“It is imperative that we position our company to withstand the current low commodity price environment. We are committed to taking the difficult but necessary steps to ensure the long-term sustainability of our business. We are also focused on driving our cost structure lower. Through negotiated cost savings with service providers, we have materially reduced the amount of exploration and development capital we must spend to maintain our production. Based on the current outlook, we anticipate an approximate 25% reduction in capital spending in 2016,” commented James Bowzer, President and Chief Executive Officer.
Bowzer said, “Through these measures, our sustainability metrics are enhanced, our leverage ratios improve and we are dedicating our resources to our highest rate of return projects. By recalibrating our business model in response to the current pricing environment, we believe we are preserving shareholder value in these extraordinary times and positioning our company for greater success when oil prices recover.”
Sustainability in a Low Crude Oil Price Environment
Since inception, our business strategy has been predicated on three fundamental principles: delivering organic production growth, paying a meaningful dividend and maintaining capital discipline. We have built an exceptional asset base focused on crude oil and liquids with a significant inventory of development prospects and sector leading capital efficiencies. When commodity prices return to more normalized levels, we are positioned for significant organic growth. Our long-term strategic objectives remain intact as we strive to grow our funds from operations, production and reserves on a per share basis.
One of the key tenets of our business model is to ensure the sustainability of our operations. We accomplish this by maintaining strong levels of financial liquidity and funding our capital program and cash dividends with funds from operations. Our business model has been challenged in 2015 given the precipitous decline in commodity prices.
Since December 2014, we undertook certain initiatives to counter the impact of falling commodity prices and to maintain strong levels of financial liquidity, including revising our level and timing of capital spending, reducing our dividend, implementing cost reduction measures and completing an equity financing. The result of these initiatives was evident during the second quarter when we essentially funded our capital spending and dividend with funds from operations, resulting in no incremental borrowings.
Subsequent to the end of the second quarter, the macro environment and outlook for commodity prices has deteriorated considerably, which has put a further strain on our business model. In particular:
- The current spot West Texas Intermediate (“WTI”) oil price is approximately US$41/bbl, down 29% from a Q2/2015 average of US$58/bbl;
- The current spot heavy oil benchmark price, Western Canadian Select (“WCS”), is approximately US$25/bbl, down 46% from a Q2/2015 average of US$46/bbl;
- The forward curve for WTI in 2016 is approximately US$48/bbl, down 26% from a high in Q2/2015 of approximately US$65/bbl; and
- The forward curve for WCS in 2016 is approximately US$34/bbl, down 32% from a high in Q2/2015 of approximately US$50/bbl.
Taking into consideration the deteriorating macro environment and a view that it is likely to last longer than earlier anticipated, we are announcing several additional measures to enhance our sustainability and preserve our per share metrics through 2016.
- We are suspending our monthly cash dividend after the September 15, 2015 payment previously declared. We believe this is a prudent step to minimize additional bank borrowings during this period of extremely low commodity prices. We continue to believe in returning a portion of our funds from operations to shareholders under normal operating conditions. However, based on the current forward strip, we would not generate sufficient funds from operations to pay a dividend. We will reinstate the monthly dividend when commodity prices recover to a supportive level.
- We expect total exploration and development expenditures for 2015 to approximate $500 million, representing the low-end of our guidance range of $500 to $575 million. We are also tightening our production guidance range for 2015 to 84,000 to 86,000 boe/d (previously 84,000 to 88,000 boe/d).
- Despite achieving cost reductions of approximately 20%, current prices do not support further drilling at Peace River or Lloydminster at this time. As a result, we have deferred our heavy oil program in Canada for the reminder of the year. We have drilled six of eight budgeted wells at Peace River and 21 of 26 budgeted wells at Lloydminster.
- In the Eagle Ford, we continue to work with our partner on further cost reductions. To-date, we have achieved an approximate 21% reduction in well costs – with wells now being drilled, completed, and equipped for approximately US$6.5 million, as compared to US$8.2 million in 2014. We expect a further 8% reduction to approximately US$6.0 million per well to be achieved in the second half of 2015. Under this new cost structure and assuming a flat US$50/bbl WTI price, the expected internal rate of return (before tax) of a new well in the Eagle Ford remains a robust 38%, demonstrating the efficiency of our capital spending in a low price environment.
- In the Eagle Ford, essentially all of our acreage is held by production. Although a majority of our acreage is non-operated, we have the ability to opt out of any proposed drilling locations. Any such decisions would be made in the context of the prevailing environment.
- We continue to focus on cost reduction initiatives. Operating costs through the first six months of 2015 have averaged $10.70/boe, a 13.5% reduction versus budget. Cost reduction initiatives include fuel savings, reduced repair and maintenance expenditures and workovers, and the shut-in of uneconomic production. General and administrative expenses have been reduced by approximately 10% and we continue to seek further spending reductions across all categories.
- The measures announced today will enhance financial liquidity going forward.
- We anticipate exiting 2015 with senior debt (being the amount drawn on our credit facilities and the principal amount of long-term debt) of approximately $1.8 billion, representing a senior debt to Bank EBITDA ratio of 3.1x, compared to a maximum permitted ratio of 4.5x to the end of 2016.
- We have unsecured revolving credit facilities consisting of a $1 billion Canadian facility and a US$200 million U.S. facility with a maturity date of June 2019. At the end of December 2015, we anticipate having approximately $975 million of undrawn capacity on these facilities.
Reduced Capital Program in 2016
In this current environment, we anticipate reducing our exploration and development spending in 2016 by approximately 25% from 2015 levels – to a range of $350 to $400 million. Although our 2016 capital and operating budget has yet to be finalized and approved by our Board of Directors, at this level of spending, we will target relatively stable production in 2016 compared to our 2015 exit production rate. Our capital program going forward will remain flexible and continues to allow for adjustments based on changes in the commodity price environment. Our Board of Directors is expected to finalize the 2016 capital and operating budget in December 2015.