Cequence Cites Exploration Success in 4Q Results
Cequence Energy announced its operating and financial results for the fourth quarter and the year ended December 31, 2009.
Cequence enjoyed excellent drilling success in the fourth quarter of 2009 and the first quarter of 2010:
- The combined productivity of the new discoveries exceeds 2,000 boe/d;
- Tie-ins are underway with 1,300 boe/d expected to be onstream by July 2010;
- Achieved finding, development and acquisition costs including future development capital of $13.67 per proved plus probable boe; and
- Increased proved reserves per share by 44 percent and proved plus probable reserves per share by 57 percent from the date of the Company's reorganization.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
The fourth quarter of 2009 was the first full quarter for new management following the reorganization and recapitalization of the Company on July 30, 2009. The quarter was highlighted by strong efficiencies from the Company's capital program and immediate reductions in cash costs.
- Increased average production from the third quarter by 59 percent to 2,089 boepd from 1,317 boepd in the third quarter;
- Reduced operating costs by 35 percent from the third quarter to $14.06 per boe and increased the operating netback by 53 percent to $23.71;
- Recorded fourth quarter funds flow of $3.2 million or $0.08 per share; exited 2009 with positive working capital of $6.0 million;
- Completed the acquisition of the remaining shares of HFG Holdings Inc. ("HFG") to increase our working interest in the Company's 14 section Sinclair Montney play and 46 additional sections of prospective Montney land;
- Established the viability of a Montney resource play at Sinclair with two successful horizontal wells; and
- Spent $16.6 million on drilling, recompletions and land and $6.0 million on property acquisitions in the fourth quarter.
- Completed the reorganization of management and the board of directors and a concurrent recapitalization of the Company in the third quarter. A total of $67.3 million in new equity was raised in the year eliminating current debt;
- Emerged from the reorganization with proven management and board of directors and with the financial flexibility to execute both drilling and acquisitions in a low natural gas price environment;
- Completed property acquisitions of $21.8 million for the year consolidating assets in its core areas;
- Increased total proved plus probable reserves by 70 percent to 12.8 mboe and proved reserves by 56 percent to 7.5 mboe;
- Achieved finding, development and acquisition costs including future development capital of $13.67 per proved plus probable boe. FD&A costs excluding future capital were $8.51 per boe on a proved plus probable basis;
- Increased the net present value of the Company's proved plus probable reserves by 34 percent to $157.7 million using a discount rate of 10 percent; and
- Net asset value of $4.83 per share based on the value of proved plus probable reserves of $157.7 million, undeveloped land of
- $31.5 million, positive working capital of $6.0 million, investments of $13.7 million and the long-term debt related to investments of $18.1 million.
Peace River Arch, Alberta
Successful drilling and land acquisitions have added to the existing opportunities for growth in the Peace River Arch. Cequence commenced its drilling program in the first quarter of 2010 with 3 exploration wells (3 net) within the Triassic fairway that yielded one new gas discovery and one oil and gas discovery. The third well is still being competed. Cequence continues to acquire additional lands in the Peace River Arch and an additional 7 wells are planned for 2010.
In the first quarter of 2010, Cequence completed a successful Montney horizontal well at Gordondale. The well was brought on production in March at a rate of 3.5 mmscf/d with a flowing pressure of 1,600 psi. Cequence has two successful Montney wells at Gordondale and a third horizontal well is planned for 2011.
In 2009, Cequence directed $15.0 million of its drilling budget to the Sinclair area of Northwest Alberta. The capital program established the viability of a Montney resource play while preserving expiring mineral rights and fulfilling the outstanding flow through commitments inherited through the acquisition of HFG.
In December 2009 Cequence drilled and completed its first horizontal well at Sinclair in the Upper Montney. The well underwent a five day flow test and produced at a stabilized rate of approximately 5.0 mmscf/d. In January 2010, our second Upper Montney well was completed with stabilized test rates of 3.5 mmscf/d. Results from these two wells were encouraging and have proven a resource play in the Upper Montney at Sinclair. Based on the success of these two wells, the December 31, 2009 reserve report includes 1.5 mboe of proved reserves and 3.5 mboe of proved plus probable reserves at Sinclair. Management estimates that further development at Sinclair will result in the recognition of up to 15 additional Upper Montney locations not recognized in the December 31, 2009 reserve report.
The Sinclair development is in its initial stages and drilling has continued in the first quarter of 2010. The Company is preparing to complete its first horizontal well in the Lower Montney. A shortage of stimulation equipment due to increased industry activity has delayed the completion of this well until the summer of 2010. A successful well has the potential to significantly increase the size of the resource as no reserves have been recognized in the Lower Montney. Cequence has plans to drill one additional well (0.5 net) at Sinclair in 2010.
In November, Cequence completed its third property acquisition of the year. The acquisition in the Valhalla area of Northwest Alberta added 165 boepd of production and related lands for total consideration of $6.1 million. More importantly, the acquisition establishes a foothold in a region with multi zone producing horizons, liquids rich gas and the potential for high-impact wells. Management intends to continue pursuing similar acquisitions and expects to find comparable opportunities at attractive valuations in the near future.
Also in November, Cequence completed the acquisition of the remaining shares of our 71 percent owned subsidiary, HFG. The acquisition simplified the corporate structure of Cequence and increased the working interest in our Sinclair Montney prospects in Northwest Alberta and Northeast British Columbia to 100 percent.
For the quarter ended December 31, 2009, Cequence reported funds flow from operations of $3.2 million compared to $1.3 million in the fourth quarter of 2008. Netbacks remained consistent with the prior year and the increase in cash flow relates to increased production volumes and lower interest expense. Cequence recorded a loss of $2.7 million for the fourth quarter of 2009 compared to a loss of $1.0 million in 2008 primarily due to a loss on derivative financial instruments in the fourth quarter of 2009.
For the year ended December 31, 2009, Cequence reported a loss of $8.7 million compared to a loss of $8.2 million in 2008. Earnings in 2009 were negatively impacted by lower production, $3.3 million expensed as part of the reorganization and a high cost structure. Following the reorganization in the third quarter, significant progress has been made to reduce the overall cost structure of the Company. Compared with the third quarter, the Company improved operating costs by 35 percent to $14.06 per boe and normalized general and administrative expenses by 52 percent to $2.94 per boe. Normalized G&A does not include the $561,000 in G&A expense in the fourth quarter related to legal settlements stemming from the acquisition of Bear Ridge in 2007.
The Company has a strong balance sheet with consolidated positive net working capital of $6.0 million at the end of the quarter, excluding the fair value of the Company's commodity hedge contract. This financial flexibility will allow the Company to execute its 2010 capital budget of $45 million from estimated cash flow, working capital and existing bank lines.
Outlook and Guidance
Cequence's 2010 capital development budget has been set at $45.0 million. Execution of the 2010 budget is expected to provide for average daily production of 3,250 boepd which represents an increase of 100 percent from 2009 average production. Approximately 30 percent of the budget is being allocated to Montney development, 55 percent to conventional oil and gas prospects in the Peace River Arch and 15 percent to land and seismic. Capital expenditures for the first quarter of 2010 are forecast to be $21.0 million with debt at March 31, 2010 estimated at $11.0 million.
Funds flow from operations for 2010 is forecast to increase to $15.0 million based on a Cdn $5.00 AECO gas price. Cequence continues to have a strong balance sheet with positive working capital of $6.0 million entering 2010.
Cequence's management believes that the Company's strong balance sheet and drilling inventory for 2010 will continue to generate strong growth in production, funds flow and reserves.