Company Announcements

JOURNEY ENERGY INC. INCREASES PRODUCTION BY 45% WITH HIGHLY ACCRETIVE, TRANSFORMATIONAL ACQUISITION OF LOW DECLINE OIL WEIGHTED ASSETS

CALGARY, AB , July 28, 2022 /CNW/ - Journey Energy Inc. (TSX: JOY); (OTCQX: JRNGF) ("Journey" or the "Company") is pleased to announce that it has today entered into a definitive agreement for the strategic acquisition of producing petroleum and natural gas assets in Alberta.

ACQUISITION OF ASSETS

Journey today entered into a definitive agreement with a senior producer for the purchase of petroleum and natural gas assets (the "Acquisition") currently producing approximately 4,400 boe/d (71% oil and NGL's) primarily in the Medicine Hat, Kaybob, Ferrier, and Ante Creek areas of Alberta for a total purchase price of $140 million prior to closing adjustments. Pro-forma, assuming an October 1 closing date, this transaction will increase Journey's fourth quarter production to 14,200-14,600 boe/d and it will increase Journey's liquid (oil and NGL's) weighting to approximately 55%.  The gross purchase price represents 2.0 times annualized operating income3 and is highly accretive to Journey on both cash flow and free cash flow per share metrics while maintaining conservative corporate leverage ratios.

 A summary of the relevant metrics for the acquisition are as follows:

Gross purchase price1

$140 million

Estimated net purchase price2

$116 million

June 2022 average daily sales volumes

4,400 boe/d (71% oil and NGL's)

Annual decline rate

12 %

Annual oil decline rate

10 %

Proved Developed Producing Reserve Life Index

8.2 years

Net wellbores

420

Liability Management Rating (June 2022)

~4.5

Undeveloped land

45,672 gross (15,338 net) acres

First-half 2022 operating netback3

$44.50/boe

Reserves4


PDP

12,680 mboe

Proved

13,827 mboe

Proved plus Probable

18,166 mboe

Acquisition cost metrics3


Multiple of operating income

2.0x

Flowing barrel

$31,800/boe/d

Cost per PDP reserves

$11.04/boe

PDP Recycle Ratio

4.0x

Notes:


1.

Before interim period adjustments for net operating income and other adjustments.

2.

Journey currently estimates that the net operating income adjustments will be approximately $25 million based on projections of net operating income from the effective date to the currently anticipated closing date of October 1, 2022.

3.

The acquisition cost metrics are based on the currently gross purchase price of $140 million and the first half, 2022 operating netback of the acquired properties.

4.

Reserve volumes are based on the vendors independent reserve evaluator's report with an effective date of December 31, 2021 and adjusted by Journey to reflect estimated production and other adjustments to the effective date of the transaction of May 1, 2022.

STRATEGIC RATIONALE

This Acquisition strengthens Journey's ability to drive shareholder returns through ongoing execution of the Company's business plan while providing free cash flow to pursue further enhancements to Journey's growth model.  These low decline, high free cash flow assets lend themselves to the implementation of a return of capital business model over time.

The following attributes support the transformational nature of the Acquisition:

  • Pro-forma, assuming an October 1 closing date, this transaction will increase Journey's fourth quarter production to 14,200-14,600 boe/d and it will increase Journey's liquid weighting to approximately 55%;

  • Large original oil in-place ("OOIP"), high value oil pools under waterflood/EOR enhance netbacks and sustainability. The Acquisition increases corporate oil production by over 70% while reducing oil declines to approximately 12%;

  • Compelling acquisition price at less than 2.0 times run-rate cash flow. The assets are being acquired for less than their PDP value under 2021 year-end pricing assumptions, which are well below current strip prices;

  • The Acquisition is accretive to Journey's 2022 adjusted funds flow per share and free funds flow per share;

  • The low decline oil revenue stream supports free cash flow generation and creates the potential for a future yield model;

  • The Acquisition is expected to close in October and is forecast to increase the Company's cash flow from operating activities by $64 million annualized, based on fourth quarter 2022 at US$90/bbl WTI and $5.40/GJ AECO;

  • The Company will maintain a strong leverage profile, with estimated 2022 exit net debt to annualized fourth quarter 2022 adjusted funds flow ratio of 0.6x at US$90/bbl WTI and $5.40/GJ AECO;

  • The acquired assets have an attractive corporate Licensee Liability Rating in Alberta of 4.5x, with a total undiscounted and uninflated decommissioning liability of $65 million. The acquisition is modestly accretive to Journey's asset retirement obligations relative to cash flow;

  • The acquisition includes proprietary operated and non-operated seismic data totaling 18,666 km of 2D data and 1,847 square kilometers of 3D seismic data. This increases Journey's 2D coverage by 6x and its 3D coverage by 3x.

The Acquisition is consistent with Journey's business model of acquiring high quality, operated, high working interest, high netback, light and medium gravity crude oil reservoirs with large OOIP. With this transaction, Journey acquires extensive infrastructure to facilitate years of future development drilling and waterflood/enhanced oil recovery optimization.

FINANCING

The net acquisition cost at closing will be financed through the combination of Journey's cash on hand, a vendor-take-back ("VTB") loan of $45 million, and the issuance of 3.0 million Journey shares to the vendor with a deemed price of $4.72 per share, which represents the five day volume weighted average of Journey shares up to an including today. Alberta Investment Management Corporation ("AIMCo"), Journey's largest shareholder and debt provider, has agreed to extend the due date of the Company's September 30, 2022 term debt maturity by six months in order for Journey to access the full complement of its cash on hand. This and the VTB loan allow the cash flow from the Acquisition to help finance the asset over the near term, thereby increasing the value accretion for all stakeholders.

The VTB carries an interest rate of 10% per annum.  Interest is paid monthly in arrears while the principal is repayable in monthly installments that are tied to the monthly average West Texas Intermediate oil price per barrel as follows:

  1.  
    1. if the average WTI oil price per barrel in a calendar month is less than US$70/bbl, the monthly
      repayment is $1.0 million;
    2. if the WTI oil price per barrel is between US$70/bbl but less than US$85/bbl, the monthly
      repayment is $2.0 million;
    3. if the WTI oil price per barrel is between US$85/bbl but less than US $100/bbl, the monthly
      repayment is $3.0 million;
    4. if the WTI oil price per barrel is greater than or equal to US$100/bbl the monthly repayment is $4.0 
      million.

The VTB will be secured by one of the acquired assets until it is repaid in full.

AMENDMENTS TO AIMCO TERM DEBT

Journey's largest shareholder and sole term debt provider, AIMCo, has consented to the Acquisition and has agreed to extend the maturity of its $23.8 million tranche of term debt from September 30, 2022 to March 31, 2023. The extension to the term debt provides additional liquidity while the assets are integrated into Journey's operations, and allows Journey to utilize the long life, free cash flow generation from the assets to the benefit of all stakeholders.

Given the strong performance from Journey's existing production base, its electricity generation assets running at or near nameplate capacity of 4 MW, cash flows from the acquired assets, and the stronger commodity prices in year-to-date 2022, Journey forecasts sufficient funds from operations to meet the new AIMCo maturity in 2023 as well as make the required repayments under the VTB obligation

The transaction closing is subject to standard conditions precedent and, while the closing date is uncertain at this time, Journey has assumed a closing date of October 1, 2022. Should that date change Journey will revise its guidance accordingly.

2022 GUIDANCE

Journey has updated its annual 2022 guidance to take into account the Acquisition as per the below table:


Revised

Previous (May 9/22)

Annual average daily sales volumes

10,400-11,000 boe/d 

(50% crude oil &
NGL's)

9,400 - 10,000 boe/d

(47% crude oil &
NGL's)

Adjusted Funds Flow

$120 - $126 million

$103 - $109 million

Adjusted Funds Flow per basic share

$2.25 - $2.40

$2.00 - $2.09

E&D plus ARO capital spending

$58 million

$51 million

Power asset capital spending

$6 million

$3 million

Capital spending (A&D):

Cash portion

Equity portion

 

$115 million

$25 million

 

$13 million

$11 million

Year-end net debt

$96 – $103 million

$4 - $10 million

Commodity prices1:

WTI (USD $/bbl)

MSW oil differentials (USD $/bbl)

AECO natural gas (CAD $/mcf)

CAD/USD foreign exchange

 

$96.50

$3.50

$5.70

$0.78

 

$94.00

$4.00

$5.45

$0.78

Commodity prices (Q4, 2022):

WTI (USD $/bbl)

MSW oil differentials (USD $/bbl)

AECO natural gas (CAD $/mcf)

CAD/USD foreign exchange

 

$90.00

$5.00

$6.00

$0.78

 

$94.00

$4.00

$5.45

$0.78

Notes:

1.

Commodity prices represent full year averages.

ADVISORS

Stifel FirstEnergy is acting as financial advisor to Journey with respect to the Acquisition. Peters & Co. Limited has been appointed strategic advisor to Journey for the Acquisition. McCarthy Tétrault LLP is acting as legal advisor to Journey.

FORWARD LOOKING STATEMENTS AND OTHER ADVISORIES

Information in this press release that is not current or historical factual information may constitute forward- looking information within the meaning of securities laws, which involves substantial known and unknown risks and uncertainties, most of which are beyond the control of Journey, including, without limitation, those listed under "Risk Factors" and "Forward Looking Statements" in the Annual Information Form filed on www.SEDAR.com on March 31, 2022. Forward-looking information may relate to Journey's future outlook and anticipated events or results and may include statements regarding the business strategy and plans and objectives. Particularly, forward-looking information in this press release includes, but is not limited to, information concerning Journey's drilling and other operational plans, production rates, and long-term objectives. Journey cautions investors in Journey's securities about important factors that could cause Journey's actual results to differ materially from those projected in any forward-looking statements included in this press release. Information in this press release about Journey's prospective funds flows and financial position is based on assumptions about future events, including economic conditions and courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that information regarding Journey's financial outlook should not be used for purposes other than those disclosed herein. Forward-looking information contained in this press release is based on current estimates, expectations and projections, which Journey believes to be reasonable as of the current date. No assurance can be given that the expectations set out herein will prove to be correct and accordingly, you should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation and do not undertake to update this information at any particular time except as required by applicable securities law.

Readers are cautioned that the above list of risks and factors are not intended to be exhaustive. Additional information on these and other factors that could affect operating and financial results are, or will be, included in reports filed with the applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

Non-IFRS Measures

The Company uses the following non-IFRS measures in evaluating corporate performance. These terms do not have a standardized meaning prescribed by International Financial Reporting Standards and therefore may not be comparable with the calculation of similar measures by other companies.

(1)     "Adjusted Funds Flow" is calculated by taking "cash flow provided by operating activities" from the IFRS financial statements and adding or deducting (as required): changes in non-cash working capital; transaction costs; and decommissioning costs. Adjusted Funds Flow per share is calculated as Adjusted Funds Flow divided by the weighted-average number of shares outstanding in the period. Because Adjusted Funds Flow and Adjusted Funds Flow per share are not impacted by fluctuations in non-cash working capital balances, we believe these measures are more indicative of performance than the GAAP measured "cash flow generated from operating activities". In addition, Journey excludes transaction costs from the definition of Funds Flow, as these expenses are generally in respect of capital acquisition transactions. The Company considers Adjusted Funds Flow a key performance measure as it demonstrates the Company's ability to generate funds necessary to repay debt and to fund future growth through capital investment. Journey's determination of Adjusted Funds Flow may not be comparable to that reported by other companies. The reconciliation between cash from operating activities on the consolidated financial statements, and Adjusted Funds Flow can be found in the annual and quarterly management, discussion and analysis. Journey also presents Adjusted Funds Flow per share where per share amounts are calculated using the weighted average shares outstanding consistent with the calculation of net income (loss) per share, which per share amount is calculated under IFRS and is more fully described in the notes to the audited, year-end consolidated financial statements.

(2)    "Netback(s)". The Company uses netbacks to help evaluate its performance, leverage, and liquidity; comparisons with peers; as well as to assess potential acquisitions. Management considers netbacks as a key performance measure as it demonstrates the Company's profitability relative to current commodity prices. Management also uses them in operational and capital allocation decisions. Journey uses three netbacks to assess its own performance and also performance in relation to its peers. These netbacks are operating, Funds Flow and net income (loss). "Operating netback" is calculated as the average sales price of the commodities sold (excluding financial hedging gains and losses), less royalties, transportation costs and operating expenses. "Adjusted Funds Flow netback" begins with the operating netback and deducts general and administrative costs, interest costs and then adds or deducts any realized gains or losses on derivative contracts. To calculate the "net income (loss) netback", Journey takes the Adjusted Funds Flow netback and then adds or deducts: unrealized gains/losses on derivative contracts; share- based compensation expense; depletion; depreciation; accretion; loss and gains on dispositions; asset impairments; exploration and evaluation expenses; PP&E impairments and reversals; and deferred income taxes. There is no GAAP measure that is reasonably comparable to netbacks.

(3)     "Net debt" is calculated by taking current assets, and then subtracting accounts payable and accrued liabilities; the principal amount of term debt; and other liabilities. Net debt is used to assess the capital efficiency, liquidity and general financial strength of the Company. In addition, it is used as a comparison tool to assess financial strength in relation to Journey's peers.

(4)     "Net Operating Income" Means petroleum and natural gas sales (before realized hedging gain or losses on derivative instruments), less royalties, transportation expenses, and operating costs.

Barrel of Oil Equivalents and Volumes

Where amounts are expressed in a barrel of oil equivalent ("boe"), or barrel of oil equivalent per day ("boe/d"), natural gas volumes have been converted to barrels of oil equivalent at six (6) thousand cubic feet ("Mcf") to one (1) barrel. Use of the term BOE may be misleading particularly if used in isolation. The boe conversion ratio of 6 Mcf to 1 barrel ("Bbl") of oil or natural gas liquids is based on an energy equivalency conversion methodology primarily applicable at the burner tip, and does not represent a value equivalency at the wellhead. This conversion conforms to the Canadian Securities Regulators' National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities.

Other than in the highlight table, where the Company uses the term "crude oil" it is referring to the aggregate of light, medium and heavy crude oil volumes or dollars as is required. Where the Company uses the term "natural gas" it is referring to the aggregate of conventional natural gas and coal-bed methane natural gas volumes or dollars as is required.

All volumes in this press release refer to the sales volumes of crude oil, natural gas and associated by-products measured at the point of sale to third-party purchasers. For natural gas, this occurs after the removal of natural gas liquids.

Oil and Gas Measures and Metrics

All reserves information in this press release was prepared by an independent reserve evaluator, effective December 31, 2020, using the reserve evaluators December 31, 2020 forecast prices and costs in accordance with National Instrument 51-101 – Standards of Disclosure of Oil and Gas Activities ("NI 51-101") and the Canadian Oil and Gas Evaluation Handbook (the "COGE Handbook"). All reserve references in this press release are "Company gross reserves". Company gross reserves are the Company's total working interest reserves before the deduction of any royalties payable by the Company and before the consideration of the Company's royalty interests. It should not be assumed that the present worth of estimated future cash flow of net revenue presented herein represents the fair market value of the reserves. There is no assurance that the forecast prices and costs assumptions will be attained and variances could be material. The recovery and reserve estimates of the Oxbow Assets and Saturn's crude oil, NGLs and natural gas reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual crude oil, natural gas and NGLs reserves may be greater than or less than the estimates provided herein.

All future net revenues are stated prior to provision of general and administrative expenses, interest, but after the deduction of royalties, operating costs, estimated abandonment and reclamation cost for wells with reserves attributed to them; and estimated future capital expenditures to book those reserves. Future net revenues have been presented on a before tax basis. Estimated values of future net revenue disclosed herein are not representative of fair market value.

The Company uses the following metrics in assessing its performance and comparing itself to other companies in the oil and gas industry. These terms do not have a standardized meaning and therefore may not be comparable with the calculation of similar measures by other companies:

Corporate decline ("Decline") is the rate at which production from a grouping of assets falls from the beginning of a fiscal year to the end of that year.

Select Abbreviations and Definitions

AIMCo

Alberta Investment Management Corporation

bbl

barrel

bbls

barrels

boe

barrels of oil equivalent

boe/d

barrels of oil equivalent per day

EOR

Enhanced Oil Recovery

gj

gigajoules

IFRS

International Financial Reporting Standards

Mbbls

thousand barrels

Mboe

thousand boe

Mcf

thousand cubic feet

Mmcf

million cubic feet

Mmcf/d

million cubic feet per day

MSW

Mixed sweet Alberta benchmark oil price

MW/H

Megawatts of electricity per hour

NGL's

natural gas liquids

WCS

Western Canada Select benchmark oil price

WTI

West Texas Intermediate benchmark Oil price

 

No securities regulatory authority has either approved or disapproved of the contents of this press release.

SOURCE Journey Energy Inc.