CALGARY, ALBERTA--(Marketwired - Jan. 10, 2016) - Seven Generations Energy Ltd. (TSX:VII) is deferring about $200 million of previously planned, discretionary capital investment in 2016 due to the recent 30 percent decrease in commodity pricing and the resulting expectation of reduced cash flow. Despite this deferral, 7G maintains 2016 production guidance of between 100,000 and 110,000 barrels of oil equivalent per day (boe/d), which is about 75 percent higher than 7G's record production in 2015 of more than 60,000 boe/d.
Capital investment in 2016 is now expected to be between $900 million and $950 million, about 18 percent lower than when 7G's 2016 capital budget was first announced in early November, and about 30 percent lower than the Company's capital investment in 2015.
"We are deferring a portion of our 2016 investments to maintain financial strength and reduce risk associated with debt leverage ratios. Our investment thesis and our growth profile remain strong. They are built upon delivering the lowest-cost supply to the over-supplied North American market. We've seen commodity prices fall to what we expect to be unsustainable levels. Until they recover, we are taking prudent steps to focus our Kakwa River Project investments on our most profitable, low-cost growth. This deferral of planned 2016 investment is not expected to significantly impact 2016 production guidance. If low prices persist, and the capital deferrals remain, we have contingency plans in place to manage and minimize the financial impact of the Company's Alliance Pipeline transportation commitments in 2017," said Pat Carlson, 7G's Chief Executive Officer.
Early 2016 capital investment to complete construction on major processing facilities
"Our high-priority 2016 capital investments include a portion of the originally planned drilling program, plus completing and tying in our inventory of about 60 wells that are already in the construction process. These wells are expected to grow production to our original 2016 target levels and support some of our planned 2017 growth. We are also building Super Pads, gathering pipelines and completing major production facilities, including a second 25,000 barrel-per-day condensate stabilizer at the Karr facility and our new Cutbank natural gas plant and associated pipelines," said Marty Proctor, 7G's President and Chief Operating Officer.
"Our 2016 investment profile is weighted towards the first part of the year as we complete these well-advanced facility construction projects and reduce our drilling fleet from the current 10 rigs to about five for most of the year," Proctor said.
Scheduled to start up in the second quarter, the Cutbank plant is expected to take 7G's processing capacity at Kakwa from the current 250 million cubic feet per day (MMcf/d) to about 500 MMcf/d of liquids-rich natural gas. In 2016, the Company has contracted firm transportation capacity on Alliance Pipeline that averages approximately 350 MMcf/d, and that Alliance capacity is scheduled to incrementally step up to 500 MMcf/d in late 2018.
"The excess processing capacity we are building, and will hold between now and late 2018, gives us latitude to speed up or slow down our growth rate while taking advantage of opportunities to market third-party natural gas as well," Proctor said.
2015 production tops guidance
Production in 2015 averaged slightly more than 60,000 boe/d, which tops the Company's 2015 production guidance of 55,000 to 60,000 boe/d. Preliminary estimates indicate that production in December, when 7G's firm liquids-rich natural gas delivery capacity on Alliance increased to 250 MMcf/d, averaged about 87,000 boe/d, and fourth quarter production averaged about 77,500 boe/d.
"We just completed a very successful operational year marked by more productive and lower cost wells, strong year-end production growth, advanced start-up of our new Lator 2 natural gas processing plant, and improved safety. Our 2015 production increased more than 90 percent, up from 31,136 boe/d in 2014," Proctor said.
"Cost optimization improved throughout 2015. Preliminary accounting indicates that 2015 capital investment is expected to be near the mid-point of 7G's guidance range of between $1.30 billion and $1.35 billion. We expect capital efficiencies gained in 2015, due to faster drilling, more effective well completions and construction optimization at our new processing facilities, will at least continue, and likely improve further in 2016. We are drilling longer wells and implementing larger hydraulic fractures as part of our standard completions and both innovations are expected to improve recoveries of liquids rich natural gas," Proctor said.
Managing market risk
"Despite the deterioration of commodity prices and the weaker Canadian dollar, our risk management program continues to fortify our near and longer-term financial strength through the execution of a methodical, three-year, rolling hedging program. With higher prices in the futures market, we have been able to forward sell liquids and natural gas at prices that provide threshold rates of return on planned capital investments," said Chris Law, 7G's CFO.
The Canadian dollar weakness also means that 7G's US-dollar denominated debt increases on its balance sheet purely due to the currency exchange effect. A portion of 7G's natural gas and liquids are sold in US dollars, which helps offset the decline in the Canadian dollar and mitigates debt servicing costs. However, implied Canadian dollar debt metrics are inflated due to this currency movement.
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| 7G Commodity Price Hedge Position - December 31, 2015 |
| |
2016 |
2017 |
2018 |
| Liquids hedging |
|
|
|
| |
WTI hedged (bbl/d) |
13,250 |
8,250 |
3,250 |
| |
Average floor ($C/bbl) |
70.04 |
68.94 |
67.93 |
| |
Average ceiling ($C/bbl) |
80.48 |
78.88 |
74.89 |
| Natural gas hedging |
|
|
|
| |
Gas hedged (MMbtu/d) |
122,500 |
105,000 |
47,500 |
| |
Average Chicago City Gate swap ($US/MMbtu) |
3.19 |
3.10 |
2.80 |
| |
Average Swap ($C/MMbtu)* |
4.01 |
4.00 |
3.83 |
| Currency exchange hedging |
|
|
|
| |
$US notional hedged (MM) |
143.10 |
118.82 |
48.46 |
| |
Average rate |
1.2562 |
1.2878 |
1.3690 |
| * Chicago City Gate natural gas price converted to $C/MMbtu @ average $C/$US hedge rate |
Seven Generations Energy
Seven Generations is a low-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.
Further information on Seven Generations is available on the Company's website: www.7genergy.com.
Reader Advisory
This news release contains certain forward-looking information and statements that involves various risks, uncertainties and other factors. The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "should", "believe", "plans", and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this news release contains forward-looking information and statements pertaining to the following: production estimates, production growth and production guidance; capital investment; the expected impact of the deferral of capital investment; expected cash flow; unsustainability of current commodity prices; ability to manage future financial impacts related to the deferral of capital investment; the timing and completion of planned facility construction; the completion and tie-in of wells already in process; the number of drilling rigs to be utilized; expected processing and transportation capacity; ability to speed up or slow down the rate of growth; opportunities to process and market third party natural gas; ability to achieve threshold rates of return; expected optimization and improvement, including improved capital efficiencies; and the ability to generate long-life value from the Kakwa River Project.
With respect to forward-looking information contained in this news release, assumptions have been made regarding, among other things: future oil, natural gas liquids and natural gas prices; the Company's ability to obtain qualified staff and equipment in a timely and cost efficient manner; the Company's ability to market production of oil, natural gas and natural gas liquids successfully to customers; the Company's future production levels; the applicability of technologies for the Company's reserves; future capital investments by the Company; future funds from operations from production; future sources of funding for the Company's capital program; the Company's future debt levels; geological and engineering estimates in respect of the Company's reserves and resources; the geography of the areas in which the Company is conducting exploration and development activities; the access, economic and physical limitations to which the Company may be subject from time to time; the impact of competition on the Company; and the Company's ability to obtain financing on acceptable terms.
Actual results could differ materially from those anticipated in the forward-looking information as a result of the risks and risk factors that are set forth in the Company's Annual Information Form, dated March 10, 2015, which is available on SEDAR at www.sedar.com, including, but not limited to: volatility in market prices and demand for oil, natural gas liquids and natural gas and hedging activities related thereto; general economic, business and industry conditions; variance of the Company's actual capital costs, operating costs and economic returns from those anticipated; risks related to the exploration, development and production of oil and natural gas reserves and resources; negative public perception of oil sands development, oil and natural gas development and transportation, hydraulic fracturing and fossil fuels; actions by governmental authorities, including changes in government regulation, royalties and taxation; the management of the Company's growth; the availability, cost or shortage of rigs, equipment, raw materials, supplies or qualified personnel; the absence or loss of key employees; uncertainty associated with estimates of oil, natural gas liquids and natural gas reserves and resources and the variance of such estimates from actual future production; dependence upon compressors, gathering lines, pipelines and other facilities, certain of which the Company does not control; the ability to satisfy obligations under the Company's firm commitment transportation arrangements; uncertainties related to the Company's identified drilling locations; the concentration of the Company's assets in the Kakwa area; unforeseen title defects; Aboriginal claims; failure to accurately estimate abandonment and reclamation costs; changes in the interpretation and enforcement of applicable laws and regulations; terrorist attacks or armed conflicts; natural disasters; reassessment by taxing authorities of the Company's prior transactions and filings; variations in foreign exchange rates and interest rates; third-party credit risk including risk associated with counterparties in risk management activities related to commodity prices and foreign exchange rates; sufficiency of insurance policies; potential for litigation; variation in future calculations of certain financial measures; sufficiency of internal controls; impact of expansion into new activities on risk exposure; risks related to the senior unsecured notes and other indebtedness, including: potential inability to comply with the covenants in the credit agreement related to the Company's credit facilities and/or the covenants in the indentures in respect of the Company's senior secured notes; seasonality of the Company's activities and the Canadian oil and gas industry; and extensive competition in the Company's industry.
The forward-looking information and statements contained in this news release speak only as of the date hereof, and the Company does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.
Definitions
bbl barrel
bbl/d barrels per day
boe barrels of oil equivalent(1)
boe/d barrels of oil equivalent per day
Mcf thousand cubic feet of gas
MM millions
MMBtu million British thermal units
MMBtu/d million British thermal units per day
MMcf/d million cubic feet per day
TSX Toronto Stock Exchange
WTI West Texas intermediate
$C Canadian Dollars
$US United States Dollars
Seven Generations Energy Ltd. is referred to herein as Seven Generations, Seven Generations Energy, 7G and the Company.
(1) 7G has adopted the standard of 6 Mcf:1 bbl when converting natural gas to oil equivalent. Condensate and other natural gas liquids are converted to oil equivalent at a ratio of 1 bbl:1 bbl. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf:1 bbl is based roughly on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at 7G's sales point. Given the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6 Mcf: 1 bbl, utilizing a conversion ratio at 6 Mcf: 1 bbl may be misleading as an indication of value.
