CALGARY, ALBERTA--(Marketwired - May 12, 2014) - Rock Energy Inc. (RE.TO) ("Rock" or the "Company") is pleased to report its financial and operating results for the three months ended March 31, 2014. Rock is a Calgary- based crude oil exploration, development and production company.
Rock has filed its unaudited condensed interim Consolidated Financial Statements for the period ended March 31, 2014 and related Management's Discussion and Analysis ("MD&A"). Copies of Rock's materials may be obtained on www.sedar.com and on our website at www.rockenergy.ca.
| CORPORATE SUMMARY |
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| FINANCIAL |
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| Three months ended March 31, |
2014 |
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2013 |
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| Crude oil and natural gas revenue ('000) |
$32,442 |
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$13,228 |
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| Funds from operations ('000) (1) |
$15,314 |
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$3,048 |
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| Per share - basic |
$0.39 |
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$0.08 |
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- diluted |
$0.37 |
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$0.08 |
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| Net loss ('000) |
($17,301 |
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($3,608 |
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| Per share - basic |
($0.44 |
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($0.09 |
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- diluted |
($0.44 |
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($0.09 |
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| Capital expenditures, net ('000) |
$22,888 |
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$12,589 |
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| As at March 31, |
2014 |
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2013 |
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| Net debt ('000) (2) |
$25,607 |
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$12,695 |
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| Common shares outstanding |
39,535,330 |
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39,169,914 |
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| Options outstanding |
3,043,689 |
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3,113,117 |
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| OPERATIONS |
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| Three months ended March 31, |
2014 |
2013 |
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| Average daily production |
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Crude oil and natural gas liquids (bbls/d) |
4,620 |
2,770 |
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Natural gas (mcf/d) |
1,673 |
2,661 |
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Barrels of oil equivalent (boe/d) |
4,899 |
3,214 |
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| Average product prices |
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Crude oil and natural gas liquids ($/bbl) |
$75.75 |
$49.72 |
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Natural gas ($/mcf) |
$6.28 |
$3.47 |
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Total ($/boe) |
$73.58 |
$45.73 |
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| Field netback ($/boe) (1) |
$39.64 |
$13.93 |
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| (1) |
Funds from operations, funds from operations per share and field netback are not terms prescribed by International Financial Reporting Standards (IFRS), and so are considered non-GAAP measures. Funds from operations represents cash generated from operating activities before changes in non-cash working capital and decommissioning expenditures. Rock considers funds from operations a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future growth through capital investment. Funds from operations per share is calculated using the same share basis which is used in the determination of net income (loss) per share. Field netback is calculated as crude oil and natural gas revenues after deducting royalties, operating costs and transportation costs, resulting in an approximation of initial cash margin in the field on crude oil and natural gas production. Rock's use of these non-GAAP measurements may not be comparable with the calculation of similar measures for other companies. |
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| (2) |
Net debt excludes commodity price contracts. |
LETTER TO THE SHAREHOLDERS
During the first quarter of 2014 Rock achieved record daily production and was able to make significant progress in delineating the Viking light oil play at Onward and the development of an enhanced oil recovery ("EOR") project at Mantario.
The quarter was highlighted by the following specific accomplishments:
- Drilled 14 (14.0 net) oil wells with 100% casing success including 4 (4.0 net) Mantario vertical step out locations in the main pool, 8 (8.0 net) horizontal Viking oil wells at Onward and 2 (2.0 net) successful Mannville oil wells (Onward, Neilburg);
- Averaged 4,899 boe per day (94% crude oil and liquids) of production representing a 22% increase from Q4 2013, and a 52% increase from a year ago;
- Divested the majority of our heritage heavy oil assets in the Lloydminster area for gross proceeds of $7.3 million, and acquired the working interests from the two offsetting owners at the Mantario pool, giving the Company 100% ownership and control of the main pool, for a combined total of $9.9 million (after adjustments);
- Spent a total of $22.9 million on the capital expenditure program;
- Generated funds from operations for the quarter of $15.3 million ($0.39/ basic share);
- Effective April 1st, promoted Mr. Scott Kober to Vice President, Engineering; and
- On April 15th, received formal approval from the Saskatchewan Government for the EOR project at Mantario.
Rock's realized price in the first quarter of 2014 was $73.58 per boe compared to $59.87 per boe in the fourth quarter of 2013. The increase in price realization is primarily attributed to a narrowing in the heavy oil price differential as additional refining infrastructure came on stream and pipeline restrictions were eased. The current WTI-WCS differential is trading around $17.00 - $20.00 US/bbl which is consistent with Rock's long term view of a sustainable range.
Operating costs increased during the quarter to $18.04 per boe compared to $16.25 per boe in the fourth quarter of 2013. This increase is attributable to additional heating and fuel costs during an extended cold winter and the inclusion of the heritage heavy oil assets until the asset sale transaction closed in late March. In addition to the effect of the sale of the heritage heavy oil assets, Rock expects to continue to reduce our operating costs going forward through the addition of low cost production from Mantario and Onward (Viking).
Rock generated a field netback of $39.64 per boe in the first quarter of 2014 compared to $28.47 per boe in the fourth quarter of 2013. Though both royalty and operating costs were higher on a per boe produced basis in the quarter, field netbacks were positively impacted by improved product pricing.
Gross capital expenditures for the first quarter of 2013 were $22.9 million, including $14.3 million for the drilling program, $4.4 million for facilities, $1.6 million for land and seismic and $9.9 million for acquisitions offset by $7.3 million of divestitures.
Rock's daily production for the first quarter of 2014 averaged 4,899 boe/d (94% oil and liquids). Currently the Company is producing approximately 5,000 boe/d. Though the Company is experiencing some impact from spring break up on our operations, we do not expect it to have a significant effect on our average production for the second quarter.
Asset Rationalization
During the first quarter of 2014, Rock completed the acquisition of approximately 290 bopd from the two offset owners on the west side of our main pool at Mantario for a combined total cost of $9.9 million. With these acquisitions, Rock now controls 100% of the Mantario main pool and is able to consolidate our operations and expand the scope of the EOR project.
Rock sold substantially all of its heritage heavy oil assets in the Lloydminster region (Alberta and Saskatchewan). With the successful completion of the transaction, the Company has divested of approximately 450 bopd of heavy oil, including the associated infrastructure and related abandonment liabilities, for approximately $7.3 million.
These transactions are significant steps in the transformation of Rock into a focused producer with higher net backs and lower operating costs.
Mantario
Rock is proceeding with the implementation of a water/chemical flood at Mantario to maximize recovery from this pool. The Company plans to have the pressure maintenance scheme (water flood) operational by the fourth quarter of this year, and the EOR scheme (polymer flood) operational by Q2, 2015. On April 15, 2014 Rock received formal approval from the Government of Saskatchewan for the EOR project at Mantario. Incremental capital spent on the EOR project starting on April 15, 2014 will qualify to reduce the royalty rate paid by the project to 1% until the qualified capital is recovered. Rock has estimated that the Company will experience a reduction in royalty costs of approximately $15 - $20 million during 2015, and then a further reduction for 2016 as additional qualified incremental capital is spent.
In conjunction with the acquisition of the offsetting working interest owners, Rock is now applying to the Saskatchewan Government to expand the EOR project to include the entire main pool. We expect to receive approval by mid-summer. The expansion of this project will provide a more efficient and complete recovery of the reserves contained in the pool and additional royalty relief associated with the incremental capital costs.
At the present time Rock is moving forward with the construction of the battery and infrastructure for this project, and once break up is over we will also begin the drilling of the new infill producing wells and conversion of the water/polymer injectors. Rock will also drill 6 new vertical step-out wells to further delineate the extent of the main pool. Production from the Mantario pool is currently averaging approximately 3,500 bopd from 41 wells.
Exploration efforts in Mantario during the remainder of the year will be focused on testing 2 - 3 new pools along the main Mantario shore face. In addition, Rock will test another 2 - 3 new exploration targets in the greater Mantario area.
Onward Viking
During the first quarter of 2014, the Company drilled an additional 8 (8.0 net) horizontal oil wells into the Viking Formation at Onward. Production rates (IP30) for these wells continue to average approximately 50 bopd. With a total of 18 (18.0 net) wells drilled in to the play, Rock believes the Company has successfully demonstrated an economically viable light oil Viking resource play on 15.5 sections. Under full development at 16 wells per section this would generate approximately 230 remaining development drilling locations. Rock plans to drill an additional 17 step-out wells by the end of the year to extend this play and more fully evaluate the Company's remaining lands in this area.
Onward Mannville
During the fourth quarter of 2013, Rock drilled a discovery well at 11-16-34-24W3 into a new Lloydminster pool (West Onward). This discovery well has been producing at rates exceeding 100 bopd for the last three months. With this success the Company has mapped a potential new pool that indicates potentially 10 - 15 development locations, and plans to drill the first 3 - 4 follow up wells in the third quarter of this year. In addition to this development project Rock has identified another 3 - 4 exploration targets that the Company plan to test in the next 12 months.
Leadership Changes
Rock is pleased to announce that as of April 1, 2014 Mr. Scott Kober was promoted to Vice President, Engineering, responsible for our reserves evaluation, reservoir management and business development. Scott has over 18 years of experience in the industry and has been working with Rock for the last 18 months as Manager, Engineering. Scott's efforts have been instrumental in the development of the Mantario field and the rationalization of our asset base.
Mr. Bill Slavin has decided not to stand for re-election to our Board of Directors. We wish to thank Bill for his many years of service with Rock, and his invaluable contribution to our progress.
Outlook and 2014 Guidance
The strong performance from first quarter activities, and the acquisition of the working interest partners in the Mantario pool have prompted the Company to expand its capital program to $91 million (from $85 million) and revise its guidance for the year. The additional capital was used to close the second acquisition at Mantario.
The Company is now forecasting to generate average 2014 production of 4,800 - 5,000 boe/d (95% oil). For the remainder of 2014, Rock is assuming that WTI averages $95.00 US/bbl, WTI - WCS differential averages $20.00 US/bbl, AECO gas price averages $4.00 CDN/mcf and the exchange rate averages $0.92 CDN/US. Given these assumptions, the Company is forecasting funds from operations of $64 - $66 million ($1.60 - $1.65/share). With the forecasted funds from operations and capital spending plan, the net debt at the end of the year is targeted to be $42 - $44 million (0.6 times forecasted annualized fourth quarter funds from operations) against its combined credit facility of $70 million.
During the second quarter of 2014, the Company is working hard to prepare for a very active summer. The third quarter of 2014 will see the Company invest approximately $40 million towards constructing the facilities at Mantario, drilling the infill locations for the development of the Mantario pool, drilling the step out wells to delineate the Viking light oil play at Onward, and testing 4 - 6 new exploration ideas in core areas. The Company is actively engaged in a process of divesting our remaining non-core assets while we build production and value in our core areas through both acquisition and drilling projects. We remain focused on building a suite of assets that will continue to provide our shareholders with a solid, long-life, predictable base of sustainable cash flow.