PACIFIC EXPLORATION AND PRODUCTION CORP Creditor and Catalyst Led Restructuring Completed
Renewed Strategic Focus to be a Low Cost Margin Driven Producer
Liquidity (including cash and available LC) at September 30, 2016 Approximately U.S.$672 million
Expiration of Rubiales-Piriri Contract Adversely Affects Volume
TORONTO, Nov. 14, 2016 /PRNewswire/ - Pacific Exploration & Production Corp. (TSX: PEN) announced today the release of its consolidated financial statements for the third quarter of 2016, together with its management discussion and analysis. These documents will be posted on the Company's website at www.pacific.energy and SEDAR at www.sedar.com. All values in this news release and the Company's financial disclosures are in U.S.$, unless otherwise stated.
The Creditor/Catalyst Restructuring Transaction, which provided $480 million of additional liquidity through the DIP Financing and a committed letter of credit facility of approximately $116 million, was completed on November 2, 2016, after the end of the quarter. With a materially improved capital structure, that includes a reduction in its annual interest cost of approximately $232 million and no material debt maturing until 2021, the Company's financial situation is significantly better than at quarter-end; accordingly, the Company has prepared the following pro-forma balance sheet as at September 30, 2016, in order to enable shareholders to understand the effect of the Creditor/Catalyst Restructuring Transaction:
As reported Effect of the Pro forma
(in thousands of U.S.$) September 30, 2016 Restructuring Transaction September 30, 2016
---------------------- ------------------ ------------------------- ------------------
Cash and cash equivalents $555,724 - $555,724
Current assets other than cash 375,367 - 373,367
Non-current assets 1,472,511 - 1,472,511
================== ========= === =========
Total assets $2,403,602 - $2,403,602
============ ========== === ==========
Current liabilities(1) $797,169 (183,227) $613,942
Loans and borrowings(1) 5,814,681 (5,564,681) 250,000
Non-current liabilities 310,186 - 310,186
======================= ======= === =======
Total liabilities $6,922,036 (5,747,908) $1,174,128
================= ========== ========== ==========
Common shares(2) $2,615,788 881,435 $3,497,223
Contributed surplus 124,150 - 124,150
Other reserves (229,633) - (229,633)
Retained deficit (7,163,424) 4,866,473 (2,296,951)
---------------- ---------- --------- ----------
Deficit attributable to equity holders of the parent (4,653,119) 5,747,908 1,094,789
Non-controlling interests 134,685 - 134,685
========================= ======= === =======
Shareholders' equity $(4,518,434) 5,747,908 $1,229,474
==================== =========== ========= ==========
Total Shareholders' equity and liabilities $2,403,602 - $2,403,602
------------------------------------------ ---------- --- ----------
Number of Common Shares Outstanding(3) 315,021,158 (265,018,661) 50,002,537
------------------------------------- ----------- ------------ ----------
1 The pro forma effects on Current
Liabilities and Loans and
Borrowings include the exchange of
the long-term debt and Catalyst's
DIP notes for common shares, the
interest accrued on the long-term
debt up to April 27, 2016 (the date
of the CCAA initial court order),
the exchange of the Funding
Creditors' DIP notes for the Exit
Notes, and amounts disclaimed on
other Affected Creditors.
(2) The pro forma effect on common
shares represents the estimated
fair value of the common shares
issued under the Restructuring
Transaction, estimated at $17.63
per share, being the average cost
of the shares acquired to fund the
Cash Elections.
3 Pro forma common shares outstanding
based on extinguishment of Affected
Claims into Claim Settlement Shares
and issuance of the Cash
Consideration Shares, conversion of
$250,000,000 DIP Notes into Plan
Sponsor Shares, the exercise of all
of the DIP Warrants into Warrant
Shares and the consolidation of the
common shares of the Company.
"The restructuring of Pacific's balance sheet was a critical first step to position the Company for future success. While we are pleased that the Company's operations have been cash flow positive during the course of the restructuring, we are now working on a renewed strategic focus driven by cost reductions and capital allocation discipline for production sustainability and margin expansion. Importantly, we truly believe the Company now has all the right tools and resources for sustainable shareholder value creation," said Gabriel de Alba, Chairman of Pacific.
Added Mr. de Alba, "Pacific has tremendous potential going forward through new leadership, skilled employees, a unique collection of assets, a strong balance sheet and a renewed focus on constant improvement across the organization. The new Board and management are in the process of reviewing future expectations for production, costs and other key performance indicators. As part of this review, the Company is also evaluating a variety of options for maximizing the value of our infrastructure assets. We look forward to updating our stakeholders on developments as we continue to rebuild Pacific as a competitive low-cost producer and a market leader over the long-term."
Third Quarter 2016 Results
Operational Highlights:
-- The Company's average daily net production after royalties was 75,096
boe/d, 41% and 51% lower compared with the previous quarter and the
third quarter of 2015, respectively. The reduction is primarily
attributable to the expiration of the Rubiales-Piriri contract on June
30, 2016. Excluding daily net production from the Rubiales Field in the
previous quarter and the third quarter of 2015, the production decline
becomes 8% and 23%, respectively.
-- Net production after royalties was 114,982 boe/d for the nine months
ended September 30, 2016 compared to 152,665 boe/d, and 97,952 boe/d
(excluding Rubiales), in 2015.
-- The combined oil and gas operating cost before overlift and other costs
was $19.90/boe, lower compared with $21.93/boe for the second quarter of
2016 and $20.98/boe in the third quarter of 2015, due to higher
production cost but lower transportation and dilution costs.
-- Total combined operating cost (including overlift, inventory movement
and other costs) was $21.93/boe, slightly higher when compared with
$20.26/boe for the second quarter of 2016 and $20.92/boe of the third
quarter of 2015, due to higher inventory movement and other costs.
-- During the nine months ended September 30, 2016, the Company achieved a
reduction in total operating costs (including overlift/underlift and
other costs) of $2.59/boe from $23.13/boe to $20.54/boe. Reductions in
field costs were achieved through a number of initiatives, including
streamlining the workforce.
Financial Highlights:
-- Revenue for the third quarter totaled $309 million, $67 million lower as
compared with the second quarter of 2016, reflecting lower volumes of
sales during the quarter. Revenue decreased by $361 million from $670
million for the third quarter of 2015, mainly due to lower realized
prices and the expiration of the Rubiales-Piriri contract.
-- Revenue for the nine months ended September 30, 2016 was $1,142 million,
47% less than the same period of 2015, which had revenue of $2,173
million.
-- Total volume of oil and gas sales (including trading) for the third
quarter of 2016 averaged 82,167 boe/d, 42% lower than the 141,492 boe/d
in the third quarter of 2015 due to the relinquishment of the Rubiales
and Piriri fields in June 2016. Total volume of oil and gas sales
(including trading) for the nine months ended September 30, 2016 was
104,173 boe/d, compared to 154, 792 boe/d in 2015, a 33% decrease during
the period.
-- Combined oil and gas operating netback for the quarter was $18.90/boe,
38% lower than the $30.57/boe in the third quarter of 2015, reflecting
the decline in market prices for crude oil. The Company's average sales
price per barrel of crude oil and natural gas was $40.83/boe for the
quarter, down from $51.49/boe in the same period of 2015.
-- During the nine months ended September 30, 2016, combined crude oil and
gas operating netback was $19.48/boe, $8.80/boe lower than the same
period of 2015 ($28.28/boe). Crude oil netback was $19.30/bbl, $9.00/bbl
lower than the same period of 2015 ($28.30/bbl). Both the combined and
crude oil netbacks were impacted by the decline in world crude prices
during the period.
-- Adjusted EBITDA for the quarter was $42 million, compared to $100
million in the second quarter of 2016 and $272 million in the third
quarter of 2015, with the decrease primarily due to lower volumes sold,
and lower realized prices when compared with the third quarter of 2015.
-- General and Administrative costs decreased to $42 million (including
one-time costs related to severance and restructuring costs) in the
third quarter of 2016 from $53 million in the same period of 2015. In
addition, annualized G&A (excluding severance and restructuring
payments) has been reduced year over year by 29% during the course of
the restructuring process, and the Company is making continuous efforts
to control G&A and all non-essential spending activities in light of the
decrease in oil prices. For instance, internal head count has been
reduced by approximately 1,100 employees (40%) since January 1, 2016, of
which approximately 335 is attributable to the reversion of the Rubiales
Field.
-- Net loss attributable to equity holders of the parent was $557 million,
largely due to $424 million of impairment recorded mainly on oil and gas
and other assets, lower sales due to the expiry of the Rubiales-Piriri
contract, $27 million of costs related to the restructuring and finance
cost of $23 million.
-- Total capital expenditures decreased to $30 million in the third quarter
of 2016, compared with $154 million in the same period of 2015.
-- During the three and nine months ended September 30, 2016, the Company
incurred $27 million and $92 million, respectively, in costs related to
the Creditor/Catalyst Restructuring Transaction.
Additional Highlights:
-- Camilo McAllister, a seasoned Colombian oil and gas executive, will
become Pacific's CFO. Jim Latimer, previously the Chief Restructuring
Officer at Pacific, will be appointed interim President and CEO while
the Board, assisted by executive search firm Spencer Stuart, completes
the process to select a permanent replacement.
-- On November 3, 2016, Standard & Poor's Ratings Services upgraded Pacific
to 'B+' from 'D'. On the same date, Fitch Ratings upgraded Pacific's
Foreign and Local Currency Long-Term Issuer Default Rating to 'B' from
'D' ('B+' for the Exit Notes). The upgraded ratings follow the
completion of the Creditor/Catalyst Restructuring Transaction.
-- On September 27, 2016, the Company reached an agreement with Karoon Gas
Australia Ltd. to sell its 35% working interest in the following
concession agreements in Brazil: S-M-1101, S-M-1102, S-M-1037, S-M-1165
and S-M 1166. The Company will receive from Karoon $15.5 million in cash
as consideration on closing for its interests in the Karoon blocks. In
addition, the Company may receive a subsequent payment of $5 million on
commercial production reaching 1 million barrels of oil or oil
equivalents. The sale is subject to Brazilian regulatory approval.
-- On August 8, 2016, the Company entered into a binding term sheet with
Queiroz Galvão Exploração e Produção S.A. ("QGEP") pursuant to
which the Company agreed to transfer the following participating
interests in certain contracts from the Company's Brazilian subsidiary
to QGEP: (i) 30% of Contract FZA-M-90; (ii) 50% of PAMA-M-337; and (iii)
70% of PAMA-M-265 (collectively, the "Participating Interests"). On
October 14, 2016, in connection with the transfer of the Participating
Interests, the Company and its Brazilian subsidiary entered into a
farm-out agreement with QGEP, pursuant to which the Company agreed to
pay to QGEP the outstanding cash calls for these blocks in the amount of
R$51,655,336 (approximately $16 million). In addition, the Company's
Brazilian subsidiary deposited $10 million into an escrow account to be
released upon the satisfaction of certain conditions (including ANP
approval). Upon closing of this transaction, the Company expects to
reduce its working commitments by approximately $25 million.
-- The Company has entered into derivative financial instruments to reduce
the exposure to unfavourable movements in commodity prices. The Company
has established a system of internal controls to minimize risks
associated with its derivative program and does not intend to use
derivative financial instruments for speculative purposes. During the
third quarter of 2016, the Company entered into several oil price risk
management contracts to hedge against oil price volatility through April
2017. The hedges consisted of zero-cost collars. As at September 30,
2016, the Company had hedged positions for approximately 6.4 million
barrels with floor and ceiling strike prices of $42.5/bbl and $57.0/bbl
ICE Brent, respectively.
Impairment:
-- The Company recorded an impairment charge of $424 million compared to
$568 million in the same period in 2015. The impairment charge was
comprised of $281 million related to oil and gas properties, $130
million related to other assets, and $13 million related to exploration
and evaluation assets.
Financial Results:
Financial Summary
=================
2016 2015
---- ----
Q3 Q2 Q3
--- --- ---
Oil & Gas Sales Revenues ($ millions) 308.7 376.4 670.0
------------------------------------ ----- ----- -----
Adjusted EBITDA ($ millions)(1) 41.5 100.4 271.6
------------------------------ ---- ----- -----
Adjusted EBITDA Margin (Adjusted EBITDA/Revenues) 13% 27% 41%
------------------------------------------------- --- --- ---
Cash Flow (Funds Flow from Operations) ($ millions)(1) 10.9 -5.7 197.2
----------------------------------------------------- ---- ---- -----
Net (Loss) Earnings ($ millions) (2) (557.1) (118.7) (617.3)
----------------------------------- ------ ------ ------
Net Production (boe/d) 75,096 127,951 152,915
---------------------- ------ ------- -------
Sales Volumes (boe/d) 82,167 110,024 141,492
--------------------- ------ ------- -------
(COP$ / U.S.$) Exchange Rate(3) 2,879.95 2,916.15 3,121.94
------------------------------- -------- -------- --------
Average Shares Outstanding - basic (millions) 315.0 315.0 313.3
============================================ ===== ===== =====
1 The terms Adjusted EBITDA and
cash flow (Funds Flow from
Operations) are non-IFRS
measures. These non-IRFS
measures do not have any
standardized meanings and
therefore are unlikely to be
comparable to similar measures
presented by other companies.
These non-IFRS measures are
included because management of
the Company uses this
information to analyze operating
performance, leverage and
liquidity. Therefore, these
measures should not be
considered in isolation or as a
substitute for measures of
performance prepared in
accordance with IFRS. Please see
"Additional Financial Measures"
in the MD&A.
2 Net earnings attributable to
equity holders of the parent.
3 COP/USD exchange rate
fluctuations can have a
significant impact on the
Company's accounting net
earnings, in the form of
unrealized foreign currency
translation on the Company's
financial assets and liabilities
and deferred tax balances that
are denominated in COP.
Production:
Net Production Summary
======================
2016 2015
---- ----
Q3 Q2 Q3
--- --- ---
Oil and Liquids (bbl/d)
-----------------------
Colombia 64,946 116,425 137,617
-------- ------ ------- -------
Peru 2,182 2,101 5,411
---- ----- ----- -----
Total Oil and Liquids (bbl/d) 67,128 118,526 143,028
----------------------------- ------ ------- -------
Natural Gas (boe/d)(1)
----------------------
Colombia 7,968 9,425 9,887
-------- ----- ----- -----
Total Natural Gas (boe/d) 7,968 9,425 9,887
------------------------- ----- ----- -----
Total Equivalent Production (boe/d) 75,096 127,951 152,915
=================================== ====== ======= =======
1 Colombian standard natural
gas conversion ratio of 5.7
Mcf/bbl.
Additional production details
are available in the MD&A.
The Company and Ecopetrol signed a termination agreement for the return of the Rubiales and Piriri fields upon the expiration of the contract on June 30, 2016. Both parties were actively involved to ensure a smooth transition of the operatorship. Pursuant to the Rubiales-Piriri contract, all fixed assets located in these fields were transferred to Ecopetrol, along with the operatorship, without compensation. Therefore, all net book value of fixed assets associated with these fields has been fully depleted. As part of the settlement, a volume of 189,776 bbl of crude oil inventory, which had been booked during the prior quarter, was physically transferred to the Company during the third quarter of 2016. This volume became part of the sales for the third quarter.
Heavy oil production from Quifa decreased by 8% compared with the prior quarter due to operational issues associated with water disposal capacity. Light and medium net oil production in Colombia and Peru totaled 39,947 bbl/d, decreasing by 6% from the second quarter of 2016 (42,453 bbl/d). The decrease is attributable to the natural decline of the Llanos oil fields, which have not been sustained by drilling activity. Light and medium oil and heavy oil production (excluding production at the Rubiales Field) now represent 53% and 36%, respectively, of total net oil and gas production. Gas production decreased 15% compared with the previous quarter due to operational issues.
Strategic Priorities
Pacific has implemented a strategy to narrow its geographic focus to Colombia and Peru and reduced organizational scale, complexity and cost while maximizing operating and cost efficiencies to ensure the Company has sustainable production and growth. The Company will be disciplined and margin-focused, not simply production-driven. The sale of the Company's Brazilian assets and suspending expansion into Mexico demonstrate this commitment. The Company is initiating a broad review of all activities and processes with an emphasis on efficient operations. Focusing on its core asset base will allow the Company to allocate capital most efficiently while maximizing value.
Since January 1, 2016, the Company reduced internal head count by approximately 1,100 employees (40%), which includes those associated with the Rubiales Field, without significantly impacting operations. Annualized G&A (excluding severance and restructuring payments) has been reduced year over year by 29% during the course of the restructuring process. The Company is taking further steps to achieve $110 million of annualized expense during 2017, excluding one-time costs, as compared to $222 million in 2015.
Mr. Camilo McAllister, Pacific's proposed new CFO, will formally commence his duties shortly but has already started working with the Board, the leadership team and key employees. Mr. Jim Latimer, the appointed interim President and CEO, continues to work with the Board to bring forward new operational initiatives and risk management strategies. The Company, assisted by executive search firm Spencer Stuart, is finalizing the process to select a permanent CEO.
Third Quarter 2016 Conference Call Details
The Company has scheduled a telephone conference call for investors and analysts on Tuesday, November 15, 2016 at 9:30 a.m. (Toronto and Bogotá time). Participants will include Gabriel de Alba, Chairman of the Board of Directors of the Company, Jim Latimer, President and Chief Executive Officer and select members of the senior management team.
A presentation will be available on the Company's website prior to the call, which can be accessed at www.pacific.energy.
Analysts and interested investors are invited to participate using the following dial-in numbers:
Participant Number (International/Local): (647) 427-7450
Participant Number (Toll free Colombia): 01-800-518-0661
Participant Number (Toll free North America): (888) 231-8191
Conference ID: 19812784
Webcast: http://www.pacific.energy/en/webcastA replay of the conference call will be available until 23:59 p.m. (Toronto and Bogotá time), Thursday, November 29, 2016 and can be accessed using the following dial-in numbers:
Encore Toll Free Dial-in Number: 1-855-859-2056
Local Dial-in-Number: (416)-849-0833
Encore ID: 19812784
About Pacific:
Pacific Exploration & Production Corp. is a Canadian public company and a leading explorer and producer of natural gas and crude oil, with operations focused in Latin America. The Company has a diversified portfolio of assets with interests in more than 50 exploration and production blocks in various countries including Colombia, Peru, Guatemala, Guyana and Belize. The Company's strategy is focused on sustainable growth in production & reserves and cash generation. Pacific Exploration & Production is committed to conducting business safely, in a socially and environmentally responsible manner.
The Company's common shares trade on the Toronto Stock Exchange under the ticker symbol PEN.
Advisories:
Cautionary Note Concerning Forward-Looking Statements
This news release contains forward-looking statements. All statements, other than statements of historical fact, that address activities, events or developments that the Company believes, expects or anticipates will or may occur in the future, including, without limitation, statements regarding the financial condition and outlook of the Company following the Creditor/Catalyst Restructuring Transaction, the pro forma financial position of the Company as of September 30, 2016, the position of the Company following implementation of the Creditor/Catalyst Restructuring Transaction, the Company's ongoing strategic focus and planning and the Company's planned expense reduction and the achievement of strategic priorities, are forward looking statements. These forward-looking statements reflect the current expectations or beliefs of the Company based on information currently available to the Company. Forward-looking statements are subject to a number of risks and uncertainties that may cause the actual results of the Company to differ materially from those discussed in the forward-looking statements, and even if such actual results are realized or substantially realized, there can be no assurance that they will have the expected consequences to, or effects on, the Company. Factors that could cause actual results or events to differ materially from current expectations include, among other things: the impact of contingent liabilities and various commitments; volatility in market prices for oil and natural gas; a continued depressed oil price environment with a potential of further decline; perceptions of the Company's prospects and the prospects of the oil and gas industry in Colombia and the other countries where the Company operates and/or has investments as the result of the completion of the Creditor/Catalyst Restructuring Transaction or otherwise; the effect of the Creditor/Catalyst Restructuring Transaction on the Company's business and operations; political developments in Colombia, Guatemala, Peru and Guyana; liabilities inherent in oil and gas operations; uncertainties associated with estimating oil and natural gas reserves; competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel; incorrect assessments of the value of acquisitions and/or past integration problems; geological, technical, drilling and processing problems; fluctuations in foreign exchange or interest rates and stock market volatility; delays in obtaining required environmental and other licences; uncertainty of estimates of capital and operating costs, production estimates and estimated economic return; the possibility that actual circumstances will differ from estimates and assumptions; uncertainties relating to the availability and costs of financing needed in the future; changes in income tax laws or changes in tax laws, accounting principles and incentive programs relating to the oil and gas industry; and the other factors discussed under the heading entitled "Risk Factors" and elsewhere in the Company's Amended and Restated Annual Information Form dated October 17, 2016. Any forward-looking statement speaks only as of the date on which it is made and, except as may be required by applicable securities laws, the Company disclaims any intent or obligation to update any forward-looking statement, whether as a result of new information, future events or results or otherwise. Although the Company believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and accordingly undue reliance should not be put on such statements due to the inherent uncertainty therein.
In addition, reported production levels may not be reflective of sustainable production rates and future production rates may differ materially from the production rates reflected in this news release due to, among other factors, difficulties or interruptions encountered during the production of hydrocarbons.
Boe Conversion
The term "boe" is used in this news release. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 5.7 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.
The Company's natural gas reserves are contained in the La Creciente, Guama and other bocks in Colombia as well as in the Piedra Redonda field in Block Z-1, Peru. For all natural gas reserves in Colombia, boe's have been expressed using the Colombian conversion standard of 5.7 Mcf: 1 bbl required by the Colombian Ministry of Mines and Energy, and for all natural gas reserves in Peru, boe's have been expressed using the Peruvian conversion standard of 5.626 Mcf: 1 bbl required by Perupetro S.A. If a conversion standard of 6.0 Mcf: 1 bbl was used for all of the Company's natural gas reserves, this would result in a reduction in the Company's net 1P and 2P reserves of approximately 4.9 and 6.9 MMboe, respectively.
Definitions
Bcf Billion cubic feet.
--- -------------------
Bcfe Billion cubic feet of natural
gas equivalent.
---- ------------------------------
bbl Barrel of oil.
--- --------------
bbl/d Barrel of oil per day.
----- ----------------------
boe Barrel of oil equivalent. Boe's
may be misleading,
particularly if used in
isolation. The Colombian
standard is a boe conversion
ratio of 5.7 Mcf:1 bbl and is
based on an energy equivalency
conversion method primarily
applicable at the burner tip
and does not represent a value
equivalency at the wellhead.
--- -------------------------------
boe/d Barrel of oil equivalent per
day.
----- -----------------------------
Mbbl Thousand barrels.
---- -----------------
Mboe Thousand barrels of oil
equivalent.
---- ------------------------
MMbbl Million barrels.
----- ----------------
MMboe Million barrels of oil
equivalent.
----- -----------------------
Mcf Thousand cubic feet.
--- --------------------
Million Tons LNG One million tons of LNG
(Liquefied Natural Gas) is
equivalent to 48 Bcf or 1.36
billion m3 of natural gas.
---------------- -----------------------------
Net Production Company working interest
production after deduction of
royalties.
-------------- ------------------------------
Total Field Production 100% of total field production
before accounting for working
interest and royalty
deductions.
---------------------- -------------------------------
Gross Production Company working interest
production before deduction of
royalties.
---------------- -------------------------------
WTI West Texas Intermediate Crude
Oil.
--- ------------------------------
SOURCE Pacific Exploration and Production Corporation
