Execution drives increase to midpoint of 2020 production guidance, 2021 budget targets stable production and free cash flow

CALGARY, Alberta--(BUSINESS WIRE)--Seven Generations Energy Ltd. (TSX: VII)

THIRD QUARTER 2020 HIGHLIGHTS

• The company successfully completed its planned three-week turnaround and upgrade at the Karr plant and condensate stabilizer on-time and on-budget, while mitigating the impact to production volumes. Third quarter sales volumes were 168.9 Mboe/d (43% natural gas, 34% condensate, 23% other NGLs). October average field production estimates are in excess of 185 Mboe/d.

• 7G has increased the lower end of its full-year 2020 production guidance to average 180-185 Mboe/d, compared to its prior guidance of 175-185 Mboe/d. Planned capital investments for 2020 are unchanged at $650 million. Additionally, the upper end of full-year 2020 operating cost guidance has been reduced from $4.50-$5.00/boe to $4.50-$4.75/boe.

• The company restarted drilling and completion activity early in the third quarter and generated a modest amount of free cash flow despite the capital and volume impacts of the Karr turnaround. For both the fourth quarter and full-year 2020, 7G expects to generate free cash flow given the remaining capital investment, production volumes and hedging profile. 7G’s strategy of free cash flow generation continues despite the multitude of challenges faced in 2020. The company currently has 80% of net condensate volumes hedged in the fourth quarter and 55% hedged in the first quarter of 2021 at an average WTI price of US$44.60/bbl.

• Third quarter drilling and completions costs averaged $6.5 million dollars per well, an 11% improvement relative to the per-well costs achieved in the first half of 2020. Drilling costs per meter and completion costs per tonne of proppant pumped improved by 5% and 30% respectively compared to the first half of 2020.

• 7G continues to execute its symbiotic ESG-driven market access strategy. Supported by its Equitable Origin EO100™ certification and its low upstream emissions intensity profile, 7G entered into a supply agreement with Vermont Gas Systems, Inc. (VGS). VGS is an integrated energy services company that will distribute 7G’s responsibly developed natural gas to its consumer base and in return pay 7G a premium that the company will direct towards the 7G Sustainability Fund.

• The company also entered a combined renewable energy certificate (REC) natural gas supply transaction, that sees a portion of 7G’s Alberta-based natural gas sales receive a REC as part of the sales price in the fourth quarter. This transaction is expected to reduce 7G’s 2020 scope 2 emissions profile to net zero and ties with 7G’s continuing emissions reduction efforts.

2021 BUDGET

• 2021 production is expected to average 180-185 Mboe/d on capital investments of $650 million. Year-over-year improvements to cash costs and operating efficiencies, combined with moderating corporate decline rates are expected to contribute to 7G’s growing free cash flow profile in 2021 at current strip prices.

• 7G’s 2021 WTI breakeven price is expected to be $35/bbl at current Henry Hub strip pricing of approximately US$2.75/MMbtu. In a $45/bbl WTI and $3/MMbtu Henry Hub price environment, 7G forecasts its 2021 capital investment plan to represent approximately 75% of forecasted funds flow.

OPERATIONAL AND FINANCIAL HIGHLIGHTS

OPERATIONS AND RESOURCE DEVELOPMENT

Seven Generations resumed field activity in early July 2020 and concluded the quarter with the successful planned turnaround of the Karr plant and upgrade of the Karr condensate stabilizer. The project was completed on-time and on-budget with a smooth post-turnaround start-up that led to average October production in excess of 185 Mboe/d. Importantly, efforts to mitigate the volume impact were successful, although there was a temporary condensate pricing and per unit cost impact.

During a three-week period in September, more than 400 contractors and staff were on site at peak times to complete the maintenance and upgrade work. Work teams adhered to strict small-cohorts, physical distancing measures and rigorous logistics plans to minimize health risks which ensured the project was completed safely during the COVID-19 pandemic. Coincident with the turnaround, the company also invested approximately $20 million to upgrade and enhance the reliability of the stabilizer’s boiler system which is expected to drive improvements to average condensate price realizations, while reducing operating costs and improving safety.

Drilling and completion costs in the quarter averaged $6.5 million per well. The company has continued to achieve record reductions in costs without sacrificing well productivity via a combination of improved drilling performance, advanced completion designs and execution efficiencies, and vendor collaboration. Notable structural cost improvements since the fall of 2019 include continued efficiency improvements to on-the-ground operational logistics, using limited entry plug-and-perf completion design with wider stage spacing, increased perforation clusters and optimized sand and water intensity.

Two additional lower Montney wells were also brought on stream in the Nest 3 region during the quarter. Early stage rates are encouraging relative to other wells in Nest 3, with IP60 sales rates of approximately 2.075 Mboe/d (685 bbl/d condensate, 480 bbl/d other NGLs, 5.5 MMcf/d natural gas) and 1.8 Mboe/d (573 bbl/d condensate, 425 bbl/d other NGLs, 4.8 MMcf/d of natural gas), respectively. Continued lower Montney success underscores 7G’s inventory along with half-cycle economics via the use of existing infrastructure.

2020 OUTLOOK AND 2021 BUDGET

Following the successful turnaround and continued strong execution, the company has increased the lower-end of its full-year 2020 production guidance to now average 180-185 Mboe/d, compared to the prior guidance of 175-185 Mboe/d.

Seven Generations has also released its 2021 budget, with total capital investments expected to total $650 million and production to average 180-185 Mboe/d. 2021 investments are expected to maintain a flat year-over-year production profile that is predicated on maximizing the company’s free cash flow generating capacity. Building on the durable cost efficiencies captured in 2020, the company anticipates ongoing improvements to its cost structure in 2021. The 2021 budget assumes similar well costs on a per metre and per tonne basis to those achieved in late 2020. Due to marginally longer average well lengths in the 2021 program, the company anticipates per well drill and complete costs to average $6.9 million, a 5% improvement relative to 2020 budget assumptions.

Free cash flow generated in the future will initially be prioritized for net debt reduction. The company has reduced its target leverage metric, net debt to adjusted EBITDA to 1.5x from the previous 2.0x target.

The 2021 capital program requires fewer wells brought on-stream than 2020 to maintain production given the company’s flattening decline profile. The company forecasts carrying an in-process inventory of 10-15 additional wells at year-end 2021 that create the option to respond to improved commodity prices in the year or to further reduce 2022 sustaining capital requirements in a “lower for longer” energy price environment.

With the continued moderation of decline rates, improvement in cost structure and expected optimization of natural gas revenues net of transportation costs in late 2022, Seven Generations expects to expand its free cash flow profile independent of commodity prices. 7G believes that returning capital to shareholders is an important component of total shareholder returns and will continue to evaluate the optimal allocation of free cash flow over time.

RISK MANAGEMENT

Seven Generations continues to execute its consistent hedging program that is designed to manage commodity price risk, support returns on invested capital, and ensure a minimum level of cash flow despite fluctuating commodity prices. Details of the company’s liquids and natural gas hedges at the end of the third quarter are shown below:

ESG UPDATE

Seven Generations continues to advance its symbiotic ESG-driven market diversification strategy with the announcement of a new responsible natural gas supply agreement with Vermont Gas Systems, Inc. (VGS). VGS is an integrated energy services company providing clean, affordable and reliable thermal energy services to more than 53,000 customers in northwest Vermont. 7G continues to pursue additional arrangements with other counterparties interested in securing responsibly produced, low-carbon intensity natural gas, supported by its Equitable Origin EO100™ certification. The company’s commitment to delivering responsibly developed natural gas to consumer markets is an evolution of its market access strategy that is enabled by its diverse, continent-wide natural gas transportation portfolio. The premium received will be directed toward the 7G Sustainability Fund, a fund created to further reduce 7G’s environmental footprint and broaden Indigenous partnerships.

7G has also entered into an Alberta-based natural gas supply arrangement that sees the company receive a REC in addition to standard index based AECO pricing for a portion of its natural gas sales. As a result of this transaction, 7G expects a net zero 2020 Scope 2 emission profile.

CONFERENCE CALL

7G management will hold a conference call to discuss its third quarter results and address investor questions today, November 9, 2020, at 9 a.m. MDT (11 a.m. EDT).

Participant Dial-In Numbers

Seven Generations is a low supply-cost energy producer dedicated to stakeholder service, responsible development and generating strong returns from its liquids-rich Kakwa River Project in northwest Alberta. 7G’s corporate office is in Calgary, its operations headquarters is in Grande Prairie and its shares trade on the TSX under the symbol VII. Further information is available on the company’s website: www.7genergy.com.

READER ADVISORY

Non-GAAP Measures

This news release includes certain terms or performance measures commonly used in the oil and natural gas industry that are not defined under IFRS, including “adjusted net income”, “adjusted net income per diluted share”, “marketing income”, “operating netback”, “funds flow per diluted share”, “funds flow per boe”, “free cash flow”, “return on capital employed” (or “ROCE”), “cash return on invested capital” (or “CRIOC”) and “available funding”. The data presented is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Such non-GAAP measures should be read in conjunction with the company’s consolidated financial statements for the years ended December 31, 2019 and 2018 and the accompanying notes and the company’s condensed interim consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 and the accompanying notes. Readers are cautioned that the non-GAAP measures do not have any standardized meaning and should not be used to make comparisons between the company and other companies without also taking into account any differences in the way the calculations were prepared. For additional information about these measures, please see “Advisories and Guidance – Non-GAAP measures” in Management’s Discussion and Analysis dated November 6, 2020 for the three and nine months ended September 30, 2020 and 2019.

GAAP Measures

Certain performance measures included in this news release which are utilized by the company and others to assess performance have also been included in the company’s financial statements as they are considered to be relevant to a reader’s understanding of the company's business, performance results and financial condition. Specifically, the company’s “net debt” and “adjusted EBITDA” measures have been included in Note 15 - Capital Management in the consolidated financial statements for the years ended December 31, 2019 and 2018, and in Note 12 of the condensed interim consolidated financial statements for the three and nine months ended September 30, 2020 and 2019. The company has also presented a “funds flow” subtotal in the consolidated cash flow statements in the financial statements. Accordingly, these performance metrics are considered GAAP measures within this news release but would otherwise have been considered to be non-GAAP measures absent their inclusion in the financial statements.

Readers are cautioned that these performance measures do not have any standardized meanings and should not be used to make comparisons between Seven Generations and other companies without also taking into account any differences in the methods by which the calculations were prepared.

For additional information about these measures, please see “Advisories and Guidance – GAAP measures” in Management’s Discussion and Analysis dated November 6, 2020 for the three and nine months ended September 30, 2020 and 2019.

Forward-Looking Information Advisory

This news release contains certain forward-looking information and statements that involve various risks, uncertainties and other factors. The use of any of the words “anticipate”, “continue”, “estimate”, “expect”, “may”, “will”, “should”, “believe”, “plans”, and similar expressions are intended to identify forward looking information or statements. In particular, but without limiting the foregoing, this document contains forward-looking information and statements pertaining to the following: expected production and production guidance; expected capital investments and capital budgets; expected breakeven commodity prices; the number of wells expected to be drilled and brought on-stream; expected royalty rates; expected operating costs, transportation costs, G&A costs, and interest expense; expected free cash flow; the premium pricing expected from sales to VGS and plans to direct such amounts to 7G’s Sustainability Fund; the company’s expected 2020 scope 2 net zero emissions profile; continued emissions reductions efforts; the expectation that year-over-year improvements to cash costs and operating efficiencies, combined with moderating corporate production decline rates will contribute to growing free cash flow in 2021 at current strip prices; the enhanced reliability of the boiler system at the Karr condensate stabilization facility, which is expected to drive improvements to average condensate price realizations and reduce operating costs and improve safety; the expectation that the company’s 2021 investments will maintain a flat year-over-year production profile with allocations that are intended to maximize the company’s free cash flow generating capacity; anticipated improvements to per well drill and complete costs; plans to prioritize the allocation of free cash flow to net debt reduction; targeted net debt to adjusted EBITDA; the expectation that fewer wells will be required in 2021 to maintain production given the company’s flattening corporate production decline profile; plans to carry an in-process inventory of 10-15 additional wells at year-end 2021 to create an option to respond to improved commodity prices or further reduce 2022 sustaining capital requirements (i.e. capital expenditures required to maintain production from existing facilities at current levels); expected drilling inventory; the optimization of natural gas revenues net of transportation costs in late 2022; and the ability to expand the company’s free cash flow profile independent of commodity prices.

With respect to forward-looking information contained in this document, assumptions have been made regarding, among other things: future oil, NGLs and natural gas prices being consistent with current commodity price forecasts after factoring in quality adjustments at the company’s points of sale; the company’s continued ability to obtain qualified staff and equipment in a timely and cost-efficient manner; drilling and completion techniques; infrastructure and facility design concepts that have been successfully applied by the company elsewhere in its Kakwa River Project may be successfully applied to other properties within the Kakwa River Project; the consistency of the regulatory regime and framework governing royalties, taxes and environmental matters in the jurisdictions in which the company conducts its business and any other jurisdictions which may affect the company; the company’s ability to market production of oil, NGLs and natural gas successfully to customers; the company’s future production levels and amount of future capital investment will be consistent with the company’s current development plans and budget; the accuracy of the forecasts provided under “2020 Outlook and 2021 Budget”; forecasted costs and expenses; new technologies for recovery and production of the company’s reserves and resources may improve capital and operational efficiencies in the future; the recoverability of the company’s reserves and resources; sustained future capital investment by the company; future cash flows from production; taxes and royalties will remain consistent with the company's calculated rates; the sources of funding for the company’s capital investment program; the company’s future debt levels; geological and engineering estimates in respect of the company’s reserves and resources; the geography of the areas in which the company is conducting exploration and development activities; the access, economic, regulatory and physical limitations which the company may be affected by from time to time; the impact of competition on the company; and the company’s ability to obtain financing on acceptable terms.

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