IPC Announces First Quarter 2022 Financial and Operational Results and Intention to Launch USD 100 million Share Repurchase Offer
May 3, 2022
International Petroleum Corporation (IPC or the Corporation) (TSX, Nasdaq Stockholm: IPCO) today released its financial and operational results and related management’s discussion and analysis (MD&A) for the three months ended March 31, 2022.
|Q1 2022 Business and Financial Highlights|
|•||Accelerating share repurchases with the intention to launch a substantial issuer bid (SIB) to purchase for cancellation up to approximately MUSD 100 of IPC common shares.|
|•||Average net production of approximately 45,800 barrels of oil equivalent (boe) per day (boepd) for the first quarter of 2022, above high end guidance (49% heavy crude oil, 17% light and medium crude oil and 34% natural gas).(1)|
|•||Full year 2022 average net production guidance range is retained at 46,000 to 48,000 boepd.|
|•||Drilling operations on the A15 side-track well and three well pump upgrades at the Bertam field, Malaysia were completed by April 2022.|
|•||Operating costs per boe of USD 17.7 for the first quarter of 2022, above the CMD guidance of USD 17.2 per boe mainly as a result of higher gas and energy prices. Full year 2022 operating costs guidance revised at between USD 16 to 17 per boe from USD 15.2 per boe.(3)|
|•||Record high operating cash flow (OCF) generation for IPC for the first quarter 2022 amounted to MUSD 145.(3)|
|•||Full year OCF guidance increased to between MUSD 430 to 635 (Brent USD 70 to 100 per barrel).(3)|
|•||Capital and decommissioning expenditures of MUSD 40 for the first quarter of 2022, in line with CMD guidance.|
|•||Record high free cash flow (FCF) generation for IPC for the first quarter of 2022 amounted to MUSD 96.(3)|
|•||Full year 2022 FCF guidance increased to between MUSD 275 to 480 (Brent USD 70 to 100 per barrel).(3)|
|•||IPC’s inaugural MUSD 300 bond issuance completed 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.|
|•||Net debt of MUSD 42 as at March 31, 2022, down from MUSD 286 at the end of the first quarter of 2021 and down from MUSD 94 as at December 31, 2021. Net cash position achieved in April 2022.(3)|
|•||Net result of MUSD 81 for the first quarter of 2022.|
|•||Proved plus probable (2P) reserves as at December 31, 2021 of 270 million boe (MMboe), with a reserves life index of 16 years.(1,2)|
|•||Contingent resources (best estimate, unrisked) as at December 31, 2021 of 1,410 MMboe.(1,2)|
|•||Front End Engineering Design (FEED) studies commenced on the Blackrod project, Canada.|
|Three months ended March 31|
|Gross profit / (loss)||119,100||37,930|
|Operating cash flow(3)||145,110||67,721|
|Free cash flow(3)||96,479||48,951|
Mike Nicholson, IPC’s Chief Executive Officer, commented,
“Oil and gas prices continued to strengthen during the first quarter of 2022, driven by a very tight physical market with oil inventories sitting well below the 5 year average and OPEC+ struggling to keep up with increasing production quotas against a backdrop of recovering demand. The Russian invasion of Ukraine in late February 2022 has triggered a severe response from the international community that has further exacerbated the market tightness and the profound effects of this crisis are likely to be long lasting as consumers and producers alike reshape their thinking around access to resources and security of supply. Brent prices averaged over USD 100 per barrel during the first quarter of 2022, well in excess of fourth quarter 2021 Brent oil prices that averaged USD 80 per barrel.
In Canada, first quarter 2022 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 are 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 hedged approximately two thirds of our WCS differential exposure at around 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 West Texas Intermediate benchmarks.
Gas markets have also strengthened driven by a combination of increasing demand and a longer period of cold weather in the United States reducing storage levels. In Canada storage levels are 40% below the average level seen in the past ten years. First quarter average Empress prices were CAD 4.96 per Mcf and forward prices are the strongest IPC has witnessed at above CAD 5.00 per Mcf for the remainder of 2022. IPC has hedged AECO gas prices, 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 50% Canadian Crude, 33% Canadian Natural Gas and 17% Brent weighted oil. With synchronized strength in pricing across the entire energy complex, combined with delivering operational excellence above the high end of our first quarter forecast, IPC has again been able to deliver our best ever quarterly financial performance since our launch in 2017.
We were very pleased to complete IPC’s first USD 300 million bond issuance 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. 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, as well as maturing our significant contingent resource base in excess of 1.4 billion barrels.
First Quarter 2022 Highlights
During the first quarter of 2022, our assets delivered average net production of 45,800 boepd, above our high end guidance. This was made possible by the very high uptime performance across all our assets as well as higher than forecast gas production at Suffield in Canada due to the milder winter conditions reducing the impact of freeze offs. Full year 2022 production guidance of 46,000 to 48,000 boepd is retained.
Our operating costs per boe for the first quarter of 2022 was USD 17.7, USD 0.5 per boe above guidance and largely driven by higher gas prices for our Onion Lake thermal project and higher energy costs. The fact that we produce more than three times the volume of gas than we consume means that the positive revenue impact is more than three times the negative cost impact of higher gas prices. We are increasing our full year operating cost guidance from USD 15.2 per boe to USD 16 to 17 per boe to account for the increase we have seen in gas and energy prices.
Operating cash flow (OCF) generation for the first quarter of 2022 was USD 145 million, a record high for IPC. Full year 2022 OCF guidance is being increased from USD 360 to 635 million to USD 430 to 635 million assuming average Brent oil prices of USD 70 to 100 per barrel for the remainder of 2022.
Capital and decommissioning expenditure for the first quarter of 2022 was USD 40 million. Full year 2022 capital and decommissioning expenditure guidance is retained at USD 127 million.
Free cash flow (FCF) generation was exceptionally strong at USD 96 million during the first quarter of 2022, a record quarterly result for IPC. Full year 2022 FCF guidance is being increased from USD 205 to 480 million to USD 275 to 480 million assuming average Brent oil prices of USD 70 to 100 per barrel for the remainder of 2022. This represents between 19% and 33% of IPC’s current market capitalization.(4)
Net debt has reduced to USD 42 million by the end of the first quarter of 2022. During April 2022, IPC moved into a net cash position.
IPC forecasts cumulative FCF for 2022 to 2026 of approximately USD 900 to 1,800 million (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 12% and 24%.(4)
Capital Allocation Plans
We were also pleased to announce IPC’s 2022 capital allocation plans at our 2022 CMD. IPC plans to distribute to shareholders up to 40% of the FCF 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.
Share Repurchase Programs
Normal Course Issuer Bid
IPC implemented the current share repurchase program/normal course issuer bid (NCIB) in December 2021. This program permits IPC to buy-back up to approximately 11.1 million shares, or approximately 7% of the total outstanding IPC shares at the time of launch, over the 12-month period up to December 2022. To date, IPC has purchased and cancelled approximately 4.4 million IPC shares under the program, or approximately 40% of the annual NCIB limit, at a total purchase cost of approximately USD 29 million. The average price of IPC shares purchased to date is approximately SEK 60 per share.
Substantial Issuer Bid
Given the strong operational delivery during the first quarter of 2022 and robust financial outlook, IPC intends to accelerate share repurchases above the limits of the NCIB. IPC is pleased to announce that IPC intends to commence a substantial issuer bid (SIB) under which the Corporation plans to offer to purchase for cancellation from shareholders up to CAD 128 million, or approximately USD 100 million or SEK 980 million, of IPC’s outstanding common shares. IPC believes that the SIB represents an effective use of IPC’s capital and that share repurchases continue to be an efficient way to return value to IPC’s shareholders.
The SIB is expected to be conducted by way of a “modified Dutch auction” which will permit shareholders to choose, within the pricing range determined by IPC, the number of shares and the price at which they wish to tender such shares, with the purchase price for all tendering shareholders being the lowest purchase price per share that will enable IPC to purchase the maximum number of shares properly tendered to the offer, up to CAD 128 million. The pricing range for the SIB is expected to be set at between CAD 12.00 to 14.00 per share, or approximately SEK 92 to 107 per share based on current foreign exchange rates, representing a range of approximately 3% discount to 13% premium over the Corporation’s volume-weighted average price on the Toronto Stock Exchange over the 10 trading days prior to May 2, 2022. The offer to purchase under the SIB is expected to be open for 35 calendar days from commencement of the SIB, unless varied, extended or withdrawn by IPC. IPC intends to suspend share repurchases under the NCIB until after the expiration of the SIB.
At the minimum and maximum purchase price of the expected pricing range of CAD 12.00 to CAD 14.00, the offer to purchase under the SIB would be for up to between 10.7 million common shares (approximately 7.1% of shares currently outstanding) and 9.1 million common shares (approximately 6.1% of shares currently outstanding), respectively. As of May 3, 2022, 150,966,013 common shares of IPC are issued and outstanding and IPC holds no common shares in treasury.
Further details relating to the SIB, including instructions for tendering shares, will be provided by IPC at the time of commencement of the SIB and will be included in the formal offer to purchase and issuer bid circular, letter of transmittal for registered shareholders, notice of guaranteed delivery for registered shareholders, tender form for shareholders holding shares through Euroclear Sweden and other related documents which will be mailed and/or made available to shareholders, and which may be filed with applicable securities regulatory authorities and made available on SEDAR at www.sedar.com and on the Corporation’s website at www.international-petroleum.com.(5)
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. As previously announced, IPC targets a reduction of our net GHG emissions intensity by the end of 2025 to 50% of the IPC’s 2019 baseline and the Corporation is on track to achieving that target.
During the first quarter of 2022, IPC recorded no material safety or environmental incidents.”
(1) See “Supplemental Information regarding Product Types” in “Disclosure of Oil and Gas Information” below. See also the annual information form for the year ended December 31, 2021 (AIF) available on IPC’s website at www.international-petroleum.com and 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, are further described in the AIF.
(3) Non-IFRS measure, see “Non-IFRS Measures” below.
(4) Estimated FCF 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 AIF. Free cash flow yield is based on IPC’s market capitalization at close April 29, 2022 (95.4 SEK/share, 9.8 SEK/USD, USD 1,470 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 Information” below.
(5) The SIB referred to in this press release has not yet commenced. The information relating to the SIB contained in this press release is for informational purposes only and does not constitute an offer to buy or the solicitation of an offer to sell shares. The solicitation and the offer to buy shares under the SIB will only be made pursuant to the issuer bid circular and related documents that are filed with the applicable securities regulatory authorities. The SIB will not be made to, nor will tenders be accepted from or on behalf of, holders of shares in any jurisdiction in which the making or acceptance of offers to sell shares would not be in compliance with the laws of that jurisdiction. Although the Board of Directors of IPC has determined to proceed towards commencement of an SIB on the terms described in this press release, market, legal, tax or other business considerations between the date hereof and the commencement of the SIB may cause the Board of Directors to determine not to proceed with the SIB on the terms described in this press release, or at all. IPC will be under no legal obligation in respect of the offer under the SIB until the SIB is formally launched. None of IPC, its Board of Directors, or IPC’s advisors makes any recommendation to shareholders as to whether to tender or refrain from tendering any or all of their shares pursuant to the SIB or the purchase price or prices at which shareholders may choose to tender shares. Shareholders should evaluate carefully all information related to the SIB, consult their own financial, legal, investment, tax and other professional advisors and make their own decisions as to whether to tender shares pursuant to the SIB and, if so, how many shares to tender and at what price.