Cequence Energy Announces Third Quarter Results and Operations Update

CALGARY, Nov. 12, 2013 /CNW/ - Cequence Energy Ltd. ("Cequence" or the "Company") (TSX: CQE) is pleased to announce the financial and operating results from the third quarter and provide an operations update.

Financial and Operating Highlights

The following are Cequence's financial and operating highlights for the third quarter of 2013:

  • Commenced the most active drilling program in the Company's history with 17 gross wells expected to be drilled prior to spring break-up;
  • Successfully completed 3 Montney wells and 1 Wilrich well at Ansell;
  • Increased average production by 16 percent from the prior year to 10,292 boepd;
  • Increased funds flow from operations by 2 percent from the prior year to $11.0 million;

Subsequent to quarter end, completed $60 million unsecured five year note investment with CPPIB Credit Investments Inc. allowing for acceleration of Simonette development.

Financial and Operating

(000's except per share and per unit amounts) Three months ended
September 30,
Nine months ended
September 30,
    2013 2012 %
Change
2013 2012 %
Change
Financial ($)              
Production revenue (1)   25,325 17,814 42 77,134 53,711 44
Comprehensive loss   (517) (3,824) (86) (1,786) (18,339) (90)
Per share, basic and diluted   (0.00) (0.02) (100) (0.01) (0.11) (91)
Funds flow from operations, excluding termination fee(2)   10,973 7,135 54 36,457 18,813 94
Funds flow from operations (2)   10,973 10,803 2 36,457 22,121 65
Per share, basic and diluted   0.06 0.06 - 0.18 0.13 38
Production volumes              
Natural gas (Mcf/d)   52,848 46,641 13 52,459 47,200 11
Crude oil (bbls/d)   844 606 39 776 636 22
Natural gas liquids (bbls/d)   640 516 24 592 503 18
Total (boe/d)   10,292 8,895 16 10,112 9,006 12
Sales prices              
Natural gas, including realized hedges ($/Mcf)   3.08 2.61 18 3.49 2.39 46
Crude oil ($/bbl)   97.42 83.38 17 93.42 84.48 11
Natural gas liquids ($/bbl)   47.26 41.89 13 45.55 58.64 (22)
Total ($/boe)   26.75 21.77 23 27.94 21.77 28
Netback ($/boe)              
Price   26.75 21.77 23 27.94 21.77 28
Royalties   (2.44) (1.13) 116 (2.48) (1.30) 91
Transportation   (1.65) (2.20) (25) (1.60) (2.13) (25)
Operating costs   (8.29) (6.88) 20 (7.78) (7.72) 1
Operating netback   14.37 11.56 24 16.08 10.62 51
General and administrative   (2.02) (2.19) (8) (2.06) (2.26) (9)
Interest(5)   (0.69) (0.60) 15 (0.63) (0.65) (3)
Cash netback   11.66 8.77 33 13.39 7.71 74
Capital Expenditures ($)              
Capital expenditures   17,949 16,818 7 66,331 67,661 (2)
Net acquisitions (dispositions) (4)   (5) 20 (125) (2,628) (13,902) (81)
Total capital expenditures   17,944 16,838 7 63,703 53,759 18
Net debt and working capital (deficiency) (3)   (72,984) (48,291) 51 (72,984) (48,291) 51
Weighted average shares outstanding              
Basic and diluted   210,918 191,612 10 206,951 172,832 20

(1) Production revenue is presented gross of royalties and realized gain (loss) on commodity contracts.
(2) Funds flow from operations is calculated as cash flow from operating activities before adjustments for decommissioning liabilities expenditures and net changes in non-cash working capital. For the three and nine months ended September 30, 2012, funds flow from operations included a $3,668 and $3,308 termination fee (net of transaction costs) related to an unsuccessful acquisition.
(3) Net debt and working capital (deficiency) is calculated as cash and net working capital less commodity contract assets and liabilities and demand credit facilities and excluding other liabilities.
(4) Represents the cash proceeds from the sale of assets and cash paid for the acquisition of assets, as applicable.
(5) Represents finance costs less accretion expense on provisions.
   

Funds flow from operations increased to $11.0 million for three months ended September 30, 2013 compared to $10.8 million for the three months ended September 30, 2012. Funds flow for the three months ended September 30, 2012 included $3.7 million of net proceeds related to a termination fee from an unsuccessful acquisition.  Excluding the termination fee, funds flow from operations increased by 54 percent from the prior year due to increased production volumes, improved commodity pricing and gains on natural gas hedging. Cequence recorded a comprehensive loss of $0.5 million for the third quarter of 2013 compared to a comprehensive loss of $3.8 million in the same period in 2012.

Third quarter AECO-C spot prices averaged $2.45 per mcf in 2013 compared to $2.30 in 2012.  Despite low natural gas prices, Cequence was able to increase its average sales price by 23 percent through realized hedging gains and increased liquids revenue.  In the third quarter, Cequence realized an average natural gas price of $3.08 per mcf.  For the remainder of 2013, Cequence has hedged approximately 50 percent of its estimated natural gas production, net of expected royalties, at an average AECO price of $3.15 /GJ or $3.65 per mcf.  Cequence has also hedged approximately 19.5 GJ/d or 30 percent of estimated natural gas production for 2014 at an average price of $3.50/GJ or $4.06 per mcf.

For the three months ended September 30, 2013, operating costs increased to $8.29 per boe from $6.88 per boe in the comparative period in 2012. Operating costs for the nine months ended September 30, 2013 were $7.78 per boe compared or $7.72 per boe for the same period in 2012.  The increase in third quarter operating costs on a per boe basis can be attributed to increased chemical costs and cost escalation in non-core properties due to plant turnarounds, workovers and declining production.

For the three and nine month periods ended September 30, 2013 operating costs in the Company's primary operating area of Simonette were significantly lower than corporate operating costs.   For the nine months ended September 30, 2013, Simonette operating costs were $4.95 per boe, a 25 percent improvement from the same period in 2012.    Conversely, operating costs in the Company's other properties have increased on a per boe basis over the same period of comparison.  Simonette currently comprises 66 percent of corporate production and has been the focus of the Company's capital expenditures and production growth for the past three years.   Cequence forecasts corporate operating costs to decrease as Simonette production volumes comprise a greater percentage of the Company's total production.

Net capital expenditures in the second quarter were $17.9 million and $63.7 million year to date.  Third quarter capital expenditures included 3.0 Montney wells spud at Simonette and 1.0 (0.15 net capital working interest) well at Ansell.  Current budgeted capital expenditures for 2013 are $110 million with $46 million planned for the fourth quarter.

Net debt and working capital deficiency at September 30, 2013 was $73.0 million.  On October 3, 2013, Cequence entered into a private transaction for the issuance of $60.0 million in unsecured five year notes ("Notes") with a further $60 million of notes available at a future date, subject to the approval by both parties.  The initial investment of $60 million of notes were issued at par and carry a 9% coupon rate per annum. In addition, Cequence has granted, to the lender of the notes, 3.0 million warrants at an exercise price of $2.03 to purchase common shares. In conjunction with the issuance of the notes, the Company's credit facility borrowing base has been reduced to $120 million and was undrawn after giving effect to the issuance of the notes.

Operations Update

Cequence achieved Q3 2013 average production of 10,292 boepd, a 16% increase from the third quarter of 2012.  During the quarter, the Simonette field experienced 4.5 days of downtime for the planned Allliance pipeline maintenance and the installation of a field condensate stabilization unit at the Cequence owned compressor facility.  Quarterly production was reduced by approximately 200 boepd as a result of these outages.  Production from the last Montney well of the winter drilling program at 9-21-61-26W5 commenced production in late July following the installation of surface equipment.  The well has been producing for 90 days at an average rate of 5.8 mmcf/d of natural gas and 240 bbl/d of condensate.  Cequence is drilling two offset wells to 9-21 in the fourth quarter of 2013.

Drilling operations commenced in July following spring break-up.  The first five wells of the winter program at Simonette were drilled for an estimated average cost of $4.7 million to an average depth of 5,359 meters.  The first three have been completed at an estimated average cost of $2.6 million.  The first three wells flowed on initial clean-up at rates up to 8.0 mmcf/d and have been producing to sales for 10 days through test equipment at an average restricted rate of 5.5 mmcf/d plus liquids.  Restrictions have been due to the installation of final surface equipment which is expected in the next few weeks. Cequence is pleased that these wells are on budget for costs and productivity. The remaining two wells are expected to be completed in the fourth quarter.

The most recent Montney well is the third consecutive well drilled from the 7-29 padsite.  It is the deepest measured depth (5,668 metres) and longest lateral (2,582 metres) to date and was drilled in 25 days which is the new pacesetter well performance in the field.

At Ansell, Cequence participated in one Wilrich well (49% working interest) in the third quarter.  As disclosed by the operator, the well was completed in October with production test rates exceeding 15.0 mmcf/d.  Production for this well will be restricted through a third-party gathering system.

Capital expenditures in the fourth quarter of 2013 are expected to be $46 million and are expected to include the completion of the wells drilled in the third quarter along with five additional gross wells including 3.0 (3.0 net) Montney wells, 1 (0.65 net) Dunvegan well and 1 (0.15 net capital working interest) Wilrich well at Ansell.

Outlook

The financing with the CPPIB Credit Investment Inc. has given Cequence the liquidity and financial flexibility required to aggressively develop its liquids rich Simonette property in the Deep Basin of Alberta. With this firm financial footing, we are currently engaged in the most active winter capital program in the Company's history.  Infrastructure spending is largely completed, allowing this capital program to be focused on drilling and completions in order to accomplish the 40 percent production growth we have forecast for 2014.  Based on the initial drilling results, execution of the plan is proceeding as expected.

Amended By-Laws

Cequence also announces the approval and adoption by its board of directors (the "Board") of amended by-laws which include, among other things, advance notice provisions (the "Advance Notice Provisions"), the purpose of which is to require advance notice to be provided to the Company in circumstances where nominations of persons for election to the Board are made by shareholders of the Company other than pursuant to: (i) a requisition of a meeting of shareholders made pursuant to the provisions of the Business Corporations Act (Alberta); or (ii) a shareholder proposal made pursuant to the provisions of that Act.

The purpose of the Advance Notice Provision is to provide shareholders, directors and management of the Company with a clear framework for nominating directors. Among other things, the Advance Notice Provision fixes a deadline by which shareholders of the Company must submit nominations to the Company before any annual or special meeting of the shareholders and sets forth the minimum information that a shareholder must include in the notice to the Company for the notice to be in proper written form.

In the case of an annual meeting of the shareholders of the Company, notice to the Company must be made not less than 30 days and no more than 65 days before the date of the annual meeting; provided, however, in the event that the annual meeting is to be held on a date that is less than 50 days after the date on which the first public announcement of the date of the annual meeting was made, notice may be made not later than the close of business on the 10th day following such public announcement.

In the case of a special meeting of shareholders (which is not also an annual meeting), notice to the Company must be made not later than the close of business on the 15th day following the day on which the first public announcement of the date of the special meeting was made.  The Board may waive any requirement in the Advance Notice Provision.

The amended by-laws, which includes the Advance Notice Provision, are effective immediately and will be placed before shareholders for ratification at the next meeting of shareholders of the Company. A copy of the amended by-laws will be available at www.sedar.com.

About Cequence

Cequence is a publicly traded Canadian energy company involved in the exploration, exploitation, acquisition, development and production of natural gas and crude oil in western Canada. Further information about Cequence may be found in its continuous disclosure documents filed with Canadian securities regulators at www.sedar.com.

Forward looking Statements or Information

Certain statements included in this press release constitute forward-looking statements or forward-looking information under applicable securities legislation. Such forward-looking statements or information are provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes, such as making investment decisions. Forward-looking statements or information typically contain statements with words such as "anticipate", "believe", "expect", "plan", "intend", "estimate", "propose", "project" or similar words suggesting future outcomes or statements regarding an outlook. Forward-looking statements or information in this press release may include, but are not limited to, statements or information with respect to its guidance and forecasts: expected capital expenditures, operating costs, business strategy and objectives; development, exploration, drilling, acquisition and disposition plans, including the anticipated benefits resulting therefrom and the timing thereof; and future production levels and facility capabilities. Forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect. Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, however, undue reliance should not be placed on forward-looking statements because the Company can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified in this press release, assumptions have been made regarding, among other things: the impact of increasing competition; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; the ability of the Company to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development of exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transportation; future oil and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters; and the ability of the Company to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which have been used.

Forward-looking statements or information are based on current expectations, estimates and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those anticipated by the Company and described in the forward-looking statements or information. These risks and uncertainties may cause actual results to differ materially from the forward-looking statements or information. The material risk factors affecting the Company and its business are contained in the Company's Annual Information Form which is available on SEDAR at www.sedar.com.

The forward-looking statements or information contained in this press release are made as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise unless required by applicable securities laws. The forward looking statements or information contained in this press release are expressly qualified by this cautionary statement.

Additional Advisories

The press release contains references to terms commonly used in the oil and gas industry.  Netback is not defined by IFRS in Canada and is referred to as a non-GAAP measure.  Netbacks equal total revenue less royalties, operating costs and transportation costs.  Management utilizes this measure to analyze operating performance. 

Funds flow from operations is a non-GAAP term that represents cash flow from operating activities before adjustments for decommissioning liability expenditures, proceeds from the sale of commodity contracts and changes in non-cash working capital. The Company evaluates its performance based on earnings and funds flow from operations. The Company considers funds flow from operations to be a key measure as it demonstrates the Company's ability to generate the cash flow necessary to fund future growth through capital investment and to repay debt. The Company's calculation of funds flow from operations may not be comparable to that reported by other companies. Funds flow from operations per share is calculated using the same weighted average number of shares outstanding used in the calculation of income (loss) per share. 

Non-GAAP measures do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers.

BOEs are presented on the basis of one BOE for six Mcf of natural gas. Disclosure provided herein in respect of BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf: 1 Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

For the first nine months of 2013, the ratio between the average price of West Texas Intermediate ("WTI") crude oil at Cushing and NYMEX natural gas was approximately 27:1 ("Value Ratio"). The Value Ratio is obtained using the first nine months 2013 WTI average price of $98.09 (US$/Bbl) for crude oil and the first nine months 2013 NYMEX average price of $3.69 (US$/MMbtu) for natural gas. This Value Ratio is significantly different from the energy equivalency ratio of 6:1 and using a 6:1 ratio would be misleading as an indication of value.

A pressure transient analysis or well-test interpretation has not been carried out and thus certain of the test results provided herein should be considered to be preliminary until such analysis or interpretation has been completed. Readers are cautioned that the foregoing well test results are not necessarily indicative of long-term performance or of ultimate recovery.

The TSX has neither approved nor disapproved the contents of this news release.

SOURCE: Cequence Energy Ltd.

For further information:

Paul Wanklyn, President and Chief Executive Officer, (403) 218-8850, pwanklyn@cequence-energy.com
David Gillis, Vice President, Finance and Chief Financial Officer, (403) 806-4041, dgillis@cequence-energy.com


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