JOY Journey Energy Inc

CALGARY, AB, March 9, 2021 /CNW/ - Journey Energy Inc. (TSX: JOY) (OTCQX: JRNGF) ("Journey" or the "Company") is pleased to announce its 2020 reserves, operating and financial results.  The complete set of financial statements and management discussion and analysis for the year ended December 31, 2020 are posted on www.sedar.com and on the Company's website www.journeyenergy.ca.

Highlights for 2020:

• Produced 8,074 boe/d (46% oil and NGL's) in the fourth quarter and 8,379 boe/d (46% oil and NGL's) for the year.
  
  
• Realized funds flow of $13.5 million for 2020 yielding $0.31 per basic share.
  
  
• Reduced net debt by 33% to $90.4 million from $134.3 million at the end of 2019.
  
  
• Purchased all of the syndicated bank debt outstanding of $75 million for $38 million plus a contingent payment of $5.75 million.
  
  
• Commissioned Journey's 4.2 megawatt electricity generation project in Countess on September 29.
  
  
• Proved developed producing reserves accounted for 40% of total proved plus probable reserves while proved reserves accounted for 58%.
  
  
• Total Proved reserves declined by 2,932 Mboe due to commodity pricing. This decline was partially offset by positive technical revisions of 1,693 Mboe due to improved performance from our asset base, even though no wells were drilled in 2020.
  
  
• Proved plus probable reserve life index of 16.1 years.
  
  
• Proved developed producing and proved plus probable developed producing reserve life index of 6.9 and 9.4 years respectively, are testaments to Journey's low decline asset base.
  
  
• Future development capital in the reserves report is:
• • $90.2 million for Proved reserves, which is 31% lower than 2019.
  • $188 million for Proved plus Probable reserves, or 26% lower than 2019.

OPERATIONS

Journey achieved sales volumes of 8,379 boe/d (46% crude oil and NGL's) in 2020, representing an 11% reduction from 9,372 (48% crude oil and NGL's) produced in 2019.  The lower volumes in 2020 are primarily the result of natural declines due to a lack of capital investment but also include reduced volumes due to shutting-in uneconomic production for a portion of the year.  In mid-March of 2020 the COVID-19 pandemic was causing systematic shutdowns of global economies, and world oil prices experienced a severe decline.  WTI oil prices declined below USD $20/bbl making several of Journey's oil properties uneconomic to operate.  Consequently, Journey took the prudent and immediate action to shut-in approximately 1,500 boe/d (73% crude oil and NGL's) of its production effective the first week of April.  Journey restarted the majority of shut-in production early in the third quarter.

Journey did not drill or complete any wells in 2020.  Capital expenditures for 2020 were limited to maintenance capital where deemed necessary, as well as the completion and commissioning of our power generation project.    The power project commenced operations in late September.  One key feature of the power project as designed is the ease in which the project can be expanded to over 6 megawatts from the current maximum capacity of 4.0 megawatts, with the addition of one additional power generation unit.  Over the past six months Journey has seen a dramatic increase in pricing for both natural gas and electricity, and remains well positioned to take full advantage of these increases in 2021.

In 2020 Journey was focused on repositioning its capital structure to provide maximum liquidity over the medium term.  This focus will continue into 2021 with Journey planning to use free cash flow to satisfy short term obligations.  Journey has been able to take advantage of the previously announced Site Rehabilitation Program whereby funds are provided to industry to complete abandonment work.  Journey has been allocated approximately $3.37 million in programs 1-5.  These funds will be utilized to abandon wells, facilities, and also to conduct Phase 1 and Phase 2 environmental assessments.  Approximately $550 thousand of these funds have been expended to date.  Technical teams at Journey have reviewed and approved for abandonment, approximately 20 well sites in Westerose; 30 well sites in Matziwin; and 50 well sites in Crystal.  This program will be ongoing throughout 2021 and into 2022.

The Duvernay drilling program has advanced to the point where Journey has significant production history for the three wells drilled by its joint venture partner, Kiwetinohk Resources Corp. ("KRC").  These wells rank in the top tier of all wells drilled to date in the East Shale Duvernay basin.  The success to date in this play highlights the significant development potential of the Duvernay land block.  The joint venture currently controls approximately 116 gross sections where Journey has a working interest of 37.5% (43.5 net sections).  Since KRC did not fully complete all possible earning during the option phase of the farm-out agreement, which ended in late August 2020, Journey retained its 100% interest in 31 unearned sections.  This, plus an additional 6 gross sections Journey previously acquired, results in the Company controlling 80.5 net sections or approximately 53% of the total acreage within the total Duvernay land block.  As Journey recovers from the 2020 price shock associated with the pandemic, the capital available for this project in 2021 is limited, despite this resource having attractive returns in the current pricing environment.  As a result, Journey is actively seeking opportunities to monetize this opportunity or find a Joint Venture partner.

Journey plans on returning to the field in late 2021 or early 2022. Journey will continue to monitor broader market forces and adjust its capital plans on an ongoing basis.  Journey has a development drilling program ready for Skiff, Cherhill and Crystal.  The horizontal development program in south Skiff follows up the three wells drilled there in 2018.  During the third quarter of 2019, the central well of the three well pattern was converted to a water injection well, and the offsetting producers have now begun to respond favorably to the injection.  The Company's low decline and predictable asset base will help the Company maintain its business and restore our long term sustainability. 

FINANCIAL

Debt Restructuring
2020 will enter its place in history as a year with many challenges.  During the first phase of the COVID-19 pandemic, the oil and gas industry experienced the largest single oil price decline in history.  For Journey, there was no challenge more significant than dealing with its outstanding bank debt.  The year started with strong commodity prices but by March, the world fell victim to the turmoil of the pandemic.  The sharp decline in commodity prices put extraordinary stress on the reserve values that supported Journey's bank borrowings. Accordingly, the banks reduced the borrowing base and as a result Journey became drawn in excess of this new borrowing base level.  Cash flows associated with these low commodity prices were insufficient for Journey to repay this deficiency.  The company spent the majority of 2020 in forbearance, trying to work out a solution with the banks that provided the remaining stakeholders an opportunity to weather this potentially short term storm. 

These efforts culminated in a multi-party transaction on October 30, 2020, whereby Journey's largest shareholder and debt provider, Alberta Investment Management Corporation ("AIMCo"), loaned Journey $38 million to buy out the outstanding bank debt of $75 million.  This restructuring was a milestone for Journey and represented the culmination of a substantial, collaborative effort from all parties.  Journey successfully emerged from the state of forbearance and now has all of its borrowings held by AIMCo.  AIMCo's support and confidence in the Journey team provided the much needed credit stability and financial flexibility to allow it control its own destiny. Events occurring subsequent to this transaction, including the rise in commodity prices, and the beginnings of the world emerging from the ravages of the pandemic, suggest that these efforts will benefit Journey stakeholders for years to come.

Operating Results
While oil prices recovered somewhat in the third quarter, the COVID-19 pandemic continued to wreak havoc on world economies and worldwide oil consumption continued to be challenged.  Journey's realized oil prices during the fourth quarter averaged $42.46/bbl which was 26% lower than the $57.70/bbl realized in the fourth quarter of 2019.  Natural gas prices showed strength as Journey realized $2.57/mcf compared to $1.74/mcf in the fourth quarter of 2019.  However, Journey's average realized commodity prices were 15% lower during the fourth quarter of 2020 at $26.46/boe as compared to $31.17/boe in the same quarter in 2019.  Journey's sales volume mix shifted more towards natural gas as the uneconomic, oil production that was shut-in at the beginning of the second quarter was brought back on-line in stages during the third and fourth quarters and therefore sales volumes for the year and the quarter were not at full capacity.  Natural gas volumes accounted for 54% (2019 – 51%) of total volumes sold in the fourth quarter while crude oil production dropped to 38% in 2020 from 42% in 2019.  On the revenue side, crude oil and NGL's comprised 69% of total revenues for the fourth quarter while for the same quarter in 2019 they were 83%.   Journey's hedging position yielded a realized gain of $0.4 million during the fourth quarter, bringing the year-to-date gains to $7.9 million.  The Company continued to pursue cost control initiatives initiated earlier in the year in response to the pandemic.  On a per boe basis, field operating expenses (royalties, operating expenses, and transportation expenses) were 22% lower at $15.36/boe during the fourth quarter of 2020 as compared to $19.72/boe in the fourth quarter of 2019. 

Journey ensured that all controllable costs were minimized, while continuing to operate its wells in a very safe manner.  General and administrative costs were 63% lower in the fourth quarter at $605 thousand as compared to $1,616 thousand in the fourth quarter of 2019.  The G&A cost reduction initiatives initiated in the second quarter had a direct bearing on the fourth quarter results. During the second quarter, Journey reduced compensation levels to its staff by approximately 10% on top of the already reduced work week implemented in 2019; temporarily furloughed approximately one-quarter of its workforce; obtained partial rent deferral for its head office lease; and applied for benefits under the Canadian Emergency Wage Subsidy program.  These initiatives continued into the fourth quarter wherein Journey re-structured its head office lease by reducing its space and reducing its cost per square foot.  Journey estimates that it will save approximately $1.5 million per year in head office rent starting in 2021. On a per boe basis, Journey's G&A was $0.81 for the fourth quarter of 2020, or 56% lower than the $1.86 realized in the fourth quarter of 2019. 

Finance expenses related to borrowings decreased by 12% to $2.0 million in the fourth quarter of 2020 from $2.3 million in the same quarter of 2019.  Average, interest-bearing debt decreased by 18% in the fourth quarter of 2020 compared to 2019 as a result of the debt repurchase for less than its face value on October 30.  The increased finance costs for the full year of 2020 were the result of higher interest rates on the new term debt that replaced the bank debt. 

Journey realized net earnings of $32.3 million in the fourth quarter of 2020, which was largely attributable to the gain on settlement of the bank debt of $35.7 million.  For the year to date this gain was over-shadowed by the large asset impairment of $60.9 million taken in the first quarter. This impairment was attributable to the sharp decline in commodity prices experienced in the first quarter. For the entire year Journey suffered a loss of $56.6 million or $1.31 per basic and diluted shares as compared to a loss in 2019 of $31.4 million or $0.78 per basic and diluted shares.

Capital program
The Company spent $0.8 million in its capital program during the fourth quarter with almost all of this spending directed to the ongoing work of Journey's power generation project.  The power project was commissioned on September 29.  Capital was conserved throughout the year for two mains reasons. Early on in the pandemic, there were very few projects that were economic given that realized oil prices dropped to a low of $6.99/bbl in April and there was great uncertainty as to the depth and length of the global economy shutdowns.  Secondly, all available cash was going toward debt reduction.  As a result, there were limited funds to expend on discretionary projects.  Journey made it a priority to complete the power generation project it started in 2019 and started delivering electricity to the Alberta power grid on September 29.  Management's view is that electricity prices are subject to less fluctuations to the downside than oil and natural gas, and because of this stability it made good sense to diversify its revenue base.  The project was originally built with possible future expansion in mind and should the asset perform as expected, Journey has the optionality to increase its capacity to 6 megawatts of generating capability a very low capital cost.

Journey exited the fourth quarter of 2020 with net debt of $90.4 million, which was 27% lower than the $124.2 million at the end of 2019. In addition, Journey has a very strong income tax pool position with approximately $679 million in aggregate deductions available.

OUTLOOK

In the fourth quarter of 2020, Journey entered into a sale agreement with a third party for its newly commissioned power project, along with the associated producing natural gas assets, which are used as the supply for the electricity generation (the "Countess Assets").  The primary purpose of this transaction was to reduce the borrowings from AIMCo, which were used to purchase Journey's syndicated bank debt.  After of series of extensions to closing date granted to the purchaser, on March 1, 2021 Journey terminated the agreement rather than provide a further extension.  Journey has retained the $902 thousand deposit advanced pursuant to this purchase and sale agreement.  Given the significant appreciation in forward pricing for both natural gas and power, Journey felt that the current consideration realized from the sale did not appropriately capture the potential value and the optionality the assets provide to the Company.  Journey management estimates that cash flow from the Countess Assets will be $1.5-2.0 million in the first quarter of 2021 alone.  In addition, the power facility was constructed in a manner that allows for expanded capacity, providing significant future optionality for the Company.

Retaining the Countess Assets was made possible by the dramatic increase in commodity prices experienced across Journey's entire asset basis since the fall of 2020.  The increase in commodity prices, if sustained, will allow Journey to meet its near term financial obligations from cash flow, allowing the company to restore financial flexibility by late 2021.  In support of this Journey made a partial repayment of $3.75 million to AIMCo on March 2, 2021.  Although this repayment will limit Journey's near term ability to invest capital in its attractive development opportunities the optionality, cash generation capability, and long life characteristics of the Countess Assets justify the trade-off.   

2020 GUIDANCE

Journey has decided to take a conservative approach to capital spending for 2021, with a focus on repaying the new borrowings from AIMCo.  The dramatic increase in commodity prices, coupled with favorable price differentials, and a lower cost structure are combining to make 2021 another transformational year for the Company.  Journey's initial 2021 guidance is presented in the table below:

Journey's 2021 forecasted funds flow is based upon the following assumed annual, average prices: WTI of $59.00/bbl USD; Company differentials of $5.50/bbl USD for oil from Edmonton light sweet prices; realized natural gas price of CDN$2.90/mcf CDN; and a foreign exchange rate of $0.79 US$/CDN$.

Over the course of 2021, we look forward to updating you on our progress as we transition to better days. We thank all of our stakeholders who have stood by us through these difficult and trying times.

RESERVES

The following table provides summary information presented in the GLJ Petroleum Consultants Limited ("GLJ") independent reserves assessment and evaluation effective December 31, 2020, (the "GLJ Report").  GLJ evaluated 100% of Journey's crude oil, natural gas liquids and natural gas reserves.  The evaluation of all of its oil and gas properties was done in accordance with the definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook ("COGE Handbook") and National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). 

The 2020 GLJ reserve report includes the abandonment and reclamation liability associated with all active and inactive wells, facilities, pipelines and gathering systems as recommended in the COGE Handbook.      

Detailed reserve information will be presented in the Company's upcoming Statement of Reserves Data and Other Oil and Gas Information section of the Company's Annual Information Form scheduled to be filed on SEDAR on or before March 31, 2021.

Company Gross Reserves
Based on Forecast Price and Costs as at December 31, 2020

Net Present Values of Future Net Revenue (Based on Forecast Prices and Costs)

The forecast prices and foreign exchange rates used in the GLJ Report are as follows:

RESERVES RECONCILIATION

The following table sets out a reconciliation of the changes in the Corporation's reserves as at December 31, 2020 compared to December 31, 2019 based on forecast prices and cost assumptions in effect at the applicable reserve evaluation date:

FUTURE DEVELOPMENT COSTS

The following table provides the breakdown of future development costs deducted in the estimation of the future net revenue attributable to the proved and proved plus probable reserve categories noted below:

RESERVE LIFE INDEX

The Company's reserve life index ("RLI") is calculated by taking the Company Gross Reserves from the GLJ Report and dividing them by the projected 2021 production as estimated in the GLJ report.

About the Company 

Journey is a Canadian exploration and production company focused on oil-weighted operations in western Canada.  Journey's strategy is to grow its production base by drilling on its existing core lands, implementing waterflood projects, and by 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.

Journey Energy Inc.
700, 517 – 10^th Avenue SW
Calgary, AB T2R 0A8
403-294-1635
www.journeyenergy.ca

FORWARD LOOKING STATEMENTS AND OTHER ADVISORIES

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 30, 2020. Forward-looking information may relate to Journey's 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 Journey believes to be reasonable as of the current date. No assurance can be given that the expectations set out 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.

Readers are cautioned that the above list of risks and factors are not intended to be exhaustive. Additional information on these and other factors that could affect operating and financial results are, or will be, included in reports filed with the applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

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.

1. "Funds Flow" is calculated by taking "cash flow provided by operating activities" from the financial statements and adding or deducting: changes in non-cash working capital; transaction costs; and decommissioning costs.  Funds Flow per share is calculated as Funds Flow divided by the weighted-average number of shares outstanding in the period. Because Funds Flow and Funds Flow per share are not impacted by fluctuations in non-cash working capital balances, we believe these measures are more indicative of performance than the GAAP measured "cash flow generated from operating activities".  In addition, Journey excludes transaction costs from the definition of Funds Flow, as these expenses are generally in respect of capital acquisition transactions.  The Company considers Funds Flow a key performance measure as it demonstrates the Company's ability to generate funds necessary to repay debt and to fund future growth through capital investment.  Journey's determination of Funds Flow may not be comparable to that reported by other companies.  The reconciliation between cash from operating activities on the consolidated financial statements, and Funds Flow can be found in the table below.  Journey also presents Funds Flow per share where per share amounts are calculated using the weighted average shares outstanding consistent with the calculation of net income (loss) per share, which per share amount is calculated under IFRS and is more fully described in the notes to the audited, year-end consolidated financial statements.  
2. "Netback(s)".  The Company uses netbacks to help evaluate its performance, leverage, and liquidity; comparisons with peers; as well as to assess potential acquisitions.  Management considers netbacks as a key performance measure as it demonstrates the Company's profitability relative to current commodity prices.  Management also uses them in operational and capital allocation decisions.  Journey uses three netbacks to assess its own performance and also performance in relation to its peers. These netbacks are operating, Funds Flow and net income (loss).  "Operating netback" is calculated as the average sales price of the commodities sold (excluding financial hedging gains and losses), less royalties, transportation costs and operating expenses.  "Funds Flow netback" begins with the operating netback and deducts general and administrative costs, interest costs and then adds or deducts any realized gains or losses on derivative contracts.  To calculate the "net income (loss) netback", Journey takes the Funds Flow netback and then adds or deducts: unrealized gains/losses on derivative contracts; share-based compensation expense; depletion; depreciation; accretion; loss and gains on dispositions; asset impairments; exploration and evaluation expenses; PP&E impairments and reversals; and deferred income taxes.  There is no GAAP measure that is reasonably comparable to netbacks.
3. "Net debt" is calculated by taking current assets, and then subtracting accounts payable and accrued liabilities; the principal amount of term debt; and the other liability. Net debt is used to assess the capital efficiency, liquidity and general financial strength of the Company.  In addition, it is used as a comparison tool to assess financial strength in relation to Journey's peers.

Barrel of Oil Equivalents and Volumes

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 six (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.

Other than in the highlight table, where the Company uses the term "crude oil" it is referring to the aggregate of light, medium and heavy crude oil volumes or dollars as is required. Where the Company uses the term "natural gas" it is referring to the aggregate of conventional natural gas and coal-bed methane natural gas volumes or dollars as is required.

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.

Oil and Gas Measures and Metrics

All reserve references in this press release are "Company Gross Reserves". Company gross reserves are the Company's total working interest share of reserves before deduction of any royalties and excluding any royalty interests of the Company.

All future net revenues are stated prior to provision of general and administrative expenses, interest, but after the deduction of royalties, operating costs, estimated abandonment and reclamation cost for wells with reserves attributed to them; and estimated future capital expenditures to book those reserves. Future net revenues have been presented on a before tax basis. Estimated values of future net revenue disclosed herein are not representative of fair market value.

The Company uses the following metrics in assessing its performance and comparing itself to other companies in the oil and gas industry. These terms do not have a standardized meaning and therefore may not be comparable with the calculation of similar measures.by other companies:

1. Recycle ratio is calculated by taking the operating netback and dividing it by the finding and development or finding, development and acquisition costs (including changes in future development costs) per boe. The ratio gives an indication of how profitably the company is replacing its reserves. The higher the ratio the more profitably it is replacing reserves.
2. The Company's reserve life index ("RLI") is calculated using the Company Gross Reserves and dividing them by the projected, next years' production from the independent reserve engineers' year end reserve report. The RLI is used by management to assess the longevity of the reserves being added which in turn gives information about the corporate decline rates of the Company.
3. Corporate decline ("Decline") is the rate at which production from a grouping of assets falls from the beginning of a fiscal year to the end of that year.

Select Abbreviations and Definitions

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

SOURCE Journey Energy Inc.