IPC 2021 Year-End Financial Results and 2022 Budget and Production Guidance
February 8, 2022
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 (MD&A) for the year ended December 31, 2021. IPC is also pleased to announce its 2022 capital expenditure budget of USD 127 million and its 2022 production guidance of between 46,000 and 48,000 barrels of oil equivalent (boe) per day (boepd).(1) 2021 year-end proved plus probable (2P) reserves and best estimate contingent resources (unrisked) are respectively 270 million boe (MMboe) and 1,410 MMboe.(1)(2) IPC forecasts cumulative free cash flow (FCF) for 2022 to 2026 of approximately MUSD 900 to MUSD 1,800 (based on forecast Brent oil prices of USD 65 to 95 per barrel) generating estimated average annual FCF yield over the five year period of between 18% and 36%.(3)(7) IPC has also approved a new capital allocation plan where, from and including 2022, IPC intends to distribute to shareholders up to 40% of the FCF generated by IPC above achieved average Brent oil prices of USD 55 per barrel.(3)(7)
|2021 Business and Financial and 2022 Business Plan Highlights|
|•||Average net production of approximately 46,800 boepd for the fourth quarter of 2021 was above the high end of the third quarter of 2021 guidance range for the period (46% heavy crude oil, 18% light and medium crude oil and 36% natural gas)(1).|
|•||Full year 2021 average net production was 45,500 boepd above the high end of guidance and year end exit rate was above 46,000 boepd.|
|•||Production from the new sustaining Pad D’ at Onion Lake Thermal, Canada successfully brought online in the third quarter of 2021, with initial performance ahead of expectations and five production infill wells drilled at Onion Lake Thermal during the fourth quarter of 2021.|
|•||Increased working interest in the Bertam Field, Malaysia from 75% to 100% in April 2021.|
|•||Exceptional operational performance at the Bertam Field during 2021, with greater than 99% uptime and the successful increase of Bertam FPSO water handling capacity from 17,000 to 24,000 barrels of water per day in Q3 2021.|
|•||Drilling operations on the A15 sidetrack well at the Bertam Field commenced in December 2021.|
|•||Second annual Sustainability Report published in Q2 2021.|
|•||2P reserves as at December 31, 2021 of 270 MMboe, with a reserves life index (RLI) of 16 years(1,2).|
|•||Contingent resources (best estimate, unrisked) as at December 31, 2021 of 1,410 MMboe.(1,2)|
|•||Operating costs per boe of USD 15.1 for the fourth quarter of 2021 and USD 15.0 for the full year compared to full year guidance of USD 15.5 per boe.(3)|
|•||Record high operating cash flow (OCF) generation for the fourth quarter and full year 2021 amounted to MUSD 111 and MUSD 337 respectively(3).|
|•||Capital and decommissioning expenditures of MUSD 48 for the full year 2021, slightly below guidance of MUSD 50 following the re-phasing of drilling projects in Malaysia into the first quarter of 2022.|
|•||Record high FCF generation for the fourth quarter and full year 2021 amounted to MUSD 87 and MUSD 263 respectively(3).|
|•||Net debt of MUSD 94 as at December 31, 2021, down from MUSD 161 at the end of the third quarter of 2021 and down from MUSD 321 as at December 31, 2020(3).|
|•||Net debt to 12 month rolling EBITDA ratio as at December 31, 2021 was 0.3 times(3).|
|•||Net result of MUSD 67 for the fourth quarter of 2021 and MUSD 146 for the full year 2021.|
|•||IPC’s inaugural USD 300 million bond issued on February 1, 2022, with a portion of the bond proceeds used to fully repay and cancel IPC’s existing reserve-based lending credit facilities.|
|Three months ended December 31||Year ended December 31|
|Gross profit / (loss)||79,469||(60,570)||210,321||(83,986)|
|Operating cash flow(3)||110,687||46,019||336,732||119,423|
|Free cash flow(3)||86,960||28,571||262,884||9,342|
Mike Nicholson, IPC’s Chief Executive Officer, commented,
“Market conditions for oil and gas producers rebounded strongly in 2021 from the lows experienced in 2020, finishing on a high in the final quarter of 2021 with an average Brent oil price of USD 80 per barrel. Full year 2021 average Brent prices averaged USD 71 per barrel, well in excess of the full year 2020 Brent oil prices average of USD 42 per barrel.
Proactive supply management by the OPEC+ group, led by Saudi Arabia, has more than rebalanced the market. Excess oil inventory levels are reported to have drawn back down well below pre-pandemic levels, and now sit below the five year average. The recovery in oil demand remains on track and it now feels like we are approaching the beginning of the end of the pandemic. Covid-19 defences are incomparable to this time last year with the vaccination and testing programs we now have in place. This should bode well for oil demand going forward as the final wave of mobility restrictions eases and OPEC+ production curtailment fully unwind, noting that some producers are facing challenges in meeting their increased quotas.
In Canada, fourth quarter 2021 Western Canadian Select (WCS) crude price differentials averaged below USD 15 per barrel and forward markets into 2022 and 2023 are pricing the WCS differential at below USD 14 per barrel. Completion and placement into service of Enbridge’s Line 3 replacement pipeline in the fourth quarter of 2021 as well as the positive construction progress on the TransMountain pipeline expansion project is providing a much more constructive outlook for Canadian oil market egress relative to the tightness we have witnessed over the past several years. IPC has positioned itself well to benefit from this fundamental improvement in market conditions and has decided to take advantage of this by hedging approximately 60% of our WTI/WCS differential exposure at approximately USD 13 per barrel for the remainder of 2022. No other oil hedges are in place providing full exposure to the strength we are seeing in both the Brent and WTI benchmarks.
Gas markets have also strengthened driven by a combination of increasing demand, lower supply and warmer than average summer temperatures that diverted gas supply away from injecting into storage. Fourth quarter 2021 average Empress gas prices were CAD 5.00 per Mcf and forward 2022 prices sit above CAD 3.50 per Mcf. IPC has hedged AECO gas prices, 19,000 Mcf per day at CAD 4.40 per Mcf in Q1 2022 and 33,000 Mcf per day at CAD 3.60 per Mcf in Q2 and Q3 2022.
IPC benefits from a well balanced mix of production comprising approximately 48% Canadian crude oil, 36% Canadian gas and 16% Brent weighted oil. With synchronized strength in pricing across the entire energy complex, combined with IPC delivering operational excellence above the high end of our forecasts, IPC has been able to deliver our best ever quarterly and annual financial performance since our launch in 2017.
We were very pleased with IPC’s first USD 300 million bond, issued on February 1, 2022, accessing the debt capital markets at a favourable time. We used a portion of the proceeds of the bond to fully repay and cancel our existing reserve-based lending facilities and at the same time, we put in place a new CAD 75 million revolving credit facility for financial flexibility in Canada. We strongly believe that the winners in the next phase of the energy transition in the upstream oil and gas industry will be the companies able to access diverse sources of funding. Whilst we do not have an imminent acquisition, we believe that being able to demonstrate to sellers that IPC has the financial strength on its balance sheet, will enable IPC to access a greater universe of opportunities whilst differentiating us from our peers in terms of certainty of being able to close transactions.
We have created significant value from acquisition for all of our stakeholders having concluded four acquisitions in the past four years and will remain opportunistic in our approach with respect to further M&A activity focusing on securing additional high quality resources.
Fourth Quarter and Full Year 2021 Highlights
During the fourth quarter of 2021, our assets delivered average net production of 46,800 boepd.(1) Production for the full year 2021 averaged 45,500 boepd.(1) In all four quarters of 2021, IPC has delivered production above our original high end guidance. This was made possible by the very high uptime performance across all our assets as well as the earlier than forecast production contribution from the newly commissioned Pad D’ at Onion Lake Thermal.
Our operating costs per boe for the fourth quarter of 2021 was USD 15.1.(3) Full year operating costs per boe of 15.0 was below our latest guidance of USD 15.50 per boe, largely driven by the production outperformance.
Operating cash flow generation for the fourth quarter of 2021 was USD 111 million, a record high for IPC.(3) Full year operating cash flow amounts to USD 337 million, above our high end guidance and a record for IPC.
Capital and decommissioning expenditures for the full year was USD 48 million, USD 2 million below guidance largely the result of re-phasing into 2022.
Free cash flow generation was exceptionally strong at USD 87 million during the fourth quarter of 2021 and USD 263 million for the full year, a record quarterly and full year result for IPC and above our latest high end guidance.(3) This represents close to 26% of IPC’s current market capitalization.
Net debt reduced more than 70% during 2021 to USD 94 million as at December 31, 2021.(3) Net debt to EBITDA drops to 0.3 times at year-end 2021 from 3 times at the year-end 2020 (trailing 12 months).
Capital Allocation Plans
We are also pleased to announce IPC’s 2022 capital allocation plans, given our strong forecast liquidity position resulting from continued operational performance and strong commodity prices. Based on our current business plans and assumptions, IPC plans to distribute to shareholders up to 40% of the free cash flow generated by IPC above achieved average Brent oil prices of USD 55 per barrel, provided that IPC’s net debt to EBITDA ratio is at or below 1 time.(3)(7) These shareholder distributions are planned to be implemented by continued share repurchases under the previously announced share repurchase program as well as the consideration by IPC of other forms of shareholder distributions, subject to further applicable regulatory and corporate approvals.
Share Repurchase Program
In Q4 2021, IPC announced a share repurchase program, with the ability to repurchase up to approximately 11.1 million IPC common shares over the twelve month period to December 2022. IPC repurchased in December 2021 and subsequently cancelled approximately 1.3 million IPC shares, at an average purchase price of approximately SEK 49.5 (or around CAD 6.95) per share. By the end of January 2022, IPC repurchased a further approximately 1.0 million IPC shares of which 726,676 shares have been cancelled.
Environmental, Social and Governance (“ESG”) Performance
Responsible operatorship and ensuring that we adhere to the highest principles of business conduct have been an integral part of how we do business since the creation of IPC in 2017. Over the past five years, IPC has rapidly grown our business with the completion of three acquisitions in Canada, an acquisition in Malaysia in addition to significant organic investments into those businesses. In parallel, we have made a concerted effort to further develop and improve our sustainability strategy. An important part of this journey involves the measurement and transparent reporting of a broad range of ESG metrics. Alongside the publication of our second quarter 2021 financial report, we were very pleased to publish our second Sustainability Report that was fully GRI compliant. We encourage everyone to read it and see first-hand the good work that is being done within our company. As previously announced, IPC targets a reduction of our net GHG emissions intensity by the end of 2025 to 50% of the Corporation’s 2019 baseline.
During the fourth quarter of 2021 and for the full year 2021, IPC recorded no material safety or environmental incidents. In response to the Covid-19 pandemic, we remain focused on protecting the health and safety of our employees, contractors and other stakeholders, while also working to ensure business continuity. Throughout 2021, IPC continued the health protocols implemented across the organization.
Reserves and Resources
As at the end of December 2021, IPC’s 2P reserves are 270 MMboe.(1)(2) During 2021, IPC replaced 91% of production through a combination of reserve additions and the acquisition of an additional 25% working interest in the Bertam field, Malaysia. The reserves life index (RLI) as at December 31, 2021, is approximately 16 years.(2)
Based on independent qualified reserve auditor reports, the net present value (NPV)(2)(4) of IPC’s 2P reserves as at December 31, 2021 was USD 2,522 million. IPC’s net asset value (NAV)(2)(5) as at December 31, 2021 was USD 2,428 million. IPC’s NAV per share(2)(6) was SEK 143 as at December 31, 2021.
In addition, IPC’s best estimate contingent resources (unrisked) as at end December 2021 have increased by more than 300 MMboe to 1,410 MMboe.(1)(2)
The biggest single contributor to the increase in contingent resource estimates comes from the Blackrod project in Canada.(1)(2) IPC commissioned a third party independent qualified reserves evaluator report from Sproule Associates Ltd. (Sproule) on the contingent resources at Blackrod Phase I as at December 31, 2021. Full field best estimate contingent resources (unrisked) increased from 987 MMboe as at end December 2020 to 1,283 MMboe as at end December 2021. Phase I best estimate contingent resources (unrisked) increased from 178 MMboe to 217 MMboe as at end December 2021. Development capital expenditure to first oil is estimated at approximately USD 540 million (unrisked). The Phase I development concept has been further optimised to include initial production capacity of 20,000 bopd rising to 30,000 bopd. First oil is assumed to be four to five years after final investment decision with production ramping up to 30,000 bopd thereafter. The breakeven oil price estimated by IPC assuming a 10% discount rate is a WTI price of approximately USD 50 per barrel. Using Sproule’s price forecasts as at December 31, 2021, the net present value at a 10% discount rate (after tax, unrisked) of Blackrod Phase I as at December 31, 2021 is USD 609 million. IPC plans to mature the Blackrod Phase I project during 2022 through FEED studies in parallel with the continuation of production from well pair three.
2022 Budget and Production
We are pleased to announce our 2022 average net production guidance is 46,000 to 48,000 boepd.(1) We forecast operating costs for 2022 to be USD 15.2 per boe.(3)
We also forecast significant free cash flow generation based on our 2P reserves base of an aggregate of more than USD 900 million to USD 1,800 million over the period of 2022 to 2026, without taking into account development of our contingent resources or any further potential acquisitions.(2)(3)(7)
Our 2022 capital expenditure budget is USD 127 million, as IPC focuses our 2022 strategy on strong free cash flow generation whilst growing our production and maturing our significant contingent resource base. The 2022 budget includes the commencement of investment at Onion Lake Thermal on the next sustaining Pad L as well as further infill drilling, Suffield oil N2N drilling, Phase I development at the Ferguson asset and Blackrod FEED studies as well as continued production from well pair three in Canada. We plan to complete the A15 sidetrack and ESP pump upsizing campaign in Malaysia as well as to start the Phase I development of the Villeperdue West project in France. Given that IPC operates 100% of these projects, significant flexibility is retained to amend our plans based on the development of commodity prices.
Further details regarding IPC’s 2022 budget and production guidance will be provided at IPC’s Capital Markets Day presentation to be held on February 8, 2022 at 14:00 CET. A copy of the Capital Markets Day presentation will be available on IPC’s website at www.international-petroleum.com.”
(1) See “Supplemental Information regarding Product Types” in “Disclosure of Oil and Gas Information” below. See also the material change report (MCR) available on IPC’s website at www.international-petroleum.com and filed on the date of this press release under IPC’s profile on SEDAR at www.sedar.com.
(2) See “Disclosure of Oil and Gas Information” below. Further information with respect to IPC’s reserves, contingent resources and estimates of future net revenue, including assumptions relating to the calculation of NPV, are further described in the MCR.
(3) Non-IFRS measure, see “Non-IFRS Measures” below and in the MD&A.
(4) NPV is after tax, discounted at 8% and based upon the forecast prices and other assumptions further described in the MCR. See “Disclosure of Oil and Gas Information” below.
(5) NAV is calculated as NPV less net debt of USD 94 million as at December 31, 2021.
(6) NAV per share is based on 155,037,454 IPC common shares, being 155,198,105 IPC common shares outstanding as at December 31, 2021 less 1,160,651 IPC common shares held in treasury for cancellation in early January 2022.
(7) Estimated free cash flow generation is based on IPC’s current business plans over the period of 2022 to 2026. Assumptions include average net production over that period of approximately 47 Mboepd, average Brent oil prices of USD 65 to 95 per boe escalating by 2% per year, average gas prices of CAD 3.00 per thousand cubic feet, and average Brent to Western Canadian Select differentials as estimated by IPC’s independent reserves evaluator and as further described in the MCR. Free cash flow yield is based on IPC’s market capitalization at close February 3, 2022 (60.0 SEK/share, 9.1 SEK/USD, USD 1,014 million). IPC’s current business plans and assumptions, and the business environment, are subject to change. Actual results may differ materially from forward-looking estimates and forecasts. See “Forward-Looking Statements” below.