Granite Oil Corp.
TSX : GXO
OTCQX : GXOCF

Granite Oil Corp.

February 21, 2017 17:18 ET

Granite Oil Corp. Announces Record 2016 Year End Reserve Metrics and Operational Update

CALGARY, ALBERTA--(Marketwired - Feb. 21, 2017) - GRANITE OIL CORP. ("Granite" or the "Company") (TSX:GXO)(OTCQX:GXOCF) is pleased to present the summary results of the independent reserves report (the "Sproule Report") prepared by Sproule Associates Limited ("Sproule") with an effective date of December 31, 2016.

During 2016, Granite invested approximately $21.5 million of estimated capital expenditures (unaudited), all organically, into its 100%-owned Bakken asset. This represents a 48% decrease in year over year capital expenditures as the Company's highly effective gas injection Enhanced Oil Recovery ("EOR") scheme continues to drive efficiency gains. Material improvements in oil recoveries combined with significant reductions in capital costs resulted in the Company achieving the lowest Finding and Development costs ("F&D") and highest Recycle Ratios in the Company's history. As well, producing and proven reserves continue to account for an increasing portion of the Company's total reserve base. As the Company injects its natural gas back into its Bakken oil pool, reserve adds are primarily attributed to oil.

In 2016 Granite drilled and completed ten 100% working interest horizontal wells with a 100% success rate, converted three producing oil wells to gas injection wells and built up its EOR infrastructure. The Company also increased its strategic land position, adding key priority acreage within the Bakken oil fairway that will be the focus of a 2017 exploration program. Granite took advantage of seasonally low gas prices late in the second and early in the third quarters of 2016, purchasing gas to re-pressurize significant portions of the pool.

2016 Reserves Highlights

  • Proven Developed Producing (PDP) F&D costs were $12.95/boe resulting in a PDP recycle ratio of 2.1 times(1)(2);
  • Total Proved (TP) F&D costs were $4.91/boe, including the change in Future Development Capital (FDC), resulting in a TP recycle ratio of 5.5 times(1)(2). Total Proved F&D costs excluding the change in FDC were $9.09/boe;
  • Proved plus Probable (2P) F&D costs were $4.55/boe, including the change in FDC, resulting in a 2P recycle ratio of 5.9 times(1)(2). Proved plus Probable F&D costs excluding the change in FDC were $10.76/boe;
  • PDP reserves increased by 11% to 6,178 Mboe and went from 31% to 33% of the Company's total 2P reserves, a 6% increase year over year;
  • TP reserves increased by 12% to 12,483 Mboe and went from 63% to 67% of the Company's total 2P reserves, a 6% increase year over year;
  • 2P reserves increased by 5.4% to 18,653 Mboe;
  • Reserve additions in all categories of reserves were primarily attributed to oil;
  • Granite's 2016 drilling program resulted in PDP, TP and 2P reserve additions replacing 158%, 225%, and 190% of production, respectively;
  • Costs associated with drilling future wells as provided for in the Sproule Report dropped by 27% to an average of $1.55 million per well, reflecting the significant cost improvements achieved in 2016. The Company believes this to be conservative, with realized all-in costs for wells in the second half of 2016 averaging approximately $1.25 million;
  • Granite remains conservative with only 30 undeveloped Bakken locations booked as of December 31, 2016, versus 28 booked at 2015 year end, leaving approximately 70% of its potential infill Bakken locations within its EOR area unbooked. The Company will continue to focus on adding reserves per well as the development and performance of the EOR progresses; and
  • The net present value of future net revenues discounted at 10% (PV10) before taxes of Granite's 2P reserves, as set out in the Sproule Report, plus an internally estimated undeveloped land value of $30 million, and net of estimated net debt of $31.5 million at December 31, 2016, is $8.37 per fully diluted common share(3).

Notes:

  1. Financial information is based on the Company's preliminary 2016 unaudited financial statements and is therefore subject to audit.
  2. Recycle ratio is calculated as operating netback divided by F&D costs. In the case of recycle ratios calculated on TP and 2P reserves, the F&D cost includes changes in FDC. Calculation is based on estimated 2016 operating netback of $27.00 per boe, which is calculated as revenue (including realized hedging gains) less royalties and production costs. See "Readers Advisories" for the method of calculating operating netback.
  3. The calculation of the net present value of future net revenue per share includes an estimated undeveloped land value of $30 million and is net of estimated net debt of approximately $31.5 million (unaudited).

Operations Update

Granite's Bakken property produced an average of approximately 2,866 boe per day (99% oil) during 2016, with an estimated fourth quarter average production rate of 2,978 boe per day (98% oil). During 2016, Granite's averaged realized operating netback is estimated to be $27.00/boe.

The Company is pleased it has drilled and completed its first three wells of 2017 for an average estimated all-in cost of $1.25 million per well, representing only a very minor increase over its lowest cost wells of 2016. Despite general escalation in costs as well as delays in equipment availability, the Company, with help from its service providers, has continued to make permanent improvements in well design to offset this trend. Furthermore, with all-season access, the Company is confident it has an advantage in its ability to access services at opportune times.

Granite reiterates its previously announced 2017 capital budget of $16.5 million, continuing a trend of decreasing year over year capital requirements driven by the efficiency of its EOR scheme. This growth budget targets a 6% year over year increase in average production, includes a $3.0 million high-impact exploration program, and funds a sustainable $0.42/year per share dividend, giving a current yield of over 7%. With major efficiency gains in recoveries and capital costs realized in 2016, as highlighted by its reserve metrics, we are excited about 2017. The Company will continue to maximize shareholder value and returns from its Bakken property by prioritizing its free cash flow-generating pool, building an increasing base of highly efficient EOR wells, and exploring its large Bakken oil fairway.

2016 Year End Reserves

The evaluation of Granite's petroleum and natural gas reserves prepared by independent reserves evaluator Sproule in accordance with definitions, standards and procedures contained in National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities ("NI 51-101") and the Canadian Oil and Gas Evaluation Handbook ("COGE Handbook"). The reserves evaluation is based on forecast prices and costs, and applies Sproule's forecast escalated commodity price deck, foreign exchange rate, and inflation rate assumptions as at December 31, 2016 as outlined in the table below entitled "Pricing Assumptions". Additional reserve information as required under NI 51-101 will be included in the Company's Annual Information Form which will be filed on SEDAR on March 22, 2017. Financial information presented above is based on management-prepared financial statements for the year ended December 31, 2016, which are in the process of being audited by Granite's independent auditors and, accordingly, such financial information is subject to change based on the results of the audit. See "Reader Advisory - Unaudited Financial Information" below.

Summary of Reserves

The following table is a summary of the Company's estimated reserves as of December 31, 2016, based on the Sproule Report.

Summary of Company Gross Oil and Gas Reserves as at December 31, 2016 (1)(2)(3)(4)(5)(6)

Reserves Category Oil
(Mbbl)
Gas
(MMcf)
Oil Equivalent
(MBOE)
BTAX PV 10%
($000's)
Future Development Capital
($000's)
Recycle Ratio Net Undeveloped Wells Booked
Proved Developed Producing 5,659 3,117 6,178 131,452 - 2.1
Proved Developed Non-Producing 155 7,376 1,507 9,121 1,231
Proved Undeveloped 4,587 1,263 4,798 63,480 51,524 33
Total Proved 10,400 11,757 12,483 204,053 52,755 5.4 33
Probable Developed Producing 2,057 1,327 2,278 34,242 -
Probable Developed Non-Producing 98 3,753 794 4,070 -
Probable Undeveloped 3,015 500 3,099 49,828 8,272 5
Total Probable 5,170 5,579 6,170 88,140 8,272 5
Total Proved + Probable 15,570 17,336 18,653 292,193 61,027 6.0 38

Notes:

  1. The tables summarize data set out in the Sproule Report may not add due to rounding.
  2. Reserves have been presented on gross basis which are the Company's total working interest share before the deduction of any royalties and without including any royalty interests of the Company.
  3. Based on Sproule's December 31, 2016 escalated price forecast. See "Pricing Assumptions" below.
  4. The net present value of future net revenues attributable to the Company's reserves are stated prior to provision for interest, general and administrative expenses and after deduction of royalties, operating costs, estimated well abandonment and reclamation costs and estimated future capital expenditures. Future net revenues have been presented on a before tax basis. It should not be assumed that the present worth of estimated future net revenue presented in the tables above 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 reserves estimates of Granite's crude oil 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 natural gas liquids reserves may be greater than or less than the estimates provided herein.
  5. The Company's reserves are developed with horizontal wells completed with multi-stage fracturing techniques.
  6. "Oil" volumes include all Light, Medium, and Heavy crude oil volumes.

Net Present Values ("NPV") of Future Net Revenue

The following table is a summary of the estimated net present values of future net revenue (before income taxes) associated with the Company's reserves as at December 31, 2016, based on the Sproule Report. The calculated NPVs include a deduction for estimated future well abandonment and reclamation but do not include a provision for interest, debt service charges and general and administrative expenses. It should not be assumed that the NPV estimates represent the fair market value of the reserves.

Summary of NPV of Future Net Revenue as at December 31, 2016 (1)(2)(3)(4)(5)

Reserves Category Net Present Value Before Income Taxes Discounted at (%/Year)
0%
$M
5%
$M
10%
$M
15%
$M
20%
$M
Proved
Proved Developed Producing 215,224 163,805 131,452 110,005 94,997
Proved Developed Non-Producing 35,072 16,680 9,121 5,731 4,051
Proved Undeveloped 145,417 92,418 63,480 46,080 34,739
Total Proved 395,713 272,903 204,053 161,816 133,787
Total Probable 258,628 138,511 88,140 62,855 48,246
Total Proved + Probable 654,341 411,414 292,193 224,671 182,033

Notes:

  1. The tables summarize data set out in the Sproule Report may not add due to rounding.
  2. Reserves have been presented on gross basis which are the Company's total working interest share before the deduction of any royalties and without including any royalty interests of the Company.
  3. Based on Sproule's December 31, 2016 escalated price forecast. See "Pricing Assumptions" below.
  4. The net present value of future net revenues attributable to the Company's reserves are stated prior to provision for interest, general and administrative expenses and after deduction of royalties, operating costs, estimated well abandonment and reclamation costs and estimated future capital expenditures. Future net revenues have been presented on a before tax basis. It should not be assumed that the present worth of estimated future net revenue presented in the tables above 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 reserves estimates of Granite's crude oil 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 natural gas liquids reserves may be greater than or less than the estimates provided herein.
  5. The Company's reserves are developed with horizontal wells completed with multi-stage fracturing techniques.

Net Asset Value

Based on Sproule's December 31, 2016 forecast pricing, Granite's net asset value calculation is set out in the following table. This net asset value determination is a "point-in-time" measurement and does not take into account the possibility of the Company being able to recognize additional reserves through successful future capital investment in its existing properties beyond those included in the Sproule Report.

Net Asset Value as at December 31, 2016 (1)

($M)
2P Reserves NPV 10 before tax 292,193
Net undeveloped land value (internal valuation) 30,000
Estimate Net Debt (unaudited) (31,500)
Proceeds from dilutive securities 346
Net asset value 291,039
Fully Diluted shares outstanding (000's) 34,778
Estimate NAV per fully diluted share ($/share) 8.37

Note:

  1. Numbers may not add due to rounding.

Future Development Capital ("FDC")

The following table provides a summary of the estimated FDC required to bring the Company's undeveloped reserves to production, which have been deducted in the estimation of future net revenue attributable to such reserves. Changes in forecast FDC occur annually as a result of development activities, acquisition and disposition activities, and capital cost estimates that reflect the independent evaluator's best estimate of what it will cost to bring the proved undeveloped and probable reserves on production using forecast prices and costs.

Future Development Costs of Undeveloped Reserves (1)

Future Development Capital ($M) ($M)
Year Total Proved Total Proved + Probable
2017 14,150 14,150
2018 14,493 15,654
2019 12,362 14,113
2020 10,770 16,129
2034 980 980
Total Undiscounted FDC 52,755 61,027
Total Discounted FDC at 10%/Year 43,812 50,047

Notes:

  1. Numbers may not add due to rounding.

Pricing Assumptions

The following table summarizes Sproule's commodity price forecast and foreign exchange rate and inflation rate assumptions as at December 31, 2016, as applied in the Sproule Report. When compared to the December 31, 2015 pricing assumptions, commodity pricing for the year 2017 has increased for oil and gas by 22% and 63%, respectively. However, the longer term oil price forecast decreased on average over the following 10 years by 7%, and increased on average for the following 10 years by 1% for gas.

Forecast Pricing and Foreign Exchange Rates (1)(2)(3)(4)(5)

Western
Canada
Select
20.5° API
($Cdn/bbl)
(4)
Alberta AECO-C Spot ($Cdn/Mmbtu)(5) Exchange
Rate
(2)
($US/$Cdn)
Edmonton Propane ($Cdn/bbl) Edmonton Butane ($Cdn/bbl) Edmonton Pentanes Plus ($Cdn/bbl)
Forecast(3)
2017 53.12 3.44 0.78 22.74 47.60 67.95
2018 61.85 3.27 0.82 28.04 55.49 75.61
2019 64.94 3.22 0.85 30.64 57.65 78.82
2020 66.93 3.91 0.85 32.27 58.80 80.47
2021 68.27 4.00 0.85 33.95 59.98 82.15
2022 69.64 4.10 0.85 35.68 61.18 83.86
Thereafter Escalation Rate of 2.0%

Notes:

  1. This summary table identifies benchmark reference pricing schedules that might apply to a reporting issuer.
  2. The exchange rate used to generate the benchmark reference prices in this table.
  3. As at December 31, 2016.
  4. The price received for the Company's oil, which is considered to be Medium crude oil, has historically corresponded very closely to Western Canada Select 20.5° API ($Cdn/Bbl), plus associated quality adjustments.
  5. The price received for the Company's natural gas has historically corresponded to AECO-C Spot pricing ($Cdn/MMBtu), adjusted for heat value and transportation.

2016 Year End Reporting

The Company will report its 2016 year end results on March 22, 2017.

Reader Advisories

Forward-Looking Statements. Certain statements contained in this news release may constitute forward-looking statements or forward-looking information. These statements relate to future events or the Granite's future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements or information are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. Statements relating to "reserves" are also deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and that the reserves can be profitably produced in the future. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Granite believes that the expectations reflected in those forward-looking statements are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this news release should not be unduly relied upon by investors. These statements speak only as of the date of this news release and are expressly qualified, in their entirety, by this cautionary statement.

In particular, this news release contains forward-looking statements, pertaining to the following: projections of market prices and costs, supply and demand for oil and natural gas, the quantity of reserves, oil and natural gas production levels, the success of the enhanced oil recovery scheme, capital expenditure programs, treatment under governmental regulatory and taxation regimes, expectations regarding Granite's ability to raise capital and to continually add to reserves through acquisitions and development, projections of market prices and costs, timing of filing of Granite's annual information form and annual financial statements for the year ended December 31, 2016.

With respect to forward-looking statements contained in this news release, Granite has made assumptions regarding, among other things: prevailing commodity prices, exchange rates, interest rates, applicable royalty rates and tax laws; the legislative and regulatory environments of the jurisdictions where Granite carries on business or has operations; future production rates and estimates of operating costs; performance of existing and future wells; reserve and resource volumes; anticipated timing and results of capital expenditures; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the timing, location and extent of future drilling operations; the state of the economy and the exploration and production business; results of operations; performance; business prospects and opportunities; the availability and cost of financing, labour and services; the impact of increasing competition; ability to market oil and natural gas successfully and Granite's ability to obtain additional financing on satisfactory terms.

Although Granite believes that the assumptions on which such forward-looking information is based are reasonable, undue reliance should not be placed on the forward-looking information because no assurance can be given that they will prove to be correct. Granite's actual results could differ materially from those anticipated in these forward-looking statements as a result of risk factors that may include, but are not limited to: volatility in the market prices for oil and natural gas; uncertainties associated with estimating reserves; uncertainties associated with Granite's ability to obtain additional financing on satisfactory terms; geological, technical, drilling and processing problems; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; incorrect assessments of the value of acquisitions; competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel. Readers are cautioned that the foregoing list of factors is not exhaustive. Management has included the above summary of assumptions and risks related to forward-looking information provided in this news release in order to provide security holders with a more complete perspective on Granite's future operations and such information may not be appropriate for other purposes. Additional information on these and other factors that could affect Granite's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

This forward-looking information represents Granite's views as of the date of this document and such information should not be relied upon as representing its views as of any date subsequent to the date of this document. Granite has attempted to identify important factors that could cause actual results, performance or achievements to vary from those current expectations or estimates expressed or implied by the forward-looking information. However, there may be other factors that cause results, performance or achievements not to be as expected or estimated and that could cause actual results, performance or achievements to differ materially from current expectations. There can be no assurance that forward-looking information will prove to be accurate, as results and future events could differ materially from those expected or estimated in such statements. Accordingly, readers should not place undue reliance on forward-looking information. Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements.

Unaudited Financial Information. Certain financial and operating information included in this news release are based on estimated unaudited financial results for the year ended December 31, 2016 and are subject to the same limitations as discussed under "Forward- Looking Statements" set out above. These estimated amounts are subject to change upon the completion of the audited financial statements for the year ended December 31, 2016 and changes could be material. Granite anticipates filings its audited financial statements and related management's discussion and analysis for the year ended December 31, 2016 on SEDAR on March 22, 2017.

Information Regarding Disclosure on Oil and Gas Reserves. The reserves data set forth above is based upon an independent reserves assessment and evaluation prepared by Sproule with an effective date of December 31, 2016 (the "Sproule Report"). The presentation summarizes the Company's crude oil, natural gas liquids and natural gas reserves and the net present values before income tax of future net revenue for the Company's reserves using forecast prices and costs based on the Sproule Report. All reserve references in this news release are "Company share reserves". Company share reserves are the Company's total working interest reserves before the deduction of any royalties and including any royalty interests of the Company. The Sproule Report has been prepared in accordance with the standards contained in the COGE handbook and the reserve definitions contained in NI 51-101. All evaluations and reviews of future net cash flows are stated prior to any provisions for interest costs or general and administrative costs and after the deduction of estimated future capital expenditures for wells to which reserves have been assigned. It should not be assumed that the estimates of future net revenues presented in the tables above represent the fair market value of the reserves. There is no assurance that the forecast prices and cost assumptions will be attained and variances could be material. The recovery and reserve estimates of the Company's crude oil, natural gas liquids 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 natural gas liquids reserves may be greater than or less than the estimates provided herein. All future net revenues are estimated using forecast prices, arising from the anticipated development and production of the Company's reserves, net of the associated royalties, operating costs, development costs, and abandonment and reclamation costs and are stated prior to provision for interest and general and administrative expenses. Future net revenues have been presented on a before tax basis. Estimated values of future net revenue disclosed herein do not represent fair market value. The reserve data provided in this news release only represents a summary of the disclosure required under NI 51-101. Additional disclosure will be provided in the Company's Annual Information Form filed on www.sedar.com on March 22, 2017.

Oil and Gas Metrics. This news release contains metrics commonly used in the oil and natural gas industry, such as "recycle ratio", "operating netback", "finding and development ("F&D") costs", "development capital", and "reserve life index ("RLI")". These terms do not have a standardized meaning and may not be comparable to similar measures presented by other companies, and therefore should not be used to make such comparisons.

"Finding and development costs" are calculated as the sum of development capital plus the change in FDC for the period divided by the change in reserves that are characterized as development for the period. Finding and development costs take into account reserves revisions during the year on a per boe basis. The aggregate of the exploration and development costs incurred in the financial year and changes during that year in estimated future development costs generally will not reflect total finding and development costs related to reserves additions for that year.

"Development capital" means the aggregate exploration and development costs incurred in the financial year on reserves that are categorized as development. Development capital presented herein excludes land, acquisition and capitalized administration costs.

"Recycle ratio" is measured by dividing the operating netback by F&D cost per boe for the year.

"Operating netback" is calculated using production revenues minus royalties and production expenses calculated on a per boe basis.

"Reserve life index" is calculated as total company share reserves divided by annual production. Management uses these oil and gas metrics for its own performance measurements and to provide shareholders with measures to compare Granite's operations over time. Readers are cautioned that the information provided by these metrics, or that can be derived from the metrics presented in this news release, should not be relied upon for investment or other purposes.

BOE Presentation. References herein to "boe" mean barrels of oil equivalent derived by converting gas to oil in the ratio of six thousand cubic feet (Mcf) of gas to one barrel (bbl) of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6: 1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

Contact Information

  • Michael Kabanuk
    President & CEO
    (587) 349-9123

    Tyler Klatt
    Vice President, Exploration
    (587) 349-9125