Over 2012, Manitok achieved a major milestone on its path to reaching
its longer term vision.
By year end, we reached a level of production that generates enough cash flow to sustain a significant capital program each year going forward. We have some flexibility in choosing if and when we raise additional capital. We drilled nine wells in 2012 and nearly doubled production from 2,100 boe/d at December 31, 2011 to 4,100 boe/d in early January 2013. In the process, we moved our oil weighting from about 20% to 53% and generated cash flow of $19.1 million which was up considerably from $1.9 million in 2011. On the strength of these achievements, and along with our new credit facility of $90.0 million from the National Bank of Canada, we are able to execute a $71.0 million capital program in 2013 which will drive growth even further. Our exploitation and production success in 2012 has made us a financially self-sustainable junior company with the wherewithal to pursue our corporate strategy with a consistent level of activity each year.
In 2012, we delivered results that more than prove the concept; our results demonstrate that Manitok’s foothills focused business plan is on very solid footing. We have an experienced technical team, that when combined with the early stage of exploitation of the foothills, the significant barriers to entry in regards to operating effectively in the foothills and the relatively low level of competition in the foothills, provides Manitok with a potent strategy for growth.
The complex nature of the geology of the foothills has acted as a formidable barrier to entry for potential competitors; providing many geological and drilling challenges to the uninitiated. Over the last several years, many of the majors that were active in the foothills prior to 2008 have shifted capital away from the foothills. This environment has enabled Manitok to acquire a very extensive land position of 284,600 acres (198,200 net) at a fraction of the cost of land transactions done in the foothills prior to 2008 and at much lower costs than other competitive areas in the Western Canadian Sedimentary basin.
Our experienced technical team developed the ideas that we have been able to successfully execute over 2012 and is currently developing other concepts that we will execute over 2013 and the years to follow. With 231,100 gross acres (178,900 net) of undeveloped land and the relatively low level of exploitation on these lands to date, there are many ideas to test. We will choose the best ones on a risk/reward basis and test a few each year as our financial capacity permits.
Early in the second quarter of 2012, we sold our Swimming heavy oil property in east central Alberta for net proceeds of $13.2 million. It was the company’s “starter kit” at inception. Manitok successfully grew heavy oil production from zero to 350 bbls/d before selling it. This disposition reduced our debt considerably at the time and provided funds for continued drilling over the summer at Stolberg without having to issue equity.
Manitok has now drilled fourteen wells in the foothills including its first liquids rich natural gas well which was drilled in 2011. To date, Manitok has not had to fracture stimulate any of its wells due to the quality of the conventional reservoirs it’s drilling. Seven of the wells have had initial flow tests in the range of 400 to 1,500 boe/d. Twelve of the fourteen wells are already, or will be, on production in 2013. Two wells were assigned some natural gas reserves and will not be on production in 2013. Of the twelve producing wells, six have produced significantly above our expectations, three have met or slightly exceeded our expectations and three are producing below our expectations. This variance in the distribution of success is expected when chasing conventional reservoirs. By focusing on conventional reservoirs, rather than unconventional, tighter reservoirs, Manitok can deliver high rate wells which exceed our initial anticipated production rates by multiples of the original expectation. These types of wells can be “game changers” for a company of our size.
Stolberg is a great example of finding a “game changing” conventional pool that provides strong rates of return on our capital initially, and then provides a relatively long lived, stable base of cash flow that can be reinvested in future growth. Stolberg will be a core property for Manitok for many years to come.
Manitok believes that about six sections at Stolberg each contain up to 20 million barrels of oil in place. It is anticipated that 8 to 15% could be recovered with our primary drilling plan and up to 30% cumulatively, could be recovered by a secondary recovery scheme like a waterflood and/or a gas injection program. We believe that we have about 20 current locations which could take 20 to 22 months to drill, assuming the use of one rig continuously. As we drill deeper on the structure to determine the extent of the reserves, by understanding the level of the oil/water contact, the number of locations may increase. On the other hand, as we learn more about the potential recoverability of reserves per well, we may find that we may need fewer wells to drain the reservoir. Our goal is to minimize the required capital expenditure to drain the maximum amount of barrels from the reservoir. Manitok anticipates that Stolberg will provide production and reserves growth over the next 2 to 3 years and that the cash flow from Stolberg will fuel future growth in other areas for sometime after that.
In October we completed a bought-deal equity issue for gross proceeds of $18.0 million to reduce debt and provide Manitok with the financial flexibility to fund an increased capital expenditure program in 2013. Early in 2013, Manitok was provided a credit facility of $90.0 million from the National Bank of Canada. It consists of an operating line of $70.0 million and an acquisition and development line of $20.0 million. Our net debt at year end was about $10.0 million leaving our balance sheet at year end solid.
Due to Manitok’s strong performance over 2012, investment banking coverage increased from about four to eleven banks providing Manitok with the best access to capital markets it has ever had in its short history.
In 2013, our cash flow, along with the increased credit facility, will fund a capital expenditure program of about $71.0 million which is focused exclusively on light oil. About $45.0 million will be dedicated to continued drilling and development of our core Stolberg Cardium oil asset. We plan to maintain a drilling pace of about one well per month at Stolberg. About $18.0 million will be spent on drilling oil targets outside of Stolberg. Manitok is likely to test up to three new areas in 2013. Two of these potential areas are prospective for Cardium light oil, like Stolberg, and the third area is prospective for several different formations with Manitok testing at least one of the formations in 2013.
Manitok has guidance of about $55.0 to $57.0 million of cash flow on average production of between 4,200 to 4,400 boe/d and an average operating netback of $39.30 per boe. Manitok anticipates a 2013 exit production rate of between 5,300 to 5,500 boe/d with approximately 65% being oil and condensate. Net debt will increase to about $27.0 million by year end 2013. That would put us at a debt to cash flow ratio of 0.5 times based on trailing cash flow. If successful in executing its plan for 2013, Manitok would be able to increase its 2014 capital expenditure program considerably without having to raise additional capital beyond its cash flow and credit facility.
To protect our netback against commodity-price fluctuation, we have hedged 1,600 bbls/d, about 71% of our anticipated oil and condensate production for a good portion of the first half of 2013, at an average of CAD$97.66/bbl WTI and have hedged 1,300 bbls/d, about 41% of our anticipated oil production for the second half of 2013, at CAD$97.61/bbl WTI. We will continue to increase our hedged oil volumes as our production targets are realized throughout the year and as pricing opportunities arise in commodity markets. We have 10,000 GJs/d, about 87% of our anticipated 2013 natural gas production, protected with put options at $3.40/GJ, creating an average theoretical floor of $3.03/GJ when considering the average premium of $0.37/GJ. The put strategy will protect our average realized sales price on natural gas, while retaining the ability to participate in any future upside in natural gas prices, less the premium.
Manitok has assembled a land position of over 440 sections, with an average working interest of 70%. These holdings give us exposure to multiple potential play types including light oil and liquids rich gas in the Cardium, Mannville and other formations. Manitok has built a team of professionals with a proven ability to successfully identify, drill and produce potential hydrocarbon reservoirs in the foothills.
While light oil has been the primary driver of our growth in 2012, and likely again in 2013, our liquids rich natural gas plays become competitive with our expected Cardium oil economics at gas prices of $3.50/GJ at AECO. If natural gas prices continue on their current upward trend over the summer of 2013, Manitok could potentially add a few liquids rich natural gas targets to its 2013 drilling program and significantly more locations to its 2014 drilling program. Manitok maintains significant leverage to natural gas with that commodity making up about 40% of Manitok’s anticipated average 2013 production and 62% of its December 31, 2012 proved plus probable reserves on a boe basis. Manitok’s balanced approach will pay off handsomely when natural gas prices consistently remain above $3.50/GJ.
Manitok is still at an early stage of execution in its long term business plan. There is plenty of organic growth that can be driven internally with 90% of its net land position still undeveloped. The ability to acquire more land, cost effectively, through crown land sale and potential farm-in opportunities are still considerable. Manitok is continuing to pursue potential acquisition opportunities in the foothills as they arise. With its increased access to capital markets, the ability to execute a significantly sized acquisition has never been better. Manitok will continue to look for opportunities to accelerate its growth and add value for its shareholders. By striving to become “best in class” in the foothills and focusing on maintaining high rates of return on its capital, Manitok will continue to deliver long term growth to its shareholders.
Massimo M. Geremia
President & Chief Executive Officer