InPlay Oil Corp. (TSX: IPO) (OTCQX: IPOOF) (“InPlay” or the
“Company”) provides an operations and corporate update in response
to the COVID-19 pandemic.
The COVID–19 pandemic has led to an
unprecedented decrease in oil prices as a result of world oil
demand destruction. Accordingly, InPlay has acted prudently in
March and April in order to stabilize our financial position and to
preserve the value of our crude oil reserves for an eventual price
recovery. As previously announced, the Company immediately
responded to this decline in prices with the suspension of our
capital program in March. In addition, InPlay has implemented
several operating and corporate cost reduction initiatives which we
estimate will lead to approximately $7.0 million in savings for the
remainder of the year. The key cost saving initiatives include:
- 20% reduction to Company wide salaries including office and
field employees;
- Deferral of well workovers until oil prices support a six to
nine month payout with careful consideration of fixed costs;
and
- Supplier and vendor cost reductions in all areas of
operations.
We value and respect our vendors and service
providers and are appreciative of their collective response to this
challenging environment. InPlay and the entire industry are in a
period of austerity and we are pleased that most of our vendors
have chosen to partner with us with an attitude of “we are in this
unprecedented environment together”.
With the current economic environment being so
severe, it is likely that most Exploration and Production companies
in Canada would not conform to the standard reserve based lending
(“RBL”) structures at the current future pricing scenarios. We are
encouraged that the Federal Government has acknowledged the
challenges facing the oil and gas industry and has announced a
support program intended to provide a liquidity backstop to RBL
credit facilities which will be administered through the Export
Development Bank of Canada (“EDC”) and the Business Development
Bank of Canada (“BDC”). In working directly with the primary
banking financial institutions, additional lending and credit
capacity is expected to be provided to qualifying oil and gas
producers that (based on certain criteria) were deemed financially
viable prior to the onset of the COVID-19 pandemic.
Based on the information provided to date,
InPlay believes it would meet the criteria for liquidity support
under the announced program. InPlay’s capital expenditure
requirement in 2020 for annual production to remain flat at the
2019 annual average of 5,000 boe/d was estimated at $25 million.
Based on pre COVID-19 pricing assumptions from our original 2020
forecast released January 21, 2020, which has since been withdrawn,
this flat production profile would have resulted in $29-32 million
of Adjusted Funds Flow(1) (“AFF”), approximately 25% above the $25
million capital spending requirement. InPlay’s low decline rate,
top tier capital efficiencies (refer to our press release dated
March 18, 2020 for further details on our top tier finding and
development costs, recycle ratios and capital efficiencies amongst
our light oil peers) and a strong net debt to AFF(1) ratio (1.7x
for the year ended December 31, 2019) leads us to believe that we
will be well positioned to meet the requirements of the EDC and
BDC’s liquidity support programs. The Company has
completed a detailed analysis of its operating areas down to an
individual well level to evaluate their economics at low commodity
prices. InPlay has divided its operations into three tiers based on
their cost structure, as well as ensuring operations continue to be
conducted safely and efficiently. These tiers, based on recent
months’ operating costs and production profiles, will be used to
determine temporary production curtailments or shut-ins. The first
tier has current production of approximately 1,000 boe/d and
associated operating costs of approximately $9.40 per boe,
excluding fixed costs, and will be the first area curtailed or shut
in with curtailments having commenced in March. The third tier has
current production of 750 boe/d and operating costs of $6.95 per
boe, excluding fixed costs, and will be the last area potentially
curtailed or shut in.
The process for placing nominations for sales
volumes on pipelines is complex and difficult in a volatile pricing
environment as producers are required to provide nominations five
weeks prior to the actual month of production without knowing the
final price of WTI or the MSW light oil differential. Our March
field estimated production was approximately 5,000 boe/d (70% oil
and liquids) which included production from recently drilled and
completed wells that were produced at restricted rates. Based on a
baseline production capacity of 5,000 boe/d, we have started
curtailments and only nominated to sales of approximately 75% of
our oil capacity in April which would result in estimated
production of approximately 4,000 boe/d with a reasonable MSW
differential of US$3.02/bbl discount to WTI. We have nominated May
oil sales of approximately 35% of our oil capacity which would
result in estimated production of approximately 2,500 boe/d of
production. The Company has approximately 32,000 bbls of oil
storage capacity that is currently 45% full allowing the Company to
store oil for future sale into a better pricing environment. This
is a complex process with the potential to nominate little to
possibly no volumes in June and potentially longer until oil demand
improves and oil prices strengthen.
InPlay also promptly entered into various
near-term crude oil and natural gas derivative contracts in order
to take advantage of the near-term contango that has occurred and
reduce the Company’s exposure to these unprecedented low and
volatile oil prices. InPlay currently has the following contracts
in place:
Product |
Currency denomination |
Volume (bbl/day) |
Average swap price |
Term |
Crude oil |
US
dollar |
500 |
32.00/bbl |
May 1,
2020 – June 30, 2020 |
Crude oil |
US
dollar |
250 |
31.85/bbl |
May 1,
2020 – July 31, 2020 |
Product |
Currency denomination |
Volume (GJ/day) |
Average swap price |
Term |
Natural gas |
Canadian
dollar |
4,000 |
1.61/GJ |
April 1,
2020 – October 31, 2020 |
Natural gas |
Canadian
dollar |
1,000 |
1.76/GJ |
May 1,
2020 – October 31, 2020 |
Natural gas |
Canadian
dollar |
1,500 |
2.22/GJ |
January 1,
2021 – December 31, 2021 |
At current strip pricing these crude oil
contracts would result in a gain of approximately $1.1
million(2).
Notes:
- “Adjusted funds flow” or “AFF” and “net debt / adjusted funds
flow ratio” do not have a standardized meaning under International
Financial Reporting Standards (IFRS) and GAAP and therefore may not
be comparable with the calculations of similar measures for other
companies. Please refer to “Non-GAAP Financial Measures” and “BOE
equivalent” at the end of this news release and to the section
entitled “Non-GAAP Measures” in our most recently filed MD&A
for details of calculations, rationale for use and applicable
reconciliation to the nearest IFRS measure.
- Current strip pricing (USD WTI) of $11.57 (May), $18.69 (June)
and $21.50 (July) and a foreign exchange rate of 0.70 was used to
calculate the gain on commodity derivative contracts of
approximately $1.1 million.
Outlook
InPlay remains focused on managing costs,
monitoring production economics and commodity sales on a daily
basis, while prioritizing the preservation of liquidity and the
value of our reserves. The economic benefit of realizing the proved
developed producing reserve volumes at the current commodity price
is significantly less than realizing these barrels in the future
and discounting the proceeds to today, given the contango in the
price curve. As one of our seasoned board members recently said,
“Oil is not like cabbage, it doesn’t rot”. We will also be closely
monitoring and actively working on potential access to the recently
announced federal support programs through EDC and BDC, in
conjunction with the support of our banking syndicate. Due to the
current volatility and uncertainty related to commodity pricing,
curtailments and potential shut-ins, InPlay is unable to provide
2020 guidance at this time. Guidance updates will be provided in
the future when economic factors begin to stabilize and demand
increases resulting in more stable and realistic commodity prices
that can be relied upon.
The Company’s rapid and effective response to
this extraordinary situation illustrates management’s ability to
maintain our Corporate strategy in all scenarios. The Company will
continue to respond quickly and with careful consideration to
safety and business principles throughout this crisis.
We thank our employees and all of our service
providers for their commitments and efforts in this unprecedented
time as well as our directors for their ongoing commitment and
dedication. Finally we thank all of our shareholders for their
continued interest and support.
For further information please contact:
Doug Bartole President and Chief
Executive Officer InPlay Oil Corp. Telephone: (587) 955-0632 |
|
Darren Dittmer Chief Financial
Officer InPlay Oil Corp. Telephone: (587) 955-0634 |
Reader Advisories
Non-GAAP Financial
MeasuresIncluded in this press release are references to
the terms “adjusted funds flow” or “AFF” and “net debt / adjusted
funds flow ratio”. Management believes these measures are helpful
supplementary measures of financial and operating performance and
provide users with similar, but potentially not comparable,
information that is commonly used by other oil and natural gas
companies. These terms do not have any standardized meaning
prescribed by GAAP and should not be considered an alternative to,
or more meaningful than, “funds flow”, “profit (loss) before
taxes”, “profit (loss) and comprehensive income (loss)” or assets
and liabilities as determined in accordance with GAAP as a measure
of the Company’s performance and financial position.
InPlay uses “adjusted funds flow” as a key
performance indicator. Adjusted funds flow should not be considered
as an alternative to or more meaningful than funds flow as
determined in accordance with GAAP as an indicator of the Company’s
performance. InPlay’s determination of adjusted funds flow may not
be comparable to that reported by other companies. Adjusted funds
flow is calculated by adjusting for decommissioning expenditures
from funds flow. This item is adjusted from funds flow as
decommissioning expenditures are incurred on a discretionary and
irregular basis and are primarily incurred on previous operating
assets, making the exclusion of this item relevant in Management’s
view to the reader in the evaluation of InPlay’s operating
performance. For a detailed description of InPlay’s method of
calculating adjusted funds flow and a reconciliation to the nearest
GAAP term, refer to the section “Non-GAAP Measures” in the
Company’s most recent MD&A filed on SEDAR.
InPlay uses “net debt / adjusted funds flow
ratio” as a key performance indicator. InPlay’s determination of
net debt/AFF may not be comparable to that reported by other
companies. Net debt/AFF is calculated by the Company as net debt
divided by adjusted funds flow for the applicable year. For a
detailed description of InPlay’s method of calculating net debt/AFF
and a reconciliation to the nearest GAAP term, refer to the section
“Non-GAAP Measures” in the Company’s most recent MD&A filed on
SEDAR.
Forward-Looking Information and
StatementsThis news release contains certain
forward–looking information and statements within the meaning of
applicable securities laws. The use of any of the words "expect",
"anticipate", "continue", "estimate", "may", "will", "project",
"should", "believe", "plans", "intends" “forecast” and similar
expressions are intended to identify forward-looking information or
statements. In particular, but without limiting the foregoing, this
news release contains forward-looking information and statements
pertaining to the following: that InPlay’s cost reduction
initiative will lead to estimated savings of approximately $7.0
million; that the federal support program will be implemented as
announced and the Company’s belief that it will meet the
criteria for access including, without limitation, financial
viability; that our original (since withdrawn) 2020 guidance
(January 21, 2020) would have generated top decile production
growth amongst our light oil peer group; the potential of
nominating low and no volumes to sales in June or longer;
production estimates; the potential for and extent of planned
curtailments or shut-ins and the potential impact thereof; that
short-term production curtailments will not have a significant
impact on long term value of the Company; the forecast of minimal
capital spending during the second quarter; future liquidity and
financial capacity; future results from operations and operating
metrics; future costs, expenses and royalty rates; future interest
costs; the exchange rate between the $US and $Cdn; and methods of
funding our capital program. Forward-looking statements or
information are based on a number of material factors, expectations
or assumptions of InPlay which have been used to develop such
statements and information but which may prove to be incorrect.
Although InPlay believes that the expectations reflected in such
forward-looking statements or information are reasonable, undue
reliance should not be placed on forward-looking statements because
InPlay can give no assurance that such expectations will prove to
be correct. In addition to other factors and assumptions which may
be identified herein, assumptions have been made regarding, among
other things: the impact of increasing competition; the general
stability of the economic and political environment in which InPlay
operates; the timely receipt of any required regulatory approvals;
the ability of InPlay to obtain qualified staff, equipment and
services in a timely and cost efficient manner; drilling results;
the ability of the operator of the projects in which InPlay has an
interest in to operate the field in a safe, efficient and effective
manner; the ability of InPlay to obtain financing on acceptable
terms; field production rates and decline rates; the ability to
replace and expand oil and natural gas reserves through
acquisition, development and exploration; the timing and cost of
pipeline, storage and facility construction and the ability of
InPlay to secure adequate product transportation; future commodity
prices; currency, exchange and interest rates; regulatory framework
regarding royalties, taxes and environmental matters in the
jurisdictions in which InPlay operates; and the ability of InPlay
to successfully market its oil and natural gas products.
The forward-looking information and statements
included herein are not guarantees of future performance and should
not be unduly relied upon. Such information and statements,
including the assumptions made in respect thereof, involve known
and unknown risks, uncertainties and other factors that may cause
actual results or events to defer materially from those anticipated
in such forward-looking information or statements including,
without limitation: changes in commodity prices; the potential for
variation in the quality of the reservoirs in which we operate;
changes in the demand for or supply of our products; unanticipated
operating results or production declines; the potential impact of
curtailing or shutting in production; changes in tax or
environmental laws, royalty rates or other regulatory matters;
changes in development plans of InPlay or by third party operators
of our properties; increased debt levels or debt service
requirements; inaccurate estimation of our oil and gas reserve and
resource volumes; limited, unfavorable or a lack of access to
capital markets; increased costs; a lack of adequate insurance
coverage; the impact of competitors; and certain other risks
detailed from time-to-time in InPlay's disclosure
documents.
The forward-looking information and statements
contained in this news release speak only as of the date hereof and
InPlay does not assume any obligation to publicly update or revise
any of the included forward-looking statements or information,
whether as a result of new information, future events or otherwise,
except as may be required by applicable securities laws.
The following assumptions were used by the
Company to forecast the $25 million required capital to keep
production flat in 2020 compared to 2019 at 5,000 boe/d and to
determine the resulting 2020 AFF. These assumptions are based on
the 2020 forecast announced on January 21, 2020, which has since
been withdrawn.
WTI |
US$/bbl |
$57.00 |
NGL
Price |
$/boe |
$25.30 |
AECO |
$/mcf |
$2.00 |
Foreign
Exchange rate |
(US$/CDN$) |
0.76 |
MSW
Differential |
US$/bbl |
$5.50 |
Production |
Boe/d |
5,000 |
Royalties |
$/boe |
3.50 – 4.00 |
Operating
expenses |
$/boe |
14.25 – 15.25 |
Transportation |
$/boe |
0.70 – 0.90 |
Interest |
$/boe |
1.10 – 1.40 |
General
and administrative |
$/boe |
3.00 – 3.50 |
Capital
Expenditures |
$
millions |
25 |
Decommissioning Expenditures |
$ millions |
0.8 – 1.2 |
Forecasted 2020 Adjusted Funds Flow |
$ millions |
$29 - $32 |
Forecasted Funds Flow |
$ millions |
$28 - $31 |
- NGLs estimated to represent approximately 23% - 25% of total
oil and liquids production
- Quality and pipeline transmission adjustments may impact
realized oil prices in addition to the MSW Differential provided
above
- Changes in working capital are not assumed to have a material
impact between Dec 31, 2019 and Dec 31, 2020
- Decommissioning expenditures are added back to AFF to arrive at
Funds Flow, which is the nearest GAAP term for AFF.
BOE equivalentBarrel of oil
equivalents or BOEs may be misleading, particularly if used in
isolation. A BOE conversion ratio of 6 mcf: 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. Given that the value ratio based on the current price of
crude oil as compared to natural gas is significantly different
than the energy equivalency of 6:1, utilizing a 6:1 conversion
basis may be misleading as an indication of value.
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