Surge in crude oil and bitumen prices drove fourth quarter 2011 growth
and is continuing
Anticipated expansion of its capital spending program at Pod One and
Algar with new steam assisted gravity drainage ("SAGD") well pairs,
infill wells at Pod One, introduction of SAGD+TM at Algar and Diluent Recovery Unit ("DRU") at Pod One to deliver higher
Great Divide bitumen output by year end 2012 with continued rampup of
volumes in 2013
Independent 100 percent-owned operations to be emphasized
Management changes and revitalization undertaken
CALGARY, Jan. 4, 2012 /CNW/ - Connacher Oil and Gas Limited (CLL-TSX)
today announced that it anticipates disclosing strong operating and
financial results for the fourth quarter of 2011, based on preliminary
information. The gains are primarily due to a significant increase in
crude oil and bitumen prices and continued strong performance by its
heavy oil refinery in Great Falls, Montana.
Assuming current strong operational conditions persist, and subject to
final formal Board approval, Connacher anticipates an expanded total
capital spending plan, including the previously-announced $37 million
2012 maintenance budget. The expanded capital program is primarily
designed to boost 2012 bitumen production, which will still be ramping
up into 2013 which will enable further volume growth. Connacher
projects that its 2012 exit rate for upstream bitumen and conventional
sales will surpass 16,000 barrels of oil equivalent per day ("boe/d"),
an increase of approximately 15% from the year end 2011 level of
approximately 14,000 boe/d.
Connacher also announced other corporate developments, including the
suspension of its oil sands joint venture process, an update on
transportation and hedging and management changes.
"We expect the crude oil and bitumen price trend will continue in 2012,
positioning us for attractive growth, solid results, increased capital
spending and also planned debt repayment, as scheduled," said Richard
Gusella, Chairman, President and CEO. "With our positive leverage to
strong bitumen prices, we can accomplish expanded plans without new
financing arrangements, excluding any possible acquisition activity.
Also, our platform for 2013 growth will have already been established
as our new wells continue to ramp up in 2013 and the impact of SAGD+TM is realized."
Connacher's preliminary fourth quarter disclosure is based on data for
October 2011 and November 2011 and the positive trend which as
referenced continued during December 2011. It is too early to provide
December 2011 or Q4 2011 results. All financial and operating results
discussed at this time are unaudited and subject to normal period end
and year end verification and adjustment. Audited 2011 financial
results are scheduled for disclosure in March 2012.
Bitumen pricing update
In November 2011 Connacher's bitumen selling price was $61.84 per barrel
("bbl") unhedged and $62.83/bbl with hedging, each of which was up 45%
from October 2011 selling prices of $42.61/bbl unhedged and $43.48/bbl
with hedging. Connacher's December 2011 final price data is not yet
available but the company knows bitumen prices remained strong during
the month. It is also Connacher's view that the trend may persist into
The bitumen prices for November 2011 largely reflect a rise in the price
for benchmark West Texas Intermediate ("WTI") crude oil to US$97.16/bbl
in November 2011 from US$89.75/bbl in the third quarter of 2011, after
a minor dip in October 2011 to US$86.43/bbl. Certain other key positive
factors affecting Connacher's bitumen selling price include the value
of the Canadian dollar against the US dollar, diluent costs and
differentials for heavy oil.
Connacher's November 2011 bitumen selling price represents a gain of 51%
from Connacher's average selling price of $40.98/bbl in the third
quarter of 2011. Considering that the trading range for WTI in December
2011 was similar to November 2011, Connacher expects that its average
bitumen selling price for the fourth quarter of 2011 was significantly
higher than in the fourth quarter of 2010 and recorded for the third
quarter of 2011.
Before operating costs, Connacher's net revenue for October 2011 was
$16.9 million based on sales volumes of 13,546 boe/d. Net revenue for
November 2011 was $24.9 million based on sales volumes of 14,275 boe/d.
The two-month total was $41.8 million.
After deduction of operating costs, Connacher's netback per barrel of
bitumen sold was $18.95/bbl in October 2011 and $37.94/bbl in November
2011, an average barrel of bitumen netback of $28.47/bbl. Netbacks
including conventional crude oil and natural gas sales proceeds, were
$19.36 per boe in October 2011 and $36.80 per boe in November 2011,
reflecting higher unit conventional start up operating costs.
Connacher's upstream netback was $8.1 million for October 2011 and $15.8
million for November 2011. The two-month total was $23.9 million.
Connacher's refinery netback was $4.8 million in October 2011 and $4.1
million in November 2011. The two-month total was $8.9 million.
This strong performance, coming on the heels of excellent results for
the nine months ended September 30, 2011, occurred despite rising crude
oil prices, which historically have eroded refining margins in the
off-peak driving seasons such as occur in the fourth quarter of each
year. The improvement is attributable to the efficient operation of the
refinery, based in Great Falls, Montana and to the diversified market
access being developed by Connacher's marketing and refining team in
Calgary and Great Falls. High crude charge rates exceeded 10,000 bbl/d
during October and November, above the refinery's rated capacity of
Combining upstream and downstream results, Connacher's corporate netback
was $12.9 million in October 2011 and $19.9 million in November 2011.
The two-month total was $32.8 million.
Of further consequence, when the downstream netbacks are translated into
dollars per barrel of bitumen sold, a further $11.17/bbl of bitumen
netback was realized. Connacher's successful integrated strategy is
sustainable and provides an effective physical hedge against heavy
crude oil price differentials and accordingly resulted in actual
realized netback of $39.63/bbl of bitumen for the two month period
under discussion. This compares very favourably to other bitumen
producers and to the average bitumen selling price of $52.22/bbl (76
percent of the bitumen selling price) and represents a 42 percent cash
netback when compared to the average WTI prices for the period. Looked
at differently, this netback per barrel of bitumen sold effective
reduces recorded operating costs by a like amount, making our effective
operating costs per barrel of bitumen among the lowest in the industry,
including the cost of natural gas for fuel. As our refinery has been
in business for approximately 70 years, it is sustainable and has a
strong record of profitability to perpetuate the physical hedge and
Cash Balances, adjusted EBITDA and Capital Expenditures
Connacher has adequate cash and financial wherewithal to meet all its
financial obligations, including the anticipated growth expenditures at
Great Divide for 2012 and also for the foreseeable future.
Connacher's cash balance at the end of December 2011 was approximately
$112 million. The company's attractively priced and available $100
million revolving credit facility remained essentially undrawn at
levels of $2 million.
Connacher's adjusted EBITDA (earnings before interest, taxes,
depreciation and amortization) for the first two months of Q4 2011 was
$27.7 million. Connacher cautions that adjusted EBITDA is a non-GAAP
Annualizing the average two-month rate, Connacher's adjusted EBITDA
would exceed $165 million or approximately two times current indicated
annualized interest charges on the company's indebtedness. Most of
Connacher's debt is long term in nature, with C$350 million maturing in
2018 and US$550 million maturing in 2019. This debt has no applicable
maintenance covenants or current maturities. Connacher does not have
traditional revolving bank debt.
Capital outlays during the two months of October 2011 and November 2011
were $11.8 million, net of asset sales proceeds during the period.
Connacher also sold its holdings of Gran Tierra Energy during the period
for $21.1 million of cash proceeds. Accordingly, November 2011 cash
balances remained at high levels exceeding $100 million, after
provision for capital outlays and some pay down of accounts payable
during the two month period. The company remains highly liquid with a
strong working capital position, even after provision for the payment
of the outstanding $100 million of convertible debentures which will be
discharged in June 2012, so that this amount is classified as a current
New Growth Activity for 2012: Focus on Great Divide
Connacher's growth plans for 2012 are focused on increased bitumen
production and sales at Pod One and Algar in the Great Divide oil sands
project. These will be enacted once formally approved by Connacher's
At Pod One Connacher will:
Complete Well Pad 104, then drill and bring onstream four new SAGD well
pairs, which, after steaming starts, will deliver additional production
in the second half of 2012 and continue ramping up into 2013;
Drill two infill wells once target downhole reservoir temperatures are
achieved, in the second half of 2012; and
Complete the building of and activate its DRU by approximately mid-year
2012. This will enable the sale of more "neat" bitumen, which is in
greater demand and provides better economic returns than bitumen
combined with diluent (dilbit). Plant site preparations to hook up the
DRU were completed during a 2011 turnaround so there should be minimal
delay on activation.
Steam for the new wells at Pad 104 will be sourced by redirecting
volumes from the company's underperforming lower-potential northern
five wells, which Connacher will continue to produce without active
steam injection, much like infill wells. The dirt work for Pad 104 was
completed in 2011. Provision has also been made for a mature gas cap
depressurization at Pod One.
At Algar Connacher plans to:
Drill at least two SAGD well pairs to replace two existing well pairs
that have been assessed as underperformers. One of the pairs had
mechanical problems and Connacher has concluded the other well pair is
"edgy" so will be relocated within the better part of the Algar
reservoir. These replacement wells will also need to be steamed for a
period of time before coming on stream; and
Install permanent SAGD+TM facilities in the first half of 2012, allowing an increasing number of
wells to benefit from commercial application of this technology, which
produced breakthrough results in a 2011 field trial. The installation
would follow the completion of a Front End Engineering and Design study
These Pod One and Algar growth activities are expected to increase Great
Divide production in the second half of 2012 and into 2013 as wells
rampup and SAGD+™ impacts production performance at more well pairs.
Subject to Board approval, Connacher also anticipates conducting a
limited but targeted core hole program of approximately $5 million for
up to twenty targeted core holes on certain of its oil sands properties
in the Great Divide region in the first quarter of 2012 drilling
season, if a suitable rig and crew can now be contracted.
No short-term expansion of the company's conventional program is
anticipated, except for completion of one long reach horizontal well
drilled by the company prior to year-end on its Twining property. The
well awaits a multifrac completion and tie-in to existing facilities.
Given Connacher's prospective cash flow and available funds, the company
believes its 2012 growth activity can be financed without prospective
permanent additional financing or dilution.
Joint Venture Updates
Connacher has decided to suspend its Great Divide oil sands joint
venture initiative, primarily as a result of its improved outlook for
2012 and the stronger financial results being realized during the
fourth quarter of 2011. Connacher expects the process will remain
suspended until approximately mid-February, 2012, when it receives an
updated reserve report from GLJ Petroleum Consultants. Based on the
current report, delivered in February 2011 for the year ended December
31, 2010, Great Divide has a 500 million barrel proved and probable
bitumen reserve base.
Connacher initiated its Great Divide oil sands joint venture process in
July 2011 just prior to significant challenges for the capital markets
and the onset of the European debt crisis. These crises reduced the
trading price of Connacher's common equity and introduced new risk
concerns among investors, including excessive and possibly unwarranted
concern about the direction of crude oil prices due to weak worldwide
economic conditions and fear of decreased demand as a result of lower
In response, Connacher decided to test the market with its attractive
joint venture opportunity, marketed on an exclusive basis by its
advisor Rothschild's. Connacher and its advisor prepared documents,
negotiated confidentiality agreements, visited prospective joint
venturers, were visited by some of these parties and extended key
parties an opportunity to complete a term sheet leading to a binding
The joint venture Connacher advanced had envisaged a possible sell down,
on a fair market value basis, of a minority interest in the existing
projects at Pod One and Algar, which have a combined capacity of 20,000
bbl/d. The process also envisaged a farmout/joint venture to develop
the next 24,000 bbl/d of design capacity at Algar, for which regulatory
approval is anticipated to occur imminently. Connacher had indicated
that if a sell down was to occur, proceeds would be substantially used
to pay down outstanding long-term debt.
During the suspension, Connacher will revisit the plan of the proposed
development and joint venture structure, taking into account improved
pricing, recent and anticipated stronger financial results, regulatory
approval delays and intense competition for services, supplies and
staffing in the western Canadian oil industry generally, which is
impacting costs and will require resource allocations, both internally
and externally, between existing and new projects.
While inevitably there will be again challenging periods in what is now
a more volatile economy than recent experience, especially related to
capital markets, Connacher is firmly committed to its current and
planned oil sands activity and is confident that this activity can be
accomplished in a measured fashion, without excessive or undue
operational or financial risk.
Connacher has also decided to revisit the structure and extent of the
joint venture process for its Twining and Penhold conventional
properties for timing reasons.
The newly constructed and acquired production facilities are all
functioning well and are providing Connacher with access to markets.
Connacher can cover anticipated capital requirements, which are minor
and the company controls over two townships of land with no undue
expiry issues, mostly with 100 percent working interests.
Also, Connacher has recently achieved encouraging production results
from some of its new Twining wells, which were drilled during 2011.
Connacher expects that a longer production history will assist the
company in arriving at the correct working interest risk alignment for
Transportation and Hedging
Connacher currently has approximately 100 rail cars under lease to
assist it in accessing remote but favourably-priced markets for its
dilbit and bitumen in the United States. Connacher has also committed
to increase this count to over 200 rail cars by the end of the first
These rail cars will allow Connacher to sell and transport approximately
2,400 bbl/d of bitumen to these markets on favourable terms, thereby
delivering competitive netbacks. This initiative will also reduce our
reliance on only a few buyers of bitumen and thus further reduce
overall corporate risk.
To the company's knowledge, Connacher was the first Canadian bitumen
producer to move dilbit by rail to markets on the US west coast and
Connacher expects that this market will grow. Connacher intends to
continue to market production, in increasing volumes, utilizing
transportation by truck, rail and pipeline.
Connacher has also recently broadened its hedging activity and has
hedges in place for WTI, refined product margins, natural gas costs and
currency. The company believes it is adequately hedged for current
To deliver on its new growth plan and capitalize on the considerable
opportunities available to the company, Connacher has made a number of
Peter D. Sametz, formerly President and Chief Operating Officer; Richard
R. Kines, formerly Vice President Finance and Chief Financial Officer
and Grant D. Ukrainetz, formerly Vice President of Corporate
Development, are no longer with the company. Connacher thanks these
gentlemen for their contribution to the company's growth and
development and wishes them the very best in their future endeavours.
Effective immediately, Richard A. Gusella, Chairman and Chief Executive
Officer, has reassumed the additional position of President and Interim
Chief Operating Officer. Mr. Gusella is in discussions with candidates
for the position of Chief Operating Officer and also intends to hire
and appoint a new Vice President, Production. Announcements will be
made once these positions have been filled and confirmed by the Board
Brenda G. Hughes, C. A., formerly Assistant Corporate Secretary of
Connacher, has been appointed Chief Financial Officer, effective
immediately. She will report directly to Mr. Gusella.
On an interim basis, Steve Marston, Vice President Exploration and Merle
Johnson, Vice President, Engineering, will now report directly to Mr.
Gusella, as will Connacher's refining, marketing and sustainability
General and Outlook
Connacher is a strong and vibrant company positioned to capitalize on
the improving economic and crude oil market conditions which have
emerged in recent months in North America and worldwide. The company
is a significant producer of bitumen, has a solid and profitable
integrated strategy which provides excellent netbacks in both high and
low-priced environments and has taken numerous steps to reduce its
perceived and actual financial risk. As a result of these steps and
strong recent performance, Connacher is now positioned to look at other
transformational opportunities to accelerate growth in an accretive
manner for its shareholders.
The company intends to move forward in a disciplined yet aggressive
manner. Connacher intends to grow its bitumen production and sales from
its existing operations at Pod One and Algar, while organizing the
anticipated staged expansion of Algar by 24,000 bbl/d, once approved by
the regulators. Connacher believes this measured growth can likely be
accomplished without a dilution of its 100% working interest or of its
Connacher believes it can deliver stronger and better returns to
shareholders by retaining its 100% ownership of Great Divide, with its
proved and probable reserves of 500 million barrels, as estimated by
GLJ Petroleum Consultants in the company's last reserve report, for the
year ended December 31, 2010. An updated report for the year ended
December 31, 2011 is scheduled for mid-February 2012. The company's
current position and attitude, however, does not necessarily preclude
future joint venture operations at the oil sands.
The company does not have any liquidity issues and does not anticipate
experiencing any such issues in 2012 or for the future at current or
higher price levels for crude oil and bitumen. Connacher's financial
position is also well-protected, through its integrated strategy and
hedging activity, against short-term cyclical downturns in crude oil
Connacher is a Calgary-based energy company with an integrated strategy.
Its primary asset is its 100 percent ownership of bitumen reserves and
production from two steam-assisted gravity drainage ("SAGD") projects,
Pod One and Algar, at its Great Divide oil sands lease block in
northeastern Alberta. Connacher also owns and operates a profitable
9,500 bbl/d heavy crude oil refinery in Great Falls, Montana.
Conventional lands, reserves and production are also owned in central
Forward Looking Information
This press release contains forward‐looking information including but
not limited to, anticipated future operating and financial results
including expectations of future production and sales, anticipated
capital expenditures for 2012, anticipated sources of funding for 2012
capital expenditures, future liquidity, Connacher's ability to meet all
its financial obligations and growth expenditures for 2012 and for the
foreseeable future, growth plans for 2012 including future development
and exploration activities at Pod One and Algar, timing of receipt of
regulatory approvals for future expansion of oil sands properties, the
Corporation's bitumen reserve base, the future repayment of Connacher's
debt, future commodity prices, Connacher's annualized adjusted EBITDA,
possible reinstatement of Connacher's oil sands joint venture
initiative, use of proceeds of the previously announced proposed sell
down of a minority interest in Pod One and Algar, increased reliance on
rail cars to sell and transport bitumen and the anticipated impact
thereof on netbacks and corporate risk, future US West Coast market for
bitumen, timing of receipt of year end 2011 reserve report and the
adequacy of the Corporation's hedged position.
Forward‐looking information is based on management's expectations
regarding future growth, results of operations, production, future
commodity prices and foreign exchange rates, future capital and other
expenditures (including the amount, nature and sources of funding
thereof), plans for and results of drilling activity, environmental
matters, business prospects and opportunities and future economic
conditions. Forward‐looking information involves significant known and
unknown risks and uncertainties, which could cause actual results to
differ materially from those anticipated. These risks include, but are
not limited to operational risks in development, exploration,
production and start‐up activities; delays or changes in plans with
respect to exploration or development projects or capital expenditures;
the uncertainty of reserve and resource estimates; the uncertainty of
estimates and projections relating to production, costs and expenses,
and health, safety and environmental risks; the risk of commodity price
and foreign exchange rate fluctuations; risks associated with the
impact of general economic conditions; sales volumes and risks and
uncertainties associated with securing and maintaining the necessary
regulatory approvals and financing to proceed with the continued
expansion of the Great Divide oil sands project.
Statements relating to "reserves" and "resources" are deemed to be
forward looking statements, as they involve the implied assessment,
based on certain estimates and assumptions, that the reserves and
resources described exist in the quantities predicted or estimated, and
can be profitably produced in the future. Certain information and
assumptions relating to the reserves and resources reported herein are
set forth in Connacher's Annual Information Form ("AIF") for the year
ended December 31, 2010 which is available at www.sedar.com. The reserves estimates of Connacher's properties described herein are
estimates only. The actual reserves on Connacher's properties may be
greater or less than those calculated.
The production guidance contained in this press release is based on
certain assumptions regarding operational performance including, among
others, steam generation levels and SORs, unplanned operational upsets,
well productivity, realized netbacks and future market conditions and
is subject to risks and uncertainties, including those risks and
uncertainties described above. Additional risks and uncertainties are
described in further detail in Connacher's AIF.
Although Connacher believes that the expectations in such
forward‐looking information are reasonable, there can be no assurance
that such expectations shall prove to be correct. The forward‐looking
information included in this press release is expressly qualified in
its entirety by this cautionary statement. The forward‐looking
information included in this press release is made as of January 4,
2012 and Connacher assumes no obligation to update or revise any
forward‐looking information to reflect new events or circumstances,
except as required by law.
In addition, design capacity is not necessarily indicative of the
stabilized production levels that may ultimately be achieved at
Connacher's SAGD facilities.
Per barrel of oil equivalent (boe) amounts have been calculated using a
conversion rate of six thousand cubic feet of natural gas to one barrel
of crude oil (6:1). The conversion is based on an energy equivalency
conversion method primarily applicable to the burner tip and does not
represent a value equivalency at the wellhead. Boes may be misleading,
particularly if used in isolation.
This press release contains terms commonly used in the oil and gas
industry, such as netbacks and adjusted earnings before interest,
taxes, depreciation and amortization ("adjusted EBITDA"). These terms
are not defined by the financial measures used by Connacher to prepare
its financial statements and are referred to herein as non‐GAAP
measures. These non‐GAAP measures should not be considered an
alternative to, or more meaningful than, cash provided by operating
activities or net earnings (loss) as determined in accordance with
Canadian GAAP as an indicator of Connacher's performance. Management
believes that in addition to net earnings (loss), netbacks and adjusted
EBITDA are useful financial measurements which assist in demonstrating
the company's ability to fund capital expenditures necessary for future
growth or to repay debt. Connacher's determination of netbacks and
adjusted EBITDA may not be comparable to that reported by other
Upstream netbacks, including by product, are calculated by deducting the
related diluent, transportation, field operating costs and royalties
from upstream revenues. Downstream netbacks are calculated by deducting
crude oil purchases and operating and transportation costs from
refining sales revenues.
Adjusted EBITDA is calculated as net earnings (loss) before finance
charges, current and deferred income tax provisions and recoveries,
depletion, depreciation and amortization, exploration and evaluation
expense, share‐based compensation, foreign exchange gains/losses,
unrealized gains/losses on risk management contracts, interest and
other income, gain (loss) on disposition of assets, defined benefit
plan expense, share of interest in and loss on associate and costs of
refinancing long‐term debt.
Reconciliations of Non‐GAAP Measures
Upstream and downstream netbacks and adjusted EBITDA are reconciled to
net earnings (loss) in the company's MD&A for the three months and nine
months ended September 30, 2011 and 2010.
SOURCE Connacher Oil and Gas Limited
For further information:
Richard A Gusella
Chairman, President and Chief Executive Officer
Phone: 403 538 6201
Fax: 403 538 6225