Journey announces second quarter 2023 financial and operating result – Energy News for the Canadian Oil & Gas Industry | EnergyNow.ca

SECOND QUARTER 2023 HIGHLIGHTS

• Increased daily sales volumes by 29% to 12,400 boe/d in the second quarter of 2023 from 9,590 boe/d in the second quarter of 2022. Six months ended June 30 sales volumes increased 40% year over year.

• Generated Adjusted Funds Flow of $11.3 million or $0.18 per basic share and $0.17 per diluted share.

• Produced 6,830 megawatts of electricity at Journey’s power generation facility in Countess, Alberta at an average price of $181.67/MWh.

• Completed the purchase of the 16.5 MW power plant in Mazeppa Alberta on April 28. Following the purchase of Mazeppa Journey also completed the purchase of the land the facility resides on and has entered into an agreement to purchase the sales pipeline delivering supply gas to the power plant from a nearby ATCO meter station.

• Completed a farm-in agreement with a freehold mineral owner in the Gilby area of Alberta. This farm-in, combined with Journey’s existing acreage will give the company access to approximately fifty contiguous, gross sections for Duvernay development drilling. The lands are held on a four year primary term with an option to enter into a secondary term for an additional three years.

SUBSEQUENT HIGHLIGHTS

• Began breaking ground on the construction of our power facility in Gilby Alberta in pursuit of an early 2024 start-up date.

• Entered into agreements for two non-core divestments for aggregate proceeds of $3 million. These divestments closed in July.

Financial & Operating Highlights

OPERATIONS

During the second quarter of 2023, Journey continued integrating the Enerplus Corporation acquisition (the “Acquisition“) that closed on October 31, 2023. This transaction was the primary contributor to the increase in sales volumes from 9,590 boe/d in the second quarter of 2022 to 12,400 boe/d in the second quarter of 2023. The acquisition had a positive impact on Journey’s liquids (crude oil and NGL’s) sales as it increased from 48% in the second quarter of 2022 to 54% in the current quarter. This change will benefit Journey’s netback going forward due to the significant shift towards the more valuable liquids weighting.

The second quarter of 2023 was a challenging period for many central Alberta producers and Journey was not immune to these challenges. Second quarter sales volumes were impacted by the early onset of the wildfire season in central Alberta (185 boe/d); an extensive turnaround at the third party Keyera Rimby facility (85 boe/d); a Westerose pipeline outage (100 boe/d); and the shut-in of the CNRL Kiskiu production, which resulted in a loss of 185 boe/d over the quarter. All production has been restored with the exception of the Kiskiu field, which is scheduled to be rerouted to another third party facility in August 2023.

Throughout 2023, Journey has maintained a conservative posture with respect to capital expenditures. The Company continues to prioritize balance sheet strength along with the expansion of the power business, due to the extensive regulatory timelines associated with adding power to the grid. In the first of half of 2023 Journey did not drill any wells. Journey reduced its 2023 capital budget to $46 million from $63 million and now anticipates drilling 7 (5.6 net) wells in the Medicine Hat and Cherhill pools. These programs are back end loaded with the majority of expenditures occurring in the fourth quarter. The reduced activity levels, project phasing, and unbudgeted downtime has led Journey to reduce its annual production guidance by 500 boe/d from 12,500 – 13,000 boe/d to 12,000 -12,500 boe/d.

Of the $46 million in capital $13 million is related to drilling and completions with a focus on maintaining production volumes. Journey’s capital program has shifted more towards oil-weighted opportunities by replacing natural gas weighted drilling in Westerose with oil weighted drilling in Cherhill and Medicine Hat in 2023 followed by oil drilling in Matziwin in the first quarter of 2024. The ability to maintain production rates above 12,000 boe/d with limited capex is a testament to Journey’s very low corporate decline rate. Approximately $10 million of capital will be devoted to land, seismic, facilities, polymer, and end-of-life costs. $18 million of capital in 2023 is associated with the expansion of Journey’s power business, including the purchase of the Mazeppa facility, building construction, and generating unit modifications for the Gilby project. In addition to all of these development projects, 2023 capital includes a final statement of adjustments from the Acquisition of $5.7 million, which will be offset by $3 million in divestments that have already closed in the third quarter.

Even though Journey shifted its capital program towards oil weighted drilling, the Company continues to advance its repeatable plays in 2023. The Company has completed a farm-in agreement with a freehold mineral owner in the Gilby area of Alberta. This farm-in, combined with Journey’s existing acreage will give the company access to approximately fifty contiguous, gross sections for Duvernay development drilling. These mineral rights are adjacent to Journey’s Gilby gas processing facility. These rights are already overlain by liquid-rich, Glauconite production and contain two Duvernay test wells drilled as part of Journey’s previous joint venture with Kiwetinohk Resources Corp. The primary term of the option agreement is for four years with a further option to extend the term to seven years. Journey currently plans to drill a minimum of three Duvernay wells on this block during the four year primary term.

In addition to unbudgeted downtime, Journey’s second quarter Adjusted Funds Flow was significantly impacted by a number of non-routine costs resulting in higher than forecasted operating expenditures. In aggregate these non-routine expenditures increased the Company’s corporate operating expenditures by approximately $2.7 million for the second quarter over the expected level. Approximately two thirds of these costs were associated with a variety of prior period adjustments, including some adjustments relating to the integration of the transformational acquisition that was closed in late October 2022. The remaining third of these non-routine costs are associated with pipeline integrity issues including line replacements in Ante Creek and Westerose. These issues have now been fully resolved and no additional costs are forecasted. In addition to the non-routine costs, power costs for the quarter were approximately $0.5 million higher than forecast mainly due to rising spot rates. Power cost rates for July and August are trending lower to date. Journey has budgeted corporate operating costs returning to a lower and more stabilized level for the second half of 2023, and is currently budgeting approximately $45 million for this period or $21/boe. The volatility and the uncertainty surrounding power costs is a vindication of Journey’s ongoing strategy to prioritize adding power to the Alberta Power grid as a corporate strategy to enhance the long-term sustainability of our asset base.

EXPANDING JOURNEY’S POWER BUSINESS

For 2023, Journey has continued to prioritize its emerging power generation business and has made significant strides in this regard. Journey is now budgeting $18 million in capital for its power generation business for 2023. The majority of this capital is associated with its Gilby power plant construction and the remainder will be allocated to the Mazeppa power plant purchase. A portion of the total capital for the Gilby project will carry over into the first quarter of 2024. This is expected to be offset by an increase in capital allocation devoted to re-energizing the purchased Mazeppa power plant. In the second quarter of 2023 Journey completed the purchase of Mazeppa, entered into an agreement to purchase the land the plant currently resides on, and purchase the pipeline to transport sales gas from a nearby ATCO meter station to the plant.

Journey has demonstrated, through the operation of its existing Countess power plant, that it is far more profitable to convert its natural gas into electricity, than to merely sell the natural gas at spot prices. The currently operating, 4 MW Countess facility, which was originally commissioned in the fourth quarter of 2020, is already close to paying out the original investment. Based on Journey’s realized power prices in 2022, the average, effective, net realized price for natural gas used to generate power for the year was approximately $10.54/mcf. For the first six months of 2023 the average, effective, net realized price was $7.50/mcf. This price takes into account the cost of the natural gas and the incremental costs of operating the power plant. As a comparison, the average AECO benchmark price for the first six months of 2023 was $2.83/mcf. Journey is planning to increase its power sales to the Alberta electricity grid by over 350% over the next year. The nature of Journey’s asset base is such that it is a large power consumer with power costs representing 25% of overall corporate operating costs.

Journey previously announced that it had entered into an agreement to purchase a 16.5 MW power generation facility through an open auction process that started in November 2022. This facility was originally commissioned by another operator in 2015, and ran for less than one year before being shut-in. The Mazeppa facility is located near the community of High River Alberta and consists of five, 3.3 MW Jenbacher generators and includes switch gear, coolers, and an export transformer. The generators, ancillary equipment, and buildings are in excellent condition as they previously had minimal run time. Journey estimates that the replacement value of this facility is in excess of five times the purchase price.

The Mazeppa power facility acquisition closed in April 2023 and its cost has been included in the capital guidance for 2023. Since agreeing to purchase this facility, Journey has been actively pursuing the option of re-energizing this facility in its existing location. This option was further advanced in early May when Journey entered into a definitive agreement to purchase the land on which the power project is located. Journey also entered into an agreement to purchase a pipeline that delivers supply gas from a nearby ATCO meter station to the plant and is beginning negotiations with ATCO to reactivate the meter station.

As each of these milestones are achieved, Journey is more certain that there is a viable path for re-energizing this facility in place at Mazeppa. That said, the regulatory process to add energy to the Alberta power grid has proven to be more rigid and inflexible than first anticipated and therefore Journey has moved the forecasted restart of Mazeppa from April 2024 to August 2024 in our budget plans. This has shifted some capital for Mazeppa into 2024 from 2023. Journey intends to provide further guidance on the time-line to an on-stream date in due course.

Journey has received preliminary approval to construct a 15.5 MW generation facility at its Gilby gas plant and has procured 17 MW of generating capacity in support of this project. The Company has continued to advance the design and approval of this project. The primary construction phase of this facility was kicked off in August 2023. In addition Journey has signed a contract with an electrical engineering company to provide electronic upgrades for each of the generators. This work is anticipated to be completed in the first quarter of 2024.

When the Gilby and Mazeppa power projects are on-stream, Journey will be in a position to more than offset its corporate power usage with power sales to the Alberta power grid. This will help diversify the corporate revenue stream and effectively provides a hedge against a volatile commodity pricing environment. The record power prices of $311/MW realized in December of 2022, along with the expanding valuations demonstrated by recent market transactions continues to re-inforce the validity of this longer term strategy.

FINANCIAL

While the second quarter of 2023 had operational challenges due to the early start of the wildfire season and its resulting shut-ins, Journey was spared a significant impact on sales volume levels. Sales volumes were down only 4% from the first quarter, but compared to the same quarter of 2022 Journey showed 29% growth in sales volumes. This growth was primarily the result of the 4,000 boe/d acquisition that was consummated in October of 2022. The 71% crude oil and NGL weighting from the Acquisition helped increase Journey’s overall liquids weighting from 48% in the second quarter of 2022 to 54% in the second quarter of 2023. Crude oil sales volumes for the second quarter of 2023 represented 44% of total boe volumes but contributed 77% of total petroleum and natural gas revenues. Natural gas sales volumes contributed 46% of total boe sales volumes in 2023 while contributing 14% of total sales revenues. While aggregate sales volumes increased quarter to quarter, the average commodity prices decreased by 39% from the over this time period with oil down by 35%, natural gas down by 67% and NGL’s down by 44%. Journey posted Adjusted Funds Flow for the second quarter of 2023 of $11.2 million.

On the expense side, and commensurate with the decrease in commodity prices, royalties were lower by 22% in the second quarter of 2023 compared to the second quarter of 2022. On a per boe basis the decline in royalty expense was similar to the commodity price decline at 39%. On a per boe basis, royalties were $9.77/boe in the second quarter of 2023 as compared to $16.12 in the second quarter of 2022. Field operating expenses increased during the second quarter of 2023 as the acquisitions from 2022, workovers, reactivations, plant turnarounds and general inflationary pressures contributed to the total increase. Operating expenses in the second quarter increased to $26.4 million or $23.41/boe as compared to $15.5 million or $17.79 per boe in the same quarter of 2022. Included in the second quarter, 2023 operating expenses were $2.6 million of workover and turnaround while for the second quarter of 2022 the amount was $1.3 million. Some of these costs were non-routine expenses on the acquired assets to bring them up to their full capabilities.

Journey’s general and administrative (“G&A“) costs were lower in 2023 as compared to the same quarter in 2022 as field-related cost recoveries mitigated additional staff costs related to the acquisitions in 2022. G&A was $2.6 million in the second quarter of 2023 as compared to $3.2 million in the second quarter of 2022. On a per boe basis, Journey’s general and administrative costs were $2.38/boe for the first quarter of 2023 and $3.63/boe for the second quarter of 2022.

Finance expenses related to borrowings, or interest costs, increased by 29% to $2.1 million in the second quarter of 2023 from $1.6 million in the same quarter of 2022. Interest-bearing debt increased by 18% in the second quarter of 2023 compared to the same quarter of 2022 mainly due to the vendor-take-back financing associated with the significant 2022 acquisition. The original debt was $45.0 million when Journey closed the acquisition on October 31, 2023 and this has been reduced to $31.0 million at June 30, 2023 with Journey making monthly principal payments of $2.0 million.

Journey realized a net loss of $1.8 million in the second quarter of 2023 compared to income of $28.2 million in the same quarter of 2022. Net loss per basic and diluted share was $0.03 for the second quarter. Adjusted Funds Flow in the second quarter was 66% lower in 2023, wherein the Company generated $11.3 million, or $0.18 and $0.17 per basic and diluted share respectively as compared to $33.4 million, or $0.63 basic and $0.56 per diluted per share respectively in the same quarter of 2022. Cash flow from operations was $10.4 million in the second quarter of 2023 ($0.17 per basic share and $0.16 per diluted share) as compared to $26.0 million in the second quarter of 2022 ($0.49 and $0.43 per basic and diluted share respectively).

Total capital expenditures in the second quarter were $14.8 million including $5.9 million for the purchase of the Mazeppa power generating assets and related land, $5.7 million for final adjustments on the October, 2022 acquisition, and $0.8 million spent on abandonment and reclamation work. Journey exited the second quarter of 2023 with net debt of $74.7 million compared to $29.7 million at June 30, 2022 and $98.8 million at the end of 2022. When comparing quarter to quarter, the higher net debt was mainly attributable to the vendor-take-back debt from the October, 2022 acquisition.

OUTLOOK & GUIDANCE

This guidance incorporates many material underlying assumptions including but not limited to:

• Forecasted commodity prices by month;
• Assumptions of VTB principal payments as principal repayments are based upon realized commodity prices;
• Forecasted operating costs, including forecasted prices for power;
• Forecasted costs for the capital program; and
• Forecasted results and phasing of production additions from the capital program;

Journey has embarked on a careful and prudent expansion of its business plan to grow the Company profitably. This includes executing on acquisitions the timing of which can be unpredictable and when executed on, can defer drilling plans. The October, 2022 acquisition is performing as expected and has been buoyed by commodity price tailwinds. The Company’s success would not be possible without the talented team at Journey, both in the office and the field. Management looks forward to updating you on Journey’s progress on its development path.

About the Company

Journey is a Canadian exploration and production company focused on conventional, oil-weighted operations in western Canada. Journey’s strategy is to grow its production base by drilling on its existing core lands, implementing water flood projects, executing on accretive acquisitions. Journey seeks to optimize its legacy oil pools on existing lands through the application of best practices in horizontal drilling and, where feasible, with water floods.

ADVISORIES

This press release contains forward-looking statements and forward-looking information (collectively “forward looking information”) within the meaning of applicable securities laws relating to the Company’s plans and other aspects of the anticipated future operations, management focus, strategies, financial, operating and production results, industry conditions, commodity prices and business opportunities. In addition, and without limiting the generality of the foregoing, this press release contains forward-looking information regarding decline rates, anticipated netbacks, drilling inventory, estimated average drill, complete and equip and tie-in costs, anticipated potential of the Assets including, but not limited to, EOR performance and opportunities, capacity of infrastructure, potential reduction in operating costs, production guidance, total payout ratio, capital program and allocation thereof, future production, decline rates, funds flow, net debt, net debt to funds flow, exchange rates, reserve life, development and drilling plans, well economics, future cost reductions, potential growth, and the source of funding Journey’s capital spending. Forward-looking information typically uses words such as “anticipate”, “believe”, “project”, “expect”, “goal”, “plan”, “intend” or similar words suggesting future outcomes, statements that actions, events or conditions “may”, “would”, “could” or “will” be taken or occur in the future.

The forward-looking information is based on certain key expectations and assumptions made by management, including expectations and assumptions concerning prevailing commodity prices and differentials, exchange rates, interest rates, applicable royalty rates and tax laws; 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; the ability to efficiently integrate assets and employees acquired through acquisitions, including the Acquisition, the ability to market oil and natural gas successfully and the ability to access capital. Although we believe that the expectations and assumptions on which such forward-looking information is based are reasonable, undue reliance should not be placed on the forward-looking information because Journey can give no assurance that they will prove to be correct. Since forward-looking information addresses future events and conditions, by its very nature they involve inherent risks and uncertainties. The actual results, performance or achievement could differ materially from those expressed in, or implied by, the forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do so, what benefits that we will derive therefrom. Management has included the above summary of assumptions and risks related to forward-looking information provided in this press release in order to provide security holders with a more complete perspective on future operations and such information may not be appropriate for other purposes.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect the operations or financial results are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).These forward looking statements are made as of the date of this press release and we disclaim any intent or obligation to update publicly any forward-looking information, whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.

This press release contains future-oriented financial information and financial outlook information (collectively, “FOFI”) about Journeys prospective results of operations, funds flow, netbacks, debt, payout ratio well economics and components thereof, all of which are subject to the same assumptions, risk factors, limitations and qualifications as set forth in the above paragraphs. FOFI contained in this press release was made as of the date of this press release and was provided for providing further information about Journey’s anticipated future business operations. Journey disclaims any intention or obligation to update or revise any FOFI contained in this press release, whether as a result of new information, future events or otherwise, unless required pursuant to applicable law. Readers are cautioned that the FOFI contained in this press release should not be used for purposes other than for which it is disclosed herein. Information in this press release that is not current or historical factual information may constitute forward-looking information within the meaning of securities laws, which involves substantial known and unknown risks and uncertainties, most of which are beyond the control of Journey, including, without limitation, those listed under “Risk Factors” and “Forward Looking Statements” in the Annual Information Form filed on www.SEDAR.com on March 31, 2023. Forward-looking information may relate to the future outlook and anticipated events or results and may include statements regarding the business strategy and plans and objectives. Particularly, forward-looking information in this press release includes, but is not limited to, information concerning Journey’s drilling and other operational plans, production rates, and long-term objectives. Journey cautions investors in Journey’s securities about important factors that could cause Journey’s actual results to differ materially from those projected in any forward-looking statements included in this press release. Information in this press release about Journey’s prospective funds flows and financial position is based on assumptions about future events, including economic conditions and courses of action, based on management’s assessment of the relevant information currently available. Readers are cautioned that information regarding Journey’s financial outlook should not be used for purposes other than those disclosed herein. Forward-looking information contained in this press release is based on current estimates, expectations and projections, which we believe are reasonable as of the current date. No assurance can be given that the expectations set out in the Prospectus or herein will prove to be correct and accordingly, you should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation and do not undertake to update this information at any particular time except as required by applicable securities law.

Non-IFRS Measures

The Company uses the following non-IFRS measures in evaluating corporate performance. These terms do not have a standardized meaning prescribed by International Financial Reporting Standards and therefore may not be comparable with the calculation of similar measures by other companies.

Measurements

All dollar figures included herein are presented in Canadian dollars, unless otherwise noted.

Where amounts are expressed in a barrel of oil equivalent (“boe”), or barrel of oil equivalent per day (“boe/d”), natural gas volumes have been converted to barrels of oil equivalent at nine (6) thousand cubic feet (“Mcf”) to one (1) barrel. Use of the term boe may be misleading particularly if used in isolation. The boe conversion ratio of 6 Mcf to 1 barrel (“Bbl”) of oil or natural gas liquids is based on an energy equivalency conversion methodology primarily applicable at the burner tip, and does not represent a value equivalency at the wellhead. This conversion conforms to the Canadian Securities Regulators’ National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities.

Abbreviations

The following abbreviations are used throughout these MD&A and have the ascribed meanings:

All volumes in this press release refer to the sales volumes of crude oil, natural gas and associated by-products measured at the point of sale to third-party purchasers. For natural gas, this occurs after the removal of natural gas liquids.

No securities regulatory authority has either approved or disapproved of the contents of this press release.

SOURCE Journey Energy Inc.

View original content: http://www.newswire.ca/en/releases/archive/August2023/08/c4596.html