Granite Oil Corp. Announces 2018 Year End Reserve Metrics and Operational Update
March 12, 2019 - 7:42 PM EDT
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Granite Oil Corp. Announces 2018 Year End Reserve Metrics and Operational Update
CALGARY, Alberta, March 12, 2019 (GLOBE NEWSWIRE) -- GRANITE OIL CORP. (“Granite” or the “Company”) (TSX:GXO)(OTCQX:GXOCF) is pleased to present the summary results of the independent reserves report (the “Sproule Report”) prepared by Sproule Associates Limited (“Sproule”) with an effective date of December 31, 2018.
In 2018, Granite invested approximately $10.2 million of capital expenditures (unaudited), all organically, into its 100%-owned Bakken oil property. This represents a decrease of approximately 46% in year-over-year capital spending. During the year, Granite drilled and completed only three 100% working interest horizontal development wells and converted one producing oil well to gas injection, and still replaced its Proved Developed Producing (‘PDP’) oil reserves by 106%. Associated PDP finding and development costs for oil were $13.26 per barrel, generating a recycle ratio of 2.3, despite highly depressed crude oil prices which negatively impacted the Company’s operating netback during the fourth quarter. With three consecutive years of top-tier recycle ratios, Granite’s Bakken development continues to demonstrate strong efficiencies in converting barrels in the ground to developed producing reserves.
The three development wells drilled in 2018 were completed with higher frac sand densities than historically utilized by the Company, and have produced at the highest combined average rate achieved to date when compared to the three prior years’ development wells. The Company is focused on continuing to prove this trend in 2019 to ultimately increase reserves per well. The number of booked undeveloped locations was not increased in the Sproule Report nor was the associated future net capital, thus maintaining a significant inventory of potential infill drilling locations in excess of current bookings.
During 2018, the Company shut-in its shallow gas production resulting in a reserves category shift from PDP to proved developed non-producing (‘PDNP’) reserves in the 2018 Sproule Report. Accordingly, to provide a more accurate representation of relevant reserves metrics, unless otherwise indicated, all finding and development costs and recycle ratios set out in this news release have been calculated for Company Gross Reserves for oil and NGL volumes using an adjusted operating netback (prior to hedging) of $30.01 per barrel, versus the Company’s all-in operating netback (prior to hedging) of $29.75 per barrel of oil equivalent.
2018 Oil Reserves Highlights (1)(2)(3)
Proved Developed Producing (PDP) reserves
F&D costs were $13.26 per barrel, resulting in a PDP recycle ratio of 2.3 times
Increased 0.7% to 7,013 mbbls 2018, from 6,966 mbbls in 2017
Reserves replacement of 106%
Total Proved (TP) reserves
F&D costs including change in future development capital (‘FDC’) were $12.39 per barrel, resulting in a TP recycle ratio of 2.4 times
Increased 1.0% to 12,314 mbbls in 2018, from 12,188 mbbls in 2017
Reserves replacement of 118%
Proved Plus Probable (P+P) reserves
F&D costs including change in FDC were $20.40 per barrel, resulting in a 2P recycle ratio of 1.5 times
Decreased 1.3% to 16,364 mbbls in 2018, from 16,571 mbbls
Reserves replacement of 71%
Notes:
“Oil” reserves include all Light, Medium, and Heavy Crude Oil volumes and Natural Gas Liquids (‘NGL’).
Financial information is based on the Company's preliminary draft 2018 unaudited financial statements and is therefore subject to revision.
Recycle ratio is calculated as operating netback divided by F&D costs. The F&D cost includes changes in FDC, where applicable. Calculation is based on estimated 2018 operating netback of $30.01 per barrel, which is calculated as revenue (prior to hedging) less royalties and production costs. See “Readers Advisories” for the method of calculating operating netback.
Net Asset Values
The present value of the Company’s future net revenues (based on Sproule’s December 31, 2018 escalated price forecast) discounted at 10% (PV10) before taxes of Granite’s reserves (including associated and non-associated gas), as set out in the Sproule Report, less estimated net debt of approximately $47.5 million at December 31, 2018, per fully diluted common share are as set out below:
Proved Developed Producing
$2.29/share
Total Proved
$4.95/share
Total Proved Plus Probable
$6.70/share
Granite’s Bakken property produced an average of approximately 1,982 bbls of oil per day (1,995 boe per day) during 2018. Granite’s average realized operating netback (prior to hedging) for the period is estimated to be $30.01 per barrel ($29.75 per boe).
2018 Year End Reserves
The evaluation of Granite’s petroleum and natural gas reserves was prepared by independent reserves evaluator, Sproule, in accordance with definitions, standards and procedures contained in National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”) and the Canadian Oil and Gas Evaluation Handbook (“COGE Handbook”). The reserves evaluation is based on forecast prices and costs, and applies Sproule’s forecast escalated commodity price deck, foreign exchange rate, and inflation rate assumptions as at December 31, 2018, as outlined in the table below entitled “PricingAssumptions”. Additional reserve information as required under NI 51-101 will be included in the Company's Annual Information Form (‘AIF’), which will be filed on SEDAR by close of business March 29, 2019. Financial information presented above is based on management-prepared financial statements for the year ended December 31, 2018, which are in the process of being audited by Granite’s independent auditors and, accordingly, such financial information is subject to change based on the results of the audit. See “Reader Advisory – Unaudited Financial Information” below.
Summary of Reserves
The following table is a summary of the Company’s estimated reserves as of December 31, 2018, based on the Sproule Report.
Summary of Company Gross Oil and Gas Reserves as at December 31, 2018 (1)(2)(3)(4)(5)(6)(7)
Reserves Category
Oil and NGLs (Mbbl)
Gas (MMcf)
Oil Equivalent (MBOE)
BTAX PV 10% ($000's)
Future Development Capital ($000's)
Oil Recycle Ratio
Net Undeveloped Wells Booked
Proved Developed Producing
7,013
132
7,035
137,453
-
2.3
Proved Developed Non-Producing
420
11,070
2,265
9,486
1,147
Proved Undeveloped
4,881
871
5,026
94,734
61,346
39
Total Proved
12,314
12,073
14,326
241,673
62,993
2.4
39
Probable Developed Producing
2,263
39
2,270
28,064
-
Probable Developed Non-Producing
148
4,486
896
2,144
-
Probable Undeveloped
1,638
388
1,703
38,440
5,795
4
Total Probable
4,049
4,913
4,868
68,648
5,795
4
Total Proved + Probable
16,364
16,986
19,195
310,321
68,787
1.5
43
Notes:
The tables summarize data set out in the Sproule Report and may not add due to rounding.
Reserves have been presented on a gross basis which are the Company’s total working interest share without including any royalty interests of the Company.
Based on Sproule’s December 31, 2018 escalated price forecast. See “Pricing Assumptions” below.
The net present value of future net revenues attributable to the Company’s reserves are stated prior to provision for interest, general and administrative expenses and after deduction of royalties, operating costs, estimated well abandonment and reclamation costs and estimated future capital expenditures. Future net revenues have been presented on a before tax basis. It should not be assumed that the present worth of estimated future net revenue presented in the tables above represents the fair market value of the reserves. There is no assurance that the forecast prices and costs assumptions will be attained and variances could be material. The recovery and reserves estimates of Granite’s crude oil and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual crude oil, natural gas and natural gas liquids reserves may be greater than or less than the estimates provided herein.
The Company’s Bakken and Sunburst reserves are developed with horizontal wells completed with multi-stage fracturing techniques.
“Oil” volumes include all Light, Medium, and Heavy crude oil volumes.
The recycle ratios presented are applicable to oil and NGL volumes using an adjusted 2018 operating netback for oil and NGLs of $30.01 per barrel.
Net Present Values (“NPV”) of Future Net Revenue
The following table is a summary of the estimated net present values of future net revenue (before income taxes) associated with the Company’s reserves as at December 31, 2018, based on the Sproule Report. The calculated NPVs include a deduction for estimated future well abandonment and reclamation but do not include a provision for interest, debt service charges and general and administrative expenses. It should not be assumed that the NPV estimates represent the fair market value of the reserves.
Summary of NPV of Future Net Revenue as at December 31, 2018 (1)(2)(3)
Reserves Category
Net Present Value Before Income Taxes Discounted at (%/Year)
0% $M
5% $M
10% $M
15% $M
20% $M
Proved
Proved Developed Producing
196,472
174,355
137,453
111,731
94,206
Proved Developed Non-Producing
69,633
17,273
9,486
7,209
5,984
Proved Undeveloped
229,731
139,277
94,734
68,630
51,837
Total Proved
495,836
330,904
241,673
187,569
152,026
Total Probable
307,963
122,027
68,648
46,107
34,049
Total Proved + Probable
803,798
452,931
310,321
233,676
186,075
Notes:
The tables summarize data set out in the Sproule Report may not add due to rounding.
Based on Sproule’s December 31, 2018 escalated price forecast. See “Pricing Assumptions” below.
The net present value of future net revenues attributable to the Company’s reserves are stated prior to provision for interest, general and administrative expenses and after deduction of royalties, operating costs, estimated well abandonment and reclamation costs and estimated future capital expenditures. Future net revenues have been presented on a before tax basis. It should not be assumed that the present worth of estimated future net revenue presented in the tables above represents the fair market value of the reserves. There is no assurance that the forecast prices and costs assumptions will be attained and variances could be material. The recovery and reserves estimates of Granite’s crude oil and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual crude oil, natural gas and natural gas liquids reserves may be greater than or less than the estimates provided herein.
Net Asset Value
Based on Sproule’s December 31, 2018 forecast escalated pricing, Granite’s net asset value calculation is set out in the following table. This net asset value determination is a "point-in-time" measurement and does not take into account the possibility of the Company being able to recognize additional reserves through successful future capital investment in its existing properties beyond those included in the Sproule Report.
Net Asset Value as at December 31, 2018 (1)
($M)
2P Reserves NPV 10 before tax
310,321
Estimate Net Debt (unaudited)
(47,500)
Net asset value
262,821
Fully Diluted shares outstanding (000’s)
39,218
Estimate NAV per fully diluted share ($/share)
6.70
Note:
Numbers may not add due to rounding.
Future Development Capital (“FDC”)
The following table provides a summary of the estimated FDC required to bring the Company’s undeveloped reserves to production, which have been deducted in the estimation of future net revenue attributable to such reserves. Changes in forecast FDC occur annually as a result of development activities, acquisition and disposition activities, and capital cost estimates that reflect the independent evaluator's best estimate of what it will cost to bring the proved undeveloped and probable reserves on production using forecast prices and costs.
Future Development Costs of Undeveloped Reserves (1)
Future Development Capital
($M)
($M)
Year
Total Proved
Total Proved + Probable
2019
7,050
7,050
2020
10,990
11,595
2021
15,067
15,067
2022
17,825
17,825
2023 and remaining
12,061
17,250
Total Undiscounted FDC
62,993
68,787
Total Discounted FDC at 10%/Year
48,210
52,116
Note:
Numbers may not add due to rounding.
Pricing Assumptions
The following table summarizes Sproule’s commodity price forecast and foreign exchange rate and inflation rate assumptions as at December 31, 2018, as applied in the Sproule Report. Forecast pricing for the year 2019 increased by 7% for oil and decreased by 37% for gas when comparing Sproule’s pricing assumptions included in the December 31, 2018 Sproule Report versus Sproule’s December 31, 2017 reserves report. The longer-term price forecast increased on average by 5% over the following 10 years for oil, and decreased on average by 19% for the following 10 years for gas when comparing Sproule’s pricing assumptions in the December 31, 2018 report versus the December 31, 2017 report.
Forecast Pricing and Foreign Exchange Rates (1)(2)(3)(4)(5)
Western Canada Select 20.5° API ($Cdn/bbl)(4)
Alberta AECO-C Spot ($Cdn/Mmbtu)(5)
Exchange Rate (2) ($US/$Cdn)
Edmonton Propane ($Cdn/bbl)
Edmonton Butane ($Cdn/bbl)
Edmonton Pentanes Plus ($Cdn/bbl)
Forecast(3)
2019
59.47
1.95
0.77
30.27
40.91
75.32
2020
62.31
2.44
0.80
34.51
50.25
80.00
2021
67.45
3.00
0.80
38.15
56.88
83.75
2022
69.53
3.21
0.80
39.64
58.01
85.50
2023
71.66
3.30
0.80
40.62
59.17
87.29
2024
73.10
3.39
0.80
41.62
60.36
89.11
Thereafter Escalation Rate of 2.0%
Notes:
This summary table identifies benchmark reference pricing schedules that might apply to a reporting issuer.
The exchange rate used to generate the benchmark reference prices in this table.
As at December 31, 2018.
The price received for the Company’s oil, which is considered to be Medium crude oil, has historically corresponded closely to Western Canada Select 20.5° API ($Cdn/Bbl), plus associated quality adjustments.
The price received for the Company’s natural gas has historically corresponded to AECO-C Spot pricing ($Cdn/MMBtu), adjusted for heat value and transportation.
Operations Update
Granite continues to manage volatility and uncertainty in the Canadian energy sector through conservative capital spending and by actively optimizing its EOR scheme and field operations. The Company has not drilled a well since early May of 2018 and spent only approximately $1.0 million in the second half of 2018 as it navigated extraordinarily high Western Canada Select (‘WCS’) discounts to West Texas Intermediate (‘WTI’) pricing.
In 2019, Granite will prioritize debt repayment with its significant free cash flow to rapidly deleverage. In just the first quarter, the Company expects to reduce net debt by approximately $3.0-3.5 million and is currently maintaining flexibility in its capital plan. Of significant advantage to the Company is its ability to create value with its highly efficient, effective and flexible EOR scheme with minimal capital. This is highlighted again by the capital efficiency at which Granite replaced its production and developed producing reserves in this past year. As the success of its 2018 wells has demonstrated, the Company has the ability to add significant production volumes quickly through drilling. Granite is ready to commence drilling but will continue to evaluate market conditions and be prudent in its capital spending.
Outlook
Granite is in a strong position with its large, early lifecycle oil pool, with an EOR program that is continuing to mature and prove itself, and having achieved some of its best drilling results to date in 2018. The Company will remain resilient to the current industry uncertainty while it continues to focus on maximizing long-term value for its shareholders.
2018 Year End Reporting
The Company will report its 2018 year end results on March 21, 2019.
For further information, please contact Michael Kabanuk, President & CEO, by telephone at (587) 349-9123, Devon Griffiths, COO, by telephone at (587) 349-9120, or Tyler Klatt, V.P. Exploration, by telephone at (587) 349-9125.
READER ADVISORIES
Forward-Looking Statements
This news release contains forward‐looking statements and forward‐looking information (collectively “forward‐looking information”) within the meaning of applicable securities laws relating to Granite’s plans, strategy, objectives and other aspects of Granite’s anticipated future operations and financial, operating and drilling plans and results. In addition, without limited the generality of the foregoing, this news release contains forward-looking information pertaining to the following: projections of market prices and costs, supply and demand for oil and natural gas, the quantity of reserves, oil and natural gas production levels, the success of the enhanced oil recovery scheme, capital expenditure programs, treatment under governmental regulatory and taxation regimes, expectations regarding Granite’s ability to raise capital and to continually add to reserves through acquisitions and development, projections of market prices and costs and plans, timing of filing of Granite’s annual information form and annual financial statements for the year ended December 31, 2018, and other matters ancillary or incidental to the foregoing.
All statements, other than statements of historical fact, may be forward-looking information. Forward-looking information is often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe” and similar expressions. The forward‐looking information is based on certain key expectations and assumptions made by Granite’s management, including: expectations concerning prevailing commodity prices, exchange rates, interest rates, applicable royalty rates and tax laws; capital efficiencies; legislative and regulatory environments of the jurisdictions where Granite carries on business or has operations; future production rates and estimates of operating costs; performance of existing and future wells; reserve and resource volumes; anticipated timing and results of capital expenditures; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the timing, location and extent of future drilling operations; the state of the economy and the exploration and production business; results of operations; performance; business prospects and opportunities; the availability and cost of financing, labour and services; the impact of increasing competition; ability to market oil and natural gas successfully and Granite’s ability to access capital on satisfactory terms.
Statements relating to “reserves” are also deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and that the reserves can be profitably produced in the future.
Although Granite believes that the expectations and assumptions on which such forward-looking information is based are reasonable, undue reliance should not be placed on the forward-looking information because no assurance can be given that they will prove to be correct. Since forward‐looking information addresses future events and conditions, by its very nature they involve inherent risks and uncertainties, including, but not limited to, volatility in the market prices for oil and natural gas; uncertainties associated with estimating reserves; uncertainties associated with Granite’s ability to obtain additional financing on satisfactory terms; geological, technical, drilling and processing problems; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; incorrect assessments of the value of acquisitions; competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel. Management has included the above summary of assumptions and risks related to forward-looking information provided in this news release in order to provide security holders with a more complete perspective on Granite’s future operations and such information may not be appropriate for other purposes. Granite’s actual results, performance or achievement could differ materially from those expressed in, or implied by, the forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward‐looking information will transpire or occur, or if any of them do so, what benefits that Granite will derive there from.
Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect Granite’s operations or financial results 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 information contained in this new release represents Granite’s views as of the date of this document and such information should not be relied upon as representing its views as of any date subsequent to the date of this document. Granite has attempted to identify important factors that could cause actual results, performance or achievements to vary from those current expectations or estimates expressed or implied by the forward-looking information. However, there may be other factors that cause results, performance or achievements not to be as expected or estimated and that could cause actual results, performance or achievements to differ materially from current expectations. Except as required by applicable securities laws, Granite undertakes no obligation to publicly update or revise any forward-looking information.
Unaudited Financial Information and Non-GAAP Measures
Certain financial and operating information included in this news release are based on estimated unaudited financial results for the year ended December 31, 2018 and are subject to the same limitations as discussed under “Forward-Looking Statements” set out above. These estimated amounts are subject to change upon the completion of the audited financial statements for the year ended December 31, 2018 and changes could be material. Granite anticipates filing its audited financial statements and related management’s discussion and analysis for the year ended December 31, 2018 on SEDAR on March 21, 2019.
This document contains the terms “net debt” and “operating netback” which are defined in the Company’s Management’s Discussion and Analysis (the “MD&A”) for the nine months ended September 30, 2018. Management uses these financial measures to analyze operating performance and leverage. These measures do not have any standardized meaning prescribed by International Financial Reporting Standards (“IFRS”) and therefore may not be comparable with the calculation of similar measures for other companies. Granite feels these benchmarks are key measures of overall sustainability.
Information Regarding Disclosure on Oil and Gas Reserves
The reserves data set forth above is based upon an independent reserves assessment and evaluation prepared by Sproule with an effective date of December 31, 2018 (the “Sproule Report”). The information contained in this news release summarizes the Company’s crude oil, natural gas liquids and natural gas reserves and the net present values before income tax of future net revenue for the Company’s reserves using forecast prices and costs based on the Sproule Report. Additional disclosure required by NI 51-101 will be provided in the Company's Annual Information Form, which Granite intends to file on SEDAR at www.sedar.com by the close of business on March 29, 2018.
All reserve references in this news release are “Company share reserves”. “Company share reserves” are the Company’s total working interest reserves before the deduction of any royalties and including any royalty interests of the Company.
The Sproule Report has been prepared in accordance with the standards contained in the COGE handbook and the reserve definitions contained in NI 51-101. All evaluations and reviews of future net cash flows are stated prior to any provisions for interest costs or general and administrative costs and after the deduction of estimated future capital expenditures for wells to which reserves have been assigned. It should not be assumed that the estimates of future net revenues presented in the tables above represent the fair market value of the reserves. There is no assurance that the forecast prices and cost assumptions will be attained and variances could be material. The recovery and reserve estimates of the Company’s crude oil, natural gas liquids and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual crude oil, natural gas and natural gas liquids reserves may be greater than or less than the estimates provided herein. All future net revenues are estimated using forecast prices, arising from the anticipated development and production of the Company’s reserves, net of the associated royalties, operating costs, development costs, and abandonment and reclamation costs and are stated prior to provision for interest and general and administrative expenses. Future net revenues have been presented on a before tax basis. Estimated values of future net revenue disclosed herein do not represent fair market value.
Oil and Gas Metrics
This news release contains metrics commonly used in the oil and natural gas industry, such as “recycle ratio”, “operating netback”, “finding and development (“F&D”) costs”, and “development capital”. These terms do not have a standardized meaning and may not be comparable to similar measures presented by other companies, and therefore should not be used to make such comparisons. Management uses oil and gas metrics for its own performance measurements and to provide shareholders with measures to compare Granite’s operations over time. Readers are cautioned that the information provided by these metrics, or that can be derived from the metrics presented in this news release, should not be relied upon for investment or other purposes.
“Finding and development costs” are calculated as the sum of development capital plus the change in FDC for the period divided by the change in reserves that are characterized as development for the period. Finding and development costs take into account reserves revisions during the year on a per boe basis. The aggregate of the exploration and development costs incurred in the financial year and changes during that year in estimated future development costs generally will not reflect total finding and development costs related to reserves additions for that year.
“Development capital” means the aggregate exploration and development costs incurred in the financial year on reserves that are categorized as development. Development capital presented herein excludes land, acquisition and capitalized administration costs.
“Recycle ratio” is measured by dividing the operating netback by F&D cost per boe for the year.
“Operating netback” is calculated using production revenues minus royalties and production expenses calculated on a per boe basis.
BOE Presentation
References herein to “boe” mean barrels of oil equivalent derived by converting gas to oil in the industry-accepted standard conversion ratio of six thousand cubic feet (Mcf) of gas to one barrel (bbl) of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf:1 bbl is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
