GRANITE OIL CORP.
CALGARY, Alberta, Oct. 30, 2018 (GLOBE NEWSWIRE) -- GRANITE OIL CORP. (“Granite” or the “Company”) (TSX: GXO) (OTCQX: GXOCF) provides an update on its dividend policy, the Strategic Alternative Review process (the “Process”) and its Credit Facility.
Message to Shareholders
From inception, Granite has been committed to providing long-term returns to shareholders. This has been reflected in the Company’s competitive dividend strategy, prioritization of capital efficiency and industry-leading reserve metrics. In 2018, the global energy industry has benefited from a strong comeback in oil prices, however, due to lack of access to international crude oil markets outside of the United States, Canadian oil prices remain volatile relative to international benchmarks. As a result, in recent weeks, Western Canada Select (‘WCS’) pricing has experienced a rapid degradation relative to West Texas Intermediate (‘WTI’) benchmark pricing.
In an effort to minimize the impact of WCS pricing, Granite has pursued a number of differential mitigation strategies throughout 2018. Recently, the Company finalized an agreement to sell the majority of its oil directly to a US refinery starting October 2018. With this agreement, Granite expects to receive an average positive price differential of approximately $6.65 CAD/bbl (net of transportation) above WCS spot prices. The Company is working to further optimize transportation costs associated with this sales agreement and continues to evaluate additional price mitigation strategies to increase netbacks.
The price escalation of WTI in 2018 has also resulted in increased hedging losses which are estimated to be approximately $5.3 million through the first three quarters of 2018. Although the impact of hedging is significant to the Company’s 2018 cash flow, Granite is looking forward to the completion of these contracts in December 2018, at which time the Company’s 2019 hedges come into effect at significantly higher prices.
Granite’s 2019 hedges are as follows: First Quarter - 800 bbl/d (100 bbl/d at $65.72 USD and 700 bbl/d at $85.86 CAD); Second Quarter - 600 bbl/d at $85.48 CAD; Third Quarter - 400 bbl/d (100 bbl/d at $69.20 USD and 300 bbl/d at $86.53 CAD).
Dividend Policy
The rapid degradation of WCS price differentials from an average of $25.00 USD per barrel during early September to record high discounts (currently in excess of $45.00 USD per barrel) has significantly changed the pricing outlook for 2019. In light of this, management and the Board of Directors of Granite (the ‘Board’) have decided to reduce the monthly dividend by 57% to $0.01 per share. With current strip prices for 2019 averaging $67.00 USD for WTI and $30.00 USD for WCS differentials, the Company’s estimated total payout ratio is 74%. This reduction will be effective for the November 2018 dividend. Management and the Board view this reduction as a prudent measure to ensure the ongoing preservation of the Company’s balance sheet and, given the low-price environment, will prioritize the repayment of debt with the redirected capital.
Operational Update
Granite has drilled three development wells in 2018, including one testing its crown lands in enhanced oil recovery (‘EOR’) Pod 4 and two in EOR Pod 2. All three wells were successful and have resulted in the highest average yearly type curve to date since the Company’s inception. Considering the heavily discounted price environment, the Company does not plan to drill any new wells for the remainder of 2018. Further, Granite shut-in five wells (approximately 160 bbl/d) late in the third quarter, and is using its gas flood EOR scheme to increase pressure in these wells with plans to bring them on at higher rates in a stronger price environment. With previous success in smaller test areas, this strategy has the potential to effectively reduce required maintenance capital going forward. With a large number of potential infill drilling locations and strong drilling results, the Company has optionality should differentials narrow or should it make further headway on price mitigation strategies.
Third Quarter Results
Granite did not drill a well in the third quarter and maintained average production of approximately 1951 bbl/d (100% oil), with capital expenditures of $0.7 million. The Company had approximately $3.1 million of funds flow (net of $2.0 million in hedging losses) and paid $2.4 million in dividends. Granite did not take on additional debt in the quarter and exited with net debt of approximately $47.1 million.
Strategic Alternatives
On March 20, 2018, Granite announced the Board had appointed an independent Committee (the ‘Special Committee’) to undertake a review of potential strategic alternatives to enhance shareholder value (the ‘Process’). The Special Committee selected Cormark Securities Inc. and National Bank Financial Inc. as co-financial advisors in connection to the Process.
The Special Committee reviewed a number of options stated from the March 20 press release, including; a sale or merger of the Company or other form of business combination; a sale or joint venture involving all or a portion of the assets; a recapitalization of the Company or other form of strategic investment; or the purchase or sale of assets. During the course of the Process, the Canadian energy sector has experienced significant degradation of investor sentiment due primarily to regulatory uncertainty and an historic increase in WCS-WTI price spreads. These factors have undermined valuation metrics, resulting in an illiquid transactional market. As a result, no satisfactory business alternatives were presented that improved the strategic positioning of the Company, and the Board has elected to terminate the Process.
Credit Facility
Granite has agreed with its banking syndicate that there will be no semi-annual review of its borrowing base in 2018. The next scheduled review of the Company’s $50 million credit facility is to be completed by April 30, 2019.
Outlook
With the Company having a proven history of successfully navigating challenging market conditions, Granite is one of the few remaining junior public oil companies in the Canadian energy space. Granite’s 100%-owned Bakken oil pool has been managed for the long-term. With its gas flood EOR scheme, Granite has the ability to manage production efficiently. The Company currently has shut-in production being re-pressurized that is ready to be brought on-stream when WCS differentials narrow. As well, the Company has taken steps to ensure the ongoing sustainability of its business, and will continue to evolve and adapt its strategy to provide long-term value to shareholders.
Contact Information
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. Certain statements contained in this news release may constitute forward-looking statements or information (collectively, “forward-looking statements” or “statements”). These statements relate to future events or Granite’s future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are 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. Statements relating to "reserves" are also deemed to be forward-looking statements, 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. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. In particular, this news release contains forward-looking statements, pertaining to the following: forecasted capital expenditures and plans, drilling and development plans, Granite’s financial strength, anticipated production rates, 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 (‘EOR’) scheme, expectations regarding Granite’s credit facility, treatment under governmental regulatory and taxation regimes and expectations regarding Granite’s ability to raise capital and to continually add to reserves through acquisitions and development.
Granite believes the expectations reflected in such forward-looking statements and the assumptions upon which such forward-looking statements are based, to be reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this news release should not be unduly relied upon by investors. These statements speak only as of the date of this news release and are expressly qualified, in their entirety, by this cautionary statement. Granite’s actual results could differ materially from those anticipated in these forward-looking statements as a result of risk factors that may include, but are not limited to: volatility in the market prices for oil and natural gas; general economic conditions, stock market volatility and ability to access sufficient capital from internal and external sources, 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. Readers are cautioned that the foregoing list of factors is not exhaustive. 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. Additional information on these and other factors that could affect Granite's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).
With respect to forward-looking statements contained in this news release, Granite has made assumptions regarding, among other things: prevailing commodity prices, exchange rates, interest rates, applicable royalty rates and tax laws; the 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 obtain additional financing on satisfactory terms.
The forward-looking statements represent 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. There can be no assurance that forward-looking statements will prove to be accurate, as results and future events could differ materially from those expected or estimated in such statements. Accordingly, readers should not place undue reliance on forward-looking information. Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements.
BOE Presentation. References herein to "boe" mean barrels of oil equivalent derived by converting gas to oil in the 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.
