Crew targets production of 30,000+ BOEPD by Q4 2017
Crew Energy Inc. (ticker: CR) reported today that it has approved a 2017 capital expenditure program of $200 million designed to achieve production growth to over 30,000 BOEPD in the fourth quarter of 2017.
This growth represents a greater than 40% increase in Montney production, funded through a combination of internally generated funds from operations and draws on our credit facility leading to an exit 2017 debt to trailing fourth quarter 2017 annualized funds from operations ratio of less than 1.5 times, the company said.
With over 300,000 net acres of Montney rights and over 110 Tcfe of Total Petroleum Initially in Place (“TPIIP”), Crew has access to a massive resource for development and significant long-term growth potential.
To date, Crew has focused on the Upper Montney at our Septimus and West Septimus areas (“Greater Septimus”) and continued development at the Tower light oil area.
“Our 2017 capital program will be predominantly focused on West Septimus development, including further delineation of the ultra liquids-rich region and includes approximately $40 million of infrastructure investments highlighted by the doubling of our West Septimus facility’s capacity to 120 mmcf per day. Production additions will be back end loaded with the West Septimus plant expansion expected to be completed in the fourth quarter. Further delineation of Upper and Lower Montney stratigraphic intervals at West Septimus and Tower will further support our growth plan designed to achieve production of over 60,000 boe per day by the end of 2019,” the company said in a statement.
Highlights:
Invest $140 million into Montney drilling, completions, equip and tie-in activities, including the planned drilling of 28 (26.3 net) and the completion of 39 (37.3 net) Montney wells through the year;
Direct $40 million of capital into key infrastructure projects including expansion of Crew’s West Septimus facility to 120 mmcf per day of gas processing capacity that in aggregate with Septimus and Tower will provide Crew with 45,000 boe per day of processing capacity for Montney gas and liquids production. Pipeline construction will also begin to provide physical access to the Trans-Canada Pipeline (“TCPL”) system by the second quarter of 2018, further diversifying Crew’s marketing strategy and to support our three year growth plan to over 60,000 boe per day;
Forecast Q4 2017 exit Montney production greater than 26,000 boe per day achieving year-over-year exit growth of over 40%;
Target annual corporate production growth of approximately 15% with volumes averaging between 25,000 and 27,000 boe per day (weighted 72% to natural gas) with a corporate exit rate of greater than 30,000 boe per day;
Continue to focus on cost control with corporate operating costs per boe in 2017 expected to be between $5.50 and $6.00 per boe, transportation costs of $2.25 to $2.50 per boe, and G&A costs of between $1.25 and $1.50 per boe. At our Greater Septimus area, Crew anticipates continued low operating costs of between $3.50 and $4.00 per boe; and
Preserve balance sheet strength and maintain a conservative 2017 year end debt to trailing 2017 funds from operations ratio of approximately two times, and debt to annualized fourth quarter 2017 funds from operations of 1.5 times.
2017 Budget Overview and Activity Summary
Crew’s 2017 capital budget is predominantly focused on drilling and completions at Greater Septimus and the expansion of the West Septimus facility, while taking advantage of key service costs that Crew has negotiated through the end of 2017. Crew anticipates having three drilling rigs running through the first half of 2017 in order to complete our 28 well Montney program. The Company also plans to complete and tie-in eleven net wells which were previously drilled in 2016 and will further contribute to production volume growth.
A summary of capital allocation and planned activities by area follows:
West Septimus (~$128 million or 64% of total): Activities at West Septimus will include the drilling of 23 (21.3 net) wells at an average total estimated drill, complete, equip and tie-in cost per well of $3.8 million. An additional five (5.0 net) wells will be completed that were drilled in the fourth quarter of 2016. The drilling program will include approximately ten development and delineation wells situated in the ultra liquids-rich window which, if comparable to the first two wells drilled and completed in the area, would be on target to generate over 100% rates of return in the current capital cost and commodity price environment. In addition, Crew plans to expand processing capacity at the West Septimus gas plant to 120 mmcf per day which is expected to come on-stream in the fourth quarter of 2017. In concert, we have budgeted approximately $20 million of additional capital to start construction of a pipeline that will tie Crew’s West Septimus infrastructure into the TCPL Saturn meter station, which is expected to be in service by early 2018. The pipeline route will also intersect the proposed site of Crew’s planned Groundbirch facility expected to be in service by late 2018 as part of the Company’s three year growth plan.
Septimus (~$24 million or 12% of total): Drill one well at a total drill, complete, equip and tie-in cost of $3.6 million. Crew plans to bring five wells on production during 2017, including four wells that were previously drilled during 2016 and carried forward into 2017. The Company also plans to allocate approximately $10 million for a pipeline expansion to accommodate production volumes from the West Septimus plant expansion and de-bottlenecking projects at Septimus.
Tower (~$30 million or 15% of total): Complete the two remaining wells from Crew’s 2014 drilling program during the first quarter of 2017, complete in-field facilities projects and drill four new wells to maintain production levels at the Tower facility at a total drill, complete, equip and tie-in cost of $5.4 million per well.
Lloydminster (~$7.5 million or 4% of total): The sales process of our heavy oil asset at Lloydminster is ongoing and as a result Crew has included a nominal amount of capital for Lloydminster in the budget, which is planned to be directed to drilling six wells and continuing with well optimizations and work-overs. At current commodity prices the Company is planning to maintain heavy oil production at approximately 2,000 boe per day.
Three Year Plan Highlights
Crew’s three year Montney development plan targets production growth to over 60,000 boe per day by the end of 2019 and includes the drilling of 175 Montney wells. Funding of this program over the three years is primarily expected to be from a combination of internally generated funds from operations and the continued prudent use of debt, while targeting a debt to future funds flow ratio of less than two times at the end of the period. By 2020, Crew is targeting free cash flow generation at current forward strip commodity prices and anticipates being able to direct excess funds to our ongoing longer-term Montney development.
Crew has also identified and secured the staged processing and takeaway requirements needed to achieve this growth, and plans to have approximately 300 mmcf per day of processing capacity, 275 mmcf per day of transportation capacity and over 20,000 bbls per day of liquids handling secured and in place by the end of 2019.
Risk Management
Crew’s active risk management program is designed to protect against volatility in commodity prices, support funds from operations and provide market diversity for the sale of our products. The Company has systematically layered in hedges for 2017 over the past year and currently has approximately 40% of our budgeted natural gas volumes hedged for 2017 with a floor of approximately $2.95 per GJ or approximately $3.11 per mcf, which increases to approximately $3.66 per mcf after adjusting for Crew’s heat conversion. The Company has also added 2017 hedges to protect funds from operations generated from our Montney light oil, condensate and natural gas liquids (“NGL”) revenue stream. Crew currently has hedges on an average of 2,122 bbls per day of WTI oil at an average price of C$67.94 per barrel.
Operations Update
Crew’s two new ultra liquids-rich wells continue to perform above expectations. The first well has been on production for 90 days and has produced a total of 36,700 bbls of condensate (an average of 408 bbls per day) and 179 mmcf of natural gas (an average of 2 mmcf per day) with the condensate to gas ratio averaging 204 bbls per mmcf. The second well was shut-in for facility modifications during the fourth quarter of 2016 but was on production for 40 days during which it produced a total of 17,700 bbls of condensate (an average of 443 bbls per day) and 97 mmcf of natural gas (an average of 2.4 mmcf per day) with the condensate to gas ratio averaging 185 bbls per mmcf.
During the fourth quarter, the Company completed two of four Tower light oil wells that had been previously drilled but uncompleted and both wells are continuing to clean-up after completion operations. Crew utilized a 30 stage plug and perf completion method with 60 limited-entry perforations per well and a higher sand loading of 2 tonnes per meter. The first well has been on production for 40 days and produced at an average rate of 950 boe per day, including 456 bbls per day of 45 degree API light oil. The second well was completed using a 23 stage plug and perf completion with 46 limited entry perforations and has been on production for 21 days over which it has produced at an average rate of 840 boe per day, including 350 bbls per day of light oil. Crew is planning to complete the second pair of Tower wells in the first quarter of 2017 and will continue to optimize completion techniques to evaluate the optimal drilling and completion parameters to be utilized for full-scale Tower field development.
Late in the fourth quarter, Crew completed three new Upper Montney wells at Septimus that are the strongest wells encountered at Septimus to date. All three wells were drilled in separate Upper Montney stratigraphic intervals and were placed on production over an average 15 day period at an average per well rate of 11.7 mmcf per day flowing at an average casing pressure of 1,765 psi. As the wells continued to clean-up, wellhead condensate rates increased to 24 bbls per mmcf translating to a combined rate of approximately 35 bbls of NGL per mmcf which is above historical Septimus field characteristics. These wells are expected to support Septimus production levels through the first quarter.
Equipment procurement is well underway for the planned expansion of the Company’s West Septimus facility which is scheduled to be in service in the fourth quarter of 2017. The plant’s design will incorporate the necessary fluid knock-out vessels to handle Crew’s drilling plans in the ultra liquids rich window that has averaged approximately 195 bbls per mmcf of condensate.
Outlook
Crew continues to focus on the economic development of our massive resource and are very encouraged by the continued improvement of our capital and operating cost structure as well as the significant improvements in well productivity. Our hedging program, diversity of sales points for our products in combination with an improved commodity price environment have allowed Crew to pursue a more aggressive growth strategy while protecting our balance sheet. In the fourth quarter, Crew’s Montney activities were impacted by unusually wet “spring-like” weather conditions resulting in road bans that delayed completions and deferred new volume additions until late in the quarter. Combined with the eight day Alliance pipeline shut-down in October, these delays are expected to result in fourth quarter 2016 average production volumes of approximately 22,300 boe per day and annual volumes averaging approximately 22,800 boe per day, just below our previous guidance range. Given the timing of the wells coming on late in the quarter, production has increased to approximately 25,000 boe per day and is expected to have a positive impact on volumes in the first quarter of 2017.
Crew anticipates exiting 2016 with debt levels of approximately $250 million, representing a 43% draw on our credit facility and $135 million of liquidity. At this debt level, our debt to annualized fourth quarter 2016 funds from operations is estimated to be at or below 2.5 times, representing continued improvement over the 2.7 times ratio at the end of the third quarter of 2016. We are committed to maintaining a strong balance sheet, and based on the program outlined above, forecast exiting 2017 with a net debt to annualized fourth quarter funds from operations ratio of approximately 1.5 times.
Our 2017 budget guidance and related targets and forecasts disclosed above are best estimates based on certain assumptions including, without limitation, operating results, known fiscal regimes, commodity prices and risk management contracts and will be regularly monitored by management. Crew’s objective will be to proactively manage our capital program as it relates to operational success and fluctuating commodity prices with a priority to maintain financial flexibility, achieve production growth and meet our guidance. Crew will closely monitor the budget and financial situation throughout the year to assess market conditions and has the ability to quickly adjust budget levels or pace of development to reflect commodity price changes, capital availability and funds from operations.
