Progress Boosts Q1 Production by 26%
Progress Energy Resources Corp. on Monday announced results for the first quarter of 2011 (the "Quarter"). Production averaged 44,356 barrels of oil equivalent ("boe") per day in the Quarter, up 26 percent as compared to the first quarter in 2010. Capital investment in the Quarter was $140.2 million and was primarily directed towards the Company's Montney properties in the Foothills of northeast British Columbia and its multi-zone Deep Basin opportunities in northwest Alberta.
"Progress is the largest land rights holder in a play that many industry investors now consider to be among the premier unconventional gas plays in North America," said Michael Culbert, President and Chief Executive Officer of Progress. "Our North Montney development provides shareholders with unique exposure and leverage to large-scale, long-term natural gas development in an area of northeast British Columbia that has access to multiple markets and is well positioned to benefit from future LNG development."
- Produced 44,356 boe per day, up 26 percent compared to the same period in 2010;
- Generated cash flow of $63.3 million in the Quarter or $0.29 per share, diluted;
- Drilled a total of 24 wells (22.7 net);
- Drilled eight horizontal and two vertical Montney wells in the Foothills of northeast British Columbia during the Quarter. The wells were primarily drilled in four of the Company's six Montney development pods at Town South, Town North, Kobes and Gundy;
- Completed construction of the first phase of the Town North gas handling facility with capability of 25 million cubic feet ("mmcf") per day. Also completed modifications on the Beg North, Beg and Blueberry compressor facilities to optimize existing volumes;
- Drilled 11 wells in the Deep Basin during the Quarter. Of these, five wells were completed with the remaining completions scheduled for the third quarter. The Nikanassin continues to be the primary target for the Company's Deep Basin program;
- Divested of 800 boe per day of assets for proceeds of approximately $35 million;
- Completed a $200 million bought-deal financing of common shares at a price of $13.90 per common share and a $200 million Convertible Debenture bought-deal financing for gross proceeds of $400 million;
- Established a new 3-year extendible revolving $650 million covenant-based credit facility with the Company's current banking syndicate. As at March 31, 2011, Progress was undrawn on its bank line;
- Maintained the first quarter dividend at $0.10 per common share and declared a second quarter dividend of $0.10 per common share.
Foothills Montney Program Update
Progress has built the industry's largest Montney land position totaling over 1,400 net sections, or approximately 900,000 net acres, spanning 560 kilometers from northeast British Columbia to northwest Alberta. The primary focus of the Company's Montney program has been in the Foothills of northeast British Columbia where Progress holds approximately 660,000 net acres of largely contiguous Montney rights. In November 2010, Progress announced that it was moving forward on its first six development pods, each capable of achieving 50 mmcf per day of natural gas production and sustaining that level for at least 10 years. As Progress pursues its goal of doubling its production base over the next five years, the Company anticipates entering into a long-term agreement with a large midstream company for gas gathering and processing services in northeast British Columbia. This will provide Progress with the ability to bring on-stream approximately 250 mmcf per day of Montney production in a timely manner from its pod developments at attractive tolls. Progress today produces in excess of 70 mmcf per day of Montney sweet gas. Drilling plans for the remainder of 2011 include 20 horizontal and two vertical wells.
At the Town North pod development (100 percent working interest), three horizontal wells were drilled and completed with initial production rates averaging 4.1 mmcf per day. To accommodate these volumes, the first 25 mmcf per day facility was constructed and brought on stream at the end of April.
At the Gundy pod development (100 percent working interest), three horizontal wells were drilled in the Quarter with initial production rates averaging 4.6 mmcf per day. The wells are initially flowing through the Town South gas handling facility via a newly constructed 8-inch pipeline. A new 25 mmcf per day facility will be constructed at Gundy in the second half of 2011, 50 percent funded through the province of British Columbia's infrastructure program.
Progress' most mature development pod is at Town South (100 percent working interest) where the Company reached 50 mmcf per day of production with the tying-in of one horizontal well drilled in the Quarter and including the Gundy pod volumes, which will initially flow through this facility.
In all areas, the Company continues to use perforation clusters in the completion process which is expected to result in higher ultimate recoveries per well. Additionally, the Company has been using its vast 3-D seismic data set to determine the optimal placement of the horizontal wellbores. The Montney formation is approximately 300 meters thick throughout Progress' North Montney lands and the optimal placement of the wellbore within the formation will enhance the effective fracturing and hence, drainage of a section. During the winter, Progress shot or participated in three significant seismic programs in the North Montney region totaling 350 square kilometers.
At the Kobes pod development (30 percent working interest), the Company is currently producing approximately 6.5 mmcf per day, net to Progress. This development pod has proven to have among the strongest initial production rates from the Lower Montney within the entire Montney fairway. One partner-operated well was spud in the Quarter and is expected to be completed and tied-in during the third quarter. The results from Progress-operated wells at Kobes are being used to evaluate the Company's adjacent, 100-percent working interest lands at West Gundy.
Deep Basin of Northwest Alberta Update
Progress drilled 11 wells (10.3 net) in its Deep Basin program with five wells being completed in the Quarter. The remaining wells are to be completed during the third quarter. Progress expects to drill six additional wells in the Gold Creek, Wapiti and Elmworth areas over the remainder of 2011.
Progress maintains ownership in the infrastructure in the Deep Basin region. The Company recently completed a cross-over pipeline that allows additional liquids-rich gas volumes to be processed through the Wapiti deep cut facility. Progress is currently producing approximately 25 mmcf per day of natural gas volumes through the Wapiti facility yielding approximately 60 barrels per million cubic feet of high-value natural gas liquids.
Progress holds a material land position covering approximately 280,000 net acres in the Deep Basin of northwest Alberta. Given the large and contiguous nature of the land base, the Company is able to test play concepts, including liquids-rich gas plays and light oil plays, and with success can quickly establish a meaningful position at lower cost than industry competitors. Progress has the proven expertise in unlocking new play types such as the Nikanassin formation for which the Company co-developed a slick-oil completion technique that is now widely used in the industry.
Progress has actively been pursuing several initiatives to provide capital funding for the Company's near to medium term growth plans. During the first four months of 2011, the Company divested of non-core assets with associated production of approximately 800 boe per day for proceeds of approximately $35 million. Additionally, Progress is in a process where it has offered to joint venture with interested parties on four properties encompassing approximately 166,000 gross Progress working-interest Montney-rights acreage within the North Montney region.
Cash flow for the Quarter was $63.3 million or $0.29 per share, diluted. Capital investment was $140.2 million. As at March 31, 2011, the Company was undrawn on its $650 million revolving credit facility. Debt-to-total capitalization as at March 31, 2011 was 12 percent.
On April 29, 2011 the Company amended and restated its bank credit facility to be a covenant-based facility rather than a borrowing base facility. This facility is a 3-year extendible revolving secured facility in the amount of $650 million from a syndicate of lenders with an initial maturity date of April 29, 2014. As Progress continues to grow its production, reserves and cash flow with the objective of doubling the size of the Company in the next five years, this new facility will provide more certainty and flexibility to fund the Company's growth program.
Progress' average gas price in the Quarter was $4.08 per thousand cubic feet ("mcf"), including the impact of the Company's hedging program. The Company's high heat content gas stream achieves a premium to AECO prices. Royalty rates averaged 10.6 percent in the Quarter as a result of lower natural gas prices and the impact of higher gas-cost-allowance recoveries in Alberta. Operating costs averaged $5.38 per boe in the Quarter reflecting the Company's continued focus on operational efficiencies and maximization of volumes through existing facilities.
Progress recently entered into a series of hedges on a portion of its natural gas production buying puts on 30,000 gigajoule ("GJ") per day at a net floor of $3.43 per GJ. The Company now has 60,000 GJ per day or approximately 22 percent of its natural gas production hedged at a net floor of approximately $3.41 per GJ or approximately $3.90 per mcf, based on Progress' high heat content gas, for the period from May 1, 2011 to October 31, 2011. The Company also entered into a series of AECO basis swaps on 40,000 million British Thermal Units ("mmbtu") per day for 2011 at a net differential of US$0.50 per mmbtu and on 40,000 mmbtu per day for 2012 at a net differential of US$0.62 per mmbtu.
Second Quarter Dividend and Dividend Reinvestment Program The Board of Directors of Progress on Monday announced that the second quarter eligible dividend will be maintained at $0.10 per share. The eligible dividend will be payable on July 15, 2011 to common shareholders of record as of June 30, 2011. The ex-dividend date is expected to be June 28, 2011. Based on the May 6, 2011 closing share price on the Toronto Stock Exchange of $12.52, this represents an annualized yield of 3.2 percent. The amount of future cash dividends, if any, is subject to the discretion of the Progress Board of Directors.
Progress has a dividend reinvestment plan (the "DRIP") that allows eligible shareholders of Progress to direct that their cash dividends be reinvested in additional common shares which, when issued from treasury, will be issued at 95 percent of the Average Market Price (as defined in the DRIP) on the applicable dividend payment date. A registered shareholder who wishes to enroll in the DRIP may do so by contacting Computershare Trust Company of Canada, the Plan Agent. Beneficial shareholders who wish to participate in the DRIP should contact the broker or other nominee through which their common shares are held to provide appropriate enrollment instructions and to ensure any deadlines or other requirements that such broker or nominee may impose or be subject to are met.
Our 2011 capital program has been established at $350 million and is expected to result in year-over-year production growth of approximately 13 percent. Production is expected to exit 2011 at between 50,000 and 52,000 boe per day, before the impact of dispositions. We have a current productive capability of approximately 46,000 boe per day with approximately 1,000 boe per day awaiting tie-in after break-up. Production in the second quarter is expected to average in the range of 39,000 to 40,000 boe per day as a result of the impact of the 21-day planned turn-around at the McMahon natural gas processing plant in Fort St. John in northeast British Columbia.
The focus of our capital program for the remainder of the year will be the continued advancement of our highly economic Montney pod developments. Our Montney developments have several advantages when compared to other areas within the Montney fairway. The natural gas we produce is sweet and therefore does not require expensive sour gas processing; we attract a deep drilling royalty credit of approximately $2.1 million per well; and, we produce approximately 20 barrels per million cubic feet of high-value natural gas liquids. In aggregate, these factors, along with strong initial production rates and recoveries, place the North Montney among the most economic shale plays in North America.
Natural gas prices have strengthened through the early part of the second quarter of 2011, a period when prices are typically weak on a relative basis due to lower demand. We remain optimistic about the long-term prospects for natural gas in western Canada. We believe that, in addition to the Kitimat LNG development, other larger international parties are also considering LNG developments along the west coast of Canada. Although these potential projects are several years away from commencing, we believe that resource development in northeast British Columbia will enhance the value of this resource which will ultimately be able to access higher priced Asian markets.
Progress is well positioned to execute on its growth plans. We have a strong balance sheet with no bank debt as at the end of the Quarter and a new credit facility to provide certainty and flexibility for future program funding. As well, we have multiple levers from which to provide future capital, including further non-core asset dispositions and potential joint venture arrangements. We believe the Montney shale opportunity across our asset base provides our shareholders with a global scale opportunity, capable of delivering low-risk, long-term sustainable growth.
Progress is a Calgary based, mid-size energy Company primarily focused on natural gas exploration, development and production in northwest Alberta and northeast British Columbia.