Journey reports third quarter financial results and provides update on operations and banking renewal

November 7, 2016

CALGARY, Nov. 7, 2016 /CNW/ - Journey Energy Inc. (JOY – TSX) ("Journey" or the "Company") is pleased to announce its financial and operating results for the third quarter of 2016.  The complete set of financial statements and management discussion and analysis for the three and nine month periods ended September 30, 2016 will be posted on www.sedar.com and on the Company's website www.journeyenergy.ca in due course.

HIGHLIGHTS

  • Achieved a production level of 8,177 boe/d (54% liquids) in the third quarter.

  • Closed 4 divestments and 2 acquisitions resulting in net production dispositions of approximately 915 boe/d (56% natural gas). The dispositions were low net back, non-core production. The net divestments had a positive impact on Journey's LMR value, increasing it to 2.4.

  • A 15% uplift in commodity prices from the second quarter to an average of $29.98/boe from $26.01/boe helped offset lower production from dispositions.

  • Realized $7.6 million in cash flow or $0.17 per basic share bringing year-to-date cash flow to $19.1 million or $0.44 per basic share.

  • Achieved a 34% year over year reduction in absolute operating costs from $41.7 million in the first nine months of 2015 to $27.5 million in the first nine months of 2016. These lower operating costs (approximately $40 million annualized) are more representative of Journey's cost structure moving forward.

  • Achieved a 65% year over year reduction in transportation expense from $2.6 million in the first nine-months of 2015, to $0.9 million in the first nine months of 2016.

  • Journey's lower cost structure resulted in a higher operating net back of $14.08/boe (excluding hedging) for third quarter.

  • Reduced net debt 18% during the quarter to $85.0 million from $103.5 million at June 30.

  • Late in the quarter Journey initiated an expanded second half capital program which is forecasted to include the drilling of six wells and approximately 290 coal bed methane (CBM) recompletions.

SUBSEQUENT EVENTS

  • On October 6 Journey closed a $30 million financing with AIMCo. 30,000 units were issued at $1,000 per unit. Each unit is comprised of a $1,000 promissory note at an interest rate of 7.65% per annum, and 165 warrants entitling AIMCo to purchase one share of Journey per warrant outstanding at a price of $2.75 per warrant.

  • Completed Journey's semi-annual review of our syndicated credit facility, resulting in an increase from $75 million (subsequent to the AIMCo transaction) to $90 million, subject to final documentation. Journey currently has $52 million drawn on this facility.

TRANSACTION SUMMARY

Journey has closed a series of asset transactions in the third quarter, which resulted in net proceeds to the Company of approximately $13.8 million.  These transactions, along with the impact of our remaining capital program for the year is forecast to result in year-end net debt of $86-87 million.  The impact on corporate production of the net divestments was a short term reduction of approximately 915 boe/d (63% natural gas).  Despite the near term decrease in production, Journey forecasts volumes to return to 9,000 boe/d in the first quarter of 2017, as higher-cost production is replaced with new, lower cost volumes associated with Journey's exploration and development program.  Acquisition and divestiture ("A&D") highlights for the third quarter, which contributed to Journey's transformation to a lower cost, growth vehicle are as follows:

  • On August 5 Journey closed the divestment of certain non-core operated and non-operated assets in the Pine Creek and Peace River Arch areas of Central and Northern Alberta, Pincher Creek assets in Southern Alberta and our 1% operated working interest in our Southern Alberta Gas assets in the Majorville, Leckie, Enchant, Carmangay, Herronton, and Shouldice properties. These assets produced approximately 595 boe/d (83% natural gas) net to the Company. This divestment included over 1,900 gross wellbores, the majority of which were operated by Journey. The transaction resulted in a 30% improvement in the value of Journey's liability management ratio ("LMR") to approximately 2.4 immediately after closing.

  • Journey closed the acquisition of additional working interest, royalty interest and complementary working interest in wells producing approximately 320 boe/d of natural gas in the Countess area. This acquisition provided Journey with a 100% working interest in two additional underutilized facilities and increased Journey's up-hole CBM recompletion inventory to over 290 net wells. The recompletion project is forecasted to provide a low risk rate of return in excess of 200% at a gas price of $2.50/mcf. To date, Journey has recompleted over 230 wells with both production additions and recompletions costs meeting or exceeding forecasted expectations.

  • On July 15, closed the disposition of 280 boe/d (54% natural gas) in the Manola area.

  • On September 8 closed the disposition of 345 boe/d (59% natural gas) in Carrot Creek and Pembina.

  • Sold 55 boe/d (43% natural gas) in Carson Creek on September 8.

  • Purchased 40 boe/d (100% natural gas) in the Crystal area on August 11. This purchase came with strategic pipeline and facility infrastructure.

Third Quarter Financial Highlights


Three Months ended

 September 30,

Nine months ended

 September 30,

Financial ($000's except per share amounts)

 

2016

 

2015

%

change

 

2016

 

2015

%

change

Production revenue

22,553

28,616

(21)

61,058

94,899

(36)

Cash flow from operations

7,571

8,612

(12)

19,118

40,015

(52)


Per basic share

0.17

0.20

(15)

0.44

0.91

(52)


Per diluted share

0.17

0.19

(11)

0.43

0.91

(53)

Net income (loss)

18,383

(153,397)

(112)

3,279

(149,923)

(102)


Per basic share

0.42

(3.49)

(112)

0.08

(3.42)

(102)


Per diluted share

0.41

(3.49)

(112)

0.07

(3.42)

(102)

Capital expenditures, net cash

(10,886)

14,460

(175)

(2,746)

39,545

(107)

Net debt

85,048

107,921

(21)

85,048

107,921

(21)








Share Capital (000's)







Basic, weighted average

43,615

43,987

(1)

43,615

43,776

-

Basic, end of period

43,615

43,127

1

43,615

43,127

1

Fully diluted

48,959

48,439

1

48,959

48,439

1








Daily Production







Natural gas volumes (mcf/d)

22,476

27,118

(17)

23,988

29,589

(19)

Crude oil (bbl/d)

4,010

4,640

(14)

4,219

4,986

(15)

Natural gas liquids (bbl/d)

421

627

(33)

565

634

(11)

Barrels of Oil Equivalent (boe/d)

8,177

9,786

(16)

8,781

10,551

(17)








Average Realized Prices







Natural gas ($/mcf)

2.29

2.88

(20)

1.76

2.73

(36)

Crude Oil ($/bbl)

45.62

46.96

(3)

39.87

50.20

(21)

Natural gas liquids ($/bbl)

25.20

24.12

4

22.17

26.32

(16)

Barrels of Oil Equivalent ($/boe)

29.98

31.78

(6)

25.38

32.95

(23)








Netbacks ($/boe)







Realized prices

29.98

31.78

(6)

25.38

32.95

(23)

Royalties

(4.07)

(4.92)

(17)

(2.76)

(4.37)

(37)

Operating expenses

(11.50)

(14.18)

(19)

(11.44)

(14.48)

(21)

Transportation expense

(0.33)

(1.07)

(69)

(0.39)

(0.91)

(57)

Operating netback

14.08

11.61

21

10.79

13.19

(18)








Wells drilled







Gross

1

5

(80)

2

11

(82)

Net

1.0

4.4

(77)

2.0

10.1

(80)

Success rate

100%

100%


100%

100%

-

 

OPERATIONS

In the third quarter of 2016, Journey continued to execute on our 2016 initiatives to concentrate our asset base, reduce our cost structure moving forward, and improve our financial flexibility. Although our industry continues to experience significant headwinds and volatility in commodity prices, the new Journey is stronger and more resilient to these headwinds. Our company is poised to deliver solid returns and grow within cash flow at commodity oil prices of $50 US for WTI and natural gas prices of $2.90/mcf at AECO.

In addition to closing all of the transactions as highlighted in our August 8, 2016 release, Journey began to execute on its expanded 2016 capital program. To date Journey has recompleted over 230 CBM wells in our Countess area. Results of this program have met or exceeded forecasted expectations. Journey has also completed a six inch pipeline to our newly acquired West Princess battery, which is resulting in substantial operating cost savings for existing production and improved economics for new development, which will use this infrastructure.

In accordance with Journey's previous guidance, production volumes declined in the third quarter of 2016. Journey achieved average production of 8,177 boe/d (54% liquids) in the third quarter. Minor delays in Journey's program have resulted in lower than forecast capital for the third quarter. Journey continues to forecast the same level of capital expenditures for 2016, and therefore 2016 exit guidance and first quarter, 2017 production volumes remain unchanged.  Prior to the end of 2016, Journey intends to add new production in Brooks, Herronton, Crystal, Poplar Creek and Countess.  With the majority of added production occurring in the Countess area, Journey is forecasting its liquids weighting to average approximately 51% for the first quarter of 2017.  After completion of the CBM project Journey's liquid weighting will begin to rise again through the remainder of 2017 as our oil-weighted development program is implemented.

THIRD QUARTER FINANCIAL RESULTS

Journey achieved cash flow from operations of $7.6 million in the third quarter of 2016 compared to $8.6 million in the same of quarter of last year.  The 12% decline from the previous year was due to the combination of natural declines as well as the net acquisition and divestiture activity that occurred over the last two quarters.  Daily production declined 16% from 9,786 boe/d in the third quarter of 2015 to 8,177 boe/d in the current quarter.  Average realized commodity prices decreased 6% from the comparable quarter in 2015 to average $29.98/boe in the third quarter of 2016.  This reduction in realized pricing was more than offset by a corresponding reduction in our cost structure resulting in a 21% quarter over quarter increase in operating net back to $14.08/boe.  On a per share basis, cash flow was $0.17 per basic and diluted weighted average share for the quarter, bringing the nine month cash flow per share to $0.44 per basic share and $0.43 per diluted.

Journey had $18.4 million in net income for the third quarter of 2016 compared to a net loss in 2015 of $153.4 million.  The largest contributor to the net income was a realized a gain on sale from the disposition of assets of $25.7 million.  In addition Journey realized cost reductions ($/boe) from: royalties (17%); operating expenses (19%); and transportation expenses (69%) as our cost cutting strategies are having their desired impact.  For the nine months of 2016 the net income was $3.3 million or $0.08 per basic share ($0.07 per diluted share) as compared to a loss in the nine months of 2015 of $149.9 million. The large net loss in 2015 was mostly attributable to impairment provisions on Journey's assets.

Journey's production mix during the third quarter was weighted as follows: 49% to oil; 46% to natural gas and 5% to natural gas liquids.  The disposition of certain natural gas assets in the third quarter caused the weighting to oil production to increase by 2% compared to the third quarter of 2015.  As a percentage of revenue, 75% of our revenues were derived from oil sales; 21% from natural gas and 4% came from natural gas liquids.

The decrease in royalty costs in the quarter was a significant contributor to cash flow.  Royalty expense per boe was down 17% in the third quarter to average $4.07/boe as compared to $4.92/boe in the same quarter of 2015. 

Journey achieved a 32% reduction in total operating costs in the third quarter compared to last year.  This reduction resulted in a $4.1 million absolute reduction for the quarter.  For the nine month periods the reduction was $14.2 million or 34%.  A portion of the reduction in the third quarter was attributable to the sale of properties but was also the result of Journey's ongoing cost cutting efforts.  Journey also realized a 65% year over year reduction in transportation expense from $2.6 million in the first nine months of 2015 to $0.9 million in nine months to date in 2016.

During the third quarter, Journey invested $2.9 million in exploration and development capital, with the vast majority of this capital relating to the initiation of our second half capital program.  Journey disposed of four assets in the quarter for net proceeds of $14.3 million.  In addition, Journey had two strategic infrastructure and production acquisitions totaling $0.5 million in the third quarter.  The net proceeds from the A&D activity coupled with Journey's cash flow were used to reduce our bank borrowings.  As a result, net debt at the end of the second quarter was reduced to $85.0 million from $103.5 million at the end of the second quarter.  In addition, and as previously press-released on October 6, Journey closed a strategic financing with AIMCo for a $30 million term debt placement.

The combination of Journey's strategic acquisitions; field cost cutting measures, the success of our CBM recompletion project, and the term debt financing deal, were all timely initiatives as they coincided with the semi-annual borrowing base review with our lending syndicate.  Subject to the execution and receipt of final documentation the syndicate has established a new borrowing base of $90 million.  The combination of the new credit facility with the banks and the term debt provide Journey with the financial flexibility to execute on its remaining 2016 and 2017 capital plans as well as provide the resources for tuck-in acquisitions that may materialize.  Currently the amount drawn on the credit facility is approximately $52 million or 57% of the available amount.

UPDATED 2016 GUIDANCE

Journey is maintaining its current plan to spend $9 million of net capital in 2016 comprised of: $18 million devoted to exploration and development activities; $5 million spent on strategic acquisitions; less $14 million of asset divestitures.  Journey is now forecasting 2016 cash flow of approximately $27-29 million based on current strip pricing and incorporating the impact of our hedging program.  The forecasted increase to cash flow from rising commodity prices and reduced operating costs is anticipated to result in year-end net debt levels of $86-87 million.


Revised

Previous

Annual average production (boe/d)

8,600 - 8,800 (53% liquids)

8,600 - 8,900 (54% liquids)

Net capital program (including net A&D activity)

$9 million

$9 million

Exploration and Development Capital

$18 million

$18 million

Net acquisition (divestiture) capital

$(9) million

$(9) million

Cash flow

$27-29 million

$24-26 million

Year end net debt

$86-87 million

$86-88 million

Cash flow per basic, weighted average share

$0.61 - 0.67

$0.55 - 0.60

 

For the fourth quarter, Journey's exploration and development activities will be allocated to drilling, completing, equipping and tieing-in 5 wells in Brooks, Countess, Herronton, Poplar Creek and Crystal.  In addition Journey will finish the 290 well, $1.7 million, CBM recompletion project in the Countess area that was initiated in the third quarter. 230 of these wells have already been completed to date, providing significant confidence in our forecasted guidance for the remainder of 2016. Although the CBM recompletion program is natural gas, the lower incremental operating cost and low royalty rates results in a payout of less than six months along with favorable decline characteristics and a high rate of return.  

2017 GUIDANCE

Journey's initial 2017 guidance is as follows:

Annual average production (boe/d)

8,800 – 9,200 (52% liquids)

Exploration and development capital

$33 million

Cash flow

$41-44 million

Year end net debt

$76-78 million

Cash flow per basic share

$0.94 – $1.00

 

Journey's 2017 forecasted cash flow from operations of $41-44 million is based on the following average prices: WTI of US$50.00/bbl; AECO gas of C$2.90/mcf; and a foreign exchange rate of $0.75 US$/CDN$.  The Company will operate substantially all of its 2017 capital program with an average working interest in excess of 90%.  Because of this, Journey can remain flexible with this budget by increasing or decreasing its spending levels should prices change materially. Although Journey has the ability to provide additional growth within cash flow Journey remains steadfast in our commitment to preserve our financial flexibility in volatile times. With the execution of our base budget Journey forecasts our net debt to annualized fourth quarter 2017 cash flow ratio to fall to less than 1.4 times.

Journey's 2017 cash flow guidance range represents a 60% improvement from 2016 to 2017. This dramatic improvement in cash flow continues into 2018 if the current commodity price strips materialize.  With only 43.7 million outstanding shares and a development inventory of over twenty years, Journey is poised to provide significant growth in shareholder value over the longer term.

Through the successful implementation of waterflood expansion projects and the development of low decline CBM, Journey has reduced its corporate decline rate to less than 18%.  Journey forecasts maintaining a production level of 9,000 boe/d throughout 2017 with the drilling of 15 (14.4 net) wells.  Capital is allocated evenly between our central and south core areas.  Journey intends to take advantage of low industry costs to prudently expand long lead time waterflood projects in addition to its drilling program.  Over 25% of Journey's 2017 growth capital is directed toward waterflood expansion projects.  These exploitation projects do not provide immediate production uplifts but generate high rates of return as they contribute to the sustainability of Journey's long term business model, which is focused on concentrated low cost, low decline, high quality conventional oil pools.

To assist in achieving our goals for 2017, Journey has implemented a strategic hedging program.  Journey now has close to 50% of its net-of-royalty production (both liquids and natural gas) hedged for 2017.  This level was designed to insure all operating and corporate costs were covered until the end of 2017. 

A summary of Journey's hedging program is shown in the following table:

Type

Volume

Time Frame

Floor

Ceiling

Oil Swap

2,500 bbl/d

Jul 16-Dec 16

$62.55/CDN

N/A

Oil Swap

1,000 bbl/d

Jan 17-Dec 17

$60/CDN

N/A

Oil 3 Way Collar

1,000 bbl/d

Oct 16-Mar18

$60/CDN*

$65/CDN

Gas Swap

5,000 Gj/d

Aug 16-Oct 17

$2.62/Gj

N/A

Gas Collar

5,000 Gj/d

Nov 16-Mar 17

$2.35/Gj

$2.86/Gj

Gas Collar

5,000 Gj/d

Nov 16-Mar 18

$2.40/Gj

$2.85/Gj

 

*put floor of $39.50 CDN

Journey remains in the fortunate position of owning and operating our own destiny.  Journey has a drill-ready inventory of capital projects and is poised to increase capital spending and grow production should the commodity prices significantly improve beyond what we have budgeted.  The Company faces no expiry issues since its legacy, low decline oil pools are held by current production.  This allows Journey to have the flexibility to prioritize the maintenance or the reduction of debt levels, versus spending development capital

Journey welcomes Maple Investments Ltd. and Alberta Investment Management Corporation as new participants in the capital structure of our Company.  All of Journey's projections are based solely on exploration and development projects and include no component for acquisitions.  Journey's improved financial position, lower cost structure, and the potential for improved access to capital could play a meaningful role in Journey's ability to capitalize on opportunities to expand our business plan.

On behalf of Journey's management team and directors we would like to thank our shareholders for their continued support through this challenging time. There are few companies within our peer group that share the same upside leverage to rising commodity prices that Journey does, and we remain steadfast in our goal to provide shareholders with superior returns over the longer term.

ABOUT THE COMPANY

Journey is a Canadian exploration and production company focused on conventional, oil-weighted operations in western Canada. Journey's strategy is to provide investors with growth plus a sustainable yield by focusing on drilling its existing core lands, implementing water flood projects, executing on accretive acquisitions and growing its production base. Journey seeks to optimize its legacy oil pools through the application of best practices in horizontal drilling and, where feasible, with water floods.

ADVISORIES

Information in this press release that is not current or historical factual information may constitute forward-looking information within the meaning of securities laws, which involves substantial known and unknown risks and uncertainties, most of which are beyond the control of Journey, including, without limitation, those listed under "Risk Factors" and "Forward Looking Statements" in the Annual Information Form filed on www.SEDAR.com on March 31, 2015. Forward-looking information may relate to our future outlook and anticipated events or results and may include statements regarding the business strategy and plans and objectives. Particularly, forward-looking information in this press release includes, but is not limited to, information concerning Journey's drilling and other operational plans, production rates, dividend policy, long-term objectives and the declaration and payment of dividends. Journey cautions investors in Journey's securities about important factors that could cause Journey's actual results to differ materially from those projected in any forward-looking statements included in this press release. Information in this press release about Journey's prospective cash flows and financial position is based on assumptions about future events, including economic conditions and courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that information regarding Journey's financial outlook should not be used for purposes other than those disclosed herein. Forward-looking information contained in this press release is based on our current estimates, expectations and projections, which we believe are reasonable as of the current date.  No assurance can be given that the expectations set out in the Prospectus or herein will prove to be correct and accordingly, you should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation and do not undertake to update this information at any particular time except as required by applicable securities law.

No securities regulatory authority has either approved or disapproved of the contents of this press release.

Readers are cautioned that the above list of risks and factors are not intended to be exhaustive. Additional information on these and other factors that could affect our operating and financial results are, or will be, included in reports filed with the applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

Non-GAAP Measures

The company uses the following non-GAAP measures in evaluating corporate performance. These terms are not recognized under Generally Accepted Accounting Principles ("GAAP").

(1)  Cash flow from operations. The Company considers cash flow from operations (also referred to as "cash flow") a key performance measure as it demonstrates the Company's ability to generate funds necessary to repay debt and to fund future growth through capital investment. Cash flow from operations is calculated as cash from operating activities before changes in non-cash working capital, and decommissioning costs incurred. Cash flow from operations per share is calculated as cash flow from operations divided by the weighted-average number of shares outstanding in the period. Journey's determination of cash flow from operations may not be comparable to that reported by other companies. Journey also presents cash flow from operations per share whereby per share amounts are calculated using weighted average shares outstanding consistent with the calculation of net earnings per share, which per share amount is calculated under IFRS and is more fully described in the notes to the financial statements.

(2)  Net debt. Net debt is a non-GAAP measure and represents current assets less current liabilities and bank debt (but excludes the potential future liability (or assets) related to the mark-to-market measurement of derivative contracts and decommissioning liabilities). It does not have a standardized meaning prescribed by International Financial Reporting Standards and it is therefore unlikely to be comparable to similar measures presented by other companies.

(3)  Netbacks. Operating netback is a non-GAAP measure and is calculated as petroleum and natural gas sales less royalties, transportation and operating costs calculated on a per boe basis. Cash flow netback equals the operating netback less cash finance costs, general and administrative costs, realized gains and losses on derivative contracts. Operating netback and funds flow from operations netback do not have a standardized measure prescribed by International Financial Reporting Standards and therefore may not be comparable with the calculations of similar measures for other companies.

Barrel of Oil Equivalents

Where amounts are expressed in a barrel of oil equivalent ("boe"), or barrel of oil equivalent per day ("boe/d"), natural gas volumes have been converted to barrels of oil equivalent at six (6) thousand cubic feet ("Mcf") to one (1) barrel. Use of the term boe may be misleading particularly if used in isolation. The boe conversion ratio of 6 Mcf to 1 barrel ("Bbl") of oil or natural gas liquids is based on an energy equivalency conversion methodology primarily applicable at the burner tip, and does not represent a value equivalency at the wellhead. This conversion conforms to the Canadian Securities Regulators' National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities.

No securities regulatory authority has either approved or disapproved of the contents of this press release.

SOURCE Journey Energy Inc.

Alex G. Verge, President and Chief Executive Officer, 403.303.3232, alex.verge@journeyenergy.ca; Gerry Gilewicz, Chief Financial Officer, 403.303.3238, gerry.gilewicz@journeyenergy.ca