Perpetual Energy Inc. is pleased to release its third quarter 2021 financial and operating results.
THIRD QUARTER 2021 HIGHLIGHTS
On July 16, 2021, Perpetual announced the creation of a new wholly owned subsidiary, Rubellite Energy Inc. ("Rubellite") and the sale of all of Perpetual's Clearwater lands, wells, roads and related facilities in northeast Alberta (the "Clearwater Assets") to Rubellite.
On September 3, 2021, the Plan of Arrangement involving Perpetual, the shareholders of Perpetual, and Rubellite was completed following approval of the plan by the shareholders of Perpetual at its special shareholder meeting held on August 31, 2021 and the receipt of the final order of the Court of Queen's Bench of Alberta approving the Plan of Arrangement. At this time, Rubellite exchanged 1.4 million Rubellite common shares valued at $2.8 million and 16.7 million arrangement warrants with Perpetual shareholders for 8.2 million Perpetual common shares. Perpetual's financial and operating results include the Clearwater Assets up to September 3, 2021, the effective date of the Plan of Arrangement.
Rubellite acquired the Clearwater Assets from Perpetual for aggregate consideration of $65.5 million. The consideration consisted of promissory notes totaling $59.4 million, which were paid in cash on October 5, 2021 upon closing of Rubellite's private placement and arrangement warrant financings. Additional consideration included the issuance of 680,485 Rubellite common shares valued at $1.4 million, the return of the 8.2 million Perpetual common shares valued at $2.8 million and issuance of warrants to purchase 4.0 million Rubellite common shares at a price of $3.00 per share for a period of five years, valued at $2.0 million.
Production averaged 4,876 boe/d (74% conventional natural gas), down 4% sequentially from the second quarter of 2021 reflecting the disposition of the Clearwater Assets as of September 3, 2021, the effective date of the Plan of Arrangement.
At Perpetual's 50% working interest East Edson property, the final well of the 8-well carried interest commitment that formed part of the consideration in the East Edson Transaction in April 2020 was drilled, completed and placed on production in mid-September. Perpetual is participating with its joint venture partner in the ongoing six (3.0 net) well drilling program targeting the Wilrich formation. Two (1.0 net) wells were drilled, completed and placed on production at the end of September and are performing in accordance with Perpetual's type curve. An additional four (2.0 net) well pad has been drilled, completed, frac'd and is commencing flow-back and testing operations, with expectations for production to commence in November to fill the West Wolf gas plant and maximize natural gas and NGL sales through the upcoming winter.
Adjusted funds flow was $2.2 million ($0.03 per share), flat with the $2.3 million reported in the second quarter of 2021 and a very positive turnaround from the negative $2.1 million adjusted funds flow recorded the same quarter a year prior.
Net income of $51.1 million ($0.80 per share) was recorded, up from the $7.5 million net loss reported in the third quarter of 2020. The increase was primarily driven by the gain on the disposition of the Clearwater Assets to Rubellite of $47.9 million.
Total net debt outstanding at September 30, 2021 dropped 49% to $56.4 million, from $110.0 million at the end of the second quarter of 2021.
On October 5, 2021, $53.6 million in promissory notes owing to Perpetual were repaid in cash by Rubellite. Perpetual paid approximately $38.5 million in cash and delivered 680,485 Rubellite common shares to extinguish all but $2.7 million of its second lien Term Loan and the remainder of the cash proceeds were used to repay the majority of the Company's outstanding bank debt. The borrowing limit on Perpetual's $20 million credit facility was reduced to $17 million, and the maturity was extended to May 31, 2023.
The Rubellite transactions (the "Rubellite Transactions") provided a "full capital solution" for Perpetual by reducing Perpetual's net debt to $53.6 million at September 30, normalizing the balance sheet leverage ratios and surfacing incremental value from enhanced ability to fund the future development of its assets. The Rubellite Transactions have materially improved Perpetual's liquidity and will enhance Perpetual's ability to capture the inherent value in its asset base by funding investment opportunities to grow and sustain production and adjusted funds flow. Interest cost savings alone will improve Perpetual's adjusted funds flow by approximately $4 million annually. The general and administrative cost recoveries under the management services agreement with Rubellite will further enhance Perpetual's liquidity by approximately $2 to $3 million annually. Additionally, the 4.0 million Rubellite Share Purchase Warrants owned by Perpetual provide an opportunity for Perpetual to participate in value creation from Rubellite's Clearwater Assets over the next five years.
Operationally, at Perpetual's 50% working interest East Edson property, the last of the 8-well carried interest commitment was drilled, completed and tied in during the third quarter and the joint venture partner drilled an additional six (3.0 net) wells targeting the Wilrich formation. Three of these 7 (3.5 net) wells have been completed and are on production while the remaining 4 (2.0 net) wells were completed and frac'd in early November and will be on production in the month of November. Perpetual's fourth quarter 2021 capital spending forecast in West Central Alberta includes funds to participate in the drilling, completion and tie-in of this East Edson program, targeting to fill the West Wolf gas plant to maximize natural gas and NGL sales through next winter.
Activity in Mannville in Eastern Alberta during the fourth quarter of 2021 will continue to be focused on waterflood optimization and battery consolidation projects as well as several shallow gas recompletions. Additionally, the Company has identified a number of horizontal, multi-lateral drilling opportunities targeting heavy oil at Mannville and modest capital spending is budgeted for preparatory work for first quarter 2022 activities.
Upon commencement of production from the four-well pad at East Edson, Perpetual's production is expected to exceed 6,000 boe/d later in the fourth quarter.
Consistent with guidance provided August 12, 2021, exploration and development capital spending for Perpetual for full year 2021 is expected to be $15 to $18 million, excluding spending recorded in Perpetual's consolidated third quarter financial statements related to Rubellite's Clearwater Assets prior to the effective date of the Plan of Arrangement. Capital spending will be funded using proceeds from the Rubellite Transactions, adjusted funds flow and the Credit Facility.
Perpetual continues its environmental, social, and corporate governance ("ESG") focus, with total abandonment and reclamation expenditures of up to $2.3 million planned in 2021, with an estimated $1.2 million to be funded through Alberta's Site Rehabilitation Program ("SRP"). The remaining $1.1 million will more than satisfy the Company's annual area-based closure spending requirements of $1.0 million.