ended 2015 as a result of lower production volumes and corporate netbacks. Our lower corporate netback was primarily due to lower realized commodity pricing.
We reported a net loss for the year ended 2016 of $54.8 million compared to a loss of $83.6 million for the year ended 2015. During 2016, we reported a lower impairment charge of $58.1 million related to development and production assets held by Craft, as well as a recovery of prior period impairments of $17.0 million related to our remaining assets at December 31, 2016, compared to an impairment charge of $75.0 million during the year ended 2015.
We have transformed into a pure play Montney focused company. Completing the foregoing non-core asset dispositions at Gold Creek and Knopcik/Pipestone during the first quarter of 2017 raised capital which we are actively deploying to develop and expand our Birley/Umbach property.
During mid-February 2016, we brought on-stream three (2.75 net) additional wells at Birley/Umbach upon the commissioning of our new compression facility. During the fourth quarter of 2016, we successfully completed a three well (2.63 net) drilling program at Birley/Umbach which was on schedule and under budget by approximately 26%, with average drilling costs of approximately $1.28 million per well ($1.12 million, net).
During the first quarter of 2017, we completed and tied-in the three wells (the a-71-F, d-95-F and c-95-F wells) drilled during the fourth quarter of 2016.
The a-71-F well has been on production for 8 days and is currently producing at a restricted gross rate of 3.9 mmcf/d and 77 bbls of free condensate per day (gross - 724 boe/d; net - 540 boe/d). The d-95-F well has been on production for 8 days and is currently producing at a restricted gross rate of 3.7 mmcf/d and 154 bbls of free condensate per day (gross - 774 boe/d; net - 761 boe/d). The c-95-F well has been on production for 4 days and is currently producing at a restricted gross rate of 3.5 mmcf/d and 111 bbls of free condensate per day (gross - 690 boe/d; net - 624 boe/d).
Our future growth potential at Birley/Umbach is significant with 52,395 acres (43,809 net) of Montney rights with an upper Montney drilling inventory of over 270 (227 net) management identified locations along with additional potential to reduce inter-well spacing in the upper Montney (from four to five or six horizontal wells per section) and also develop middle and lower Montney layers throughout a 250 meter thick Montney interval.
We use commodity price hedges to support our capital investment and growth by providing more certainty regarding our funds flow and balance sheet management. Our internal policy permits us to hedge up to a maximum period of 24 months, based on our total estimated oil and natural gas production volumes, consisting of no more than 50% for the first 12 months and 25% for the last 12 months.
On January 23, 2017, we announced a $40 million capital program for 2017 which included the expansion of our facility at Birley/Umbach to 50 mmcf/d and the drilling of six (4.5 net) wells which were anticipated to be 1,600 meters in length with frac spacing of 60 to 65 meters. We are optimizing our drilling and completion program which has been revised to now include the drilling of four (3.67 net) wells, two (2.0 net) of which will have lateral sections of 1,600 meters in length and two (1.67 net) will have 1,800 meter length laterals. All four wells will have tighter frac spacing of approximately 52 meters from the original 60 to 65 meters. The additional length of two of the wells is anticipated to add to the recoverability of hydrocarbons while increased frac density is anticipated to result in increased initial well rates. This change in our drilling program will result in 10% more net frac stages despite resulting in 0.83 fewer net wells. As a result of the longer length of two of the wells and the decreased frac spacing, the amount of our capital program will be maintained at $40 million. We are also marginally increasing our previously announced average and ending production for 2017 and marginally decreasing our working capital surplus at December 31, 2017.
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.
SOURCE: Chinook Energy Inc.
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