Crown Point Announces Operating and Financial Results for the Three and Nine Months Ended September 30, 2016, CEO Change and Additional Cost Reduction Measures
TSX-V: CWV: Crown Point Energy Inc. (“Crown Point”, the “Company” or “we“) (TSX VENTURE:CWV) today announced its operating and financial results for the three and nine months ended September 30, 2016, the retirement of its CEO and additional cost reduction measures.
Copies of the Company’s unaudited condensed interim consolidated financial statements and Management’s Discussion and Analysis (“MD&A“) for the three months and nine months ended September 30, 2016 are being filed with Canadian securities regulatory authorities and will be made available under the Company’s profile at www.sedar.com and on the Company’s website at www.crownpointenergy.com. All dollar figures are expressed in United States dollars (“USD“) unless otherwise stated.
CEO CHANGE AND COST-REDUCTION MEASURES
Mr. Murray McCartney, who has served as the Company’s President and Chief Executive Officer since 2009, will retire as an officer and director of the Company effective today. Dr. Brian Moss, the Company’s Executive Vice-President and Chief Operating Officer, has been appointed as Mr. McCartney’s replacement. The Board does not intend to fill Dr. Moss’ existing position as those duties will be shared by Dr. Moss and other members of management.
“On behalf of our Board of Directors and staff, I would like to thank Murray for his dedicated service to the Company and wish him every success in his future endeavors,” said Gordon Kettleson, Crown Point’s Chairman. “Dr. Moss has more than 4 years of experience serving as an officer of Crown Point, more than 16 years of experience in the Argentine oil and gas industry, and more than 31 years of experience in the oil and gas industry in North and South America, including in the areas of exploration and exploitation, asset evaluation and business development. He has successfully built and managed operations in the San Jorge, Austral, Neuquén and Northwest Basins of Argentina. Dr. Moss also has significant public company experience. As a result, the Board is confident that Brian is well positioned to lead the Company going forward.”
It is anticipated that Dr. Moss will spend a considerable amount of his time in Argentina working with the Company’s Argentine staff, including the Company’s CFO who is now based out of Argentina. As a result, the Company has made the decision to close its Calgary office as a part of its ongoing cost-reduction initiatives. Although the Company will incur charges in the fourth quarter in connection with these changes, the Company estimates that the reduction of its head count in Calgary and the closure of the Calgary office will reduce the Company’s general and administrative costs by approximately $0.4 million in 2017.
Tierra del Fuego Concession
The Company identified a number of older producing and non-producing wells on the Las Violetas concession as candidates for fracture stimulation during 2016. Four wells were selected for treatment in 2016 and all have been fracture stimulated. Of these, two wells have been returned to production (one in late August) and two wells will undergo chemical treatments in 2017 to improve inflow.
- LV-104, an older producing gas well offsetting LV-112, was successfully fracture stimulated in April 2016 and placed back on production.
- El Monte-2 (EM-2), located immediately to the west of the San Luis Field, was fracture stimulated in March 2016. This well was drilled and cased by YPF and tested gas from the Springhill Formation in the 1970s before being suspended. The well was tied-in to the San Luis field gathering system and placed on production in August 2016.
- LVx-4, a shut in gas well offsetting LV-104 and LV-112, was fracture stimulated in June 2016. On cleanup, only small volumes of gas plus frac fluid were recovered and the well was suspended. A chemical treatment will be carried out in 2017 to remove near wellbore emulsion buildup and improve inflow.
- RCh-6, a shut in oil and gas well located on the eastern flank of the Los Patos pool, was fracture stimulated in early July 2016. On clean up, swabbing operations recovered some frac fluid with oil and gas shows. The Company is planning to carry out a chemical treatment in 2017 to help improve inflow.
Prospect identification and evaluation to develop additional exploitation, step out and appraisal locations on the Las Violetas Concession is ongoing.
Cerro de Los Leones Exploration
The Company has a 100% working interest in the 100,907 acre area covered by the Cerro de Los Leones (“CLL“) Concession Permit, which is located in the northern portion of the Neuquén Basin in the Province of Mendoza, Argentina.
In late 2015, the Company re-entered two wells in the Vega del Sol area that had been previously drilled by YPF and subsequently abandoned when YPF relinquished the acreage.
VdS x-3 was re-entered in November 2015 and three additional sand zones within the Neuquén Group were perforated, stimulated and tested. The well was then placed on an 80 hour production test with all perforated zones co-mingled. During the test period, the well flowed gas, oil and water at restricted rates of 665 Mcf per day of gas, 10 bbls per day of oil plus 18 bbls per day of treatment fluid and formation water. Total gross production during the test was 1.75 MMcf of gas and 90 bbls of liquids comprised of 35% oil and 65% treatment fluid and water. The well has been suspended as a potential oil and gas producer. A decision as to whether the Company will place this well on long-term test by pipelining the production through the VdS x-1 facilities (see below) has been delayed until production testing of the VdS x-1 well has been completed.
VdS x-1 was re-entered in December 2015 to swab test the fractured igneous sill in the Chachao formation. Swabbing operations continued for 3 days at the end of which time a stabilized production rate of 8.9 bbls of oil per hour or 215 bbls per day (zero water cut) was achieved. A total of 145.8 bbls of oil and 497.6 bbls of treatment water were recovered. The well was suspended while a pump jack, tanks and separator were installed at the well site. Installation was completed in April 2016 after which the well was placed on long-term production test. During the first week of testing the well flowed gas with little fluid inflow. Testing operations were suspended, and in May 2016 the pump was pulled and de-emulsifier was pumped into the reservoir to clear any near bore emulsion blockage. The pump was re-run and in early June 2016, the well was placed back on long-term production test. During June and July 2016, the well produced at an average rate of 12 barrels of fluid per day with a 75% oil cut (9 bopd), however production levels have continued to drop and the average production rate for Q3 2016 was 1.5 bopd with little or no water. The well was shut in on October 27, 2016. Additional analysis of the reasons for the restricted inflow has been undertaken. Other operators have reported similar performance issues in local wells producing from this reservoir type which were remedied by a limited fracture stimulation designed to prop open the natural fracturing in the intrusive immediately around the perforated interval. The Company believes that the fractures are not naturally propped and can close as the reservoir pressure near the well drops due to production, thus impeding fluid flow from further back in the pool. Crown Point has elected to employ this treatment in an effort to improve production rates at VdS x-1. The design of the frac program has been completed and is budgeted at $0.5 million. The Company is planning to perform this workover in late 2016, subject to equipment availability. The Company is also considering seeking a partner in the Vega del Sol project to share future capital costs as well as providing some capital cost recovery on prior project capital costs.
Crown Point estimates a total of $2.3 million of capital expenditures for the fourth quarter of 2016 and $9.0 million for the first half of 2017 comprised of $3.9 million on the Tierra del Fuego (“TDF“) concessions and $7.4 million on the CLL concession. Crown Point expects to meet these obligations, along with its other anticipated expenses, using funds flow from operations, working capital which totaled approximately $1.1 million at the end of Q3 2016 and the receipt of publicly traded government of Argentina bonds in satisfaction of outstanding certificates owing to the Company under the cancelled Petróleo Plus Program (approximately US$1.9 million) as well as additional debt and/or equity financings.
The Company anticipates the following activities to occur during the fourth quarter of 2016 and first half of 2017 at a total estimated cost of $11.3 million:
- Workover of Vega del Sol x-1 well. Future capital programs at CLL will be determined after a full evaluation of the results of the workover has been completed.
- Acquisition of 234 km2 of 3-D seismic on the CLL concession to fulfill the work commitment for the second exploration period.
- Reprocessing of a subset of the CLL 3-D seismic to high grade possible development locations on the Vega del Sol structure.
- Completion of geological and seismic work to build a drilling inventory on the Rio Chico and Los Flamencos eastern extensions, Puesto Quince and the south flank of the Las Violetas gas pool.
- Drilling of one exploration well on each of the Rio Cullen and Angostura concessions in TDF.
Management is taking a prudent approach to discretionary spending and will continue to review the Company’s cost structure to reduce expenses and improve efficiencies where possible.
Domestic oil pricing policy has been influenced by the worldwide collapse in international oil prices. The stated intent of the Government is to allow domestic oil pricing to be coupled with international benchmarks. At the outset the Government was reluctant to allow domestic oil pricing to fall precipitously as it was concerned that this could result in a severe downturn in the industry, which in turn could trigger extensive layoffs, social unrest and disruptions, but in fact oil prices are getting closer to international prices faster than anticipated. The Government had therefore entered into a new oil pricing scheme for 2016 which fixed domestic oil prices approximately US$10 per barrel lower than the previous pricing scheme, which expired on December 31, 2015. However in August 2016, the Government reached an unofficial agreement with the major oil companies to reduce the internal Argentine oil price by an additional 2% per month between August and October and it is expected that another price adjustment will occur in December 2016. As a result, the Company expects to receive an average of US$47 per barrel for its TDF oil in Q4 2016.
On March 29, 2016, the Ministry of Energy and Mines issued Resolutions 28/2016 and 34/2016 which set new natural gas prices as of April 1, 2016. The TDF natural gas price for residential sales was expected to be approximately $2.66 to $4.25 per Mcf, depending on certain variables.
On June 6, 2016, the Ministry of Energy and Mines issued Resolution 99/2016 which established a 400% increase limit for residential users and a 500% increase limit for small and medium-sized companies on prices set before the issuance of Resolutions 28/2016 and 34/2016.
On July 12, 2016, the Ministry of Energy and Mines issued Resolution 129/2016 which modified Resolution 99/2016 and clarified that the 400% increase limit for residential users and the 500% increase limit for small and medium-sized companies related to prices set in the comparative period, not to prices set before the issuance of Resolutions 28/2016 and 34/2016.
Consumers, including residential consumers and small businesses, were upset by these proposed increases and initiated class action suits blocking the mandated increases.
On October 6, 2016, the Ministry of Energy and Mines issued Resolution 212/2016 which specified that new prices for residential users will commence October 7, 2016 with a 300% to 400% increase limit to prices set in the comparative period of the previous year, depending on the type of residential user, and a 500% increase limit for small and medium-sized companies.
As a result, the Company adjusted its previous estimates of residential gas prices charged to customers to reflect the prices that were in effect before the aforementioned Resolutions were issued, and has determined its estimates for gas prices for periods after Resolution 212/2016 came into effect on October 7, 2016. The Company now estimates that it will receive an average gas price of $3.75/mcf during 2017.
SUMMARY OF FINANCIAL INFORMATION
|(expressed in $, except shares outstanding)||September 30
|Exploration and evaluation assets||8,701,802||7,731,691|
|Property and equipment||27,765,439||32,250,082|
|Non-current financial liabilities (1)||591,651||1,253,469|
|Total common shares outstanding||164,515,222||164,515,222|
|(expressed in $, except shares outstanding)||Three months ended||Nine months ended|
|September 30||September 30|
|Oil and gas revenue||2,993,957||3,447,010||10,448,351||11,376,759|
|Net loss per share (2)||(0.01||)||(0.01||)||(0.03||)||(0.03||)|
|Cash flow from (used by) operations||(326,872||)||241,054||1,119,100||153,302|
|Cash flow per share – operations (2)||(0.00||)||0.00||0.01||(0.00||)|
|Funds flow from operations (3)||290,727||109,818||2,032,214||524,403|
|Funds flow per share -operations (2)(3)||0.00||0.00||0.01||0.00|
|Weighted average number of shares||164,515,222||164,515,222||164,515,222||152,855,201|
|(1)||Non-current financial liabilities are comprised of bank debt. The total amount outstanding at September 30, 2016 is $1,780,350 of which $1,191,699 is classified as current and $591,651 is long-term (December 31, 2015 – $2,416,186; $1,162,717 current and $1,253,469 long-term).|
|(2)||All per share figures are based on the basic weighted average number of shares outstanding in the period. The effect of options is anti-dilutive in loss periods. Per share amounts may not add due to rounding.|
|(3)||“Funds flow from operations” and “Funds flow per share” are non-IFRS measures. See Non-IFRS Measures for a reconciliation of these measures to the nearest comparable IFRS measures.|
TDF Operating Netback
The Company’s operating netback improved in Q3 2016 as compared to Q3 2015 due primarily to a decrease in per BOE amounts for operating costs.
|Three months ended||Nine months ended|
|September 30||September 30|
|Sales Volumes and Revenues||2016||2015||2016||2015|
|Light oil bbls per day||136||124||215||203|
|NGL bbls per day||31||42||25||22|
|Natural gas Mcf per day||6,806||7,713||6,963||7,435|
|BOE per day||1,301||1,452||1,400||1,464|
|Oil and gas revenue ($)||25.02||25.80||27.24||28.46|
|Operating costs ($)||(9.79||)||(11.28||)||(10.01||)||(11.05||)|
|Operating netback ($)||10.53||10.06||12.25||12.45|
TDF Sales and Production Volumes
During Q3 2016, the Company’s average daily sales volumes were 1,301 BOE per day, down 10% from 1,439 BOE per day in Q2 2016 due mainly to lower sales of inventoried volumes of oil and down 10% from 1,452 BOE per day in Q3 2015 due to lower sales of gas volumes in Q3 2016.
TDF average daily production volumes for Q3 2016 averaged 1,376 BOE per day, down 2% from 1,406 BOE per day in Q2 2016 and down 12% from 1,555 BOE per day in Q3 2015. The decrease in Q3 2016 daily production volumes is due to the natural decline of wells.
Operating costs were $9.79 per BOE in Q3 2016 as compared to $11.28 per BOE in Q3 2015 due in part to the effect of the devaluation of the ARS against the USD. During the year ended December 31, 2015, the ARS declined 53% against the USD and declined a further 19% during the September 2016 period. The majority of the devaluation has occurred since December 16, 2015, the date currency controls were lifted. A portion of the Company’s operating costs, including rates for field personnel and trucking, are set and settled in ARS based on the ARS to USD exchange rate at a particular point in time. Rates are subsequently adjusted in the event of significant changes in the ARS to USD exchange rate.
General and Administrative (“G&A”) Expenses
G&A expenses were 33% and 37% lower in Q3 2016 and the first nine months of 2016, respectively, than the comparative 2015 periods. The decrease in 2016 G&A expenses is due to a reduction in staffing levels, lower professional fees and other efficiencies and cost savings achieved in the Canadian and Argentina offices combined with the effect of the devaluation of the ARS against the USD which reduced certain ARS denominated expenses.
About Crown Point
Crown Point Energy Inc. is an international oil and gas exploration and development company headquartered in Calgary, Canada, incorporated in Canada, trading on the TSX Venture Exchange and operating in South America. Crown Point’s exploration and development activities are focused in two of the largest producing basins in Argentina, the Austral basin in the province of Tierra del Fuego and the Neuquén basin, in the province of Mendoza. Crown Point has a strategy that focuses on establishing a portfolio of producing properties, plus production enhancement and exploration opportunities to provide a basis for future growth.
Certain Oil and Gas Disclosures: Barrels of oil equivalent (BOE) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet (6 Mcf) to one barrel (1 bbl) is based on an energy equivalency 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 in Argentina as compared to the current price of natural gas in Argentina 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. “Mcf” means thousand cubic feet. “Mmcf” means million cubic feet. “bbls” means barrels. “bopd” means barrels of oil per day. “km” means kilometers. “2-D” means two dimensional. “3-D” means three dimensional. “Q2” means the second quarter. “Q3” means the third quarter.
Non-IFRS Measures: This press release contains the term “funds flow from (used by) operations” which should not be considered an alternative to, or more meaningful than, operating cash flows from (used by) operations as determined in accordance with IFRS as an indicator of the Company’s performance. Funds flow from (used by) operations and funds flow from (used by) operations per share (basic and diluted) do not have any standardized meanings prescribed by IFRS and may not be comparable with the calculation of similar measures used by other entities. Management uses funds flow from (used by) operations to analyze operating performance and considers funds flow from (used by) operations to be a key measure as it demonstrates the Company’s ability to generate cash necessary to fund future capital investment. Funds flow from (used by) operations per share is calculated using the basic and diluted weighted average number of shares for the period consistent with the calculations of earnings per share. A reconciliation of funds flow from (used by) operations to cash flows from (used by) operations is presented in the Q3 MD&A which will be made available under the Company’s profile at www.sedar.com.
This press release also contains other industry benchmarks and terms, including “operating netbacks” (calculated on a per unit basis as oil, natural gas and NGL revenues less royalties, transportation and operating costs), which is a non-IFRS measure. Management believes this measure is a useful supplemental measure of the Company’s profitability relative to commodity prices. Readers are cautioned, however, that operating netbacks should not be construed as an alternative to other terms such as net income as determined in accordance with IFRS as measures of performance. Crown Point’s method of calculating this measure may differ from other companies, and accordingly, may not be comparable to similar measures used by other companies.
Forward-looking information: Certain information set forth in this document is considered forward-looking information, including: under “CEO Change and Cost-Reduction Measures”, the Company’s estimate for G&A cost reductions in 2017 arising as a result of recent restructuring measures; under “Operational Update – Tierra del Fuego Concession”, the operations that the Company intends to conduct on certain of its TDF assets and the planned timing thereof and the benefits that the Company expects to derive therefrom; under “Operational Update – Cerro de Los Leones Exploration”, the operations that the Company intends to conduct on certain of its CLL assets and the expected timing thereof and the benefits that the Company expects to derive therefrom and the budget for certain expenditures and the intention to seek a partner for the Vega del Sol project; under “Outlook – Capital Spending”, our estimated capital expenditures for the fourth quarter of 2016 and the first half of 2017 and the allocation of expenditures between our TDF and CLL Concessions, the elements of our capital program for these periods, our estimates of the costs to complete the elements of the program and the timing thereof, and our expectations for how we will fund our capital programs; under “Outlook – Commodity Prices”, our expectations regarding the impact that the Argentine government’s evolving energy policies and reforms may have on commodity prices in Argentina, including the Company’s estimates with respect to its realized commodity prices for the fourth quarter of 2016 and 2017.
Forward-looking information necessarily involves risks and uncertainties, certain of which are beyond Crown Point’s control. Such risks include but are not limited to: risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation; risks associated with operating in Argentina, including risks of changing government regulations (including the adoption of, amendments to, or the cancellation of government incentive programs or other laws and regulations relating to commodity prices, taxation, currency controls and export restrictions, in each case that may adversely impact Crown Point), risks that new government initiatives will not have the consequences the Company believes (including the benefits to be derived therefrom), the risk that the Company may not receive any bonds in consideration of its Petróleo Plus and Gas Plus credits, expropriation/nationalization of assets, price controls on commodity prices, inability to enforce contracts in certain circumstances, the potential for a hyperinflationary economic environment, and other economic and political risks; loss of markets and other economic and industry conditions; volatility of commodity prices; currency fluctuations; imprecision of reserve estimates; environmental risks; competition from other producers; inability to retain drilling, fracturing and other services at economic prices or at all; incorrect assessment of value of acquisitions and failure to realize the benefits therefrom; delays resulting from or inability to obtain required regulatory approvals; the lack of availability of qualified personnel or management; stock market volatility and ability to access sufficient capital from internal and external sources; and economic or industry condition changes. Actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking information and, accordingly, no assurance can be given that any events anticipated by the forward-looking information will transpire or occur, or if any of them do so, what benefits that Crown Point will derive therefrom.
In addition, the information relating to reserves is deemed to be forward-looking information, as such information involves the implied assessment, based on certain estimates and assumptions that the reserves described can be economically produced in the future. With respect to forward-looking information contained herein, the Company has made assumptions regarding: the impact of increasing competition; the general stability of the economic and political environment in Argentina; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the costs of obtaining equipment and personnel to complete the Company’s capital expenditure program; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; the ability of the Company to obtain financing on acceptable terms when and if needed; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development and exploration activities; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transportation; future oil and natural gas prices; costs of operational activities in Argentina (including in respect of the operations described herein); currency, exchange and interest rates; the regulatory framework regarding royalties, commodity price controls, import/export matters, taxes and environmental matters in Argentina; and the ability of the Company to successfully market its oil and natural gas products.
Additional information on these and other factors that could affect Crown Point are included in reports on file with Canadian securities regulatory authorities, including under the heading “Risk Factors” in the Company’s most recent annual information form, and may be accessed through the SEDAR website (www.sedar.com). Furthermore, the forward-looking information contained in this document are made as of the date of this document, and Crown Point does not undertake any obligation to update publicly or to revise any of the included forward looking information, whether as a result of new information, future events or otherwise, except as may be expressly required by applicable securities law.
Well-Flow Test Results and Initial Production Rates
Any references in this document to well-flow test results, swab test rates and/or initial production rates are useful in confirming the presence of hydrocarbons, however, such test results and rates are not determinative of the rates at which such wells will continue production and decline thereafter. While encouraging, readers are cautioned not to place reliance on such test results and rates in calculating the aggregate production for the Company. Well-flow test results, swab test rates and initial production rates may be estimated based on other third party estimates or limited data available at the time. Well-flow test result data should be considered to be preliminary until a pressure transient analysis and/or well-test interpretation has been carried out. In all cases in this document, well-flow test results and initial production results are not necessarily indicative of long-term performance of the relevant well or fields or of ultimate recovery of hydrocarbons.
Certain information contained herein is considered “analogous information” as defined in NI 51-101. In particular, this news release describes certain information with respect to operational remedies performed by other oil and gas operators in areas in close proximity to the Company’s Vega del Sol wells. Such analogous information has not been prepared in accordance with NI 51-101 and the Canadian Oil and Gas Evaluation Handbook and Crown Point is unable to confirm whether such information has been prepared by a qualified reserves evaluator. Such information is not intended to be a projection of future results. Such information is based on independent public data and public information received from other producers and Crown Point has no way of verifying the accuracy of such information. Such information has been presented to help demonstrate the basis for Crown Point’s business plans and strategies. There is no certainty that such results will be achieved by Crown Point and such information should not be construed as an estimate of future reserves or resources or future production levels.
Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this news release.