Rock Energy Inc. (TSX: RE) ("Rock" or the "Company") is pleased to report its
financial and operating results for the year and three months ended December 31,
2013.
Rock has filed its Annual Information Form (AIF), which includes Rock's reserves
data and other oil and natural gas information for the year ended December 31,
2013. The AIF includes annual disclosure regarding reserves data and other oil
and gas information as mandated by National Instrument 51-101 Standards of
Disclosure for Oil and Gas Activities of the Canadian Securities Administrators.
Copies of Rock's audited financial statements and related management's
discussion and analysis and AIF for the year ended December 31, 2013 have been
filed on the SEDAR website at www.sedar.com and may be obtained on Rock's
website at www.rockenergy.ca.
Rock is a Calgary-based crude oil exploration, development and production company.
CORPORATE SUMMARY
FINANCIAL
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Year Ended December 31, 2013 2012
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Crude oil and natural gas revenue ($000) $ 81,717 $ 46,567
Funds from operations ($000) (1) $ 30,571 $ 13,592
Per share
- basic $ 0.78 $ 0.35
- diluted $ 0.76 $ 0.35
Net loss ($000) $ (1,806) $ (12,210)
Per share
- basic $ (0.05) $ (0.31)
- diluted $ (0.05) $ (0.31)
Capital expenditures (divestitures), net ($000) $ 46,726 $ (14,337)
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As at December 31, 2013 2012
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Net debt (2) ($000) $ 18,135 $ 3,072
Common shares outstanding (000) 39,423,913 39,101,582
Options outstanding (000) 3,123,106 2,738,437
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OPERATIONS
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Year ended December 31, 2013 2012
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Average daily production
Crude oil and natural gas liquids (bbls/d) 3,195 1,836
Natural gas (mcf/d) 2,183 3,246
Total (boe/d) 3,559 2,377
Average product prices
Crude oil and natural gas liquids (Cdn$/bbl) $ 68.03 $ 64.81
Natural gas (Cdn$/mcf) $ 3.45 $ 2.54
Combined average (Cdn$/boe) $ 62.91 $ 53.53
Field netback (Cdn$/boe) (1) $ 27.37 $ 18.33
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(1) Funds from operations, funds from operations per share and field
netback are not terms prescribed by International Financial Reporting
Standards (IFRS), and so are considered non-GAAP measures. Funds from
operations represents cash generated from operating activities before
changes in non-cash working capital and decommissioning expenditures.
Rock considers funds from operations a key measure as it demonstrates
the Company's ability to generate the cash necessary to fund future
growth through capital investment. Funds from operations per share is
calculated using the same share basis which is used in the
determination of net income (loss) per share. Field netback is
calculated as crude oil and natural gas revenues after deducting
royalties, operating costs and transportation costs, resulting in an
approximation of initial cash margin in the field on crude oil and
natural gas production. Rock's use of these non-GAAP measurements may
not be comparable with the calculation of similar measures for other
companies.
(2) Net debt excludes commodity price contracts.
LETTER TO THE SHAREHOLDERS
Introduction
The last year has been a remarkable year of transformation for Rock. Our total
corporate production grew from approximately 3,200 boepd in the first quarter of
last year to currently exceeding 4,800 boepd, an increase of 50%.
During 2013, our operational focus started with the development of a strong
production base at Mantario through the drilling of 27 (27.0 net) wells and the
delineation of the pool. We then moved to design the water/chemical flood to
maximize the recovery factor and arrest declines. In the meantime, the company
was successful in discovering a new extension to the Viking light oil play at
Onward. The activity in these core areas dominated our spending for the year and
produced not only a significant increase in production, but an increase in
operating cash flow as we grew production of higher netback, low cost oil.
While we were focusing our growth in Mantario and Onward, we were also able to
divest of our heritage heavy oil assets in the Lloydminster area. We have spent
a limited amount of capital here in the past few years, and have decided to sell
these high operating cost properties so that we can re-deploy the proceeds into
our development plans at Mantario and Onward. In 2013, our average cash flow
netback was approximately $24/boe; in 2014 with the new production mix yielding
higher prices and lower operating costs, we are forecasting an average cash flow
net back of over $35/boe.
Rock has made a strategic shift in focus during the last year to assets that
have higher product prices and lower operating costs yielding higher netbacks.
However, we also remained focused on developing a suite of assets with the
highest possible recovery factors so that we can achieve the lowest possible
decline rates to provide a sustainable foundation of production and cash flow.
Rock's 2013 Operating Accomplishments
During 2013, the Company expanded its total proved reserves by 17% to 6.8
million boe from 5.8 million boe at year-end 2012. Our total proved plus
probable reserves at year-end 2013 increased 22% to 10.9 million boe from 8.9
million boe at the end of 2012. The proved plus probable reserve additions
replaced 254% of production during the year. In 2013, Rock delivered average
daily production of 3,559 boepd, and during the fourth quarter production
averaged 4,023 boepd. Currently, the Company is producing over 4,800 boe per day
with a 95% oil weighting.
Rock spent a total of $23.0 million at Mantario in 2013 ($21.9 million drilling,
$1.1 million land and seismic). The Company drilled a total of 22 (22.0 net)
vertical step-out oil wells, and 2 (2.0 net) horizontal infill producers into
the main pool. This development drilling was able to expand the size of the
pool; however, the Company believes it may extend further to the south east. In
addition to the oil wells, Rock also drilled 2 dry and abandoned exploration
wells in Mantario, and 1 water source/service well (for the planned
water/chemical flood). The exploration wells were testing new leads, but with
refinement to our seismic/geological model we have identified another 4 - 8
exploration leads in the area. These new exploration leads and the pool
extension will be tested in the next 12 months. Mantario at year end had 36
producing oil wells yielding over 3,000 bopd and is currently producing over
3,300 bopd from 40 wells.
At Onward, we continued to advance the development of our water flood in the
Mannville (Lloydminster) Formation by acquiring interests in offset lands from
competitors and crown land sales, and drilling two net oil wells. Production
from the water flood project is currently 325 bopd. In the fourth quarter we
drilled 2 (2.0 net) additional Mannville exploration wells in the area, of which
one was dry and abandoned, and one which discovered a new Lloydminster pool near
our existing facilities. The new discovery well is currently producing over 100
bopd and the company plans to follow up this discovery with 4 - 6 drilling
locations in the second half of 2014. During the year Rock invested $7.6 million
at Onward developing the Mannville Formation.
In addition to the Mannville development at Onward, during 2013 Rock discovered
and began to develop a Viking light oil resource play by investing $14.0 million
($1.7 million land, $12.3 million drilling and completions). The original play
concept was tested by recompleting three vertical wells on our existing land
base to determine if the Viking Formation was oil charged on our lands. With
these successful tests, Rock assembled over 38 net sections of land over the
area that we believed to be prospective. By September we were in a position to
drill our first 2 (2.0 net) horizontal wells. These wells were successful,
producing at average (IP 30) rates of 40 bopd. Rock then proceeded to drill
another 8 (8.0 net) wells before the end of the year. The next set of wells came
on at average rates (IP 30) of approximately 50 bopd. Of the 10 (10.0 net) wells
drilled into the Viking play only 7 were completed by year-end. Production from
the Viking at year end was less than 200 bopd, however, the Viking is currently
producing approximately 450 bopd (from 14 of 18 wells drilled to date).
2013 Drilling Results
For the year ended December 31, 2013, the Company drilled a total of 46 (45.0
net) wells made up of 10 (10.0 net) Viking light oil wells, 31 (30.0 net) heavy
oil wells, 1 (1.0 net) service well and 4 (4.0 net) dry and abandoned wells, for
an overall net casing success rate of 91%.
Reserves
Rock's total Company proved plus probable reserves increased by 22%
year-over-year to 10.9 million boe at year-end 2013 (from 8.9 million boe at
year end 2012) generating an RLI of 7.4 years (using 2013 fourth quarter average
production rates). All-in finding, development and acquisition costs (including
changes in future development capital and revisions) averaged $31.42 per proved
plus probable boe, and $32.75 per total proved boe.
At Mantario, the Company anticipates that the eventual finding costs will trend
lower as the additional resource potential for the main Rex pool related to
successful secondary (water flood) and tertiary (chemical flood) oil recovery
should be recognized as reserves over time, with limited (if any) additional
future development capital.
At Onward, the year-end reserves report assigns reserves and value to less than
10% of the potential that the Company has identified.
Further information respecting Rock's year-end reserves is contained in its AIF,
which has been filed on the SEDAR website at www.sedar.com and may also be
obtained on Rock's website at www.rockenergy.ca.
Financial Results
Rock generated funds from operations of $30.6 million ($0.78 per basic share,
0.76 per fully diluted share) in 2013, compared to $13.6 million ($0.35 per
basic share) in 2012. For the fourth quarter of 2013, the Company generated
funds from operations of $9.4 million ($0.24 per basic share) compared to $11.5
million ($0.29 per basic share) in the third quarter of 2013. Funds from
operations for the fourth quarter were adversely impacted by increased price
differentials (WTI vs. Western Canada Select). Realized prices averaged
$59.87/boe during the quarter compared to $62.91/boe during the year. Operating
costs continue to trend downward as lower cost production from Mantario
continued to grow (averaging $19.33 per boe in 2013 compared to $24.21 per boe
in 2012).
The Company had a net loss of $1.8 million ($0.05 per basic and fully diluted
share) in 2013 compared to a net loss of $12.2 million ($0.31 per basic share)
in 2012. Rock incurred net capital expenditures of $46.7 million in 2013 of
which $23.0 million was focused on Mantario, and $14.0 million was spent on the
emerging Viking play at Onward. Total year-end net debt was $18.1 million
against available bank lines of $45.0 million resulting in a debt to fourth
quarter annualized cash flow ratio of 0.5. The Company recently received an
increase to its combined credit facility to $70.0 million from its lending
institution.
2014 Area Activity Update
To date in 2014, Rock has drilled 14 (14.0 net) oil wells with 100% casing
success including 4 (4.0 net) Mantario vertical step out locations in the main
pool, 8 (8.0 net) horizontal Viking oil wells at Onward and 2 (2.0 net)
successful Mannville oil wells (Onward, Neilburg).
Mantario
The 4 vertical step out locations drilled in the first quarter have confirmed
that the main pool continues to the south east with pay thicknesses ranging from
4 - 6 meters. Rock is now planning to drill an additional 6 vertical wells (on
40 acre spacing) to continue to extend the eastern limit of the main pool plus 9
horizontal infill locations. Production from the pool is currently averaging
approximately 3,300 bopd from 40 producing wells including the contribution from
the two horizontal wells (175 - 200 bopd each). Subsequent to year end, Rock was
able to acquire the working interest in the lands from one of the offset owners
on the West side of our main pool at Mantario for $3.9 million.
Rock is proceeding with the implementation of a water/chemical flood at Mantario
to arrest the decline and maximize the recovery factor of this pool. The Company
has completed the application with Saskatchewan Government and expects to
receive the preferred royalty treatment applicable to Enhanced Oil Recovery
("EOR") projects. This royalty program allows the Company to recover the capital
costs incurred to implement the EOR project (chemical/polymer flood) through a
reduction in royalties. Rock expects to receive further clarification from the
Government in the coming weeks, but it is anticipated that we will receive a
royalty credit of approximately $20 - $30 million over the next 2 - 3 years
(starting in 2015). The engineering and design work for this project is
completed and we expect to commence water injection into the reservoir for
pressure maintenance by the end of the third quarter of this year.
Onward Viking
During the first quarter of 2014, the Company drilled an additional 8 (8.0 net)
horizontal oil wells in to the Viking Formation at Onward. Production rates
(IP30) for these wells continue to average approximately 50 bopd and total
production from the Viking net to Rock is approximately 450 bopd from 14 of the
18 wells drilled to date. With a total of 18 (18.0 net) wells drilled in to the
play, Rock believes the Company has successfully demonstrated an economically
viable light oil Viking resource play on 15.5 sections. Under full development
at 16 wells per section this would generate 230 remaining development drilling
locations. In light of this success, the Board of Directors have approved an
expansion to Rock's capital program for 2014 to allow for the continued
development of this Viking play. Rock expects to drill an additional 17 wells by
the end of the year to more fully evaluate the lands in this area.
Onward Mannville
During the fourth quarter of 2013, Rock drilled a discovery well at
11-16-34-24W3 into a new Lloydminster pool (West Onward). This discovery well
has been producing at rates exceeding 100 bopd for the last two months. With
this success we have mapped a potential new pool that indicates potentially 10 -
15 development locations, and we plan to drill the first 4 follow up wells in
third quarter of this year.
Asset Rationalization
During the first quarter of 2014, Rock completed the acquisition of 130 bopd
from one of the offset owners on the West side of our main pool at Mantario for
$3.9 million. This transaction was closed on February 20, 2014 with an effective
date of February 1, 2014.
In addition to the Mantario acquisition, Rock has agreed to the sale of
substantially all of its heritage heavy oil assets in the Lloydminster region
(Alberta and Saskatchewan). With the successful completion of the transaction,
the Company will have divested of 450 bopd of heavy oil, including the
associated infrastructure and related abandonment liabilities, for $7.0 million
effective February 1, 2014 to a private oil and gas Company. The transaction is
anticipated to close by March 31, 2014.
These transactions are significant steps in the transformation of Rock into a
higher net back, lower operating cost producer.
Commodity Prices
During November and December of 2013, the Company experienced a widening of
heavy oil differentials as refinery start-up delays and pipeline bottlenecks
persisted. Today the differential has narrowed considerably and is expected to
narrow further as the BP Whiting refinery ramps up the consumption of heavy
crude oil (160,000 bopd growing to 350,000 bopd in the next few months). It is
our view that these increases in refinery demand coupled with additional
pipeline projects (such as the recently announced Enbridge Line 9 reversal) will
continue to act to reduce the discount Canadian crude receives from world
prices. In addition to the crude oil pricing we are also benefiting from a lower
Canadian dollar exchange rate. For every $0.01 change in exchange rate, the
Company's cash flow changes by approximately $1 million for the year. For the
remainder of 2014, Rock is assuming that WTI averages $90.00 US/bbl, WTI - WCS
differential averages $20.00 US/bbl, AECO gas price averages $3.50CDN/mcf and
the exchange rate averages $0.92 CDN/US.
In order to minimize risk due to price fluctuations, Rock is actively hedging a
portion of our production. We currently have between 1,250 and 1,500 bbls/d
hedged quarterly at average WCS $81.42CDN/bbl until September 30, 2014. We also
transport up to 1,500 bbls per day by rail. Rock has been shipping its heavy oil
by rail for over two years in order to bypass pipeline bottlenecks and achieve
premium pricing.
Outlook and 2014 Guidance
The strong performance from the first quarter's activities has prompted the
Company to expand its capital program to $85 million (from $62 million) and
revise its guidance for the year. The additional capital is largely focused on
continued drilling and de-risking of the Viking play at Onward, coupled with an
acceleration of the Mantario polymer flood, and the development of the Onward
West Lloydminster pool.
Rock's 2014 capital budget of $85 million is expected to provide 29% growth in
average daily oil production from 2013 (including the effect of the asset
rationalization activity). During the year the Company plans to drill up to 61
wells with 25 horizontal wells to be drilled into the Onward Viking play, 10
vertical wells at Mantario to extend the pool boundaries, 9 horizontal infill
wells in Mantario to develop the pool and replace vertical wells being converted
to injectors, 8 Mannville development wells and 9 exploration wells.
The Company is forecasting this activity to generate average production of 4,500
- 4,700 boped (95% oil). Given the price assumptions mentioned above and an
average operating cost of $16.50/boe the Company is forecasting cash flow of $59
- $61 million ($1.50 - $1.55/share). With this cash flow and capital spending
plan, the debt at the end of the year is forecasted to be $43 - $45 million (0.7
times forecasted fourth quarter cash flow annualized) against its combined
credit facility of $70 million.
As Rock approaches the second quarter of 2014, the Company is excited about the
team we have assembled, the assets we have discovered and developed, and the
prospects that will allow us to continue to develop a significant growth
profile. We are focused on building a suite of assets that will continue to
provide our shareholders with a solid, long-life, predictable base of
sustainable cash flow.
Advisory Regarding Forward-Looking Information and Statements
This press release contains forward-looking statements and forward-looking
information within the meaning of applicable securities laws. The use of any of
the words "will", "expects", "believe", "plans", "potential" and similar
expressions are intended to identify forward-looking statements or information.
More particularly and without limitation, this press release contains forward
looking statements and information concerning: 2012 average production;
anticipated production rates from the Onward waterflood program; and Rock's
drilling plans on its crude oil properties.
Statements relating to "reserves" are deemed to be forward-looking statements,
as they involve the implied assessment, based on certain estimates and
assumptions, that the reserves described can be profitably produced in the
future.
The forward-looking statements and information in this press release are based
on certain key expectations and assumptions made by Rock, including prevailing
commodity prices and exchange rates; applicable royalty rates and tax laws;
future well production rates; reserve and resource volumes; the performance of
existing wells; the success obtained in drilling new wells; the sufficiency of
budgeted capital expenditures in carrying out planned activities; the
availability and cost of labour and services; and the receipt, in a timely
manner, of regulatory and other required approvals. Although Rock believes that
the expectations and assumptions on which such forward-looking statements and
information are based are reasonable, undue reliance should not be placed on the
forward-looking statements and information because Rock can give no assurance
that they will prove to be correct. There is no certainty that Rock will achieve
commercially viable production from its undeveloped lands and prospects.
Since forward-looking statements and information address future events and
conditions, by their very nature they involve inherent risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors and risks. These include, but are not limited to, the risks
associated with the oil and natural gas industry in general, such as:
operational risks in development, exploration and production; delays or changes
in plans with respect to exploration or development projects or capital
expenditures; the uncertainty of reserve estimates; the uncertainty of estimates
and projections relating to reserves, production, costs and expenses; health,
safety and environmental risks; commodity price and exchange rate fluctuations;
marketing and transportation of petroleum and natural gas and loss of markets;
environmental risks; competition; incorrect assessment of the value of
acquisitions; failure to realize the anticipated benefits of acquisitions;
ability to access sufficient capital from internal and external sources; stock
market volatility; and changes in legislation, including but not limited to tax
laws, royalty rates and environmental regulations.
Readers are cautioned that the foregoing list of factors is not exhaustive.
Additional information on these and other factors that could affect the
operations or financial results of Rock are included in reports on file with
applicable securities regulatory authorities and may be accessed through the
SEDAR website (www.sedar.com). The forward-looking statements and information
contained in this press release are made as of the date hereof and Rock
undertakes no obligation to update publicly or revise any forward- looking
statements or information, whether as a result of new information, future events
or otherwise, unless so required by applicable securities laws.
For further information please visit Rock's website at www.rockenergy.ca.
FOR FURTHER INFORMATION PLEASE CONTACT:
Rock Energy Inc.
Allen J. Bey
President and Chief Executive Officer
403.218.4380
Rock Energy Inc.
Todd Hirtle
Vice President Finance and Chief Financial Officer
403.218.4380
www.rockenergy.ca
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