2017 & Beyond
Delphi remains well positioned to achieve significant production, cash flow and reserve growth over the near and long term to the benefit of all our stakeholders.
Delphi continues to execute a strategic development plan of our world-class, liquids-rich Montney property located at Bigstone in northwest Alberta, while strengthening our overall financial position through several tactical initiatives. The Company continues to successfully deliver robust economic returns on our capital projects including higher cash netbacks, which continue to exceed our historical proved producing finding and development costs. Positioned on the largest landbase at Bigstone, Delphi’s Bigstone Montney asset is poised to deliver strong and sustainable growth over the long-term.
Our business strategies and initiatives both mitigate the impacts of the current prolonged lower commodity price environment and enhance the Company’s long-term growth profile. Delphi continues to innovate our field operations resulting in significantly improving well results. Well stimulation design innovations continue to enhance well productivities, field condensate yields and well economics. As we drill further west on our Bigstone Montney property, we are seeing ultra-rich field condensate yields.
These field condensate yields in the most recent wells have increased two to four times compared to the average yields realized from the Company’s previous wells. Increased condensate yields of this magnitude on new wells, combined with higher forecast condensate prices in 2017 have the compound result of doubling revenue per barrel of oil equivalent (“boe”) and increasing unhedged field operating netbacks per boe by as much as three times, compared to 2016 netbacks. Delphi’s 2017 development plan contemplates the drilling of 13 gross (8.4 net) Bigstone Montney horizontal wells and the completion, tie-in and well site equipping of 14 gross (9.0 net) wells.
Delphi has secured the required firm service transportation for 100 percent of forecasted 2017 natural gas production growth. The contracted Alliance full path service to Chicago with its incremental priority interruptible service, together with the existing and incremental 2018 contracted firm TCPL service, will provide the Company with sufficient firm service to handle accelerated growth plans beyond 2017. The Company’s Bigstone Montney field compression and dehydration facilities are also sufficient for the forecasted growth in 2017.
Delphi’s strong hedge position has protected cash flow and economic returns through the entire period of lower commodity prices, creating the flexibility to pursue operational margin growth initiatives. The Company’s successful operational margin growth is a result of the high quality Bigstone Montney asset base, majority ownership in strategic infrastructure, firm take away capacity and proven expertise in developing its world-class, liquids-rich asset.
In 2016, the inclusion of Senior Secured Notes into the Company’s capital structure, a new supportive bank syndicate, and our Partner Transaction all contributed to reduce overall debt by 51 percent over the past two years and allowed for the planned acceleration of drilling activity through 2017.
In June, Delphi closed a $60.0 million public offering of five year term ten percent Collateralized Exchange Listed Notes which redefined the capital structure of the Company. In December, the Company entered into a new $80 million senior secured revolving credit facility with a banking syndicate comprised of Canadian chartered banks to support our accelerated production growth program.
In December, the Company also executed a strategic agreement (the “Partner Transaction”) with an existing working interest partner (the “Partner”) for proceeds of $54.6 million (including purchase price adjustments) to accelerate growth of our Bigstone Montney asset. The Partner Transaction was comprised of a $20 million joint drilling program to be completed before July 15, 2017, of which Delphi retains a 65 percent working interest in approximately five to six wells to be drilled at Bigstone Montney, and a $34.6 million cash component paid to Delphi for our Partner’s equalization into certain working interests in various Bigstone Montney assets. The Partner Transaction has equalized our combined working interests in these various Bigstone Montney assets as such that our Partner will hold a 35 percent working interest in certain partially developed and undeveloped lands and infrastructure. Delphi retained operatorship of the Bigstone Montney capital program, production and facilities comprising the Transaction Assets.
The production rate in the fourth quarter of 2017 is forecast to increase by 61 percent to approximately 11,000 to 11,500 barrels of oil equivalent per day when compared to Delphi’s corporate production from the fourth quarter of 2016. Significant condensate growth coupled with operational margin growth in the fourth quarter of 2017 will have the compounding effect of increasing annualized funds from operations per share by 143 percent over the comparable quarter in 2016, with cash netbacks on a dollar per barrel equivalent basis increasing in the fourth quarter of 2017(excluding hedges) by 111 percent over the same quarter in 2016.
Operating and Capital Costs
Delphi continues to focus on operating efficiencies at Bigstone Montney. Our 2017 capital program is forecast to be $65.0 to $70.0 million targeting an increase in annual production of approximately 25 percent (absolute and per share) to between 9,000 and 9,500 barrels of oil equivalent per day. Annual 2017 funds from operations (FFO) are forecast to increase approximately 82 percent (absolute and per share) based on an average West Texas Intermediate oil price of US$55.00 per barrel and an average New York Mercantile Exchange natural gas price of US$3.25 per million British thermal units.
As a result, the Company’s increasing cash flow is expected to reduce bank debt to annualized fourth quarter 2017 FFO of 0.8 times and total debt to annualized fourth quarter 2017 FFO of 1.5 times. The contemplated 2017 capital program is net of an estimated $10.1 million of carry capital costs remaining from our Partner Transaction.
Cash costs are forecast to decrease by approximately ten to twelve percent in 2017, with a continued focus on cost saving initiatives and significant production growth. Delphi continues to maintain a strong risk management position on both volumes and pricing.
At December 31, 2016, the Company had total net debt of $85.9 million outstanding, a 29 percent decrease from the previous year. The reduction in net debt is a result of the Partner Transaction proceeds of $34.6 million and the total associated $20 million carry capital costs for total proceeds of $54.6 million. At December 31, 2016, Delphi had $53.4 million (net of outstanding letters of credit of $6.6 million) available to be drawn on its senior credit facility. Total net debt has been reduced 51 percent from $173.7 million at December 31, 2014, while the shares outstanding have remained unchanged at 155.6 million.
Commodity Price Risk Management
Delphi continues to maintain a strong risk management position on both volumes and pricing. The Company believes that reducing commodity price volatility through an active and strategic hedging program reduces cash flow risk while protecting the economics of new capital being deployed.
The Company’s successful operating margin growth is a result of the high quality Bigstone Montney asset base, majority ownership in strategic infrastructure, firm take away capacity and proven expertise in developing this liquids-rich asset. Delphi’s strong hedge position has protected cash flow and economic returns through the entire period of prolonged lower commodity prices, creating the flexibility to pursue growth initiatives.
Protecting simple payouts for new wells of approximately one year through a strategic hedging program ensures the ability to effectively reinvest post-payout free cash flow. The Company has approximately 20 million cubic feet per day or 58 percent of its 2017 forecast natural gas production hedged at an average price of CDN$4.21 per million British thermal units (“mmbtu”) and approximately 1,000 barrels per day (bbls/d) of condensate hedged at an average West Texas Intermediate (“WTI”) price of CDN$66.70 per barrel (“bbl”).