NuVista Energy Ltd. is pleased to announce financial and operating results for the three and nine months ended September 30, 2021, and provide a number of updates which demonstrate continued successful advancement of our Pipestone and Wapiti Montney play development. This was a successful quarter for NuVista, with results that included the continued ramp-up of production in the new Pipestone North compressor station facility, the drilling of 14 and startup of 6 new wells, and the delivery of production and cash flow results which were ahead of expectations. We are pleased to note that both condensate and natural gas future strip prices have increased significantly, resulting in a material increase to cash flows and decreasing projected net debt levels. Our continuing efforts will be to focus on a disciplined capital program to maximize economic returns from our existing facilities combined with net debt reduction.
During the quarter ended September 30, 2021, NuVista:
- Produced 51,005 Boe/d, versus the guidance range of 50,000 – 52,000 Boe/d. The production consisted of 31% condensate, 9% NGL’s, and 60% natural gas;
- Achieved $80.6 million of cash flow in the quarter ($0.36/share basic), above expectations due to increased commodity pricing, partially offset by hedging losses. This figure is an increase of 45% versus the prior quarter, and an increase of 94% compared to the third quarter of 2020;
- Achieved an operating netback of $28.06/Boe excluding hedging, an improvement of 28% and 235% as compared to the previous quarter and the third quarter of 2020, respectively. Corporate netback after hedging and all corporate costs also improved significantly to $17.18/Boe, an increase of 45% as compared to the prior quarter;
- Reduced net G&A expenses to $0.99/Boe, a reduction of 11% compared to the prior quarter;
- Executed a successful capital program of $77.2 million, including 14 new wells drilled, 12 completed, and 6 new brought online. Well results are exceeding management expectations, and our average year to date costs to drill and complete per horizontal meter are more than 15% lower than the 2020 all-well average;
- Continued to significantly advance our progress and plans in environmental, social and governance items (“ESG”), including the release of our 2019 & 2020 ESG report and 2025 targets; and
- Successfully refinanced and redeemed our $220 million of senior unsecured notes, as previously reported. The notes were due 2023, and they were retired with the issuance of $230 million 5 year senior unsecured notes due July 2026, at a coupon rate of 7.875%.
The world is in an inflationary environment right now, and the control of costs and assurance of reliable supply of people and equipment is of high importance. We have made significant efforts to smooth and flatten out our rig schedule, and therefore our personnel and equipment needs. This helps to ensure steady work for all and therefore the maximum predictability to NuVista’s people and equipment supply chain. It also leads to the maximization of efficiency, cost, and safety performance. NuVista has continued to drill and complete wells ever more quickly, which reduces cost per well and reduces cycle times to first production. It also leads to more wells being drilled per rig per year, which requires slightly earlier spend phasing.
Excellence in Operations and Cost Reductions
Wapiti
Activity in the Greater Wapiti area has been directed to maintaining flat production levels while generating material free cash flow to fund the ramp up in Pipestone and contribute to net debt reduction. Quarterly production was 26,750 Boe/d (30% condensate) with accompanying free cash flow generation of $47MM. During the quarter the latest Elmworth IP365 milestone was reached. The 4-well pad averaged 5.6 MMcf/d and 205 Bbls/d condensate for a total of 1,105 Boe/d, which is a 22% improvement over the historic average first-year production per well. Also, in the quarter we finished drilling a new 4-well pad on the Elmworth Property, which we have subsequently completed and begun testing with excellent early flowback results. Drill costs for this pad were $949/Hz meter, while completion costs were $499/Tonne of sand. These costs are approximately 15% below those achieved on the pad referenced earlier that has just reached IP365. In an effort to maintain steady and flat drilling rig counts we have accelerated the drilling of the next Elmworth 6-well pad from 2022 into 2021.
Pipestone
Activity in Pipestone is proceeding well and exceeding expectations. Production in the quarter averaged 24,000 Boe/d (34% condensate), approximately flat from the prior quarter, and has already begun to ramp up through the fourth quarter. Well costs, productivity and cycle times are all continuing to improve. Our latest 6-well pad to come on production (Pipestone Pad #6) was drilled and completed for costs of $830/Hz meter and $420/Tonne of sand, with total drill, complete, equipping and tie-in (“DCET”) costs which averaged $5.6 million per well. Production over the first 30 days averaged 6.1 MMcf/d including approximately 70% condensate (240 Bbls/MMcf). Based on field estimates, this pad has reached pay out of capital invested within the first three months of production, a NuVista record.
Pipestone Pad #7, a 6-well pad, achieved drilling and completion costs of $720/Hz meter and $460/Tonne of sand and has been brought on-stream in November with excellent early flowback results. In addition, Pipestone Pad #8, also a 6-well pad, is currently drilling. In order to maintain continuous frac crew operations, the completion of this pad will be accelerated from 2022 into late 2021. For similar operational continuity reasons, we plan to commence drilling on Pipestone Pad #9 immediately after Pad #8, which was originally scheduled to spud in early 2022.
Significant Commodity Price Diversification and Risk Management
Global oil prices continued to strengthen significantly through the third quarter as advances in vaccine delivery have spurred increased demand and expectations. The supply outlook looks tight as a consequence of reduced global capital spending and OPEC production discipline. Condensate pricing differentials have continued strong due to increased demand and moderated supply growth. With natural gas storage levels reducing partially due to a large increase in LNG shipments, impactful and sustained strength in NYMEX gas pricing has been occurring and is expected to continue through 2022. Propane and butane are also experiencing improved pricing levels. As commodity prices have now returned to levels in excess of what we require to drive our near term strategic priorities, we have re-engaged our rolling hedge program to ensure partial attenuation of future price volatility.
We have primarily been using a combination of collars, swaps and three-way collars in order to provide downside protection while maintaining upside for price growth. For the full year of 2022, we have hedged approximately 28% of projected liquids production at an average floor price of C$71.14/Bbl using three-way collars. The average ceiling price is C$86.03/Bbl. We have hedged approximately 22% of projected natural gas production for 2022 with floor and ceiling prices of C$3.04/Mcf and $5.00/Mcf (hedged and exported volumes converted to an AECO equivalent price). All of the preceding percentage figures relate to production net of royalty volumes, and the hedge volumes are front end loaded in the year.
ESG Progress Continues
We continue to execute upon our stated GHG and methane emission reduction projects, and we were proud to issue our newest ESG report during the quarter, covering 2019 and 2020. In this report we detailed the significant progress that we continue to make, and we committed to 2025 targets in all key areas of ESG to ensure our continued progress.
2021 Guidance Update and 2022 Budget
In order to maintain a smooth unbroken 3-rig drilling schedule and to optimize value, NuVista is shifting a small amount of 2022 capital spending into the fourth quarter of 2021. NuVista’s capital spending guidance for 2021 has been increased to a range of $275 - $285 million, from the original top of range of $250 million. Our 2022 capital spending budget has been set at the reduced level of $290 - $310 million, which is $25 million less than the original outlook. The aforementioned numbers have been adjusted to account for expected inflation in the range of 5-10%, offset by continued engineering and efficiency gains. NuVista retains the flexibility to adjust capital spending upwards or downwards to maximize value and to suit the ongoing economic environment as it unfolds.
Excellent well results and a slight acceleration of capital phasing leads to enhanced production, cash flow, and overall value. Full year 2021 production guidance is increased and tightened to 51,000 – 52,000 Boe/d versus the prior range of 50,000 – 52,000 Boe/d. Fourth quarter production guidance is 56,000 – 58,000 Boe/d***. Full year 2022 production guidance is set at 65,000 – 68,000 Boe/d, an increase from our prior outlook of 62,500 – 67,500 Boe/d.
At strip prices* we anticipate exiting 2021 with a net debt to annualized fourth quarter cash flow ratio of well under 1.0x and absolute net debt levels below $485 million. This is a reduction of almost $175 million from the peak during the 2020 pandemic and is well below our previous year end 2021 expected debt level of $520 million despite the shifting of capital into 2021 from 2022.
* 2021 full year pricing projection incorporating actual year to date pricing and October 22nd strip pricing: WTI US$69.25/Bbl, NYMEX US$3.75/MMBtu, AECO $3.35/GJ, CAD:USD FX 1.25
Our 2022 budget is anticipated to achieve our significant growth objectives in production and cashflow while enabling a continued material reduction in net debt. At current strip prices**, NuVista’s 2022 free cash flow (forecast cash flow net of forecast capital spending) is projected to be approximately $315 million. 100% of free cash flow will be directed towards debt reduction until our net debt is reduced below $400 million. This is expected to be achieved as early as the second quarter of 2022. Free cash flow remaining after passing below this milestone is anticipated to be allocated between further debt reduction, return of capital to shareholders and continued optimization of the business. The specific nature of shareholder return will be determined and communicated as this milestone approaches.
We intend to carefully direct available cash flow towards a prudent balance of net debt reduction, shareholder return, and production growth until our existing facilities are filled to maximum efficiency, and net debt to cash flow levels reach approximately 0.5x. That maximum efficiency point is 85,000 – 90,000 Boe/d, and we are confident that the actions described above accelerate the Company towards that goal by as early as 2023. With facilities filled, returns and netbacks are enhanced significantly due to efficiencies of scale, with overall cash costs per Boe which are expected to reduce by over 25%, or approximately $6/Boe by 2023 as compared to the first quarter of 2021. Capital spending will continue to be weighted heavily towards Pipestone, as our highest return area, with expected well payouts well below a year.
