InPlay Oil Corp. has released its financial and operating results for the three and 12 months ended Dec. 31, 2019, and the results of its independent oil and gas reserves evaluation effective Dec. 31, 2019, prepared by Sproule Associates Ltd. InPlay’s audited annual financial statements and notes, as well as Management’s Discussion and Analysis (“MD&A”) for the year ended December 31, 2019 will be available at “www.sedar.com” and our website at “www.inplayoil.com”.
Message to Shareholders:
InPlay’s strategy has always been to operate a smart, prudent, and well run junior light oil focused Company that has the ability to provide growth through its strong technical expertise and generate top tier efficiencies in finding reserves and adding production. This has been done while being flexible in executing our capital program and in operations where we have continually been reacting to the extremely volatile commodity price environment that our industry has endured over the last six plus years.
The Company continued to deliver exceptional operational and financial results, delivering 7% production per share growth in 2019 over 2018, achieving our annual average production guidance of 5,000 – 5,200 boe/d, notwithstanding the sale of 250 boe/d in the fourth quarter of 2018. This average production was achieved while reducing our planned capital expenditures by 11% in the fourth quarter of 2019 which resulted in spending less than adjusted funds flow (“AFF”)(1) for 2019, adhering to our approach of being adaptable and maintaining financial flexibility. A 10% reduction in operating costs per boe and an increased operating income profit margin(1) of 6% in 2019 over 2018 was achieved, generating a 20% increase in AFF for the year over 2018 to $32.5 million in 2019. These results were achieved within a reduced pricing environment resulting in a corporate realized price of $41.11/boe in 2019 compared to $45.00/boe in 2018, due to lower West Texas Intermediate (“WTI”) and natural gas liquids (“NGL”) pricing in the year.
InPlay continued to leverage our proven track record of drilling efficiency and operational expertise, setting industry pacesetting drilling times for horizontal wells in our Willesden Green and Pembina core areas. Production results and costs continued to be better than our expectations. The Company is focused on project economics where we drill, complete and equip wells, and build adaptable, fit for purpose, modular infrastructure for the full development of a specific area. The results of our project based economics combined with our technical expertise and focused execution of our capital projects provided expected top tier efficiencies including finding and development costs of $13.98, $7.92 and $7.82 in proved developed producing (“PDP”), total proved (“TP”) and total proved plus probable (“TPP”) reserve categories respectively. This equates to recycle ratios of 1.6, 2.9 and 2.9 in all three respective categories and achieves capital efficiencies in adding producing barrels of $18,387 per boe/d in 2019 which matches our three year average of $18,390 per boe/d. These are all expected to be competitive with top tier efficiencies amongst our light oil peers.
The beginning of 2020 was looking very promising for the energy industry with stability in world oil prices and several industry agencies predicting that demand would outpace supply at some point during the upcoming year. These are unprecedented times and conditions have changed quickly with concerns of demand destruction due to the COVID – 19 outbreak. In addition, a crude oil price war was initiated between certain OPEC+ members resulting in a quick and severe drop in world oil prices. InPlay’s response to these events will be to continue its approach of maintaining prudence and financial flexibility with a focus on preserving value and the balance sheet. Refer to the Outlook section for further details of our reaction and plans, to address the current economic situation.
InPlay is a nimble, focused Company that has always reacted quickly to volatility in challenging environments. The current situation we are facing is no exception. The Company will be diligent and responsive to react quickly and resume our capital program once the pricing environment improves. As we face these difficult circumstances we would especially like to thank our many dedicated shareholders, our dedicated staff and our strong and vested Board of Directors for their guidance and support.
Generated AFF(1) of $32.5 million ($0.48 per basic and diluted share) during 2019, an increase of 20% compared to $27.0 million ($0.40 per basic and diluted share) in 2018.
InPlay has always been focused on the prudent and efficient deployment of capital. This is evident in the exceptional finding and development costs incurred, and associated recycle ratios, in developing new reserves, and the strong capital efficiencies in adding new producing barrels. These metrics are expected to be top tier amongst our light oil peers:
degree Finding and development (“F&D”)(2) and finding, development and acquisition (“FD&A”)(2) costs of $13.98/boe, $7.92/boe, and $7.82/boe for PDP, TP and TPP reserve categories respectively.
degree Strong recycle ratios(2) of 1.6 (PDP), 2.9 (TP) and 2.9 (TPP)
degree Generated capital efficiency(2) of $18,387 per boe/d in 2019 which substantially equals our average of $18,390 over the last three years.
Averaged annual 2019 production of 5,000 boe/d, an increase of 7% compared to 4,653 boe/d in 2018, achieving our annual production guidance of 5,000 – 5,200 boe/d which was increased in August 2019 due to the excellent drilling results during the year which exceeded our expectations.
Production growth was achieved notwithstanding the sale of approximately 250 boe/d of non-core producing assets late in 2018 and an 11% reduction to originally forecasted 2019 capital spending.
Continued focus on efficiencies resulted in operating cost rates decreasing 10% to $14.36/boe in 2019 compared to $16.02/boe in 2018.
Operating income profit margin(1) of 55% was generated in 2019 compared to 52% in 2018, an increase of 6% which was achieved even with a 9% decrease in our overall realized prices per boe received over the same respective periods.
Achieved PDP reserve growth of 4% and TPP reserve growth of 1% resulting in 120% and 113% replacement of production respectively.
Returns on the reduced capital program resulted in 15% reduction in the Company’s annual Net Debt / AFF(2) ratio of to 1.7 times for 2019 compared to 2.0 times in 2018.
Financial and Operating Results ($000's) Three months ended Dec. 31 Year ended Dec. 31 2019 2018 2019 2018 Financial (CDN$) Oil and natural gas sales 18,425 12,716 75,025 76,419 Funds flow 7,592 1,441 30,984 25,800 Per share - basic and diluted 0.11 0.02 0.45 0.38 Per boe 16.51 3.12 16.98 15.19 Adjusted funds flow(1) 7,846 1,721 32,541 27,040 Per share - basic and diluted(1) 0.11 0.03 0.48 0.40 Per boe(1) 17.06 3.73 17.83 15.92 Comprehensive income (loss) (18,892) (7,887) (26,842) (8,598) Per share - basic and diluted (0.28) (0.12) (0.39) (0.13) Exploration and development capital expenditures 4,574 6,954 32,106 50,206 Property acquisitions/(dispositions) 14 (17,305) 93 (21,470) Net debt (55,170) (53,670) (55,170) (53,670) Operational Daily production volumes Light and medium crude oil (bbls/d) 2,466 2,937 2,626 2,756 Natural gas liquids (boe/d) 869 573 697 492 Natural gas (Mcf/d) 9,978 9,065 10,058 8,431 Total (boe/d) 4,998 5,021 5,000 4,653 Realized prices Light and medium crude oil & NGLs ($/bbls) 52.54 35.09 56.59 60.49 Natural gas ($/Mcf) 2.51 1.66 1.74 1.53 Total ($/boe) 40.07 27.53 41.11 45.00 Operating netbacks ($/boe)(1) Oil and natural gas sales 40.07 27.53 41.11 45.00 Royalties (2.32) (2.43) (3.19) (4.72) Transportation expense (0.67) (1.00) (0.81) (0.83) Operating costs (15.38) (15.26) (14.36) (16.02) Operating netback 21.70 8.84 22.75 23.43 Realized gain (loss) on derivative contracts 0.00 (0.66) 0.01 (2.42) Operating netback (including realized derivative contracts) 21.70 8.18 22.76 21.01
2019 Financial & Operations Overview
InPlay delivered another year of exceptional operational results while successfully responding to commodity price challenges facing the industry. InPlay achieved organic drill bit production growth of 7% over 2018 despite an 11% reduction in originally planned capital spending to accommodate lower commodity prices than originally forecasted. The Company continues to focus on operational efficiencies which resulted in a 10% reduction to operating costs to $14.36/boe in 2019 from $16.02/boe in 2018 and a 6% increase in operating income profit margin to 55% in 2019 from 52% in 2018 (which had higher realized prices). Prudent decision making on the timing of capital expenditures, continued drilling proficiency in our Willesden Green and Pembina core areas and a strong focus on operational efficiencies allowed InPlay to generate AFF in excess of capital spending and increased AFF by 20% to $32.5 million in 2019 from $27.0 million in 2018. This growth in the year was achieved without any share dilution and positioned the Company with a solid net debt / adjusted funds flow ratio of 1.7 for 2019 compared to 2.0 in 2018.
InPlay’s 2019 capital program consisted of $32.1 million of development capital, focused on drilling wells in our Willesden Green and Pembina Cardium areas, and was less than AFF for the year. The Company drilled 10 (5.2 net) extended reach horizontal (“ERH”) wells and three (3.0 net) one-mile horizontal wells during the year ended December 31, 2019, amounting to an equivalent of 22 gross horizontal miles (11.8 net horizontal miles) and completed two (2.0 net) ERH wells that were drilled in the fourth quarter of 2018. Eight (4.8 net) ERH wells were drilled in Willesden Green and three (3.0 net) horizontal wells were drilled in Pembina.
The results noted above were achieved in light of negative market factors that affected Natural Gas Liquids (“NGLs”) prices during 2019. Revenues were impacted by multi-year lows in NGL prices beginning at the start of the second quarter of 2019 which caused a 50% reduction in realized NGL prices to $19.02/boe in 2019 from $38.27/boe in 2018, following continued propane and butane price reductions. These lower NGL prices in addition to lower WTI prices resulted in a 9% reduction in total realized prices in 2019 compared to 2018. InPlay prudently reacted to these deteriorating prices by reducing 2019 capital expenditures by 11% compared to our initial forecast in order to generate AFF that was in line with total capital expenditures.
2019 Reserve Highlights:
The strong performance of the Company’s assets, specifically in the Willesden Green and Pembina areas is highlighted by increased PDP year-end reserves by 4% to 8,718 mboe. Following are the 2019 year-end reserve highlights derived from the Sproule Report:
PDP increased 4% to 8,718 mboe (63% light crude oil & NGLs) TP decreased 2% to 18,573 mboe (69% light crude oil & NGLs) TPP increased 1% to 27,295 mboe (71% light crude oil & NGLs)
F&D and FD&A Costs per boe(1):
PDP F&D and FD&A costs were $13.98 TP F&D and FD&A costs were $7.92 TPP F&D and FD&A costs were $7.82
PDP was 1.6 times TP was 2.9 times TPP was 2.9 times
PDP replacement was 120% TP replacement was 84% TPP replacement was 113%
PDP reserve life index of 4.8 years TP reserve life index of 10.2 years TPP reserve life index of 15.0 years
Growth was achieved in year-end reserves, however decreases in WTI, natural gas and NGL pricing combined with additional Abandonment, Decommissioning and Reclamation (“ADR”) costs recognized as a result of changes to the Canadian Oil and Gas Evaluation Handbook (“COGEH”) resulted in reductions to 2019 year-end reserve net present values (“NPV”) of future net revenues and year-end net asset values (“NAV”)(2):
NAV based on NPV before tax discounted at 10% (“NPV 10 BT”)(3):
PDP NAV of $116 mm equating to $1.70 per basic share TP NAV of $196 mm equating to $2.87 per basic share TPP NAV of $311 mm equating to $4.56 per basic share
These results were accomplished despite the following changes in Sproule’s year over year price assumptions:
WTI prices dropping 9%, and 7% in years 1 and 2 respectively and 6% for the remaining years. Propane prices dropping 27% and 17% in years 1 and 2 respectively and 18% for the remaining years. Butane prices dropping 25% and 23% in years 1 and 2 respectively and 18% for the remaining years. AECO spot gas prices dropping 16% and 24% in years 1 and 2 respectively and 12% for the remaining years. NPV 10 BT in all reserve categories includes approximately $4.3 million ($0.06 per share) of additional future ARO compared to 2018 as recommended in COGEH’s 2019 industry guidelines.
Corporate Reserves Information:
The following summarizes certain information contained in the Sproule Report. The Sproule Report was prepared in accordance with the definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook (the “COGE Handbook”) and National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (“NI 51-101”). 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 the end of March 2020.
December 31, 2019 Light and Medium ConventionalOil BTAX NPVFuture DevelopmentNetUndeveloped Reserves Category(1)(2)(3)(4)(5) Crude Oil NGLs Natural Gas Equivalent 10 % Capital Wells Mbbl Mbbl MMcf MBOE ($000's) ($000's) Booked Proved developed producing 4,002.81,486.7 19,370 8,717.8 108,937 - - Proved developed non-producing 165.9 16.8 289 230.9 3,743 560 - Proved undeveloped 6,082.31,042.8 14,998 9,624.7 76,427 166,649 81.7 Total proved 10,251.02,546.3 34,657 18,573.4 189,108 167,209 81.7 Probable developed producing 1,041.1 370.6 4,839 2,218.4 21,159 - - Probable developed non-producing 157.6 26.2 410 252.1 5,142 102 - Probable undeveloped 4,235.2 621.6 8,366 6,251.2 88,880 57,723 26.6 Total probable 5,434.01,018.5 13,616 8,721.7 115,182 57,825 26.6 Total proved plus probable(6) 15,684.93,564.7 48,273 27,295.1 304,289 225,034 108.3
InPlay began the 2020 capital program drilling one (1.0 net) ERH horizontal Willesden Green well and three (3.0 net) horizontal Pembina wells in the first quarter of 2020. The Company also recompleted and commissioned a water disposal well in Pembina which is expected to provide long term savings in the area. All wells drilled in the first quarter have been completed and placed on production albeit at lower ramp up rates than would normally occur, as a result of the current low oil price.
In January of 2020, the Company’s Board of Directors had approved a 2020 capital program of $35 million which was less than projected AFF on WTI futures pricing of $57 USD/bbl. With the significant drop and volatility in world crude oil prices as a result of the COVID – 19 outbreak and the corresponding oil price war, consistent with past practices the Company will manage its spending and adjust the capital program accordingly throughout 2020 and no longer has plans for capital spending of $35 million. InPlay has completed its first quarter capital program and only minimal capital spending is expected over the second quarter during spring break-up. As such, no major capital spending decisions are being made at this time. Capital planning decisions for the second half of 2020 and any updated forecasts will be made in due course in consideration of forecasted AFF reflecting the prevailing commodity prices at that time.
The Company’s low decline rate, strong operating netbacks, top-tier capital efficiencies, lack of drilling commitments and primarily operated capital program provide flexibility in this volatile market. Efforts have been initiated to optimize operations in order to minimize costs and preserve value for the Company. All operations will be thoroughly vetted to optimize corporate cash flows which may include shutting in any wells that that will not generate positive cash flow under current prices (net of fixed cost considerations). Further operating and corporate cost efficiencies will also be pursued in consideration of the current pricing environment.
We seek Safe Harbor.