IPC third quarter 2021 financial results
November 2, 2021
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 three and nine months ended September 30, 2021. In addition, IPC is pleased to announce that it has sought approval from the Toronto Stock Exchange (TSX) to commence a normal course issuer bid to repurchase its own common shares through the facilities of the TSX and Nasdaq Stockholm.
Q3 2021 Business and Financial Highlights
- Average net production of approximately 46,800 barrels of oil equivalent (boe) per day (boepd) for the third quarter of 2021 is above the high end of the second quarter of 2021 guidance for the period (46% heavy crude oil, 18% light and medium crude oil and 36% natural gas)(1).
- Full year 2021 average net production forecast increased to above 45,000 boepd(1), with an expected exit rate 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.
- Preparations continued during the quarter for the five well infill drilling campaign at Onion Lake Thermal and for the A15 sidetrack well at the Bertam Field, Malaysia.
- Operating costs(2) per boe of USD 14.7 for the third quarter of 2021, slightly better than Capital Markets Day (CMD) guidance. No changes to the full year guidance of USD 15.5 per boe.
- Record high operating cash flow (OCF)(2) generation for the third quarter and first nine months of 2021 amounted to MUSD 91 and MUSD 226 respectively.
- Full year OCF(2) guidance is increased to between MUSD 315 to MUSD 335 (actual realized prices for the first nine months of 2021 and Brent USD 75 to 85 per barrel for the fourth quarter of 2021) from MUSD 290 (Brent USD 75 per barrel).
- Capital and decommissioning expenditures of MUSD 30 for the first nine months of 2021. Full year guidance has been reduced to MUSD 50 from MUSD 73 following the re-phasing of drilling projects in Malaysia into the first quarter of 2022.
- Record high free cash flow (FCF)(2) generation for the third quarter and first nine months of 2021 amounted to MUSD 77 and MUSD 176 respectively.
- Full year FCF(2) guidance is increased to between MUSD 240 million to MUSD 260 (actual realized prices for the first nine months of 2021 and Brent USD 75 to 85 per barrel for the fourth quarter of 2021) from MUSD 195 (Brent USD 75 per barrel).
- Forecast cumulative FCF(2) for 2021 to 2025 increased from approximately MUSD 600 to MUSD 1,200 to approximately MUSD 740 to MUSD 1,200 (Brent USD 55 to 75 per barrel), generating estimated average annual FCF yield over the five year period of between 17% and 28%(3).
- Net debt(2) of MUSD 161 as at September 30, 2021, down from MUSD 241 at the end of the second quarter of 2021 and down from MUSD 321 as at December 31, 2020.
- Net debt(2) to 12 month rolling EBITDA(2) ratio as at September 30, 2021 was 0.6 times.
- Net result of MUSD 31 for the third quarter of 2021.
- IPC intends to launch a new share repurchase program, the third since the April 2017 spin-off, with the ability to repurchase at its discretion up to approximately 7% of IPC’s outstanding common shares or 10.8 million IPC shares, the maximum permitted over a twelve month period under Canadian and Swedish securities law. Implementation of the share repurchase program remains subject to TSX approval.
|Three months ended September 30||Nine months ended September 30|
|Gross profit / (loss)||58,636||5,557||130,852||(23,416)|
|Operating cash flow||91,365||37,181||226,045||73,404|
|Free cash flow||76,607||22,766||175,924||(19,229)|
(1) See “Supplemental Information regarding Product Types” below.
(2) See “Non-IFRS Measures” below.
(3) Free cash flow yield based on IPC market capitalization at October 29, 2021 (48.0 SEK/share, 8.6 SEK/USD, 868 MUSD). Assumptions described below in “Forward-Looking Statements”.
Mike Nicholson, IPC’s Chief Executive Officer, commented,
“Market conditions for oil and gas producers have continued to strengthen during the third quarter of 2021. Third quarter 2021 average Brent oil prices were USD 73 per barrel, in excess of second quarter 2021 prices that averaged USD 69 per barrel.
Proactive supply management by the OPEC+ group, led by Saudi Arabia, is rebalancing the market. The International Energy Agency (IEA) is forecasting a net supply deficit during the fourth quarter of 2021 and excess oil inventory levels are reported to have drawn back down below pre-pandemic levels.
The recovery in oil demand remains on track as we see the easing of restrictions on mobility following the successful roll-out of Covid-19 vaccination programs to the wider population. With demand still not expected to fully recover to pre Covid-19 levels until next year, tapering of the supply curtailments by OPEC+ members looks set to continue into 2022.
In Canada, third quarter 2021 Western Canadian Select (WCS) crude price differentials averaged below USD 14 per barrel and forward markets into 2022 and 2023 are pricing the WCS differential at around USD 15 per barrel. Completion and placement into service of Enbridge’s Line 3 replacement pipeline 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.
Gas markets have surged to new highs driven by a combination of increasing demand, lower supply and warmer than average temperatures that has diverted gas supply away from injecting into storage. Third quarter average Empress prices were above CAD 4.00 per Mcf and the winter strip pricing is above CAD 5.00 per Mcf. We could witness further tightness during the winter period if cold temperatures prevail.
IPC benefits from a well balanced mix of production comprising approximately 49% Canadian Crude, 36% Canadian Natural Gas and 15% Brent weighted oil.
With synchronized strength in pricing across the entire energy complex, combined with delivering operational excellence above the high end of our forecasts, IPC has been able to deliver our best ever quarterly financial performance since our launch in 2017 and has approved our third share repurchase program.
In addition we continue to remain opportunistic in our approach with respect to further M&A activity.
Third Quarter 2021 Highlights
During the third quarter of 2021, our assets delivered average net production of 46,800 boepd. Production for the first nine months of 2021 averaged 45,100 boepd.
This is our third quarter in succession of delivering production above our original high end guidance. It 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.
In our second quarter report, we increased our full year average net daily production guidance to above 44,000 boepd, with a forecast 2021 exit rate in excess of 45,000 boepd.
We now expect our full year average net daily production to be above 45,000 boepd, with an increased forecast 2021 exit rate in excess of 46,000 boepd.
Our operating costs per boe for the third quarter of 2021 was USD 14.7, slightly better than our latest guidance. No changes are made to our full year guidance of USD 15.5 per boe.
Operating cash flow generation for the third quarter of 2021 was close to USD 91 million, a record high. First nine months’ operating cash flow amounts to USD 226 million.
Full year operating cash flow guidance is now increased to between USD 315 million to USD 335 million (Brent USD 75 to 85 per barrel) from USD 290 million (Brent USD 75 per barrel).
Capital and decommissioning expenditures during the first nine months of 2021 was USD 30 million. Our full year 2021 guidance is reduced to USD 50 million from our second quarter guidance of USD 73 million. The reduction is largely the result of rephrasing Malaysian drilling expenditures into the first quarter of 2022.
Free cash flow generation was exceptionally strong at USD 77 million during the third quarter of 2021 and USD 176 million for the first nine months of 2021, a record high. This represents close to 22% of IPC’s current market capitalization.
Full year 2021 free cash flow guidance is increased to between USD 240 million to USD 260 million (Brent USD 75 to 85 per barrel) from USD 195 million (Brent USD 75 per barrel). The revised guidance represents a free cash flow yield of between 28 to 30%.
A recent research report by RBC Capital Markets analyzing Global Integrated and E&P companies showed average 2021 free cash flow yields by each sub group to range between 8% and 16% with a global average of 12%. It is clear that IPC offers an attractive proposition for investors with a yield that is more than double that of our fellow industry peers.
We are revising our longer term guidance of generating between USD 600 and 1,200 million of free cash flow over the 2021 to 2025 period to between USD 740 and 1,200 million (with average Brent prices between USD 55 to 75 per barrel). This is to reflect our higher 2021 free cash flow. At this upper end of our forecast, the entire enterprise value of IPC would be liquidated in less than five years.
Net debt has reduced by half during the first nine months to USD 161 million. Net debt to EBITDA drops to 0.6 times from 3 times at the year-end 2020 (trailing 12 months), and deleveraging is continuing.
Share Repurchase Program
IPC is pleased to announce today that we have sought approval from the TSX to commence a normal course issuer bid (NCIB) to repurchase IPC’s common shares through the facilities of the TSX and Nasdaq Stockholm. This will be IPC’s third share repurchase program since listing in 2017. The Board of Directors has approved, subject to acceptance by the TSX, the repurchase of up to approximately 10.8 million common shares, representing approximately 7% of IPC’s outstanding common shares (or 10% of IPC’s “public float” as at November 2, 2021), over a period of twelve months. IPC currently does not hold any common shares in treasury.
As and when considered advisable by IPC, common shares may be repurchased on the TSX and Nasdaq Stockholm at the then prevailing market price at the time of such purchase, in accordance with the applicable rules and policies of the TSX and Nasdaq Stockholm and applicable Canadian and Swedish securities laws. The actual number of common shares that will be repurchased, and the timing of any such purchases, will be determined by IPC, subject to the limits imposed by the TSX and Nasdaq Stockholm. There cannot be any assurances as to the number of common shares that will ultimately be acquired by IPC. Any common shares purchased by IPC under the share repurchase program will be cancelled.
Environmental, Social and Governance (“ESG“) Performance
Health, Safety & Environmental performance remains a priority for all operational assets. Our objective is to reduce risk and eliminate hazards to prevent the occurrence of accidents, ill health and environmental damage, as these are essential to the success of our operations. During the third quarter of 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. In the third quarter of 2021, IPC continued the health protocols implemented throughout the organization.”