Black Swan Energy Ltd. has officially opened its Nig Creek Gas Processing Facility located in northeast British Columbia. The company hosted a celebration at the plant which was attended by the Chief of the Blueberry River First Nations, Marvin Yahey, Mayor of Fort St. John and 2019 Canadian Energy Person of the Year, Lori Ackerman and Liberal MLA for Peace River North, Dan Davies. Following a tour of the state-of-the-art facility Elder May Apsassin offered a blessing, which highlighted the importance of actively engaging with our First Nations partners.
Obsidian Energy announces second quarter 2019 financial and operational results
Obsidian Energy has continued to make good progress moving through the second quarter of 2019, according to its most recent financial reports.
Michael Faust, Interim President and CEO commented "Throughout the second quarter of 2019 we made significant progress on our top priorities: improving our balance sheet, maintaining strong operational results, and making headway on cost cutting initiatives.
In the quarter, we successfully improved the balance sheet by reducing our Net Debt and since quarter end, reached an amended agreement on our syndicated credit facility to maintain our underlying borrowing base and amount available at $550 million and $460 million, respectively.
We continued the momentum from our first quarter with strong operational and financial results. These positive results are due to the Cardium Phase 1 program which continues to perform as expected. Through this dedicated program we have achieved 10 percent production growth in the Cardium versus the second quarter of 2018 and increased our netbacks to $30 per boe in the area. We have now commenced Phase 2 of our Cardium program with two rigs drilling in Willesden Green, and are expecting to see similar results as the Phase 1 program.
In the second quarter, we made progress on our cost cutting initiatives by meaningfully reducing staff in our corporate office to better align with that of a single-asset focused Company. We have also taken steps to reduce our restructuring and other expenses. These efforts ensure we are making the most of every dollar we spend as well as achieving our operating and general and administrative cost targets set for 2020 of $13.00 and $1.85 per boe, respectively."
Second Quarter Financial and Operational Overview
Obsidian Energy maintained strong operational and financial results in the second quarter and continued to focus on its high-quality, light oil Cardium asset. In the quarter, the Company averaged 27,835 boe per day (67 percent oil and NGL's), an increase of 184 boe per day from the first quarter of 2019, despite no new development drilling taking place due to spring break-up. The strong production is attributed to the five Cardium wells that were brought on early in the quarter, as well as an accelerated optimization program that exceeded expectations. Production from the Cardium remained robust at 20,289 boe per day, a five percent increase over the first quarter of 2019 and a 10 percent increase versus the second quarter of 2018. These wells are offsetting the Phase 2 locations that the Company is currently drilling.
Operating Netbacks improved in the second quarter of 2019 to $21.54 per boe, compared to $16.51 per boe in the second quarter of 2018. The increase was largely driven by improved crude oil benchmark pricing and lower operating costs underpinned by the Company's Cardium assets with its Field Netback of $30.35 per boe. As part of our strategic priorities, Obsidian Energy continues to make progress on reducing operating costs which came in at $12.86 per boe for the second quarter of 2019, a decrease of $0.63 per boe versus the previous quarter and $1.61 per boe year over year. The improvements are a result of shutting in legacy asset production in late 2018 and the Company's focus on growing its low operating cost Cardium production.
Funds Flow from Operations ("FFO") in the quarter was $41 million or $0.56 per share, an increase of $5 million from the first quarter of 2019. FFO increased $9 million or 28 percent year over year, due to improved operating costs and lower risk management losses. As expected, Obsidian Energy invested capital, including decommissioning expenditures, totaling $9 million for the second quarter and $45 million in the first half of 2019. With strong FFO and lower capital spending, the Company successfully reduced its Net Debt in the quarter by $19 million, improving the balance sheet.
- Strong FFO totaling $41 million ($0.56 per share) for the second quarter of 2019 compared to $36 million ($0.50 per share) in the first quarter of 2019 and $32 million ($0.44 per share) in the second quarter of 2018.
- Average production was 27,835 boe per day compared to 27,651 boe per day in the first quarter of 2019 and 28,697 boe per day in the second quarter of 2018. Production increased from the first quarter of 2019 as a result of wells from the Company's Cardium development program being brought on-line early in the quarter.
- Capital expenditures for the quarter, excluding decommissioning liabilities, totaled $8 million. Capital expenditures were minimal in the second quarter due to spring break-up conditions with the focus on early preparations for the Company's Phase 2 drilling program as well as optimization activities.
- Operating costs were $12.86 per boe in the second quarter of 2019 compared to $14.47 boe per day in the second quarter of 2018. The Company benefited from the recently completed legacy asset shut-in program which removed several negative cash flow properties from its portfolio and reduced operating costs.
- General and administrative costs were $2.20 per boe in the second quarter of 2019 compared to $2.49 per boe in the second quarter of 2018. The Company reduced both staff count and information technology spending levels during the second quarter of 2019 which will result in lower absolute costs in the second half of the year.
- Net Debt totaled $478 million, a decrease of $19 million from March 31, 2019, including $416 million drawn on our syndicated credit facility and $62 million of senior notes. During the quarter $17 million of senior notes matured and were repaid. On June 30, 2019, Senior Debt to Adjusted EBITDA, as calculated under the Company's credit agreement was 2.86:1.
- The Company filed articles of amendment on June 5, 2019 to consolidate the common shares of the Company on the basis of a consolidation ratio of seven old common shares to one new common share (the "Common Share Consolidation"). At the Annual and Special meeting the Common Share Consolidation was approved by shareholders and commenced trading on a post consolidation basis on June 10, 2019.
- Subsequent to June 30, 2019, the Company entered into crude oil swaps on 750 barrels per day for the third quarter of 2019 at $77.97 per barrel and on 1,250 barrels per day for the fourth quarter of 2019 at $77.35 per barrel. All trades were completed in Canadian dollars.
- Subsequent to June 30, 2019, the Company reached an agreement with its lenders whereby the underlying borrowing base of the syndicated credit facility and the amount available under the syndicated credit facility remain at $550 million and $460 million, respectively. The revolving period was extended to end on February 28, 2020 with revolving period confirmation dates on November 19, 2019 and January 20, 2020. Under the amended agreement the term-out period is November 30, 2020. As a result of not signing the agreement prior to June 30, the Company's credit facility was classified as a current liability at the end of the quarter, as the term-out period was within 12 months at that date. Additionally, upon close of the Company's disposition of its interest in the Peace River Oil Partnership, the amount available under the syndicated credit facility will be reduced to $420 million.
Hedging Program Updates
The Board of Directors and management have continued to layer additional hedges on a Canadian dollar basis to help minimize volatility in commodity pricing and provide a level of certainty to our cash flow. While our hedging volumes have increased, we are cautious to only hedge at levels that provide investors continued upside. Currently, the Board of Directors have approved up to 5,000 bbl per day of oil hedges extending until the end of the second quarter of 2020.
The Company has no currency or gas hedges currently in place.
Phase 2 Cardium Program Underway
The total planned capital of $120 million for 2019 remains unchanged with a second half 2019 capital spend of $75 million, including decommissioning expenditures. Of the of $75 million, approximately $50 million will be allocated to drill 13 primary Cardium wells. The remaining $25 million of capital will be earmarked for further Cardium wellbore optimization, non-operated development, maintenance and corporate capital. The Company will continue to target spending within FFO and depending on commodity price, has an inventory of drill ready locations to adjust development activity accordingly.
After a wet spring break-up season, the Company began Phase 2 of its Cardium drilling program mobilizing two rigs to the Crimson area. The first of two wells 5-23-43-8W5 was spud July 28 and has been rig released with the second well 102/10-22-43-08W5 spud July 31. Each rig is currently drilling two-well pads with all four wells estimated to be on stream by mid-October. The Company has nine additional wells planned in 2019 with all locations fully licensed and ready to execute. These locations utilize existing infrastructure to minimize costs and are along trend with the previous best in class Cardium results the Company achieved during its Phase 1, 19 well program in late 2018 and early 2019. Obsidian Energy does not expect that the Alberta government mandated curtailment program will impact its operations with the assumption that it will remain in place through the balance of 2019. As part of normal course operations, the Company has planned turnaround activity scheduled in the third quarter of 2019. Consequently, the Company's operating cost per boe metric for the third quarter is likely to increase but expects to remain within its annual guidance range.
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