- Published: 10 November 2016
- Written by Editor
Granite Oil Corp. Announces Third Quarter Results and Provides Operational Update and Guidance
GRANITE OIL CORP. ("Granite" or the "Company") (TSX:GXO)(OTCQX:GXOCF) is pleased to announce results for the third quarter of 2016 and to provide an operational update and guidance.
Operational Update
Granite's focus throughout 2016 continues to be the rapid transition of its 100%-owned Alberta Bakken oil resource to a proven, full-scale gas injection enhanced oil recovery (EOR) scheme as efficiently as possible, positioning the Company for sustainability with the emphasis on maximizing long-term shareholder value.
Starting in April 2016 and continuing into the third quarter, the Company took advantage of low gas prices and ramped up gas injection by over 60% allowing it to reach its re-pressurization goals ahead of schedule. As well, further advancing the project, Granite pursued several strategic EOR testing projects and process-driven capital cost reductions which will remain regardless of oil pricing.
The Company is very pleased in the culmination of these achievements. A five well drilling program initiated late in the third quarter has resulted in five of the most capital-efficient wells in the pool's history. These wells have been drilled, completed and tied in for an average cost of $1.2 million, 55% less than the Company's average well costs in 2015, and approximately 40% less than booked costs in the Company's most recent independent reserve report. Additionally, through the combination of re-pressurization, optimized horizontal placement and refined completions techniques, the first four wells tested at an average final rate of approximately 400 bbls/d per well at the end of a four day test period. The first three of these wells continue to flow at restricted rates with lower initial declines, meeting the Company's long-term objectives. The fourth well has been brought on in the past few days and the fifth well is currently in the early testing stages.
These five new wells represent the summation of more than three years of engineering and geoscience testing and refinement to be applied to the long term development of the pool, allowing the Company to add producing barrels at its lowest cost ever. Importantly, these initial efforts have been focused on a small, 2.5 section area of the surrounding 24 section EOR approval area. The Company is confident that these results are repeatable and can be applied over its entire EOR approval area at a prudent pace.
The Company now has a 20 year optimized drilling inventory of over 130 locations and has developed a model for the pool with the Company objective of recovering over 20% of the estimated 200 mmbbls of oil in place under its currently approved EOR Scheme as efficiently as possible. With approximately 2.5% of the estimated oil in place recovered to date, the Company is well-positioned for the future.
Guidance
Going forward, the Company is ahead on its injection and re-pressurization schedule with ten current injectors and will only be drilling wells within the area supported by the EOR scheme. With all facilities, land and infrastructure in place, general capital requirements in the EOR area have dramatically dropped year over year and future budgets will be almost entirely allocated to bringing new, low-cost production on-stream. Future savings are also anticipated as the Company's oil production continues to rebalance towards flowing wells versus pumping wells. The Company anticipates only $13 million of total development capital is required to grow the production within the EOR Scheme area 3 to 5% per year over the next several years as declines shallow and continued efficiencies are realized. The Company will closely monitor the pool and manage for the long-term, growing the production for several years, then determining the roll over point at which it will maintain flat production with reduced capital requirements.
Granite will also continue to pursue its significant inventory of opportunities on its large defined 100%-owned oil fairway with a portion of its free cash flow. The Company is allocating approximately $3 million of exploration and delineation capital for the next few years. In 2017, Granite is planning two high-priority exploration wells on recently acquired lands, as well as a step-out delineation well that, if successful, would significantly expand the current potential of the EOR scheme area.
Despite the continued oil price volatility, the Company is on solid ground with its operational flexibility and strong netbacks, as well as low debt metrics and a strong hedge position. The Company will continue to prioritize its dividend and its advanced EOR Scheme. Prolonged dips in crude oil prices can be managed by reducing capital and growth to maintain the dividend and its sustainability while still creating future value by improving overall pool declines. Granite's 15 year model can be found in the Company's updated presentation on the web site at www.graniteoil.ca.
Fourth quarter production is estimated to be 3,000 - 3,100 bbls/d of crude oil. Production levels will be determined by a number of factors including: results from the well which is currently being tested; prevailing commodity prices; and the management of production volumes related to 1,150 bbls/d coming from restricted, flowing wells. Granite will retain its long-term focus on maximizing value and oil recoveries from the Bakken oil pool with near-term production managed to best achieve that goal.
Financial and Operating Highlights
Financial and operational highlights for the three and nine month periods ended September 30, 2016 are set out below and should be read in conjunction with the financial statements and related management's discussion and analysis available for review at www.granite.ca and www.sedar.com. This is the fourth interim period completed by Granite following its disposition of certain oil and gas properties pursuant to its May 2015 corporate reorganization. Prior period information is not presented in the following table due to its limited comparability resulting from these dispositions.
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Three Months Ended Nine Months Ended
September 30 September 30,
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2016 (6) 2016 (6)
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(000s, except per share amounts) ($) ($)
FINANCIAL
Oil and natural gas revenues 11,582 31,436
Funds from operations (1) 6,061 18,033
Per share - basic 0.18 0.56
Per share - diluted (7) 0.18 0.56
Cash flow from operating activities 8,819 20,105
Net income (loss) 1,052 (6,216)
Per share - basic 0.03 (0.19)
Per share - diluted (7) 0.03 (0.19)
Capital expenditures (2) 6,244 16,297
Net debt (3) 29,323 29,323
Shareholders' equity 218,198 218,126
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(000s) (#)
SHARE DATA
At period-end 33,614 33,614
Weighted average - basic 33,598 31,942
Weighted average - diluted (7) 33,922 32,280
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OPERATING (5)
Production
Natural gas (mcf/d)(8) 145 145
Crude oil (bbls/d) 2,728 2,804
NGLs (bbls/d) - -
Total (boe/d) 2,752 2,828
Average wellhead prices
Natural gas ($/mcf) 2.50 1.51
Crude oil and NGLs ($/bbl) 45.95 40.70
Combined average ($/boe)(9) 45.68 40.43
Netbacks
Operating netback ($/boe)(4) 28.67 27.73
Gross (net) wells drilled
Oil (#) 3 (3.0) 7 (7.0)
Dry and abandoned (#) - (-) - (-)
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Total (#) 3 (3.0) 7 (7.0)
Average working interest (%) 100 100
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(1) Funds from operations and funds from operations per share are not
recognized measures under International Financial Reporting Standards
(IFRS). Refer to the commentary below under "Reader Advisory - Non-GAAP
Measurements" for further discussion.
(2) Total capital expenditures, excluding acquisitions and excluding non-
cash transactions. Refer to commentary in the Management's Discussion
and Analysis under "Capital Expenditures and Acquisitions" for further
information.
(3) Net debt, which is calculated as current liabilities (excluding
derivative financial instruments) and bank debt less current assets
(excluding derivative financial instruments), is not a recognized
measure under IFRS. Please refer to the commentary below under "Reader
Advisory - Non-GAAP Measurements" for further discussion.
(4) Operating netback, which is calculated by deducting royalties,
operating expenses and transportation expenses from oil and gas revenue
and adjusting for any realized hedging on financial instruments, is not
a recognized measure under IFRS. Please refer to the commentary below
under "Reader Advisory - Non-GAAP Measurements" for further discussion
(5) For a description of the boe conversion ratio, refer to the commentary
below under "Reader Advisory - Other Measurements" for further
discussion.
(6) Refer to the description of the disposition by Granite of certain oil
and gas properties pursuant to its May 2015 corporate reorganization
and the comparability of prior period information in the Management's
Discussion and Analysis under "About Granite Oil Corp."
(7) The Company uses the weighted average common shares (basic) when there
is a net loss for the period to calculate net income (loss) per share
diluted. The Company uses the weighted average common shares (diluted)
to calculate the funds from operations diluted.
(8) Commencing in March 2016, the Company began injecting 100 percent of
its natural gas production into the Alberta Bakken property pursuant to
the EOR scheme. Any gas sales reflected post March 2016 are the result
of conservation efforts while planned injector maintenance occurs.
(9) Combined average realized prices includes all oil, gas and NGL sales
revenue, excluding other income
Outlook
With the Company's 2016 capital program largely complete, Granite is looking forward to 2017. While the current year was challenging, with significant commodity price volatility and crude oil prices reaching record lows during the first quarter of 2016, Granite will exit the year having made dramatic improvements to its drilling design, gas flood effectiveness, associated capital efficiencies and recycle ratios.
The Company allocated significant capital throughout 2016 to expanding its gas flood infrastructure and land base as well as obtaining additional data on its EOR scheme through strategic testing initiatives. Granite also dramatically expanded its gas injection volumes during the year through the purchase of supplemental gas in order to take advantage of record low natural gas prices through mid-2016 to speed up re-pressurization of targeted portions of the pool. Having succeeded in this re-pressurization process, the Company has curtailed the purchase of additional gas as it matches current gas injection volumes to production levels.
Granite approaches 2017 with an excellent financial position, exiting the third quarter with less than $30 million of net debt and a strong hedge portfolio going into 2017 consisting of 1,000 bbls/d hedged for the first half at an average US$48.05 WTI and 750 bbls/d for the second half at an average of US$52.23 WTI. Third quarter operating netbacks averaged $28.67 per BOE, reflecting Granite's almost 100% oil weighting and low-cost structure, which provides the company with excellent cash flow generation capabilities.
In 2017 the Company will target over 90% of its budget on drilling activity in the Core Bakken pool, with a small portion of the budget targeting exportation activities west of the pool, all on 100% Granite-owned lands. Granite will provide 2017 guidance during December 2016.
Reader Advisory
Forward-Looking Statements. Certain statements contained in this news release may constitute forward-looking statements. These statements relate to future events or Granite's future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Granite believes that the expectations reflected in those forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this news release should not be unduly relied upon by investors. These statements speak only as of the date of this news release and are expressly qualified, in their entirety, by this cautionary statement.
In addition, and without limiting the generality of the foregoing, this news release contains forward-looking statements pertaining to the following: drilling and development plans, Granite's financial strength, supply and demand for oil and natural gas, the success of the enhanced oil recovery scheme, expectations regarding Granite's credit facility, treatment under governmental regulatory and taxation regimes and expectations regarding Granite's ability to raise capital and to continually add to reserves through acquisitions and development.
With respect to forward-looking statements contained in this news release related to Granite's business and operations, Granite has made assumptions regarding, among other things: prevailing commodity prices, exchange rates, estimates of cost, including drilling and operating costs, the sufficiency of budgeted capital expenditures in carrying out planned activities; the state of the economy and the exploration and production business; the legislative and regulatory environments of the jurisdictions where Granite carries on business or has operations, the impact of increasing competition, and Granite's ability to obtain additional financing on satisfactory terms.
Granite's actual results could differ materially from those anticipated in these forward-looking statements as a result of risk factors that may include, but are not limited to: volatility in the market prices for oil and natural gas; uncertainties associated with estimating reserves; uncertainties associated with Granite's ability to obtain additional financing on satisfactory terms; geological, technical, drilling and processing problems; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; incorrect assessments of the value of acquisitions; competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel.
This forward-looking information represents Granite's views as of the date of this document and such information should not be relied upon as representing its views as of any date subsequent to the date of this document. Granite has attempted to identify important factors that could cause actual results, performance or achievements to vary from those current expectations or estimates expressed or implied by the forward-looking information. However, there may be other factors that cause results, performance or achievements not to be as expected or estimated and that could cause actual results, performance or achievements to differ materially from current expectations. There can be no assurance that forward-looking information will prove to be accurate, as results and future events could differ materially from those expected or estimated in such statements. Accordingly, readers should not place undue reliance on forward-looking information. Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements.
Non-GAAP Measurements. This news release includes non-GAAP measures as further described herein. These non-GAAP measures do not have a standardized meaning prescribed by International Financial Reporting Standards ("IFRS" or, alternatively, "GAAP") and therefore may not be comparable with the calculation of similar measures by other companies.
This news release contains the terms "funds from operations" and "funds from operations per share", which should not be considered an alternative to or more meaningful than cash flow from (used in) operating activities as determined in accordance with IFRS. These terms do not have any standardized meaning under IFRS. Granite's determination of funds from operations and funds from operations per share may not be comparable to that reported by other companies. Management uses funds from operations to analyze operating performance and leverage, and considers funds from operations to be a key measure as it demonstrates the Company's ability to generate cash necessary to fund future capital investments and to repay debt, if applicable. Funds from operations is calculated using cash flow from operating activities as presented in the statement of cash flows, before changes in non-cash working capital. Granite presents funds from operations per share whereby per share amounts are calculated using weighted-average shares outstanding, consistent with the calculation of earnings per share.
Operating netbacks are per boe measures used in operational and capital allocation decisions. Management believes that the Company's operating netback is the most useful supplemental measure as compared to other netback measures presented by the Company in previous MD&A's as it assists in analyzing the Company's operating performance. Operating netbacks are determined by deducting royalties, operating expenses and transportation expenses from oil and gas revenue and adjusted for any realized hedging gain (loss) on financial instruments.
Net debt, which represents current liabilities (excluding derivative financial instruments) and bank debt less current assets (excluding derivative financial instruments), are used to assess efficiency, liquidity and the Company's general financial strength. No IFRS measure is reasonably comparable to net debt.
BOE Presentation. References herein to "boe" mean barrels of oil equivalent derived by converting gas to oil in the ratio of six thousand cubic feet (Mcf) of gas to one barrel (bbl) of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
Test Rates. Test rates are not necessarily indicative of long-term performance or of ultimate recovery. Neither a pressure transient analysis nor a well-test interpretation has been carried out and the data should be considered to be preliminary until such analysis or interpretation has been done.
Contacts:
Michael Kabanuk
President & CEO
(587) 349-9123
Jonathan Fleming
E.V.P.
(587) 349-9118
