Rock Energy Inc. Achieves Record Production and Cash Flow, Increases Capital Spending and Guidance for 2014, and Reports Second Quarter Results
CALGARY, ALBERTA--(Marketwired - Aug 12, 2014) - Rock Energy Inc. (RE.TO) ("Rock" or the "Company") is pleased to report its financial and operating results for the three and six months ended June 30, 2014. Rock is a Calgary-based crude oil exploration, development and production company.
Rock has filed its unaudited condensed interim Consolidated Financial Statements for the period ended June 30, 2014 and related Management's Discussion and Analysis ("MD&A"). Copies of Rock's materials may be obtained on www.sedar.com and on our website at www.rockenergy.ca.
CORPORATE SUMMARY
FINANCIAL | Three Months Ended | Six Months Ended | ||||||
2014 | 2013 | 2014 | 2013 | |||||
Crude oil and natural gas revenue ('000) | $37,422 | $18,215 | $69,864 | $31,443 | ||||
Funds from operations ('000) (1) | $19,276 | $6,665 | $34,590 | $9,705 | ||||
Per share - basic | $0.48 | $0.17 | $0.87 | $0.25 | ||||
- diluted | $0.46 | $0.17 | $0.83 | $0.25 | ||||
Net income (loss) ('000) | $8,292 | $100 | ($9,009 | ) | ($3,508 | ) | ||
Per share - basic | $0.21 | - | ($0.23 | ) | ($0.09 | ) | ||
- diluted | $0.20 | - | ($0.23 | ) | ($0.09 | ) | ||
Capital expenditures, net ('000) | $12,004 | $2,175 | $34,892 | $14,891 | ||||
As at | As at | |||||||
Net debt ('000) (2) |
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Common shares outstanding | 40,179,008 | 39,343,244 | ||||||
Options outstanding | 3,271,971 | 3,223,641 | ||||||
OPERATIONS | Three Months Ended | Six Months Ended | ||||||
2014 | 2013 | 2014 | 2013 | |||||
Average daily production | ||||||||
Crude oil and natural gas liquids (bbls/d) | 4,730 | 2,704 | 4,675 | 2,737 | ||||
Natural gas (mcf/d) | 1,549 | 2,379 | 1,611 | 2,519 | ||||
Barrels of oil equivalent (boe/d) | 4,988 | 3,100 | 4,944 | 3,157 | ||||
Average product prices | ||||||||
Crude oil and natural gas liquids ($/bbl) | $85.32 | $71.27 | $80.62 | $60.23 | ||||
Natural gas ($/mcf) | $4.99 | $3.86 | $5.65 | $3.65 | ||||
Total ($/boe) | $82.45 | $64.56 | $78.08 | $55.03 | ||||
Field netback ($/boe) (1) | $47.82 | $28.61 | $43.79 | $21.18 | ||||
(1) | Funds from operations, funds from operations per share and field netback are not terms prescribed by International Financial Reporting Standards (IFRS), and so are considered non-GAAP measures. Funds from operations represents cash generated from operating activities before changes in non-cash working capital and decommissioning expenditures. Rock considers funds from operations a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future growth through capital investment. Funds from operations per share is calculated using the same share basis which is used in the determination of net income (loss) per share. Field netback is calculated as crude oil and natural gas revenues after deducting royalties, operating costs and transportation costs, resulting in an approximation of initial cash margin in the field on crude oil and natural gas production. Rock's use of these non-GAAP measurements may not be comparable with the calculation of similar measures for other companies. |
(2) | Net debt excludes commodity price contracts. |
LETTER TO THE SHAREHOLDERS
During the second quarter of 2014, Rock achieved record daily production and cash flow. Although the quarter experienced a relatively low level of activity (as is typical during spring break-up) the Company completed preparations for the upcoming summer drilling season.
The quarter was highlighted by the following specific accomplishments:
Drilled 4 (4.0 net) oil wells with 100% casing success including 1 (1.0 net) horizontal Viking oil well at Onward and 3 (3.0 net) successful Mannville oil wells at Onward;
Averaged 4,988 boe per day (95% crude oil and liquids) of production representing a 61% increase from a year ago;
Spent a total of $12.0 million net on the capital expenditure program;
Generated funds from operations for the quarter of $19.3 million ($0.48/ basic share) which is an increase of 23% from Q1 2014 and 182% increase from a year ago;
Net debt at the end of Q2 was $16.8 million and effective August 12, 2014 the Company's bank has increased the lending facility to $80.0 million;
To date in Q3, the company has drilled another 6 (6.0 net) horizontal Viking oil wells at Onward, 2 (2.0 net) horizontal oil wells at Mantario, 1 (1.0 net) standing step out well at Mantario, and 2 (2.0 net) unsuccessful exploration wells (West Mantario, Atlee Buffalo); and
In conjunction with the acquisition of the two offsetting Mantario assets in Q1, Rock applied for, and on August 6, 2014 received, approval for the expansion of the EOR project at Mantario.
Rock's average realized price in the second quarter of 2014 was $82.45 per boe compared to $73.58 per boe in the first quarter of 2014. The increase in price realization is primarily attributed to an increase in WTI pricing, and a higher percentage of Viking light oil production.
Operating costs decreased during the quarter by 18% to $14.82 per boe compared to $18.04 per boe in the first quarter of 2014. This decrease is attributable to a change in production mix resulting from the sale of the heritage heavy oil assets, combined with the increase in lower cost production from both Mantario and Onward. Incremental operating costs associated with spring break-up were minimal; however wet weather was a challenging factor in July and to date in early August.
Rock generated a field netback of $47.82 per boe in the second quarter of 2014 compared to $39.64 per boe in the first quarter of 2014. Though royalties were higher on a per boe produced basis in the quarter, field netbacks were positively impacted by improved product pricing and reduced operating costs.
Gross capital expenditures for the second quarter of 2014 were $12.0 million, including $3.7 million for the drilling program, $8.6 million for facilities, $0.6 million for land and seismic offset by $0.9 million of non-core property divestitures.
Rock's daily production for the second quarter of 2014 averaged 4,988 boe/d (95% oil and liquids).
Mantario
Rock continues to move forward with the construction of the battery and infrastructure for the implementation of the water/chemical flood at Mantario. This summer the Company has drilled 2 (2.0 net) horizontal wells and 1 (1.0 net) step out vertical location to the south-east of the main pool. We have also drilled one unsuccessful exploration well to the south west of the main pool. For the remainder of the year the Company will drill another 6 (6.0 net) vertical step out locations, 7 (7.0 net) horizontal producers into the main pool, and convert 9 (9.0 net) wells into injectors. The Company plans to have the pressure maintenance scheme (water flood) operational by the beginning of Q4 this year, and in conjunction with the recent approval for the project expansion, is working to accelerate the EOR scheme (polymer flood) and have it operational during Q1, 2015, once the EOR project is operational the Company will be eligible to receive its royalty credit and thus a significant increase in cash flow.
Exploration efforts in Mantario during the remainder of the year will be focused on testing 2 - 3 new pools along the existing main Mantario shore face. In addition, Rock will test another 2 - 3 new exploration targets in the greater Mantario area.
Onward Viking
During the second quarter of 2014, the Company did not complete any horizontal oil wells in the Viking Formation at Onward. As a result of this lack of drilling (due to spring break-up), Viking production from this area (which peaked at approximately 500 bopd) has declined to 250-275 bopd. Drilling of Viking wells has resumed after break up and to date we have drilled 7 (7.0 net) horizontal step out wells. These wells are currently being completed and brought on stream. Rock plans to drill an additional 5 step-out wells by the end of the year to extend this play and more fully evaluate the Company's remaining lands in this area. Another 6 step out wells will be drilled in Q1 2015 which have been delayed due to surface access limitations requiring winter conditions. With the delay of this capital spending, the Company has decided to reallocate funds to begin drilling development locations in the areas already de-risked by our previous activity. In addition, Rock has elected to expand our capital program to drill an extra 10 (10.0 net) wells for a total of 15 (15.0 net) Viking development locations by year end. With this additional activity, Rock is now forecasting Viking light oil production to reach approximately 1,000 bopd by year end.
Onward Mannville
During the fourth quarter of 2013, Rock drilled a discovery well at 11-16-34-24W3 into a new Lloydminster pool (West Onward). This discovery well has been producing at rates exceeding 100 bopd for the last three months. During the second quarter, Rock drilled 3 (3.0 net) follow-up locations. These wells were successful in encountering the main Lloydminster formation and are being completed and brought on stream. One of the wells encountered an additional pay zone in the Bakken and initial completion results from this zone have been very encouraging, yielding initial rates of over 50 bopd. We are mapping this new zone to determine the size of the pool, and identify the follow-up locations. In addition to this development work, Rock has identified another 3 - 4 exploration targets that the Company plans to test in the next 12 months.
Outlook and 2014 Guidance
The strong financial performance during the second quarter, and the opportunity to accelerate production and cash flow growth, has prompted the Company to expand its capital program to $110 million (from $91 million) and revise its guidance upward for the year. The incremental capital will be used for the additional Viking development locations at Onward and to accelerate the implementation of polymer injection at Mantario. While this additional capital spending will not have a significant impact on 2014 results, it will provide substantial benefits in 2015.
The Company is now forecasting to generate average 2014 production of 4,900 - 5,100 boe/d (95% oil). For the remainder of 2014, Rock is assuming that WTI averages $98.50 US/bbl, WTI - WCS differential averages $20.00 US/bbl, AECO gas price averages $4.00 CDN/mcf and the exchange rate averages $1.08 CDN/US. Given these assumptions, the Company is forecasting funds from operations of $70 - $72 million ($1.75 - $1.80/share). With the forecasted funds from operations and capital spending plan, the net debt at the end of the year is targeted to be $55 - $57 million (0.6 times forecasted annualized fourth quarter funds from operations) against its newly amended credit facility of $80 million.
The third quarter of 2014 will see the Company invest approximately $40 million towards constructing the facilities at Mantario, drilling the infill locations for the development of the Mantario pool, drilling the step out wells to delineate the Viking light oil play at Onward, and testing 4 - 6 new exploration ideas in core areas.
The Company is also actively engaged in a process of divesting our remaining non-core assets while we build production and value in our core areas through both acquisition and drilling projects. We remain focused on building a suite of assets that will continue to provide our shareholders with a solid, long-life, predictable base of sustainable cash flow.
Advisory Regarding Forward-Looking Information and Statements
This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "will", "expects", "believe", "plans", "potential" and similar expressions are intended to identify forward-looking statements or information. More particularly and without limitation, this press release contains forward looking statements and information concerning: forecast average production; forecast funds from operations; forecast net debt; forecast capital spending; anticipated in-service date for, and royalty rates and royalty credits from the Mantario water/chemical flood program; and Rock's drilling plans for its crude oil properties.
Statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future.
The forward-looking statements and information in this press release are based on certain key expectations and assumptions made by Rock, including prevailing commodity prices and exchange rates; applicable royalty rates and tax laws; future well production rates; reserve and resource volumes; the performance of existing wells; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services; and the receipt, in a timely manner, of regulatory and other required approvals. Although Rock believes that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward-looking statements and information because Rock can give no assurance that they will prove to be correct. There is no certainty that Rock will achieve commercially viable production from its undeveloped lands and prospects.
Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the oil and natural gas industry in general, such as: operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to reserves, production, costs and expenses; health, safety and environmental risks; commodity price and exchange rate fluctuations; marketing and transportation of petroleum and natural gas and loss of markets; environmental risks; competition; incorrect assessment of the value of acquisitions; failure to realize the anticipated benefits of acquisitions; ability to access sufficient capital from internal and external sources; stock market volatility; and changes in legislation, including but not limited to tax laws, royalty rates and environmental regulations.
Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the operations or financial results of Rock are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com). The forward-looking statements and information contained in this press release are made as of the date hereof and Rock 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 so required by applicable securities laws.
For further information please visit Rock's website at www.rockenergy.ca.
