IPC second quarter 2020 financial results and corporate update
August 4, 2020
International Petroleum Corporation (IPC or the Corporation) (TSX, Nasdaq Stockholm: IPCO) today released its financial and operating results and related management’s discussion and analysis for the six months ended June 30, 2020.
• Forecast 2020 net average production revised upwards to 37,000 to 40,000 barrels of oil equivalent per day (boepd) from the previous guidance of 30,000 to 37,000 boepd.
• Capital and decommissioning expenditure guidance marginally increased by MUSD 3 to MUSD 80.
• Financial flexibility strengthened with the refinancing of our International and Canadian Reserve Based Lending (RBL) credit facilities in addition to securing a new MEUR 13 unsecured credit facility in France.
• Assuming average Brent oil prices of USD 35 per barrel and average Western Canadian Select (WCS) oil prices of USD 22 per barrel for the second half of 2020, IPC expects to be free cash flow positive for that period and to have access to more than MUSD 100 of spare financial headroom by year end 2020.
Q2 2020 Financial and Operational Highlights
• Average net production of approximately 35,700 boepd for Q2 2020 (31% heavy crude oil, 22% light and medium crude oil and 47% natural gas).
• Operating costs of USD 10.7 per boe for Q2 2020, slightly ahead of Q1 guidance. Full year forecast retained at USD 12 to 13 per boe.
|Three months ended June 30||Six months ended June 30|
|Gross profit / (loss)||(16,537)||39,287||(28,973)||86,172|
|Operating cash flow||14,742||76,496||36,223||159,552|
|Free cash flow||717||22,756||(41,995)||74,820|
• Operating cash flow generation for the second quarter 2020 amounted to MUSD 14.7, ahead of our latest forecast as a result of oil prices strengthening through June 2020. Moreover, as a result of our spending reductions, operational choices made and our hedging program, IPC was free cash flow neutral during Q2 2020.
• Net debt increased from MUSD 302.5 as at March 31, 2020 to MUSD 341.4 as at June 30, 2020.
• Refinancing of IPC’s RBL credit facilities has been successfully concluded. The International RBL facility size has been increased from MUSD 125 to MUSD 140 and the maturity extended by two and a half years to the end of 2024. The Canadian RBL facility has been refinanced at MCAD 350 and extended until end May 2022. In addition, in early May 2020 and as previously disclosed, a MEUR 13 credit facility was secured in France.
Mike Nicholson, IPC’s Chief Executive Officer, commented,
“The second quarter of 2020 is certainly one that all of us are relieved to see is behind us. The global Covid-19 outbreak and the resulting confinement measures placed on the world’s population led to a collapse in world oil demand, inventories approaching breaking point, and an unprecedented level of volatility and commodity price weakness.
Thankfully though, we have seen encouraging steps taken by OPEC+ and other oil producers that have removed significant supply, helping to deal with the massive demand destruction. Those actions have helped to flatten the curve of inventory builds and have set us on a course expected to rebalance markets in the second half of 2020 and into 2021.
With governments now progressively easing the restrictions that have been imposed to contain the pandemic, together with the enormous financial and fiscal stimulus packages that have been announced, prospects for a rebalancing of the oil market have improved and IPC has started to plan for a recovery in both demand and prices. Clearly though, uncertainties remain around a potential second wave of infections and the impact that could have will determine the pace and magnitude of recovery in oil demand. A recovery in oil prices is likely to take some time, and discipline and compliance on the supply side measures announced by OPEC+ will also be essential.
Update of 2020 Business Plan
Given that IPC operates the majority of our assets, we had the financial and operational flexibility to react swiftly to the situation and to positively position the Corporation to navigate through this period of extremely low commodity prices. All remaining discretionary 2020 expenditures were deferred or cancelled. In addition, during the second quarter of 2020, we took the decision to temporarily curtail production from those fields that were not expected to generate positive cash flows at the low pricing levels we were experiencing. These production curtailments related to a portion of our oil production. Our Canadian gas production was not curtailed as we continue to forecast positive cash flows.
In our latest Q1 2020 guidance, we revised our forecast 2020 net average production to be in the range of 30,000 to 37,000 boepd, estimated operating costs for 2020 to be in the range of USD 12 to 13 per boe, and reductions in total forecast 2020 expenditure of between MUSD 175 and 190 as compared to 2020 Capital Markets Day (CMD) estimates.
The upper end of our Q1 2020 production guidance assumed that curtailments implemented in Canada to the end of June 2020 continued through to the end of the year, with the lower end of the range assuming full curtailment of our Canadian oil production in the second half of 2020.
Given the improvement in our business outlook with strengthening oil prices, and in particular the strengthening in Canadian crude oil pricing, we have taken the decision to progressively bring back on stream our oil production from our Suffield Oil asset and our Onion Lake Thermal asset. In addition, in France, the temporary suspension of operations at the Total-operated Grandpuits refinery was lifted in early June and production from our Paris Basin assets has recovered to pre-curtailment levels.
As a result, we now forecast our 2020 net average production to be above the upper end of our previous guidance with a new range of 37,000 to 40,000 boepd.
Following these revisions, IPC’s estimated 2020 capital and decommissioning expenditures are marginally increased by MUSD 3 to MUSD 80 and IPC’s forecast 2020 unit operating costs are unchanged at USD 12 to 13 per boe.
Maximizing Financial Flexibility
During the second quarter of 2020, we have been working closely with our International and Canadian banking partners to maximize our financial flexibility.
We are pleased to report that we have successfully concluded our discussions with our international banking partners to increase and extend the maturity of our existing RBL facility. Our facility size is increased by MUSD 15 to MUSD 140 and the maturity is extended by two and a half years to the end of 2024. The facility size does not commence amortization until the second half of 2022 and is fully available.
In Canada, we also successfully concluded discussions with our banking partners. Our primary Canadian RBL facility, previously sized at MCAD 375 was refinanced at MCAD 350 and the maturity was extended by one year to end of May 2022. This new facility was concluded without having to access any of the financial support packages that were previously announced by the Canadian Federal Government, through Export Development Canada (EDC). Further, the leverage ratio was removed from the extended Canadian RBL facility and we are required to hedge a minimum of 30% of forecast production in Canada for the period from October 1, 2020 to June 30, 2021.
As previously disclosed in May 2020, IPC gained access to an unsecured French Government backed loan of MEUR 13. This unsecured loan carries the lowest margin of our loan portfolio and does not have any financial covenants.
Our overall cost of funding will increase slightly following the conclusion and extension of our finance facilities. Our weighted average cost of debt for the second half of 2020 is expected to increase to approximately 4.5%, an increase of around 1% compared with the first half of 2020 under the previous facilities but in line with the weighted average cost of debt of 2019.
In summary, during the second quarter of 2020, we have been able to increase the size of our available credit facilities by more than MUSD 10 whilst extending their maturities and removing any leverage ratio. This demonstrates the strong support we have been able to maintain from our banking partners.
Furthermore, IPC has decided to extend our Canadian oil price hedging program through the remainder of 2020 in order to lock in additional positive cash flow as we restore some of our curtailed production at our Suffield and Onion Lake properties. During June and July 2020, we have put in place additional oil hedges and have now hedged close to two thirds of our forecast Canadian oil production for the third quarter of 2020 and close to half of our forecast Canadian oil production for the fourth quarter of 2020 at WCS prices averaging USD 28 and 25 per barrel respectively.
Having refinanced and extended the maturities of both our Canadian and International credit facilities in June and July 2020, we have now MUSD 90 of undrawn financial headroom. Assuming average second half 2020 Brent oil prices of USD 35 per barrel and average second half 2020 WCS oil prices of USD 22 per barrel, we expect to be free cash flow positive for the second half of 2020 and assuming the Granite credit facility is refinanced before the end of 2020, we project year end financial headroom in excess of MUSD 100. This represents a significant improvement from our first quarter guidance where we forecasted using up to 40% of that available headroom had commodity prices remained weak. This demonstrates that IPC has managed to preserve our financial resilience through this period of extreme volatility.
Second Quarter Performance
During the second quarter of 2020, our assets delivered average daily net production of 35,700 boepd, in line with our Q1 2020 guidance. Our operating costs per boe for the second quarter of 2020 was USD 10.7, slightly ahead of our Q1 2020 guidance.
Operating cash flow generation for the second quarter amounted to MUSD 14.7, ahead of our Q1 forecast as a result of oil prices strengthening through June. Moreover, as a result of our spending reductions, operational choices made and our hedging program, IPC was free cash flow neutral during the second quarter of 2020.
Capital and decommissioning expenditures during the second quarter of 2020 of MUSD 8.4 was in line with forecast and reflects the implementation of our expenditure reduction program previously announced.
Net debt increased during the second quarter of 2020 by MUSD 39 to MUSD 341. The increase was driven by non-cash exchange rate movements as a result of the Canadian dollar strengthening against the US dollar during the quarter (MUSD 10) as well as negative working capital movements (MUSD 29).”