Journey Energy Inc. is pleased to announce its financial and operating results for the three and six month periods ending June 30, 2024. The complete set of financial statements and management discussion and analysis are posted on www.sedarplus.ca and on the Company's website www.journeyenergy.ca.
Highlights for the second quarter are as follows:
Generated sales volumes of 11,235 boe/d in the first quarter (45% crude oil; 9% NGL's; 46% natural gas)
Realized Adjusted Funds Flow of $9.5 million or $0.15 per basic share and $0.14 per diluted share.
Continued with the construction of the Gilby power generation asset. Completion of this project is currently scheduled for early in the fourth quarter.
On May 7, 2024 Journey announced its participation in a 128 section Joint Venture land block with Spartan Delta Corp. to mutually develop the Duvernay in the west shale basin. The initial working interest within the block is 37.5% Journey and 62.5% Spartan Delta Corp. The partners currently control 94 sections within the block. Two wells are currently planned for later in 2024. Journey's share of the expenditures will be funded through a combination of internally generated cash flows and proceeds from the recent convertible debenture issuance.
Financial & Operating Highlights
OPERATIONS
During the second quarter of 2024 Journey continued to move forward on all of its initiatives with a view to increasing free cash flow beginning in 2025 and with a long-term strategy of increasing its proved, developed, producing value on a per share basis. Journey experienced a number of one-time events that impacted the recent quarters' results, however, the medium-term outlook for the Company remains intact.
On March 20, 2024 Journey issued $38 million in convertible debentures to not only term-out certain of its debt obligations, but also to increase the 2024 capital program adding planned capital programs in Herronton and Medicine Hat. These programs were originally scheduled to add 400-500 boe/d for the second half of 2024, providing comfort in Journey's previous guidance range. These programs have now been deferred to 2025 in order to fund the working interest participation in two Duvernay wells. Since the Duvernay wells are expected to come on-stream in late 2024 they will have a positive impact on 2024 exit rates but will result in reduced annual sales volume guidance for 2024.
Total capital spending for the second quarter of 2024 was $4.7 million. These costs included continuing advancement of the power projects, injection projects in Matziwin and Medicine Hat, and decommissioning expenditures. Capital expenditures are expected to increase to $16.5 million in the third quarter, with increased capital for power projects ($7 million); the initiation of Duvernay drilling; facility debottlenecking in Cherhill; and expanding the polymer flood in Medicine Hat to new, unflooded areas.
In the second quarter of 2024, Journey had sales volumes of 11,235 boe/d (55% oil and liquids). Second quarter volumes were negatively impacted (approximately 500 boe/d) by second quarter turnarounds, road bans, and a royalty divestment. Journey completed a 4.0 (2.9 net) well program in the Medicine Hat area during the first quarter of 2024 and all wells were on-production throughout the second quarter. These new wells helped mitigate the second quarter downtimes. No additional wells were drilled in the second quarter.
The majority of the downtime in the second quarter was due to significant turnarounds in four of Journey's main producing areas. The impact from these turnarounds throughout the quarter was approximately 400 boe/d with approximately $3 million in additional operating costs charged to the Matziwin, Ante Creek, Carrot Creek, and Gilby Gas properties. Extended downtime was observed in Matziwin and Ante Creek in order to redo the internal coating on separating and treating equipment in these central batteries. These facilities are normally inspected every five years and it is unusual to encounter these issues. Journey also experienced downtime due to wet road conditions for the new Poplar Creek wells. In all of these cases stated above the downtime was weighted heavily to oil wells. The combination of lost volumes and increased operating expenditures resulted in an approximately $6 million reduction in Adjusted Funds Flow for the quarter.
At the beginning of August Journey was notified by a third party well operator that they were shutting in Journey volumes, which in turn had been going to a third party processing facility due to a dispute on processing fees. The majority of Journey's Stolberg production volumes will be impacted by this closure due to a lack of takeaway capacity for solution gas. These volumes were curtailed in late July, 2024 and are expected to reduce overall production by approximately 200 boe/d for the duration of the curtailment.
For the medium term, the primary purpose of the debenture was to extend a portion of the 2024 debt repayment obligations to 2029, thereby allowing for an expansion in exploration and development capital in 2024 and 2025 for projects including preliminary development of the Duvernay resource. Because of this financing Journey remains on track to achieve its exit rate guidance while meeting its 2024 debt repayments.
Duvernay Joint Venture
On May 7, 2024 Journey announced its participation in a 128 section joint venture land block with Spartan Delta Corp. ("Spartan") to mutually pursue the development of the Duvernay west shale basin. The initial working interest within the block is 37.5% Journey and 62.5% Spartan. The partners currently control 94 sections within the block. Two wells are planned to spud in the third quarter of 2024. Journey's share of these expenditures will be primarily funded through the convertible debenture financing, which closed in March. Initial capital expenditures for the joint venture are capped at gross amounts of $30 million and $100 million for 2024 and 2025 respectively. The cap on expenditures can be increased upon mutual agreement of both parties. The 2024 capital program is sufficient to drill, complete, equip and tie-in two wells on azimuth from a single pad.
With the revised term-out of the majority of its debt until 2029, and with future revenues from its power business, Journey is in a solid position to fund its working interest portion of this development. Journey believes it has found a quality partner in Spartan to help benefit from the economies of scale while minimizing the risk of single events on the Company's business plan. The Company's desire was to accomplish this without diluting the existing land position, while maximizing the net number on azimuth locations in the liquids window. Journey's working interest position in the joint lands is enough to support 60 net 2.5 mile on azimuth locations.
Expanding Journey's Power Business
Journey budgeted $11 million to complete the Gilby power project in 2024. Journey forecasts spending the majority of its budgeted capital for this project by October 2024. The building for the Gilby project was completed in early April and the generators have now been placed in the building. Activity is currently ramping up with an overhauling of the engines and upgrading electronic components. Journey currently forecasts completion of the Gilby project early in the fourth quarter. However, the timeline for start-up remains outside of its control due to final regulatory and transmission approvals. For this reason, Journey's current guidance contains no power revenue from Gilby in 2024.
Journey has budgeted $6.3 million for re-energizing the Mazeppa power project in 2024. Recent results of the Stage 2 cluster study were released at the end of June. Normally the cluster study would result in a payment due in July resulting in the projects moving to Phase 3. While awaiting final documentation on new legislation AESO has delayed the required payment to get to Phase 3 for new projects from July to the end of November. Journey has proactively reached out to the stakeholders involved to accelerate the required payment and move to Phase 3. These meetings are ongoing and Journey will provide further information as it becomes available.
Journey is planning to increase its power sales to the Alberta electricity grid by over 350% when the Gilby and Mazeppa projects come on-line. 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 power grid. With all of Journey's power projects on-stream Journy's fund flow from power sales is forecast to exceed $15 million per year based upon GLJ's pricing assumptions. Journey has approximately $17 million in remaining expenditures to bring these projects on in order for the power to begin contributing meaningfully to cash flow in 2025.
FINANCIAL
Due to continued depressed natural gas prices resulting from a relatively warm winter, liquids revenues continued to account for a greater proportion of commodity revenues, becoming 95% for the second quarter. Even though realized natural gas prices declined by 59% in the second quarter of 2024 from the first quarter, overall commodity prices increased by 3% in this same period due to realized oil prices increasing by 16%. Operating costs were higher by 18% quarter over quarter in 2024 and this was mainly attributable to an additional $3.0 million in operating costs associated with turnarounds at four major facilities. Absent these incremental costs and associated production losses, operating costs would be more in line with both those experienced in the first quarter of 2024, and what Journey is projecting for the balance of the year. In the second quarter carbon taxes, property taxes and other government fees came in significantly higher than forecast. In addition to seasonally higher budgeted costs for property taxes, surface lease rentals, and AER fees, second quarter 2024 costs were negatively impacted by a $2.4 million adjustment to prior periods for carbon taxes.
On the administrative side, costs were $3.6 million for the second quarter. The increase over the first quarter was primarily due to the payment of annual bonuses during the second quarter along with a small increase in office lease costs. The $2.8 million quarterly average in G&A costs for the first half of 2024, is considered more representative of Journey's ongoing G&A on a quarterly basis.
Combining the impact of lower natural gas prices, lower sales volumes, and higher non-recurring operating and general and administrative costs, Journey recorded Adjusted Funds Flow for the second quarter of 2024 of $9.5 million as compared to $17.7 million in the first quarter. Adjusted Funds Flow per share was $0.15 on a basic weighted average basis and $0.14 on a diluted basis. Applying an average quarterly G&A burden and removing the carbon tax adjustment would have had a $3.2 million positive impact on Adjusted Funds Flow for the quarter.
Journey experienced a net loss of $2.3 million in the second quarter of 2024. Net loss per basic and diluted share was $0.04 for the second quarter. Cash flow from operations was $8.3 million in the second quarter of 2024 ($0.13 per basic share and $0.12 per diluted share).
Journey continued to be prudent with its capital spending during the second quarter as it underspent its Adjusted Funds Flows. Total capital expenditures (including decommissioning obligations) in the second quarter were $4.7 million. As a result, Journey's net debt was reduced from $60.1 million at March 31, 2024 to $55.5 million at June 30, 2024. Payment of $38 million of this debt has been extended to March of 2029, through the convertible debenture issuance that closed in March 2024.
OUTLOOK & GUIDANCE
Journey is reducing its 2024 guidance from 11,500-12,000 boe/d to 11,200-11,500 boe/d. The following factors have impacted 2024 sales volumes:
200-250 boe/d due to the phasing of capital expenditures substituting Duvernay drilling for Herronton and Medicine Hat drilling;
200 boe/d due to the impact of divestments (75 boe/d) and the unplanned shut-in of Stolberg due to a third party dispute. (50-125 boe/d); and
100 boe/d due to second quarter turnarounds
Adjusted Funds Flow guidance has been impacted by reduced sales volume guidance and the declining price for natural gas. Natural gas pricing has now been reduced to $1.75/mcf for 2024 resulting in a $4 million forecast reduction in Adjusted Funds Flow. Journey has hedged one-third of 2025 natural gas volumes at a price of $3.20/mcf. Although natural gas is a minor component of Journey's revenue, the difference between $1.75/mcf and $3.20/mcf is approximately $12 million per year on an annualized basis. This bodes well for 2025 revenues.
This guidance incorporates many material underlying assumptions including but not limited to:
Forecasted commodity prices by month;
Forecasted operating costs, including forecasted prices for power;
Forecasted costs for the capital program and the timing of the spending; and
Forecasted results and phasing of production additions from the capital program;
IMPLEMENTING A NORMAL COURSE ISSUER BID (NCIB)
Although well positioned for 2025, the overall industry sentiment remains negative and at certain times the value of Journey's shares does not accurately reflect the underlying value of the asset base and future opportunities. At times such as these, Journey's shareholders could benefit from a re-allocation of capital toward the purchase of Journey shares for cancellation. On August 8, 2024 Journey's Board of Directors approved the implementation of a Normal Course Issuer Bid ("NCIB") and Journey is in the process of completing the regulatory paperwork to implement the NCIB. Journey has not included the purchase of shares for cancellation in its guidance and will provide further information in due course as it becomes available.
Journey has embarked on a careful and prudent expansion of its business plan to grow the Company profitably. Journey has been diligently reducing indebtedness since the October 2022 acquisition while continuing to prudently invest in its future. The $38 million convertible debenture financing in March of 2024 has proven timely in light of the decline in commodity prices realized in the second quarter 2024. This capital provides the opportunity to meet near-term obligations while providing the mid-term capital that is critical for the anticipated growth in 2025.
In 2025, Journey expects forecasting higher revenues from: the power assets as they begin contributing meaningfully to cash flow; higher pricing for natural gas; an active capital program focused on volume growth; and the development of the vast Duvernay resource.
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.
