- 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 2012.
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 9,500 bbl/d.
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 related benefits.
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 measure.
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 liability.
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 Board.
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 now underway.
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 economic activity.
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 agreement.
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 the process.
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 quarter 2013.
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 market conditions.
To deliver on its new growth plan and capitalize on the considerable opportunities available to the company, Connacher has made a number of personnel changes.
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 of Directors.
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 groups.
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 equity capital.
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 prices.
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 Alberta.
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 companies.
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.
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