Crew Energy Inc. Announces First Quarter 2017 Financial and Operating Results, Updated Montney Resource Evaluation and Non-Core Asset Disposition
Crew Energy Inc. (TSX:CR) ("Crew" or the "Company") is pleased to announce our operating and financial results for the three month period ended March 31, 2017, along with an updated independent Montney Resource Evaluation. Our Financial Statements and Notes, as well as Management's Discussion and Analysis ("MD&A") for the three month period ended March 31, 2017 are available on Crew's website and filed on SEDAR.
During the first three months of 2017, activity levels increased across the Western Canadian Sedimentary Basin in response to frozen ground conditions and an improved commodity price environment. This resulted in a tight supply-demand dynamic for field services, particularly reservoir stimulation. Crew was able to complete five of a planned ten wells in the quarter and as a result underspent our forecasted first quarter budget by deferring these operations until after spring break up. Our production of 23,231 boe per day was at the lower end of our guidance range for the quarter and is reflective of these service delays. Work on the expansion of our West Septimus facility to double throughput capacity continued in the quarter, and is currently ahead of schedule, with commissioning of the expanded facility currently planned for the fourth quarter of 2017.
We continued to move forward on Crew's long term growth plan by successfully closing a $300 million senior note financing, which has a 6.5% coupon and a term through March, 2024. This financing has positioned Crew with $535 million of total credit capacity and enhances our ability to manage through continued commodity price volatility for an extended period. Upon the closing of this financing, we repaid the balance on our $235 million credit facility, resulting in an undrawn bank facility, and after the end of the quarter, the credit facility was approved for extension at the same level. Subsequent to quarter end, we entered into an agreement to dispose of our non-core Goose property in NE BC for proceeds of approximately $49 million. Upon closing, which is expected prior to the end of the second quarter, we will have monetized a portion of our asset base that was not within Crew's long-term development horizon.
MONTNEY RESOURCE EVALUATION UPDATE
Crew is pleased to report the results of its annual updated independent Montney resource evaluation conducted by Sproule Associates Ltd. ("Sproule") on our principal NE BC Montney lands including Septimus, West Septimus, Groundbirch / Monias, Attachie and Tower as well as other minor NE BC Montney lands, effective December 31, 2016 (the "Resource Evaluation"). Sproule performed detailed mapping across the evaluated areas which included section by section estimates of reservoir parameters, such as pressure, temperature, porosity, and water saturation, which make up the TPIIP determination. At 112.2 TCFE, Crew's TPIIP estimate provides the Company with significant opportunities to continue increasing the current ECR estimates plus add reserves with further drilling. Crew's risked best estimate ECR on natural gas increased 3% to 7.7 Tcf, natural gas liquids ("ngl") risked best estimate ECR was 1% higher at 227 million barrels, while our crude oil risked best estimate ECR decreased by 2 million bbls to 21 million bbls. All numbers referenced from the Resource Evaluation are prior to the pending disposition of Crew's Goose asset.
The updated Resource Evaluation demonstrates the significant potential of our lands, offering multiple years of future running room and significant value creation opportunities. Although the play remains in its early stages of development, with new and enhanced drilling and completions techniques, Crew and other area operators continue to further delineate and de-risk the potential of this massive play and demonstrate results from the Montney that continue to improve.
Crew's first quarter funds from operations of $27.7 million was consistent with the previous quarter but 137% higher than the first quarter of 2016, reflecting stronger year over year commodity prices, and operating and transportation costs that were 17% and 9% lower, respectively. We continue to see compelling returns from Greater Septimus, where our first quarter operating netback from the area was $19.41 per boe compared to $17.16 per boe corporately, reflecting the strong economics and returns generated in our core Montney operating areas.
Crew's realized light oil price improved by 60% in the first quarter of 2017 over the first quarter of 2016, while our heavy oil price increased 110% and our ngl prices were 76% higher than the same period in 2016. Improved first quarter oil and ngl prices were the result of improved world oil prices prompted by OPEC's (Organization of Petroleum Exporting Countries) decision to limit production in the first half of 2017 in order to reduce global inventories. This action stabilized world oil prices late in 2016 resulting in a 50% improvement in Crew's Canadian dollar denominated WTI benchmark price. Higher oil prices also supported stronger demand and pricing for the condensate, propane and butane that make up Crew's ngl mix. Crew's realized natural gas price increased 51% over Q1 of 2016 as a result of stronger North American natural gas prices. Natural gas prices were supported by lower supply related to reduced capital investment and lower inventories resulting from warmer 2016 summer weather, liquefied natural gas exports from the U.S. gulf coast and increased U.S. exports to Mexico.
First quarter 2017 capital expenditures totaled $75 million which included the drilling of eleven Montney wells and four heavy oil wells. Operations during the quarter also included the completion of five Montney wells and two heavy oil wells. Drilling and completion expenditures for the quarter were $10 million lower than budgeted as a lack of available completion services restricted the first quarter program to five of a planned ten Montney completions. During the quarter we also continued with the expansion of our West Septimus facility from 60 mmcf per day to 120 mmcf per day. Major equipment fabrication was ahead of schedule resulting in $14.1 million charged to the expansion which represents an additional $5 million of capital accrual towards the project in the quarter.
Consistent with our efforts to maintain a strong balance sheet, control costs, and ensure liquidity to execute our strategy, on May 1, 2017 Crew entered into a new arrangement resulting in the replacement of one of the partners in our Septimus Gas Processing Complex (comprised of the Septimus and West Septimus facilities). This new arrangement will not impact Crew's current 28% ownership or operatorship of the complex, while the other remaining partner retains a 22% ownership and the new partner a 50% ownership. This change to the arrangement will save the Company approximately $1 million per year on processing costs associated with the current complex further reducing overall Greater Septimus operating costs. As part of this arrangement, the new partner has agreed to fund 50% of the current West Septimus facility expansion. Crew has retained the option to buy both partners' interest in these facilities at future dates.
On March 14, 2017, Crew closed an offering of $300 million aggregate principal amount of 6.5% senior unsecured notes due March 14, 2024. Proceeds from the note offering were partially used to redeem Crew's $150 million, 8.375% senior unsecured notes due 2020, with the excess proceeds used to repay indebtedness under our credit facility and for the continued development of our Montney assets. Successful completion of this offering enhances Crew's liquidity and financial flexibility. Total net debt at the end of the quarter was $301.6 million, including working capital deficiency and our new $300 million ($293.0 million net of deferred financing costs) 6.5% senior unsecured notes that have a seven year term with repayment due in March of 2024. The Company also recently completed our annual bank facility review with the facility renewed at the same level of $235 million. The pending disposition of our non-core Goose asset will further contribute to our flexibility and add cash to our balance sheet.
TRANSPORTATION, MARKETING & HEDGING
Crew's realized natural gas price has outperformed the benchmark indices for the last six quarters, which demonstrates the value of our active marketing and hedging program, diversified sales markets as well as the 19% higher heat content of our natural gas over industry standards. One of the many advantages of our Montney land base is that we are situated with access to all three major export pipeline systems which provides substantial market and operational optionality. During the first quarter, our natural gas sales portfolio was allocated 45% to Chicago City Gate, 26% to AECO, 19% to Alliance ATP and 10% to Station 2. Crew will continue to plan for processing and transportation diversification that is timed to coincide with our longer term growth strategy, and afford us the ability to access new markets. Our transportation arrangement on the Spectra pipeline increased from 13 mmcf per day to 30 mmcf per day effective April 1, 2017. In the second quarter of 2018, we also secured 60 mmcf per day of capacity on the TransCanada pipeline system ("TCPL"), affording improved market diversity for natural gas from our Greater Septimus and Groundbirch areas. In mid-2019, we have also secured an additional 60 mmcf per day of firm capacity on the TCPL system.
In the interests of managing our commodity price risk and exposure, Crew continued to systematically add 2017 and 2018 hedges during the first quarter. For the balance of 2017, Crew's total natural gas hedged position is approximately 50% of our forecast 2017 gas sales at a transportation-adjusted equivalent price of $2.92 per gj, which when adjusting for the higher heat content of Crew's gas, equates to $3.62 per mcf. For liquids, we have approximately 50% of our 2017 light oil and natural gas liquids sales hedged at an average price of CDN$68.17 per bbl.
NE BC Montney - Greater Septimus Overview
During the first quarter, Crew continued to focus on drilling and completions activities primarily at our Greater Septimus area, while advancing our West Septimus facility expansion. We directed the majority of our first quarter capital to our Greater Septimus, including $14.1 million allocated to the doubling of our West Septimus processing facility from 60 mmcf per day to 120 mmcf per day. In addition, Crew drilled ten (10.0 net) Montney wells and completed three (3.0 net) Montney wells of our budgeted eight well Greater Septimus completions program in the quarter.
Crew continued to see efficiency improvements in the first quarter as the first five wells drilled off the 4-22 pad achieved a record low average 12.6 drilling days per well at an average well cost of $1.5 million, contributing to strong capital efficiencies and supporting returns. Following up on the success of our first two ultra condensate-rich wells, we spud the first well on a six well pad directly offsetting the 7-30 wells which continue to exceed expectations.
Late in 2016, industry activity increased significantly in NE BC, particularly the demand for reservoir stimulation services. All industry participants, including Crew, have been subject to scheduling challenges with service companies. The delays Crew experienced with completions in turn delayed new production volumes coming on-stream in the quarter. These delays reduced capital expenditures for completions by approximately $10 million in Q1 relative to our budget, which were partially offset by the West Septimus facility expansion running ahead of schedule.
Crew's geographic location in the Montney has typically provided year round access to conduct our drilling and completions operations, or at worst, resulted in modest delays during spring break-up. For the first time in Crew's operational history in the Montney, we were forced to completely shut down these activities in the middle of April. This year's spring break up was a 'perfect storm' of an initial spring thaw, complicated by a significant period of cool, snowy weather which led to extremely poor road conditions and resultant road bans. Given the circumstances, and an emphasis on prioritizing our capital efficiencies, Crew has adjusted our operational plan to incorporate an extended spring break-up period during which no drilling or completions activity will be undertaken until June. Crew currently has three drilling rigs sitting on Crew leases, a significant inventory of 18 wells drilled and uncompleted in NE BC and has made arrangements to secure necessary equipment and services to complete the wells once access to our well sites is available.
First quarter production at Greater Septimus averaged 17,440 boe per day, representing approximately 76% of the Company's total production volumes. Greater Septimus operating netbacks of $19.41 per boe were the highest in the past five quarters, due to increased revenue, and supported by low operating costs of $3.34 per boe and $1.67 per boe transportation costs, which have been kept stable despite inflationary pressures as industry activity levels increase.
Crew's ultra condensate-rich area is the Company's new focus for development at Greater Septimus. Results from area wells at the 7-30 pad are compelling in the current environment, including C7-30 which has produced 70,000 bbls of condensate in 220 days on production with an average condensate gas ratio ("CGR") of 187 bbls per mmcf, and B7-30 which has produced 40,000 bbls of condensate over 165 days with an average CGR of 133 bbls per mmcf.
Three new well completions at Septimus in late 2016 have resulted in record well performance at an all-in average well cost of $3.8 million. Over a 123 day period, the wells each produced 0.8 bcf of natural gas with a well head condensate yield of 19 bbls per mmcf and have continued to produce at a current average rate of 4.7 mmcf per day per well.
NE BC Montney - Groundbirch overview
Crew spud the first of two delineation wells at Groundbirch that will employ the latest completion technology as part of further delineating our significant Groundbirch resource (which represents 18.7 TCFE of TPIIP in our Resource Evaluation) and in preparation for development drilling in 2018 as part of our long-term growth plan. The Company also acquired ownership of 10 sections of surface rights at Groundbirch on which we have planned the construction of a gas plant and associated Montney development of a minimum of 150 wells. Ownership is expected to reduce surface lease costs, improve access and timing of operations, provide access to a major rail line for potential trans-load capability in addition to providing access to proprietary gravel for lease and road maintenance and construction.
NE BC Montney - Tower overview
Crew's Montney Tower area continues to represent significant future development opportunity for the Company as crude oil prices strengthen. We realized increased oil production at Tower in Q1 as a result of successfully completing two light oil wells in the fourth quarter of 2016 and two light oil wells in the first quarter of 2017. These four wells were drilled in 2014 prior to the collapse in oil prices, and were designed to be completed using plug and perf technology, which has been the predominant completion technique within the light oil window of the Montney relative to the then available open-hole completion technology. The first two wells have been on production for 60 and 80 days at average rates of 365 and 600 boe per day, with 53% and 64% liquids, respectively. The second two wells were completed late in the first quarter and achieved average rates of 445 and 520 boe per day, with 55% and 58% liquids over 35 and 60 days, respectively. In both sets of wells, the stronger of the two was placed in Crew's "Upper B" interval of the upper Montney while the other two wells tested the deeper Montney "C" stratigraphic interval of the upper Montney. All four wells presently flow without the aid of artificial lift. Crew has also undertaken the first stage of facility modifications to install gas lift which we believe will allow us to further optimize fluid production rates from these wells.
Lloydminster, AB/SK overview
At Lloydminster, Crew drilled four (4.0 net) oil wells including two dual-leg horizontal wells, completed two (2.0 net) wells and recompleted four (3.5 net) oil wells in the quarter. Production at our Lloydminster heavy oil property averaged 1,865 boe per day in the first quarter of 2017 which reflects minimal impact from the drilling and completion operations, and is part of the Company's plan to maintain heavy oil production in the range of 2,000 boe per day. The two completions were vertical wells in the Swimming area (Sparky formation) and the Wildmere area (Colony formation). The wells were placed on production in early March and by mid-April were producing at a combined average rate of 220 bbls of oil per day. Crew's two dual leg horizontal wells also located in the Swimming area are expected to be completed when road ban restrictions are removed.
Crew has assembled a sizeable and uniquely situated land base of 474 net sections (prior to the impact of the pending Goose disposition) which offers exposure to condensate-rich natural gas and light oil. The intrinsic value of Crew's acreage coupled with owned and operated facilities and infrastructure, firm transportation arrangements, a diversified marketing strategy, a strong balance sheet and a returns-focused strategy provide the foundation for long-term profitable growth and value creation. Under our current plan, we expect to exit 2017 in a strong financial position with an estimated debt to annualized fourth quarter 2017 funds from operations ratio of 1.5 times. Given these strengths, we believe our share price does not always reflect the underlying value of Crew's assets and as such, the Company intends to apply to implement a normal course issuer bid ("NCIB") through the facilities of the Toronto Stock Exchange (the "TSX") and alternative Canadian trading platforms, pursuant to which Crew would have the ability to repurchase, from time to time, our outstanding shares for cancellation. This NCIB is expected to commence later in May following application being made to, and approved by, the TSX and will terminate one year later.
Exiting the first quarter, Crew has an inventory of 18 drilled but uncompleted wells that we intend to complete in order to bring on new volumes, and will continue to time our completions to ensure new volumes come on-stream with the commissioning of our West Septimus facility expansion. In the interests of creating value for our shareholders, we remain focused on return-on-capital in the development of our assets. Crew's activity levels can be scaled back in a weak market to preserve our valuable reserves. We believe in the potential of our Montney assets, and are excited by the results from the ultra condensate-rich area which offers attractive economics in the current environment. Additional improvements in well results will be pursued through enhanced completions, while striving to improve operational efficiencies. With stronger financial liquidity, proceeds from the pending sale of Goose and the $300 million note offering, we are well positioned to continue executing our Montney focused strategy over the near and longer-term.
We have revised our capital planning based on the previously referenced delays, with our projected second quarter capital program reduced by approximately $30 million to between $25 and $35 million. Production additions will be heavily weighted to the fourth quarter, concurrent with the commissioning of our West Septimus plant expansion. Also, during the second quarter of 2017, the third-party McMahon gas processing facility will be shut down for an estimated 21 days, which will impact Crew's volumes by approximately 900 boe per day in the second quarter. This shut down, combined with the production delays caused by the extended spring break-up, results in second quarter 2017 production estimates of approximately 20,000 to 21,000 boe per day. We anticipate that Q3 and Q4 2017 production will average between 24,500 to 26,500 boe per day, and 29,500 to 31,500 boe per day, respectively, spending approximately $100 million in the last half of 2017. Accordingly, our 2017 annual production guidance is reduced by 4% to 24,000 to 26,000 boe per day, with a positive impact to our forecast 2017 exit rate, which is increasing to over 31,000 boe per day while our $200 million capital budget remains unchanged.
We are very pleased to have secured additional financial flexibility, and have a high-quality asset base that only continues to improve with time and technology. We would like to thank our employees and Board of Directors for their commitment to Crew, and our shareholders for their ongoing support through ongoing market challenges.
DECEMBER 31, 2016 RESOURCE EVALUATION
The following discussion in "Crew Northeast British Columbia Montney Resource Evaluation" is subject to a number of cautionary statements, assumptions and risks as set forth therein. See "Information Regarding Disclosure on Oil and Gas Reserves, Resources and Operational Information" at the end of this release for additional cautionary language, explanations and discussion, and see "Forward-looking Information and Statements" for a statement of principal assumptions and risks that may apply. See also "Definitions of Oil and Gas Resources and Reserves" in this news release. The discussion includes reference to TPIIP, DPIIP and ECR as per the Resource Evaluation as at December 31, 2016, prepared in accordance with the NI 51-101 and current COGE Handbook guidelines. Unless otherwise indicated in this news release, all references to ECR and prospective volumes are Best Estimate ECR and Best Estimate prospective volumes, respectively. All information referenced in the Resource Evaluation is prior to the pending disposition of Crew's Goose area, expected to close in the second quarter of 2017.
In accordance with NI 51-101 Crew's contingent resources have been subclassified into specified project maturity subclasses. Those that apply to Crew's resources include "development pending", "development on hold", and "development not viable". Sproule considers the 'development pending' and 'development on hold' project maturity subclasses to be economic and are therefore included in ECR. The economic status of the 'development not viable' project maturity subclass is undetermined and is therefore not included in the ECR reported. The "development not viable" sub-classification represented less than 2% of the sum of all three sub-classifications on a BOE basis, and accordingly, has not been considered to be material for reporting purposes. Crew does not have any resources within the "development unclarified" subclass.
CREW NORTHEAST BRITISH COLUMBIA MONTNEY RESOURCE EVALUATION
The Montney formation in NE BC has been identified as a world-class unconventional resource play with the potential for significant volumes of recoverable resources. The area includes dry gas, liquids-rich gas and light oil development opportunities, with Crew having access to all three hydrocarbon windows. It is one of the largest and lowest cost liquids-rich natural gas resource plays in North America and Crew's land base comprises 300,000 net acres, ideally situated in some of the most prospective parts of the play, with good access to infrastructure and multiple egress options.
Sproule was engaged to conduct an updated independent Montney resource evaluation of Crew's principal lands in the NE BC Montney region including Septimus, West Septimus, Groundbirch/Monias, Attachie, Tower and other minor NE BC Montney lands (the "Evaluated Areas") effective as of December 31, 2016, and based on Sproule's forecast price deck as at December 31, 2016 (the "Resource Evaluation"). The Resource Evaluation highlights the development potential on the Company's undeveloped land base providing Crew with significant opportunities to progress conversion of Resource to ECR and ultimately to increased reserve bookings over time. Further, the diversity of Crew's NE BC Montney assets with exposure to liquids-rich gas, crude oil and dry natural gas allows us to effectively navigate through commodity price cycles.
TPIIP for the natural gas-bearing lands in the Evaluated Areas remains unchanged relative to year end 2015 at 64.3 Tcf. Natural gas ECR was evaluated on an unrisked and risked basis in the Resource Evaluation and was subdivided into the Maturity Subclasses of 'development pending' and 'development on hold'. The risked 'development pending' natural gas ECR totaled 7.3 Tcf and the risked 'development on hold' ECR totaled 0.43 Tcf, which includes 104 bcf of 'development pending' natural gas and 26 bcf of 'development on hold' natural gas on Crew's oil-bearing lands.
The ECR of our ngl was also evaluated on an unrisked and risked basis in the Resource Evaluation and was subdivided into the Maturity Subclasses of 'development pending' and 'development on hold'. The risked 'development pending' ngl ECR totaled 211 MMbbl and risked 'development on hold' ngl ECR totaled 16 MMbbl which includes 3 mmbbls of 'development pending' ngl and 1 mmbbls of 'development on hold' ngl on Crew's oil-bearing lands.
On the oil-bearing Montney lands, TPIIP increased 1% to 7,979 MMbbl and DPIIP increased 2% to 1,647 MMbbl. Oil ECR was evaluated on an unrisked and risked basis in the Resource Evaluation and was subdivided into the Maturity Subclasses of 'development pending' and 'development on hold'. The risked 'development pending' oil ECR totaled 17 MMbbl and risked 'development on hold' oil ECR totaled 4 MMbbl.
Risking of the contingent resources included a quantitative assessment of the contingencies applicable to the project including evaluation drilling, corporate commitment and timing of production and development. Risking of the prospective resources included a quantitative assessment of these same factors, as well as a quantitative assessment of the chance of discovery.
The estimated cost to fully develop and bring on commercial production of the 'development pending' contingent resources for all three product types is approximately $11.2 billion (or approximately $3.0 billion discounted at 10%). The forecasted timeline to bring these resources onto production is between two and 17 years utilizing the same technology in horizontal drilling and multi-stage fracturing that Crew has already proven to be effective in the Montney formation in NE BC.
Based upon the foregoing analysis and resource information, coupled with Crew's expertise in the NE BC Montney, we anticipate that significant additional reserves will be developed in the future as we achieve continued drilling success on that portion of our Montney acreage which is currently undeveloped. Key positive factors considered in the Resource Evaluation estimates which support Crew's view that significant additional resources will be recovered include completions enhancements; improved economic conditions; historic drilling success and recoveries on the more fully-developed Montney acreage; abundant well log and production test data; the presence of analogue wells in the area; improving average initial productivity trends; and the application of increased drilling densities. Continuous development through multi-year exploration and development programs and significant levels of future capital expenditures are required in order for additional resources to be recovered in the future.
Our ability to recover additional resources is subject to numerous risks and the key negative factors include minimal well data from the Montney formation in certain intervals; a lack of long-term production history in the Montney; potential for variations in the quality of the Montney formation where minimal well data currently exists; access to capital that would enable us to continue development; low commodity prices which could impact economics; the future performance of wells; regulatory approvals or surface restrictions; lack of infrastructure in certain areas; access to required services at the appropriate cost; overall industry cost structures; and the continued efficacy of fracture stimulation technologies and application. In order for ECR to be converted into reserves, Crew's management and technical teams must continue to assess commercial production rates, devise firm development plans that incorporate timing, infrastructure and capital commitments. Confirmation of commercial productivity is generally required before the Company can prepare firm development plans and commit required capital for the development of the ECR. With continued development and delineation, some resources currently classified as ECR are expected to be reclassified as Reserves.
A key contingency that prevents the classification of ECR as Reserves is the additional drilling, completions and testing required to confirm viable commercial rates. Sproule assigned ECR beyond those areas which were assigned Reserves but which were within three miles of existing wells, or production tests. Further, a lack of infrastructure in the Evaluated Areas which is required to develop the resources, such as gas gathering, processing and natural gas liquids separation facilities, further impedes the reclassification of ECR to Reserves. In addition to these factors, and the general operational risks facing the oil and gas industry, there are several technical and non-technical contingencies that need to be overcome in order to reclassify ECR to Reserves. These include evaluation drilling, corporate commitment and timing of production and development of the ECR.
There is no certainty that any portion of the prospective resources will be discovered. There is uncertainty that it will be commercially viable to produce any portion of the prospective (if discovered) or contingent resources.
Crew Energy Inc. is a dynamic, growth-oriented exploration and production company, focused on increasing long-term production, reserves and cash flow per share through the development of our world-class Montney resource. Crew is based in Calgary, Alberta and our shares are traded on The Toronto Stock Exchange under the trading symbol "CR".
Financial statements and Management's Discussion and Analysis for the three month period ended March 31, 2017 and 2016 will be filed on SEDAR at www.sedar.com and are available on the Company's website at www.crewenergy.com.
SOURCE: Crew Energy Inc.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.