Seven Generations Energy Ltd.'s (TSX:VII) first quarter production averaged 153,100 barrels of oil equivalent per day (boe/d), up 73 percent from the same period last year. With record quarterly production and stronger commodity prices, first quarter funds from operations also set a record at $272.3 million or 75 cents per share, an increase of 146 and 88 percent, respectively, compared to the first quarter of 2016.
"Production in the first quarter was 16 percent higher than the fourth quarter of 2016 and consistent with our budget. We remain on track to deliver full-year production in line with our 2017 guidance of 180,000 to 190,000 boe/d. Our continued focus on operating efficiencies and innovation is yielding strong financial and operating results. We had a robust start to the year, running 13 drilling rigs and two pressure pumping spreads for most of the first quarter, and had 78 Nest wells in various stages of development at the end of March," said Marty Proctor, 7G's President & Chief Operating Officer.
Processing plant expansion completed and on stream
"We have ample processing and transportation capacity in place to continue our high rate of production growth. We have access to the recently expanded capacity at Pembina's Kakwa River natural gas processing plant, where condensate processing capacity is up about 50 percent to approximately 25,000 barrels per day (bbls/d), which enables significant production growth from our recently acquired lands," Proctor said.
Deliberate and focused innovation continues to improve well performance
"In the time since our initial public offering in November 2014, we have continued to drive both operating efficiency and innovation in pursuit of optimal well and economic performance. Our most recent wells are 30 percent longer, have 45 percent more sand injected and twice as many fracture stages than our 2014 type curve wells. Initial results from these new wells demonstrate the higher productivity and enhanced economics associated with higher intensity completions," said Pat Carlson, 7G's Chief Executive Officer.
Experimental 60-stage completions herald promising production rates
7G completed eight wells in the first quarter on a pad located on the boundary between Nest 1 and Nest 2 type curve areas. These wells had an average lateral length of approximately 2,600 metres and six were completed with 40 fracture stages. On two of the wells, 7G experimented with a higher intensity completion design with 60 fracture stages.
"Although only early-time data are available, we are encouraged by the wells' performance. The condensate production from this pad is outperforming 7G's 2016 Nest 2 condensate type curve. In the first 30 days, condensate production from the 40-stage wells is about 25 percent higher, while the 60-stage well production is up about 50 percent when compared to our 2016 Nest 2 condensate type curve. These results further demonstrate our focus on value enhancement through the ongoing application of technology," said Glen Nevokshonoff, 7G's Senior Vice President, Operations.
"Given our success in reducing drilling costs since the IPO, and the view that the technology has yet to mature, we are encouraged to continue our focus on both improved efficiency and innovation - two tools that we expect will allow us to remain among North America's lowest cost producers as we pursue increased value from the development of our project," Carlson said.
Operating netbacks before hedging up 79 percent year-over-year to $24.09 per boe
First quarter realized natural gas and liquids prices were $35.52 per boe, up 52 percent compared to a year earlier. Prices for condensate, 7G's biggest revenue contributor, increased 61 percent in the first quarter to average $64.07 per bbl. Operating netbacks prior to hedging were up 79 percent to $24.09 compared to the first quarter of 2016.
"Our operating income of $75 million in the first quarter highlights the fact that we continue to drive towards full-cycle returns for our shareholders, as indicated by our growing operating income per share of 21 cents, which was a 62 percent increase from the fourth quarter of 2016. If the economic environment remains similar to what we have now, we expect per-share growth and profitability metrics will continue to stand out compared to our peer group and produce industry-leading results," said Chris Law, 7G's Chief Financial Officer.
HIGHLIGHTS FOR THE QUARTER ENDED MARCH 31, 2017
2017 FIRST QUARTER FINANCIAL AND OPERATING RESULTS
Drilling days reduced by 13 percent in the Nest
Seven Generations drilled 23 Nest wells in the first quarter at an average rate that was 13 percent faster than the first quarter of 2016 due to a series of innovations such as underbalanced drilling, batch drilling, improved drill bit design, downhole directional motor enhancements and running a 24-hour real-time operating centre to guide directional drilling. Nest wells averaged 2,649 metres on the horizontal leg, took 34 days to drill and had an average cost of $3.8 million. 7G operated up to 13 drilling rigs targeting the Montney Formation across its Kakwa River Project during the quarter.
"At the time of the IPO in November 2014, wells with a similar horizontal length took 55 days to drill and cost $6.6 million each. With first quarter wells being drilled in 34 days at $3.8 million each, 7G has institutionalized enduring savings, not just lower costs due to the reduced activity in the supply and service sector," Nevokshonoff said.
Although the entire industry, including 7G, endured cost pressures due to heightened activity in the Montney, 7G's average drilling cost per lateral metre fell by 10 percent compared to the first quarter of 2016. The company shaved five days off the time it takes to drill a Montney pad well, bringing it down to an average of 34 days.
Completions stage count up 44 percent, cost per tonne of sand pumped down 10 percent
"In Nest completions, we averaged 39 stages per well compared to 27 stages in the same quarter of 2016 while adding 37 percent more sand per well at a 10 percent lower cost per tonne of sand," Nevokshonoff said.
7G's first quarter completions cost were consistent with historical unit costs. Higher intensity completions, delineation wells to the south and west of existing Nest pads and one acquired pad that was not setup with 7G's typical high-efficiency batch-process resulted in an increase in average well costs.
Operating and transportation costs aligned with 2017 expectations
First quarter operating and transportation costs of $10.21 per boe were in line with 2017 expectations despite being impacted by using temporary production equipment at delineation drilling sites and drilling wells on new pads within the Nest where permanent processing facilities were under construction. The increased application of lower-cost slickwater fractures also resulted in higher water trucking volumes.
"We remain confident that our innovation and efficiencies will continue to drive down unit costs over the course of 2017 as our development program reverts to a higher proportion of completions on 7G-designed pads, as we focus on reducing cycle times from well spud to production, as we use more modules in production facility construction and as our production growth increases throughput efficiencies in processing facilities,"
Continual improvement in operations
The company continued to ramp up production with batch drilling and higher intensity completions, which employ more fracture stages and more proppant sand per well in pursuit of increased well productivity. 7G ran two hydraulic fracture spreads through most of the first quarter, ended the quarter with three spreads, and now has four operating. This high level of activity reflects 7G's ability to capture the economics of operating year round on its permanent, all-season roads and pads. 7G continued to optimize the use of slickwater fractures in its completions to maximize condensate recovery and the net present value of its wells.
DRILLING AND COMPLETIONS
Construction of new Super Pads on track, enabling significant growth
Super Pads are scalable, minimize the company's footprint, reduce operational risks and maximize efficiency by having the capacity to process a portion of raw gas and condensate on site. In the first quarter, 7G advanced construction on three new Super Pads that are expected to start operating in the second half of 2017, taking the company's Super Pad count to 12.
"7G's application of Super Pad production systems remains key to our ability to handle the increased water production associated with the application of lower cost and better performing slickwater completions," Nevokshonoff said.
7G continues to pursue a variety of expanded market opportunities, such as supplying natural gas to power generation in Alberta, supplying natural gas and natural gas liquids to petrochemical facilities and exporting liquefied natural gas and propane off Canada's West Coast to serve Asia consumers.
Advancing market access options to Central Canada, capturing stronger prices
"We recently contracted 77 MMcf/d of firm transportation service on TransCanada's mainline natural gas pipeline from the Alberta border to the natural gas trading hub at Dawn, Ontario starting in November 2017, subject to regulatory approval. This is another step in our diversified natural gas marketing strategy, providing increased access to central Canadian markets. This transportation commitment represents about 10 percent of our 2018 contracted transportation volumes, which rise to 870 MMcf/d in the third quarter of 2018," said Proctor.
"Our production remains on a steep growth curve, and our take-away capacity and market access optionality is keeping pace with our total natural gas processing capacity," Proctor added.
Disciplined financial strength, capital investment on track in 2017
Seven Generations maintained its strong financial position with $500 million of adjusted working capital and $640 million of cash and cash equivalents at March 31, 2017. 7G has available funding of approximately $1.5 billion and net debt of approximately $1.6 billion. The company invested capital of $362 million in the first quarter, which is in line with its expected 2017 capital investment of between $1.5 billion and $1.6 billion.
Managing market risk
Hedging remains an integral component of 7G's financial strategy. Seven Generations' consistent and balanced approach ensures coverage of debt servicing costs and non-discretionary capital costs while protecting a portion of returns on capital investment. 7G's risk management program operates within the guidelines set out by its Board of Directors and its credit agreement. Hedging is part of the company's broader risk management focus and is considered alongside other important risk mitigation policies such as insurance. The program allows for partial participation in upside commodity price movements while guaranteeing a minimum cash flow stream to underpin the company's multi-year commitments such as transportation and processing agreements, term debt, office space contracts and investments in human capital. Having revenue assurance on a portion of production is critical in the process of planning future capital allocations.
Disciplined long-term growth
Seven Generations intends to complete a $1.5 billion to $1.6 billion capital investment program in 2017, with the majority of funds being directed to drilling, completions and facilities development. Through innovatively applying technology and the continuous pursuit of operating efficiencies, 7G aims to deliver maximum shareholder value over the long term, delivering resources safely and responsibly. 7G's 2017 production guidance is 180,000 to 190,000 boe/d, 55 to 60 percent of which is expected to be comprised of liquids.
"The first quarter of 2017 was punctuated by several milestones for Seven Generations' stakeholders and shareholders: record production, record funds flow, and the company's 250th Montney well, 181 of which were completed by 7G through evolving drilling, completions and production practices. Over the nearly two-and-one-half-year period since our IPO, we have applied our growing expertise to drill some of the best performing wells to date in the prolific Montney Formation. This has helped us improve the economics for our developing core resource area and has given us comfort in acquiring more land in the region. Our significant production growth was rounded out with continued conservative financial management and disciplined execution of our capital program. All of this has given us confidence to add to our market commitments, enabling continued growth in this period of over-supply," said Pat Carlson, 7G's Chief Executive Officer.
Seven Generations' annual and special meeting of shareholders today
Seven Generations is holding its annual and special meeting of shareholders today, Thursday, May 4, 2017 at 2 p.m. in Calgary's Telus Convention Centre, Room: Glen 206, 120 - 9th Avenue S.E., Calgary, Alberta.
7G management will hold a conference call to discuss results and address investor questions today, Thursday, May 4, 2017 at 9 a.m. MT (11 a.m. ET).
Participant Dial-In Numbers:
Operator Assisted Toll-Free(877) 390-7644
Local or International(647) 252-4486
Conference Call ID:3694861
Encore Dial In:(855) 859-2056 or (800) 585-8367
Available:May 4 - May 11, 2017
Seven Generations Energy
Seven Generations is a low-supply-cost, high-growth Canadian natural gas developer generating long-life value from its liquids-rich Kakwa River Project, located about 100 kilometres south of its operations headquarters in Grande Prairie, Alberta. 7G's corporate headquarters are in Calgary and its shares trade on the TSX under the symbol VII.
SOURCE: Seven Generations Energy Ltd.
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