Advantage Announces First Quarter 2020 Results, Strong Asset Performance, and Revised Capital Program

Source Company Press Release
Company Advantage Energy Ltd.
Tags Corporate: Corporate Results, Guidance, Overview/Strategy, Country: Canada, Financial - Costs & Metrics: Capital Expenditures, Hedging
Date May 06, 2020

Advantage Oil & Gas Ltd. ("Advantage" or the "Corporation") is pleased to announce solid first quarter 2020 operating results including production of 46,458 boe/d (up 3% from first quarter 2019) and record liquids production of 3,714 bbls/d (up 83% from first quarter 2019) with continued low operating costs of $2.28/boe. Production from new wells at Progress and Pipestone/Wembley is meeting or exceeding expectations, and performance of the foundational assets at Glacier and Valhalla has remained robust.

Advantage's highly active first quarter included the completion of strategic oil infrastructure projects at both Pipestone/Wembley and Progress.  With the recent commissioning of this infrastructure, Advantage has established flexibility to optimize capital deployment between our prolific low-cost gas at Glacier, our prolific condensate-rich gas at Valhalla, and our high quality light oil assets at Wembley and Progress.

In response to the current shift in commodity prices, the Corporation has updated 2020 capital guidance to between $130 million and $145 million, with plans to moderate liquids growth and focus spending on the highest rate-of-return investments at Glacier.  This plan is designed to increase liquidity and financial flexibility, bolstering our ability to pursue strategic opportunities and execute value-generating investments with a disciplined approach.  In conjunction with the Corporation's recently announced sale of 12.5% of our Glacier Gas Plant for $100 million (see Advantage news release dated April 13, 2020) to fortify our balance sheet, Advantage will continue to target a net debt to adjusted funds flow(a) ratio of 2x or less in 2021.

Advantage wishes to thank our field staff, head office staff and service providers for their commitment and hard work required to complete recent projects under strict health protocols, during the COVID 19 pandemic.  We commend and appreciate their dedication, along with other industry producers and all front-line workers, as we continue to deliver environmentally responsible, essential energy to Canada and the world.

First quarter 2020 results:

  • Total production of 46,458 boe/d including natural gas production of 256.5 mmcf/d and liquids production of 3,714 bbls/d
  • Cash provided by operating activities of $20.8 million and adjusted funds flow(a) of $32.1 million or $0.17 per share
  • Net capital expenditures(a) of $93.6 million. This included $49 million of infrastructure spending to establish efficient operations at both Wembley and Progress. First half 2020 spending remains approximately $100 million. All drilling, completions and facilities spending required to meet 2020 production guidance is now substantially complete; remaining capital spending is primarily discretionary investment in the highest rate-of-return projects.
  • Bank indebtedness of $330.6 million and net debt(a) of $364.9 million. The Corporation intends to use the proceeds from the $100 million sale of 12.5% of our Glacier Gas Plant to reduce bank indebtedness on closing in July.
  • Maintained low cash costs including operating costs of $2.28/boe.
  • A non-cash impairment expense of $361 million ($277 million net of tax) was recognized due to a significantly reduced independent reserve engineer price forecast attributable to exceptional commodity price volatility. The impairment has no impact on adjusted funds flow and could reverse in the future should the commodity futures recover.

a. Non-GAAP Measure which may not be comparable to similar non-GAAP measures used by other entities. Please see Advisory for reconciliations to the nearest measure calculated in accordance with GAAP. 

Operational Update

At Progress, construction of a 26 km gathering system was completed during the first quarter, connecting five wells from our recently discovered light oil play to the Glacier Gas Plant.  Productivity of the wells is exceeding expectations and the wells remain restricted, with maximum capacity of approximately 2,000 bbls/d, depending on frac water flowback rates.  In preparation to construct a 5,000 bbl/d battery, $18 million was spent during the quarter to purchase major equipment.  Construction of this battery has been deferred while oil prices remain impacted by the COVID pandemic.

At Wembley, construction of our 36 mmcf/d gas and 5,000 bbl/d liquids hub was completed and commissioned during April.  With liquids extraction and compression now in place, liquids constraints at a third-party gas plant have been alleviated and wellhead pressures have been reduced.  Since the battery was commissioned, the 8 Wembley wells drilled to date have been ramping up and producing at expectations.

At Glacier, one previously drilled well was brought on production during the quarter. The well averaged 7.5 mmcf/d and 7.5 MPa flowing pressure over the first 30 days of production.  Approximately four wells will be drilled during the remainder of 2020, targeting low-risk prolific gas that will produce into existing processing capacity at the Glacier Gas Plant.

All four properties (Glacier, Valhalla, Wembley and Progress) now have established infrastructure and proven productivity.  Development of each of the assets can continue within existing capacity, with no major infrastructure or land spending, providing strong returns in most commodity price environments.  Advantage has minimal take-or-pay obligations, which provides flexibility to redirect capital to the highest rate-of-return projects, and to vary the pace of development freely.

Advantage has hedged approximately 55% of its natural gas production for the second and third quarters of this year.  For 2021, 12% of forecast natural gas production is hedged between Henry Hub, Chicago and Dawn at an average price of US $2.51 per mmbtu, with more hedging planned in the coming months.

Looking Forward and Updated Guidance

Although gas prices experienced a significant decline across the North American complex in the first quarter due to a warm winter, futures have strengthened significantly as supply and demand have rebalanced; as such, Advantage has adjusted capital spending to be prepared to capitalize on strategic opportunities and to deliver strong returns through organic development.  The asset sale of 12.5% of our Glacier Gas Plant, which is scheduled to close in July, fortifies the Corporation's balance sheet and provides significant financial and operational flexibility during this period of unprecedented volatility.  Key goals for our revised guidance will be to optimize returns, invest opportunistically, and target a net debt to adjusted funds flow(a) ratio of approximately 2x or less in 2021.  The Corporation has revised its 2020 guidance as follows:

  Updated Guidance (1)  Original Guidance (2) 
Cash Used in Investing Activities (3) ($ millions)  $130 to 145(4)  $170 to $200 
Average Production (boe/day)  43,500 to 46,500  45,000 to 47,500 
   Gas Production (mmcf/d)  235 to 250  234 to 245 
   Liquids Production (bbls/d)  4,200 to 4,700  6,000 to 6,700 
Royalty Rate (%)  3% to 5%  3% to 5% 
Operating Expense ($/boe)  $2.50  $2.50 
Transportation Expense ($/boe)  $3.70  $3.70 
G&A/Finance Expense ($/boe)  $1.80  $1.70 
     

(1)  Forward-looking information. Refer to Forward-Looking Information and Other Advisories for cautionary statements regarding Advantage's guidance including material assumptions and risk factors. 
(2)  See News Release dated January 8, 2020. 
(3)  Cash Used in Investing Activities is the same as Net Capital Expenditures as no change in non-cash working capital is assumed and other differences are immaterial. 
(4)  Excludes net proceeds from the asset sale of 12.5% of our Glacier Gas Plant. 

First Quarter 2020 Operating and Financial Summary 

Financial Highlights         Three months ended March 31 
($000, except as otherwise indicated)            2020    2019 
Financial Statement Highlights                 
Sales including realized derivatives (3)          65,772  81,372 
Net income (loss) and comprehensive income (loss)          (266,519)  681 
per basic share (2)          (1.43)  0.00 
Cash provided by operating activities          20,826  44,483 
Cash provided by financing activities          34,960  19,501 
Cash used in investing activities          65,221  59,714 
Basic weighted average shares (000)            186,911    185,942 
Other Financial Highlights                 
Adjusted funds flow (1)          32,093  50,023 
per boe (1)          7.59  12.38 
per basic share (1)(2)          0.17  0.27 
Net capital expenditures (1)          93,630  57,422 
Working capital deficit (surplus) (1)          34,284  (9,325) 
Bank indebtedness          330,644  290,612 
Net debt (1)          364,928  281,287 

(1)  Non-GAAP measure which may not be comparable to similar non-GAAP measures used by other entities. Please see "Non-GAAP Measures". 
(2)  Based on basic weighted average shares outstanding. 
(3)  Excludes net sales of natural gas purchased from third parties. 

Operating Highlights         Three months ended March 31 
            2020    2019 
Operating                 
Daily Production                 
Natural gas (mcf/d)            256,463    257,219 
Crude oil and condensate (bbls/d)            2,151    750 
NGLs (bbls/d)            1,563    1,280 
Total production (boe/d)`            46,458    44,900 
Average realized prices (including realized derivatives)                 
Natural gas ($/mcf) (2)          2.11  3.11 
Crude oil and condensate ($/bbl)          60.64  61.59 
NGLs ($/bbl)          32.98  46.28 
Operating Netback ($/boe)                 
Petroleum and natural gas sales from production          15.18  18.90 
Net sales of natural gas purchased from third parties (1)              (0.35) 
Realized gains on derivatives            0.38    1.23 
Royalty expense            (0.89)    (0.57) 
Operating expense            (2.28)    (2.02) 
Transportation expense            (3.50)    (3.40) 
Operating netback (1)          8.89  13.79 

(1)  Non-GAAP measure which may not be comparable to similar non-GAAP measures used by other entities. Please see "Non-GAAP Measures". 
(2)  Excludes net sales of natural gas purchased from third parties. 

The Corporation's unaudited consolidated financial statements for the three months ended March 31, 2020 together with the notes thereto, and Management's Discussion and Analysis for the three months ended March 31, 2020 have been filed on SEDAR and are available on the Corporation's website at advantageog.com. Upon request, Advantage will provide a hard copy of any financial reports free of charge.

Net Capital Expenditures

Net capital expenditures include total capital expenditures related to property, plant and equipment and exploration and evaluation assets incurred during the period.  Management considers this measure reflective of actual capital activity for the period as it excludes changes in working capital related to other periods.  A reconciliation between net capital expenditures and the nearest measure calculated in accordance with GAAP, cash used in investing activities, is provided below:

    Three months ended March 31 
($000)        2020    2019 
Cash used in investing activities          65,221  59,714 
Changes in non-cash working capital            28,409    ( 2,292) 
Net capital expenditures          93,630  57,422 

Working Capital

Working capital includes cash and cash equivalents, trade and other receivables, prepaid expenses and deposits and trade and other accrued payables at the reporting date.  Working capital provides Management and users with a measure of the Corporation's operating liquidity.        

Net Debt

Net debt is comprised of bank indebtedness and working capital.  Net debt provides Management and users with a measure of the Corporation's bank indebtedness and expected settlement of net liabilities in the next year.  A detailed calculation of net debt is provided below:

($000)          March 31 2020  December 31 2019 
Bank indebtedness (non-current)          330,644  295,624 
Working capital deficit            34,284    7,996 
Net debt          364,928  303,620 
                   

Adjusted Funds Flow

The Corporation considers adjusted funds flow to be a useful measure of Advantage's ability to generate cash from the production of natural gas and liquids, which may be used to settle outstanding debt and obligations, and to support future capital expenditures plans.  Changes in non-cash working capital and other long-term liabilities are excluded from adjusted funds flow as they may vary significantly between periods and are not considered to be indicative of the Corporation's operating performance as they are a function of the timeliness of collecting receivables or paying payables.  Expenditures on decommissioning liabilities are excluded from the calculation as the amount and timing of these expenditures are unrelated to current production, highly variable and discretionary.  Adjusted funds flow has also been presented per boe, by dividing adjusted funds flow by total production in boe for the reporting period, and per basic share, by dividing by the basic weighted average shares outstanding of the Corporation.

A reconciliation between adjusted funds flow and the nearest measure calculated in accordance with GAAP, cash provided by operating activities, is provided below:

        Three months ended March 31 
($000, except as otherwise indicated)            2020    2019 
Cash provided by operating activities          20,826  44,483 
Expenditures on decommissioning liability            179    865 
Changes in non-cash working capital            11,088    4,675 
Adjusted funds flow          32,093  50,023 

Net Debt to Adjusted Funds Flow

Net debt to adjusted funds flow is calculated by dividing net debt by adjusted fund flow for the previous four quarters.  Net debt to adjusted funds flow is a coverage ratio that provides Management and users the ability to determine how long it would take the Corporation to repay its bank debt if it devoted all its adjusted funds flow to bank debt repayment.

Operating Netback

Advantage calculates operating netback on a per boe basis.  Operating netback is comprised of sales revenue, realized gains (losses) on derivatives and net sales of natural gas purchased from third parties, net of expenses resulting from field operations, including royalty expense, operating expense and transportation expense.  Operating netback provides Management and users with a measure to compare the profitability of field operations between companies, development areas and specific wells.

  Three months ended March 31 
  2020  2019 
    $000    per boe    $000    per boe 
Petroleum and natural gas sales from production  64,185  15.18  76,393  18.90 
Net sales of natural gas purchased from third parties        (1,400)    (0.35) 
Realized gains on derivatives    1,587    0.38    4,979    1.23 
Royalty expense    (3,755)    (0.89)    (2,302)    (0.57) 
Operating expense    (9,647)    (2.28)    (8,157)    (2.02) 
Transportation expense    (14,804)    (3.50)    (13,750)    (3.40) 
Operating netback  37,566  8.89  55,763  13.79 
                   

Net Sales of Natural Gas Purchased from Third Parties

Net sales of natural gas purchased from third parties represents the revenue or loss generated from the sale of natural gas volumes purchased from third parties, after deducting the cost to purchase the volumes.  The purchase and sale transactions are non-routine and are considered by Management to be related for performance purposes.

Source: EvaluateEnergy® ©2024 EvaluateEnergy Ltd