Kiwetinohk reports second quarter results, achieves record production and cash flow while advancing Green Energy projects

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Kiwetinohk reports second quarter results, achieves record production and cash flow while advancing Green Energy projects

by ahnationtalk on August 11, 202247 Views

Calgary, Alberta – August 11, 2022 – Kiwetinohk Energy Corp. (TSX: KEC), an energy transition company, today announced its second quarter 2022 results. The Company achieved record quarterly adjusted funds flow from operations1 of $76.2 million, reflecting both the strong commodity price environment and new record quarterly average production. Kiwetinohk, as a shipper on Alliance Pipeline, is uniquely positioned with approximately 90% of its natural gas anticipated to be sold into the currently strong Chicago market in the second half of the year. The Company is encouraged by the outlook for North American natural gas prices and believes its ability to access the Chicago market presently offers attractive opportunities for enhanced price realization. Second quarter production of 16,810 boe/d positions the Company to achieve its updated 2022 production guidance of 15,500-17,000 boe/d.

The Green Energy division progressed projects through engineering, community consultation and regulatory milestones. Financing discussions for the 400 MW Homestead Solar project have progressed well and are advancing with several potential financial partners.

“Kiwetinohk has firmly delivered production growth via the accelerated development program announced last quarter, taking clear advantage of our strong assets, attractive access to US gas markets and a very supportive overall commodity price environment. We remain focused on safely and efficiency, executing our upstream capital investment program, advancing our Green Energy power projects and selecting our financial partner for our first power projects by year end,” said CEO Pat Carlson.

Quarterly highlights

Upstream

  • Record quarterly average production of 16,810 boe/d.
  • Record quarterly adjusted funds flow from operations1 of $76.2 million, or $1.71/share (diluted).
  • Strong operating netback1 of $70.70/boe before hedging ($53.19/boe after hedging).
  • Sold 78% of natural gas production to strong Chicago market during the quarter with Chicago sales anticipated to increase to 90% for the second half of 2022.
  • Capital spending totaled $52.3 million, predominately on upstream oil and gas development at Fox Creek.
  • Net commodity sales from purchases1 of natural gas in Q2 of $5.5 million before hedging.
  • Four-well Simonette pad completed drilling in July, shortly after the end of the second quarter, with completion activity recently underway.

Green Energy

  • The 400 MW Homestead Solar project entered Alberta Electric System Operator (AESO) stage 3 on June 7, 2022; on track to secure grid capacity.
  • For the 101 MW Opal Firm Renewable project, the Alberta Utilities Commission (AUC) power plant application progressed during the quarter and achieved approval on August 3.
  • Non-GAAP measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities. Please refer to the Corporation’s MD&A as at and for the three months ended June 30, 2022, under the section “Non-GAAP Measures” available on Kiwetinohk’s SEDAR profile at www.sedar.com
  • Financing discussions for the Homestead Solar project at an advanced stage with several potential investors.
  • Expanded the Company’s solar development portfolio with the acquisition of an early-stage 150 MW solar development project in central Alberta on May 18.

Financial

  • Available credit facility capacity1 was $273.6 million as at June 30, 2022.
  • Gas Cost Allowance (GCA) recovery received during the quarter was $8.2 million higher than originally accrued, significantly reducing stated royalty rates.
  • Incremental operating costs of $5.5 million incurred during the quarter inflated operating costs for the quarter by $3.56/boe.
  • The Company realized free funds flow from operations1 of $23.9 million during the quarter, resulting in reduced debt quarter-over-quarter.
  • Net debt to annualized adjusted funds flow from operations1 of 0.33x at quarter end, down from 0.66x at the end of the first quarter, below the corporate target ceiling of 1.0x.

Financial and operating results

Q2 2022 Q1 2022 Q2 2021 YTD 2022 YTD 2021
Sales volumes 5,673 4,581
Condensate (bbl/d) 3,475 3,096 1,595
Light oil (bbl/d) 718 876 331 797 337
Heavy oil (bbl/d) 10 13 29 11 31
NGLs (bbl/d) 1,870 1,561 1,220 1,716 659
Natural gas (Mcf/d) 51,232 43,970 36,723 47,621 19,045
Total (boe/d) 16,810 13,253 10,797 15,042 5,797
Oil and condensate % of production 38% 33% 32% 35% 34%
NGL % of production 11% 12% 11% 11% 11%
Natural gas % of production 51% 55% 57% 54% 55%
Realized prices 131.33 125.46
Condensate ($/bbl) 115.77 76.60 76.63
Light oil ($/bbl)) 133.46 115.85 75.61 123.83 70.35
Heavy oil ($/bbl) 107.25 85.83 57.85 95.30 52.80
NGLs ($/bbl) 86.71 66.03 42.04 77.36 40.82
Natural gas ($/Mcf) 9.98 6.35 4.06 8.32 4.04
Total ($/boe) 90.17 66.96 43.01 80.00 43.37
Royalty expense ($/boe) (2.69) (6.74) (2.60) (4.47) (2.64)
Operating expenses ($/boe) (12.11) (9.56) (8.10) (10.99) (8.14)
Transportation expenses ($/boe) (4.67) (4.55) (4.36) (4.62) (4.13)
Operating netback 1 ($/boe) 70.70 46.11 27.95 59.92 28.46
Net commodity sales from purchases ($/boe) 1 3.58 0.50 (1.19) 2.23 (1.11)
Realized loss on risk management ($/boe) 4 (21.09) (11.09) (3.42) (16.71) (6.09)
Adjusted operating netback 1 53.19 35.52 23.34 45.44 16.13
Financial results ($000s, except per share amounts) 137,931 217,797
Commodity sales from production 79,866 42,261 45,503
Net commodity sales from purchases (loss) 1 5,486 596 (1,167) 6,082 (1,167)
Cash flow from (used in) operating activities 38,780 25,332 (15,753) 64,112 (19,332)
Adjusted funds flow from (used in) operations 1 76,232 37,002 17,905 113,234 15,245
Per share basic 2, 3 1.73 0.84 0.61 2.58 0.63
Per share diluted 2, 3 1.71 0.84 0.61 2.55 0.63
Net debt to annualized adjusted funds flow from 0.33 0.33
operations 1 0.66 2.92 2.92
Free funds flow (deficiency) from operations 23,884 6,674
(excluding acquisitions/dispositions) 1 (17,210) 14,035 19,433
Net income (loss) 44,854 (24,552) 3,915 20,302 (42,352)
Per share basic 2, 3 1.02 (0.56) 0.47 0.46 (1.34)
Per share diluted 2, 3 1.01 (0.56) 0.47 0.46 (1.34)
Capital expenditures prior to acquisitions/ 52,348 54,212 3,870 106,560 4,188

 

(dispositions) (1,620) (1,858)
Acquisitions (dispositions) (238) 282,414 282,414
Total capital expenditures 50,728 53,974 286,284 104,702 286,602
Balance sheet ($000s, except share amounts) 744,454 744,454
Total assets 662,245 572,401 572,401
Long-term liabilities 180,619 145,549 142,838 180,619 142,838
Net debt (surplus) 1 55,027 73,521 (42,105) 55,027 (42,105)
Adjusted working capital deficit (surplus) 1 (19,736) 21,466 (18,139) (19,736) (18,139)
Weighted average shares outstanding 2, 3 44,061,471 43,948,511
Basic 43,815,340 29,506,300 24,285,200
Diluted 44,502,777 43,815,340 29,506,300 44,332,524 24,285,200
Shares outstanding end of period 2 44,111,135 44,042,515 33,436,900 44,111,135 33,436,900

1 –Non-GAAP measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities. Please refer to the Corporation’s MD&A as at and for the three months ended June 30, 2022, under the section “Non-GAAP Measures” available on Kiwetinohk’s SEDAR profile at www.sedar.com

2 – Per share amounts are based on weighted average basic and diluted shares, respectively.

3 – Realized loss on risk management contracts includes settlement of financial hedges on production and natural gas purchases.

Guidance

Management remains confident in the previously communicated 2022 guidance. With two quarters of results, adjustments have been made to guidance to incorporate first half actuals.

Steady performance from existing assets and the addition of six new development wells year-to-date contributed to average second quarter production rates of 16,810 boe/d, at the high end of the Company’s annual production guidance. Accordingly, the company is increasing the lower end of production guidance for 2022 by 500 boe/d to a new range of 15,500-17,000 boe/d.

Royalty rates are reduced to an annual range of 10-12%, from the prior range of 11%-14%. This was driven by a larger than expected Gas Cost Allowance (GCA) credit during the second quarter that is netted against royalties. In addition, while Alberta royalty rates are set on AECO pricing, the royalty rate paid will appear lower when measured against the higher Chicago price expected to be received by the Company on an estimated 90% of its natural gas sales in the second half of the year. Based on the mid-point of production guidance, and first half 2022 realized prices, every 1% reduction to royalty rates improves cash flows by ~$4.7 million.

General and administrative (G&A) cost guidance increased to a range of $18-$20 million, from a prior range of $15-$18 million. The increase comes as a result of non-cash working capital adjustments from 2021 corporate acquisitions of $0.6 million ($0.23/boe), higher than forecast one-time TSX listing and reporting related expenses and slightly higher than forecast new hires required to support the Company’s increased growth profile. The Company expects to benefit from improving G&A/boe costs in inverse proportion to projected production growth targets.

The following table sets out Kiwetinohk’s revised and previous adjusted funds flow from operations, net debt to adjusted funds flow from operations, capital expenditures, costs and production guidance for 2022:

Operational & financial guidance Revised Revised Original
August 11, 2022 May 18, 2022 January 12, 2022
Production (2022 average) 1 Mboe/d 15.5 – 17.0 15.0 – 17.0 13.0 – 15.0
Oil & liquids Mbbl/d 7.75 – 8.50 7.5 – 8.5 6.50 – 7.50
Natural gas MMcf/d 46.5 – 51.0 45 – 51 39 – 45
Production by market 2 % 100% 100% 100%
Chicago % 80% – 85% 80% – 85% 87% – 97%
AECO % 15% – 20% 15% – 20% 3% – 13%
Financial
Royalty rate % 10% – 12% 11% – 14% 12% – 15%

 

Operating costs 1 $/boe $7.50 – $8.50 $7.50 – $8.50 $7.50 – $8.50
Transportation $/boe $5.00 – $6.00 $5.00 – $6.00 $5.00 – $6.00
Corporate G&A expense 3 $MM $18 – $20 $15 – $18 $15 – $18
Cash taxes $MM $0 $0 $0
Capital guidance $MM 290 – 310 280 – 310 210 – 240
Upstream $MM 275 – 290 265 – 290 200 – 220
Green Energy $MM 15 – 20 15 – 20 10 – 20
Drilling – Fox Creek wells 16 16 11
Duvernay wells 15 15 10
Montney wells 1 1 1
Sensitivities
2022 Adjusted Funds Flow from
Operations 4, 5, 6
US$70/bbl WTI & US$3.75/MMBtu HH $MM $210 – $230 $190 – $200 $145 – $155
US$80/bbl WTI & US$4.25/MMBtu HH $MM $220 – $240 $210 – $220 $165 – $175
2022 Net debt to Adjusted Funds Flow from
Operations 4, 5, 6
US$70/bbl WTI & US$3.75/MMBtu HH X 0.5x 0.7x 1.0x
US$80/bbl WTI & US$4.25/MMBtu HH X 0.4x 0.6x 0.7x

1 – Operating costs include scheduled Fox Creek plant turnarounds.

2 – Chicago natural gas sales of ~90% expected for second half of 2022.

3 – Includes all G&A expenses for all divisions of the Company – Corporate, Upstream, Green Energy and Business Development.

4 – Non-GAAP measure that does not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other entities. Please refer to the Corporation’s MD&A as at and for the three months ended June 30, 2022, under the section “Non-GAAP Measures” available on Kiwetinohk’s SEDAR profile at www.sedar.com

5 – H1/22 actual prices with US$70/Bbl WTI flat; US$3.75/MMBtu HH flat; US$0.79/CAD flat thereafter for remainder of 2022.

6 – H1/22 actual prices with US$80/Bbl WTI flat; US$4.25/MMBtu HH flat; US$0.81/CAD flat thereafter for remainder of 2022.

Upstream operational update

Production for the quarter and the first six months averaged 16,810 boe/d and 15,042 boe/d, respectively. Incremental operating costs of $5.5 million incurred during the quarter inflated operating costs by $3.56/boe. Operating costs including periodic facility turnarounds but excluding other discretionary items was $10.25/boe. Half of the incremental costs during this quarter were related to scheduled plant turnarounds while the other half were related to a decision to accelerate new well production which required producing through higher cost temporary flowback equipment ahead of permanent tie-in operations. This decision was made to take advantage of the high commodity price environment. Periodic items incurred in the first half of 2022, combined with ongoing production growth, suggest an expectation to improve operating costs during the second half of the year.

Significant Duvernay activity is underway at Simonette, the focus area of the 2022 development program. The two wells drilled in late 2021 and an additional two wells drilled in the first quarter are all producing through permanent facilities and, on average, performing as expected. The strongest and longest producing well has been onstream since the end of February and has averaged production rates of approximately 5 MMcf/d of natural gas and NGL in addition to 800 bbls/d of condensate.

The Company recently finished drilling four additional wells on a single pad and completion operations are currently underway. The wells are scheduled to come on production in late Q3 or early Q4. The specific timing of these wells coming on production could impact Q3 results, but the wells are expected to more fully contribute to Q4. Kiwetinohk also commenced drilling at a two-well pad in the northern part of Simonette offsetting the wells drilled and completed earlier this year. These wells are expected to come on production late in the year or early 2023, having negligible impact on 2022 results but contributing to expected Q1/23 production rates of 22,000-23,000 boe/d as previously guided.

Overall, Kiwetinohk’s strong base production coupled with new wells coming on-line delivered solid production during the first half of the year in a strong commodity price environment further supported by superior gas pricing in Chicago. Steady operations and continuous learning contributed to ongoing efficiency improvements, offsetting some of the inflationary pressure experienced by the upstream oil and gas sector of the energy industry.

Green Energy development update

Kiwetinohk continues to make significant progress in the development and permitting of its 1,950 MW solar and gas-fired power project portfolio.

The Company advanced regulatory and permitting activities for its power plant portfolio during Q2. For the 400 MW Homestead Solar project (Solar 1), Kiwetinohk progressed the AUC power plant and substation application by working with community stakeholders to resolve questions on project impacts and successfully addressed all known concerns regarding the project. Management estimates AUC regulatory approval by mid October. On June 7, 2022, the Homestead Solar project entered into the AESO Stage 3, which is the final stage prior to conditionally securing 400 MW of grid capacity for the project. Kiwetinohk also advanced the Alberta Environment and Parks (AEP) industrial application and AUC power plant and substation applications (submitted on March 31, 2022, and April 5, 2022, respectively) for the 101 MW Opal Firm Renewable project. Subsequent to Q2, Kiwetinohk received AUC power plant approval for the Opal project on August 3, 2022 and expects AEP industrial approval by year end. The 300 MW Granum solar project (Solar 2) entered AESO Stage 2 on August 5, 2022.

The Company will evaluate engineering, procurement and construction (EPC) bids as part of its due diligence process prior to reaching a final investment decision (FID) for Homestead and Opal. Kiwetinohk launched an EPC request for proposal (RFP) for Homestead on July 10, 2022, with tier one EPC companies, and bids are due in September 2022.

The Company completed the acquisition of an early- stage 150 MW (with expansion potential to 300 MW) solar development project (project Phoenix, or Solar 3) in central Alberta on May 18, 2022. Located near Red Deer, this solar project diversifies and complements Kiwetinohk’s previously existing solar development portfolio located in southern Alberta. The 150 MW first phase of the Phoenix project may reach FID as early as the fourth quarter of 2023, subject to regulatory review timelines.

Kiwetinohk continues to progress development of its Natural Gas Combined Cycle (NGCC) 1 and NGCC 2 projects with pre-FEED analysis, carbon capture, use and storage (CCUS) evaluation and preliminary environmental scoping underway.

In conjunction with advancing the regulatory process, environmental permitting, engineering and capital cost updates of Kiwetinohk’s power portfolio, the Company has engaged with several potential financial partners to seek external capital for the funding of its power portfolio, with the Homestead Solar project expected to be the first project financed. The Company is in discussions with several parties and estimates completion of negotiations and selection of a financial partner for Homestead, and possibly other projects, by year-end.

Prior to reaching FID for a power project development, Kiwetinohk seeks to have the following key milestones completed: stakeholder consultations, AUC power plant and transmission line approvals, AEP industrial approval, grid access, gas supply, selection of EPC and securing of financing partners. Notwithstanding significant progress made across its power project portfolio on both the regulatory and financing fronts during the first half of 2022, Kiwetinohk is updating FID and COD timing estimates for each of its projects to reflect experiences gained during the Homestead and Opal processes, specifically relating to providing additional time for public consultation and regulatory consideration. Consistent with disclosure in Kiwetinohk’s Annual Information Form, updated estimates for FID and COD dates have been set out as the earliest dates such milestones are expected to be achieved, reflecting the uncertainty of pre-construction development timelines for large-scale industrial projects. Specific to Opal and the Company’s NGCC projects, Kiwetinohk is seeking additional clarity regarding the federal government’s evolving view on gas-fired power projects.

As at August 10, 2022 early-stage development and design factors and the status of each project are summarized in the following table:

Early-stage Green Homestead Opal Granum Phoenix
Energy (Firm NGCC 2 NGCC 1
development, (Solar 1) Renewable 1) (Solar 2) (Solar 3)
design factors &
status
Capacity 400 MW 101 MW 300 MW 150 MW 500 MW 500 MW
(nameplate, AC)
Capacity 400 MW 97 MW 300 MW 150 MW 460 MW 460 MW
(net to grid, AC)
AESO stage 3 2 2 2 2 2
Site control Secured Near Secured Secured In progress Secured
completion
Consultation Completed/ Completed/ Planning Planning Planning Planning
(plant/transmission) Planning
Underway underway underway underway underway
Underway
AUC plant AUC plant AUC
Regulatory / application application applications Work Work Work
submitted; approved; AEP to be filed;
Environmental 6 underway underway underway
AEP low risk application AEP low
rating under review risk rating
FEED FEED
completed; completed; Feasibility Feasibility Pre-FEED Pre-FEED
Engineering EPC request detailed
complete complete underway underway
for engineering
proposals launched
Estimated regulatory
approval date (plant Q1 2023 Q2 2023 Q4 2023 Q4 2023 1H 2024 2H 2024
& transmission)
Earliest FID date Q1 2023 Q2 2023 Q4 2023 Q4 2023 2H 2024 1H 2025
Earliest COD date4 Q3 2025 Q2 2025 Q4 2025 Q2 2025 2H 2027 1H 2028
Total installed $750 $156 $492 $257 $875 $875
capital cost (Class 2) (Class 3) (Class 3) (Class 4) (Class 4) (Class 4)
($ million) 1, 2, 3, 5

1 – Total installed cost estimates are classified in a manner consistent with American Association of Cost Engineering (AACE) standards.

2 – Total installed cost numbers exclude carbon capture and sequestration for gas-fired projects. CCUS costs are estimated to be an incremental 60 to

80% of the total installed cost based on an engineering study by Gas Liquids Engineering (GLE).

3 – None of the Company’s planned power generation projects have a final design, performance projection or cost estimate, or full regulatory approval or internal or external funding. There is no assurance that the power generation projects will proceed as described or at all.

4 – If an FID decision is reached, the Company will advance the project towards an estimated Commercial Operations Date (COD).

5 – Capital costs may increase due to the state of the current economic environment and related inflation and supply chain challenges; specific capital cost adjustments will be applied as projects progress through engineering review stages. Homestead Solar capital cost estimate updated with completion of Class 2 estimated on June 8, 2022.

6 – Regulatory and environmental applications are filed with the Alberta Environment and Parks (AEP) and Alberta Utilities Commission (AUC).

Sustainability update

Kiwetinohk continues to advance its energy transition business strategy through focus on responsible upstream production growth and advancing its Green Energy power projects through regulatory processes. As the Company grows, management remains focused on embedding its culture of safety, Indigenous and stakeholder engagement and energy transition strategy.

Kiwetinohk believes that Canada holds the resources, clean technology and experience to thrive in the energy transition. In Q2, Kiwetinohk submitted several Full Project Proposals to the Government of Alberta for carbon capture, use and storage (CCUS) hub projects. The Company remains very supportive of the Alberta government’s prioritization of CCUS as a pillar of Alberta’s energy strategy and it encourages the federal and provincial governments to enhance collaboration to address the urgency of climate change and energy security through aggressive pursuit of low carbon energy opportunities, including renewable power and gas-fired power with CCUS as well as production of both blue (natural gas-sourced) and green (renewable-sourced) hydrogen.

Kiwetinohk continues to engage with the provincial and federal governments on climate and energy policies and regulations, including the emerging Government of Canada Clean Electricity Regulations.

The Company’s first ESG report outlining its specific ESG priorities and initiatives, including areas such as Inclusion, Equity and Diversity, will be published during the third quarter.

Conference call

Management of Kiwetinohk will host a conference call on August 11 at 8 AM MT (10 AM ET) to discuss results and to field questions.

Participants will be able to listen to the conference call by dialing 1-888- 220-8451 (North America toll free) or 1-647-484-0475 (Toronto and area). A recording will be available for replay until August 18, 2022, by dialing 1-888-203-1112 and using the replay code 3976375.

About Kiwetinohk

We, at Kiwetinohk, are passionate about climate change and the future of energy. Kiwetinohk’s mission is to build a profitable energy transition business providing clean, reliable, dispatchable, low-cost energy. Kiwetinohk develops and produces natural gas and related products and is in the process of developing renewable power, natural gas-fired power, carbon capture and hydrogen clean energy projects. We view climate change with a sense of urgency, and we want to make a difference.

Kiwetinohk’s common shares trade on the Toronto Stock Exchange under the symbol KEC.

Additional details are available within the year-end documents available on Kiwetinohk’s website at www.kiwetinohk.com and SEDAR at www.sedar.com.

Oil and Gas Disclosure

The term “boe” may be misleading, particularly if used in isolation. A boe conversion rate of six thousand cubic feet of natural gas per barrel of oil (6 mcf:1 bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and do 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 from an energy equivalency of 6:1, utilizing a conversion ratio of 6:1 may be misleading as an indication of value.

In this press release, “light oil” refers to light and medium crude oil, “heavy oil” refers to heavy crude oil and “natural gas” refers to conventional natural gas, in each case as defined in NI 51-101.

Abbreviations

$/bbl  dollars per barrel
$/boe  dollars per barrel equivalent
$MM  millions of dollars
AESO  Alberta Electric System Operator
AEP  Alberta Environment and Parks
AIF  Annual Information Form
AUC  Alberta Utilities Commission
bbl/d  barrels per day
boe  barrel of oil equivalent, including crude oil, condensate, natural gas liquids, and natural
gas (converted on the basis of one boe per six mcf of natural gas)
CCUS  Carbon Capture Use and Storage
COD  Commercial Operations Date
FEED  Front End Engineers and Design
FID  Final Investment Decision
HH  Henry Hub
Mbbl/d   millions of barrels per day
Mboe/d  millions of barrels of oil equivalent per day
Mcf/d  thousand cubic standard feet per day
MMboe  million barrels of oil equivalent
MMBtu  million British thermal units
MMcf/d  million cubic feet per day
MW  Megawatt
NGCC  Natural Gas Combined Cycle
WTI  West Texas Intermediate

FOR MORE INFORMATION ON KIWETINOHK, PLEASE CONTACT:

Mark Friesen, Director, Investor Relations

IR phone: (587) 392-4395

IR email: [email protected]

Address: Suite 1900, 250 – 2 Street S.W. Calgary, Alberta T2P 0C1

Pat Carlson, CEO

Jakub Brogowski, CFO

NT4

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