Seven Generations Energy Ltd. is pressing ahead with its drilling plans despite the industry's severe downturn, taking advantage of low costs and access to capital, its chief executive officer says.
Seven Generations, the last sizable energy producer to go public before the market for oil and gas shares cratered last year, reported a 92-per-cent rise in cash flow and 126-per-cent jump in production from its Alberta operations in the second quarter.
Last week's outage of a major gas pipeline to the U.S. Midwest from Western Canada that is Seven Generations' main transport route has temporarily curtailed its production. But it is not expected to force a cut to the annual output forecast of 55,000 to 60,000 barrels of oil equivalent a day.
The company said it is sticking to its 2015 capital spending budget of up to $1.35-billion, staying the course for production gains at its Kakwa River Montney natural gas project south of Grande Prairie, Alta.
Seven Generations is pushing ahead as numerous competitors, large and small, have chopped their budgets several times in the past eight months and jettisoned staff to cope with the downturn in energy markets and dwindling cash flow.
A focus on keeping drilling and operating costs down is key to the spending plans, CEO Pat Carlson said in an interview.
The company's Montney acreage has among the lowest break-even costs of North American shale-gas formations, according to research by Credit Suisse. Its production, rich in condensate, can make money at gas prices of 94 cents (U.S.) to $2.73 per million British thermal units (mmBtu). Gas sold for $2.84 per mmBtu on the New York Mercantile Exchange on Monday.
"Our business plan was built around the ability to grow the way we've laid out, provided that the capital's available to us, and profitably grow in the worst of commodity pricing," he said.
"Lower prices affect our available cash for reinvestment just like everyone else. Even though we have a profit proposition, we have less cash arising from our existing operations than we would have if the prices were higher."
Seven Generations bolstered its cash war chest last fall, with its initial public offering raising $932-million (Canadian). This year, it has issued $425-million (U.S.) of senior debt, due in 2023, and boosted its revolving credit facility to $650-million (Canadian) from $480-million.
It is not immune to the pressures facing the industry. In February, Seven Generations cut its spending plans by $300-million, deferring projects outside of its main project area.
Montney drilling is not a cheap proposition. Its recent wells have cost $12-million, although that represents a $1-million reduction per well since the start of the year as the company's use of technology has improved.
Seven Generations was forced to stop producing gas last week when the 1.6-billion-cubic-feet-a-day Alliance Pipeline to Chicago shut down due to contaminated supplies. It is expected to restart this week. The impact on the company should be minor, especially as it had planned to take some wells down for maintenance, Mr. Carlson said.
"We've been able to make use of the time. We would have had some outage anyway. We're not changing our guidance for the year at all at this point, certainly not if they expect to be back up in the middle of the week," he said.
Diversifying its access to markets, the company has signed a deal with TransCanada Corp. to ship 107 million cubic feet of gas a day on its Alberta system starting in 2018.
In the second quarter, it lost $22-million or 9 cents a share, compared with a year-earlier profit of $44-million or 20 cents. Excluding unusual items, earnings were $28-million or 11 cents a share. Cash flow rose 92 per cent to $127-million.
Production more than doubled to 54,219 barrels of oil equivalent a day.
Jeffrey Jones