Journey Energy Inc. Reports its 2016 Financial Results, Announces Strategic Acquisition, and Updates 2017 Guidance
Journey Energy Inc. (JOY – TSX) ("Journey" or the "Company") is pleased to announce its financial results for 2016. The complete set of financial statements and management discussion and analysis for the year ended December 31, 2016 are posted on www.sedar.com and on the Company's website www.journeyenergy.ca.
Journey is pleased to announce that it has entered into a purchase and sale agreement with a private company to acquire interests in our Central Alberta core for an aggregate purchase price of approximately $35.6 million (the "Acquisition"), comprised of $29.6 million of cash and 2.1 million common shares of Journey. The Acquisition consists of approximately 2,000 boe/d (average for 2017; 28% oil & NGLs) of high value, long reserve life, operated, high working interest (75% average WI) liquids-rich gas production. This low-decline (16% decline) production base provides a stable estimated funds flow stream of $8-9 million for 2017, on an annualized basis. Journey will acquire a high working interest in two strategic gas plants and a network of greater than 250 kilometers of pipelines. Journey has identified a number of low-risk, low-cost, near term development opportunities that will allow Journey to maintain production on the assets over the remainder of the year for approximately 30% of forecasted funds flow.
The Acquisition is consistent with Journey's expansion strategy within its central Alberta core area by increasing Journey's extensive network of strategic infrastructure and further expanding its portfolio of low-risk multi-zone liquids focused horizontal drilling opportunities. Further details on the Acquisition are contained herein.
Highlights for the fourth quarter and the year ended 2016 are as follows:
Journey achieved production of 8,505 boe/d (49% liquids) in the fourth quarter, representing a 4% decrease from third quarter levels. During 2016 Journey sold approximately 1,290 boe/d of production and purchased approximately 650 boe/d resulting in net proceeds to the Company of $9.3 million. The impact of the net dispositions in the year was offset by our very successful coal bed methane ("CBM") project, which commenced in the third quarter. By the end of the CBM program Journey had recompleted in excess of 300 net, existing wellbores in the Countess area resulting in approximately 1,100 boe/d of initial, incremental, CBM production. These wells were recompleted at an aggregate cost of approximately $2.0 million to Journey. The incremental operating costs for these wells is less than $1.00/mcf as all the recompletions were within existing wellbores which are already serviced by existing Journey infrastructure and field operations staff.
Over the course of 2016, Journey participated in 7 (6.1 net) wells as compared to 16 (13.2 net) wells in 2015. The reduction in drilling activities was reflective of the low commodity prices in 2016, and particularly the first half of the year. The majority of the wells drilled were in the fourth quarter (5 gross (4.1 net)) to capitalize on positive signs that commodity prices were stabilizing at levels higher than those experienced earlier in the year. As the majority of our exploration and development capital was spent in the fourth quarter Journey realized only a partial benefit in 2016 from these new wells.
The low commodity prices in early 2016 forced our entire industry to focus on controllable costs. Journey was successful in reducing its field costs (operating and transportation) by 19% to $12.04/boe in the year from $14.83 in 2015. A portion of this reduction was attributable to the Company's acquisition and divestiture ("A&D") program. Certain higher operating cost properties were disposed of and this was offset with the acquisition of a strategic processing facility in the Brooks area. The $3.3 million Brooks acquisition in June also included 200 boe/d of predominantly light oil production. In the third quarter, Journey constructed a pipeline connecting two newly drilled oil wells in the area to the acquired facility, thereby eliminating trucking and water disposal costs for this production.
Journey realized funds flow of $8.4 million in the fourth quarter of 2016 compared to $9.5 million in the same quarter last year. Average commodity prices were 18% higher, and production volumes were 11% lower in the fourth quarter compared to 2015. The combination of net dispositions of producing assets, a significantly reduced drilling program and normal declines during the year caused production to decrease compared to 2015. Conserving capital and protecting the balance sheet were major initiatives throughout the year. Journey focused its attention on items that were within its control and in particular concentrated on reducing its operating costs. These initiatives paid off, as operating costs of $14.00/boe in 2015 were reduced to $11.64/boe in 2016. Funds flow per share was $0.19 (basic and diluted) in the fourth quarter and for the year was $0.63 (basic and diluted). Journey forecasts that these cost reductions will continue to yield benefits in future years.
Journey realized net income of $49.3 million or $1.13 per basic and diluted share in the fourth quarter. For 2016 the entire years' net income was $52.6 million or $1.21 per basic and diluted share. The largest items affecting net income were net impairment recoveries. While Journey recognized $24.0 million in additional asset impairments in respect of two of its operating areas in the fourth quarter, the Company also recorded reversals of previous impairments of $103.4 million in five other areas. The reversals were directly attributable to Journey's successful efforts in enhancing petroleum and natural gas reserves value even in the face of low commodity prices. The initiatives we embarked on during the year and that created this value included: operating cost reductions that are expected to continue into the future; lower drilling costs; the successful CBM recompletion program; asset acquisition and divestment activities; and the results of Journey's organic drilling program. All of these initiatives were factored into the December 31, 2016 reserve report and the impairment reversals were reflective of these value creation strategies.
Journey's production mix moved to a slightly higher natural gas weighting at 51% in the fourth quarter and 47% for the year. The increase in gas weighting was primarily the result of the successful CBM recompletion program as well as the sale of a higher operating cost oil weighted property in Manola at the end of the second quarter. Even though the natural gas weighting increased, liquids (oil and NGL's) were the largest contributor to total revenues at 73%. The efforts taken by Journey to become even more sustainable have paid off in the fourth quarter. The lower cost structure was a direct contributor to an 18% increase in field netbacks in the fourth quarter to $16.60/boe as compared to the third quarter while average commodity prices increased by only 10% in this same period.
Commensurate with increasing oil and natural gas prices in the latter part of 2016, royalty costs were up 158% in the fourth quarter to average $4.16/boe as compared to $1.61/boe in the same quarter of 2015. The average royalty rate (as a percentage of revenue) was up significantly to 12.4% in the fourth quarter of 2016 compared to 5.7% in 2015. Journey considers a royalty rate of 12% to be more representative in the current commodity price environment. Operating costs were down 13% in the fourth quarter of 2016 to $9.6 million compared to $11.0 million in 2015. On a per boe basis the rate was down 2% to $12.25/boe from $12.46 in the same quarter of 2015. General and administrative costs continued to improve and were $3.13/boe in the fourth quarter compared to $4.00 in the same quarter of 2015. Cash interest costs were higher at $1.66/boe compared to $1.07/boe in the fourth quarter of 2015. Even though borrowings were down in the fourth quarter, higher bank interest rates, and the new term debt interest rate, coupled with lower production levels caused the per boe rate to increase.
Commodity prices had a significant impact on capital spending within our industry in 2016. AECO natural gas prices sunk to a low of $1.10/mcf in April before reversing course. It wasn't until the fourth quarter that gas prices showed signs of a rebound, increasing to a high of $3.46/mcf in December. WTI oil prices hit a low of $30.62/bbl USD in February and stayed in the low to mid-$40 USD range until they increased to $52.17/bbl in December after a new OPEC production agreement was reached. The low prices realized throughout the first nine months of the year created significant uncertainty, adversely affecting Journey's capital spending plans. However, the Company took these challenges in stride and capitalized on the opportunities that materialized to make accretive acquisitions that increased reserve value and, in turn, borrowing value from our banking syndicate.
Journey reduced its bank borrowing throughout the year. At the start of 2016 Journey had bank debt of $90 million and at the end of the year it was $52.5 million. The company used the combination of the term debt proceeds of $30 million in October and funds flow in excess of net capital spending of $20.5 million to reduce its bank borrowings.
In the fall, Journey renewed its credit facility at $90 million. In addition, Journey welcomed a new financing partner, Alberta Investment Management Company ("AIMCo") with a $30 million term debt financing. The term debt provided Journey ample room on its banking credit facility to pursue additional acquisitions to expand our business plan, ultimately resulting in the acquisition of complementary Crystal interests in the first quarter and the Strategic Acquisition described herein. On March 2, 2017 AIMCo exercised the warrants they received in the term debt placement well in advance of their expiry. The resultant $13.6 million in proceeds went to reduce outstanding borrowings with the banks. However, the proceeds will ultimately be used to partially finance the Strategic Asset Acquisition. The bank facility is currently undergoing its annual review. We expect this review will be completed by the end of April.
Journey is pleased to announce that it has entered into a purchase and sale agreement with a private company to acquire interests in its Central Alberta core area with a focus on upstream and midstream assets in the greater Gilby area for an aggregate purchase price of approximately $35.6 million (the "Acquisition"), subject to certain closing adjustments. The assets are largely contiguous with Journey's existing Central core region. The consideration to be paid is comprised of $29.6 million of cash and 2.1 million common shares of Journey, representing additional consideration of $6.0 million, based upon the Journey share price of $2.89 being the 10-day volume weighted average price preceding the execution of purchase and sale agreement. The Acquisition is consistent with Journey's expansion strategy within its central Alberta core area by increasing Journey's extensive network of strategic infrastructure and further expanding its portfolio of low-risk multi-zone liquids focused horizontal opportunities.
The cash component of the Acquisition will be funded entirely within Journey's existing credit facility. In addition to the proceeds of $13.6 million from the AIMCo exercise of 4.95 million share purchase warrants (see the March 3, 2017 press release), Journey is currently evaluating divestment opportunities for certain of its assets deemed to be non-core.
The Effective Date of the Acquisition is March 1, 2017 (the "Effective Date"). The transaction is anticipated to close in early May, and is subject to the successful waiver of rights of first refusals.
Upon closing of the Acquisition, Journey anticipates to be drawn approximately $70 million on its existing $90 million syndicated credit facility. Journey is anticipating an increase to its credit facility due to the results from its highly successful 2016 operations and due to incremental lending value associated with the Acquisition. With the implementation of its currently planned $35 million exploration and development capital program, Journey forecasts net debt levels to be approximately $86 million by the end of 2017, including bank debt of less than $50 million. This debt level is expected to result in a net debt to annualized fourth quarter debt to funds flow ratio of less than 1.5:1.
The Acquisition consists of approximately 2,000 boe/d (28% oil & NGLs) of high value, long reserve life, liquids-rich gas production with an annual decline estimated at 16%. Consistent with Journey's strategy, the production will be predominantly Journey operated with an average working interest of 75%. This low-decline production base is expected to provide a stable funds flow stream of approximately $8-9 million for 2017, on an annualized basis. Journey has identified a number of low-risk, low-cost, near term development opportunities on the acquired assets including, the installation of compression and a pipeline tie in which will allow Journey to maintain production on the assets over the remainder of the year for approximately 30% of forecasted funds flow. In addition, Journey forecasts operating cost synergies of over $300,000 per year due to the integration of the acquired assets with our existing assets.
The Acquisition includes approximately 161,700 gross (83,700 net) acres of land focused primarily in the Gilby area of central Alberta. The assets have established multi-zone production and potential focused primarily on the liquids-rich Glauconite in the Hoadley Barrier complex. The portfolio of projects includes 19 gross (14.4 net) horizontal locations in the Glauconite. Other established targets in the immediate region are Cardium oil, Belly River oil, and an emerging play in the liquid rich window of the Duvernay shale zone. The Acquisition also includes a significant proprietary seismic data set consisting of more than 200 square kilometers of 3D seismic and over 400 kilometers of 2D seismic that will allow for further prospective well delineation.
The strategic infrastructure to be acquired pursuant to the Acquisition complements Journey's extensive network of infrastructure within its central core area. Journey will acquire a high working interest in two strategic gas plants and associated gathering systems and sales lines. The key infrastructure at Gilby includes a 43.3% non-operated working interest in the 01-04-42-03W5 Tidewater gas plant having 75 mmcf/d of gas processing capability (20% current utilization), superior liquids recovery, and a strategic network of greater than 250 kilometers of pipelines. The existing ownership structure provides Journey the ability to maintain its low-cost structure. Additionally, this infrastructure generates annual revenues of approximately $1.0 million from third-party processing fees. Journey's focus is to continue to grow both Company volumes and third party volumes in the Crystal/Gilby area to effectively utilize its infrastructure and lower the operating cost structure of the Company.
In conjunction with the transaction, Journey has acquired natural gas hedges from the vendor, which represents approximately 50% of the acquired gas production in 2017 at an average price of $3.00/gj; and 40% of production in 2018 at an average price of $2.73/gj. Journey is not currently anticipating any additional general and administrative expenses associated with the Acquisition.
The Acquisition is consistent with Journey's previously communicated portfolio strategy focused on high quality; predictable, low-decline, oil and liquids focused assets with associated infrastructure capable of delivering strong free funds flow to maintain growth while preserving a healthy balance sheet. This combination of characteristics provides management the flexibility to deliver efficient growth to shareholders through technical and operational expertise and by taking advantage of synergies associated with having a significant presence in a focused core area.
The key benefits to Journey shareholders, pro forma the Acquisition, are:
REVISED 2017 GUIDANCE
Journey's revised 2017 forecasted funds flow from operations of $50-54 million is based upon the following average prices: WTI of US$54/bbl; AECO gas of CDN$2.65/mcf; and a foreign exchange rate of $0.75 US$/CDN$. The Company will operate substantially all of its 2017 capital program with an average working interest in excess of 90%. Because of this, Journey can remain flexible with its budget by increasing or decreasing its spending levels should commodity prices change materially. Although Journey has the ability to provide additional growth within funds flow, Journey remains steadfast in its commitment to preserve financial flexibility during volatile times.
In the near term Journey will commence its semi-annual review of its syndicated bank line, which is anticipated to conclude by the end of April. Journey is anticipating increased credit capacity due to its strong 2016 reserves additions and the lending value of the Acquisition. Journey projects it has sufficient liquidity for the continued execution of its growth oriented capital program for 2017 and beyond. With the execution of Journey's 2017 budget, and after giving effect to the funds flow associated with the acquired assets, Journey forecasts the net debt to annualized fourth quarter 2017 funds flow ratio to decrease to less than 1.5 times. Journey's 2017 funds flow guidance range represents an 85% improvement from 2016. This increase in funds flow is after taking into account approximately $6.0 million in forecasted hedging losses based on current strip prices. Further improvement in funds flow for 2018 is anticipated if the current commodity strip prices materialize.
Journey forecasts annual production of between 10,100 and 10,500 boe/d in 2017, with the drilling of 14 gross (13 net) wells. Capital spending is currently allocated evenly between Journey's Central and South core areas.
Journey intends to prudently expand long lead-time waterflood projects in addition to its drilling program. Approximately 25% of Journey's 2017 growth capital is directed toward waterflood expansion projects. These exploitation projects do not provide immediate production uplifts but generate high rates of return as they contribute to the sustainability of Journey's long term business model, which is focused on low cost, low decline, high quality conventional oil pools and liquids projects.
On behalf of Journey's management team and its directors, Journey would like to thank its shareholders for their continued support through this challenging time. There are few companies within Journey's peer group that share the same upside leverage to rising commodity prices that Journey does. With only 50.7 million pro forma basic outstanding shares after the Acquisition is closed, a fourth quarter net debt to funds flow ratio of less than 1.5:1, and a development inventory of over twenty years, Journey is poised to provide significant growth in shareholder value over the longer term.
About the Company
Journey is a Canadian exploration and production company focused on conventional oil and liquids-rich natural gas operations in western Canada. Journey's strategy is to grow its production base by drilling on its existing core lands, implementing water flood projects, executing on accretive acquisitions. Journey seeks to optimize its legacy oil pools on existing lands through the application of best practices in horizontal drilling and, where feasible, with water floods.
SOURCE: Journey Energy Inc.
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