CREW ENERGY INC. CREW ENERGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
ABOUT CREW
Crew Energy Inc. ("Crew" or the "Company") is a Canadian liquids-rich natural gas producer committed to pursuing sustainable per share growth through a balanced mix of financially responsible exploration and development, complemented by strategic acquisitions. The Company's operations are focused in northeast British Columbia ("NE BC") and include a large contiguous land base with a vast Montney formation resource. Crew's liquids-rich natural gas areas of Septimus and West Septimus ("Greater Septimus") and Groundbirch offer significant development potential over the long-term. The Company has access to diversified markets with operated infrastructure and access to multiple pipeline egress options. Crew adheres to safe and environmentally responsible operations while remaining committed to sound environmental, social and governance practices which underpin Crew's fundamental business tenets. Crew's common shares are listed for trading on the Toronto Stock Exchange ("TSX") under the symbol "CR".
BASIS OF PRESENTATION
Management's discussion and analysis ("MD&A") is the explanation of the financial performance for the period covered by the financial statements along with an analysis of the financial position of the Company. Comments relate to and should be read in conjunction with the unaudited condensed interim financial statements of the Company for the three month period ended March 31, 2023 and 2022. The unaudited condensed interim financial statements have been prepared in accordance with IAS 34 - Interim Financial Reporting of the International Financial Reporting Standards ("IFRS"). There have been no significant changes to the critical estimates disclosed in the Company's audited financial statements for the year ended December 31, 2022. All figures provided herein and in the March 31, 2023 unaudited condensed interim financial statements are reported in Canadian dollars ("CDN"). This MD&A is dated May 8, 2023.
RESULTS OF OPERATIONS
Quarterly Overview
Crew's first quarter 2023 production averaged 32,963 boe per day, at the high end of guidance and slightly higher than the fourth quarter of 2022, despite the Company shutting-in an average of over 2,400 mcf per day of dry natural gas production due to weak pricing at certain delivery hubs. The Company's first quarter capital program totaled $22.2 million, focused on the remaining completion and equipping costs for the five liquids-rich wells on the 11-27 pad at West Septimus that were initially brought on for testing before the end of 2022. First quarter capital also included the start of drilling on a planned five well 3-32 liquids rich pad at West Septimus that will continue to drill through the second quarter.
Petroleum and natural gas sales decreased 26% in the first quarter as compared to the fourth quarter of 2022, mainly due to a 40% decline in the Company's realized natural gas price to $3.67 per mcf from $6.14 per mcf in the prior quarter. A mild winter across most of the northern hemisphere resulted in weak global natural gas heating demand. The weak winter demand was met by rapidly growing supply in North America, due to increased drilling activity in 2022, resulting in a rapid compression of global natural gas storage deficits and a corresponding fall in prices. Liquids prices also declined during the quarter as concern grew that western central banks' inflation fighting policies will trigger a global recession and reduce demand for crude oil. Crew's first quarter liquids benchmark price, Canadian dollar denominated West Texas Intermediate ("WTI"), decreased 8% compared to the prior quarter. The rapid first quarter decline in natural gas prices resulted in Crew refocusing its activity on increasing condensate production. During the quarter, condensate revenue increased 6% over the previous quarter, aided by a 16% increase in production as compared to the prior quarter. The Company's combined liquids pricing, including crude oil, condensate, and other natural gas liquids ("ngl"), remained strong averaging $78.15 per barrel, a 1% decline over the prior quarter as lower realized prices were offset by increased condensate production.
Adjusted funds flow ("AFF") for the first quarter totaled $74.5 million, a small decrease over the fourth quarter of 2022, primarily due to the weaker natural gas sales offset by realized gains on derivative financial instruments from the Company's risk management program and higher condensate production. Cash costs and cash costs per boe increased by 8% as compared to
Q1 2023 MANAGEMENT DISCUSSION & ANALYSIS 1
CREW ENERGY INC.
the prior quarter as inflationary pressures caused net operating and net transportation costs per boe to increase by 16% and 8% respectively, partially offset by reduced financing expenses on debt per boe due to lower net debt.
The Company's conservative first quarter capital program combined with another solid quarter of AFF resulted in the Company generating Free AFF(1) of $52.4 million and a reduction in net debt of 30% to $105.3 million. Strong Free AFF over the past year has resulted in the Company holding cash and cash equivalents of $81.5 million at the end of the quarter. As a result, subsequent to quarter end the Company redeemed the remaining $172 million of outstanding senior unsecured notes due March 2024 with cash on hand and drawings on the bank facility.
Notes:
- Non-IFRSmeasure or ratio that does not have any standardized meaning as prescribed by International Financial Reporting Standards, and therefore, may not be comparable with the calculations of similar measures or ratios for other entities. See "Non-IFRS and Other Financial Measures" contained within this MD&A.
- Supplementary measure. See "Non-IFRS and Other Financial Measures" contained within this MD&A.
Production(1)
Three months | Three months | Three months | ||
ended | ended | ended | ||
March 31, 2023 | December 31, 2022 | March 31, 2022 | ||
Crude oil (bbl/d) | 71 | 84 | 116 | |
Condensate (bbl/d) | 4,572 | 3,955 | 3,926 | |
Ngl (bbl/d) | 2,355 | 2,565 | 2,856 | |
Natural gas (mcf/d) | 155,789 | 157,732 | 159,007 | |
Total (boe/d) | 32,963 | 32,893 | 33,399 |
Notes:
- Throughout this MD&A unless otherwise specified, crude oil refers to light, medium and heavy crude oil product type as defined by National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). Condensate is a natural gas liquid as defined by NI 51-101. Throughout this MD&A, references to ngls comprise all natural gas liquids as defined by NI 51-101 other than condensate, which is disclosed separately. Throughout this MD&A, references to natural gas comprise all conventional natural gas as defined by NI 51-101.
First quarter 2023 compared to fourth quarter 2022:
Production during the first quarter of 2023 was consistent with the previous quarter as a result of production increases from the addition of the new liquids-rich natural gas wells in the Greater Septimus area late in the previous quarter, partially offset by the impact of shut-in production from various wells due to weaker natural gas prices at certain delivery points.
First quarter 2023 compared to first quarter 2022:
Production during the first quarter of 2023 was consistent with the same period in 2022 as a result of shut-in production and natural production declines, offset by the successful execution of drilling and completion activities that included the addition of 10 new producing wells in the Greater Septimus and Groundbirch areas over the past year.
2 Q1 2023 MANAGEMENT DISCUSSION & ANALYSIS
CREW ENERGY INC.
Petroleum and Natural Gas Sales
Three months | Three months | Three months | ||
ended | ended | ended | ||
March 31, | December 31, | March 31, | ||
2023 | 2022 | 2022 | ||
Petroleum and natural gas sales(1) ($ thousands) | 541 | 778 | 1,120 | |
Light crude oil | ||||
Natural gas liquids | 8,223 | 8,832 | 12,521 | |
Condensate | 40,459 | 38,311 | 41,078 | |
Natural gas | 51,458 | 89,027 | 75,713 | |
Total | 100,681 | 136,948 | 130,432 | |
Average realized(2) | 84.56 | 100.10 | 107.35 | |
Light crude oil price ($/bbl) | ||||
Natural gas liquids price ($/bbl) | 38.80 | 37.42 | 48.72 | |
Condensate price ($/bbl) | 98.33 | 105.30 | 116.27 | |
Natural gas price ($/mcf) | 3.67 | 6.14 | 5.29 | |
Commodity price ($/boe) | 33.94 | 45.25 | 43.39 | |
Benchmark pricing | 102.90 | 112.22 | 119.40 | |
Light crude oil - WTI (Cdn $/bbl) | ||||
Condensate - Condensate @ Edmonton (Cdn $/bbl) | 107.92 | 113.17 | 121.67 | |
Natural Gas: | 3.22 | 5.11 | 4.74 | |
AECO 5A daily index (Cdn $/mcf) | ||||
AECO 7A monthly index (Cdn $/mcf) | 4.34 | 5.58 | 4.59 | |
Alliance 5A (Cdn $/mcf) | 2.98 | 4.94 | 4.83 | |
Chicago City-Gate at NIT (Cdn $/mcf) | 2.31 | 6.05 | 4.36 | |
Chicago Interstates at ATP (Cdn $/mcf) | 2.84 | 6.45 | 4.86 | |
Dawn at NIT (Cdn $/mcf) | 2.65 | 5.98 | 4.57 | |
Station 2 (Cdn $/mcf) | 2.89 | 3.23 | 4.71 | |
Natural gas sales portfolio | 64% | 62% | 65% | |
AECO 5A | ||||
Alliance 5A | 7% | 8% | 10% | |
Chicago City-Gate at NIT | 3% | 5% | 5% | |
Chicago Interstates at ATP | 6% | 5% | - | |
Dawn at NIT | 6% | 5% | 5% | |
Station 2 | 14% | 15% | 15% |
Notes:
- Throughout this MD&A, light crude oil refers to light and medium crude oil product type as defined by National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). Condensate is a natural gas liquid as defined by NI 51-101. Throughout this MD&A, references to other natural gas liquids or ngls comprise all natural gas liquids as defined by NI 51-101 other than condensate, which is disclosed separately. Throughout this MD&A, references to natural gas comprise all conventional natural gas as defined by NI 51-101.
- Supplementary measure. See "Non-IFRS and Other Financial Measures" contained within this MD&A.
First quarter 2023 compared to fourth quarter 2022:
In the first quarter of 2023, the Company's petroleum and natural gas sales decreased 26% as compared to the previous quarter mainly due to the 25% decrease in the average realized commodity price.
The Company's first quarter average realized light crude oil price decreased 16% over the previous quarter, which was higher than the 8% decrease in the Company's WTI benchmark price, due to an increase in the pricing differential between realized Canadian crude oil prices and the Company's WTI benchmark.
Crew's average realized ngl price increased 4% in the first quarter as compared to the previous quarter, due to increases in the value of component pricing across North America combined with trucking larger portions of ngl volumes to local Canadian markets at higher net pricing. The Company's first quarter average realized condensate price decreased 7% over previous quarter, which was consistent with the 5% decrease in the Condensate at Edmonton benchmark price.
Crew's average realized natural gas price decreased 40% in the first quarter of 2023 as compared to the previous quarter, which is consistent with the 38% decrease in the Company's natural gas sales portfolio weighted benchmark price.
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CREW ENERGY INC.
First quarter 2023 compared to first quarter 2022:
First quarter 2023 petroleum and natural gas sales decreased 23% as compared to the same period in 2022, mainly due to the 22% decrease in average realized commodity price.
The Company's first quarter average realized light crude oil price decreased 21% over the first quarter of 2022, which was higher than the 14% decrease in the Company's WTI benchmark, due to an increase in the pricing differential between realized Canadian crude oil prices and the Company's WTI benchmark.
Crew's average realized ngl price decreased 20% in the first quarter as compared to the same period in 2022, due to significant decreases in the value of ngl component pricing across North America. The Company's first quarter average realized condensate price decreased 15% over the same period in 2022, which was consistent with the 11% decrease in the Condensate at Edmonton benchmark price.
Crew's average realized natural gas price decreased by 31% in the first quarter of 2023 as compared to the same period in 2022, which is consistent with the 35% decrease in the Company's natural gas sales portfolio weighted benchmark price.
Royalties
Three months | Three months | Three months | |
ended | ended | ended | |
($ thousands, except per boe) | March 31, | December 31, | March 31, |
2023 | 2022 | 2022 | |
Royalties | 12,265 | 18,424 | 8,371 |
Per boe | 4.13 | 6.09 | 2.78 |
Percentage of petroleum and natural gas sales | 12.2% | 13.5% | 6.4% |
For the first quarter of 2023, royalties per boe and as a percentage of petroleum and natural gas sales decreased as compared to the previous quarter due to additional production from new wells that attract lower royalty rates combined with a decrease in the average realized natural gas price that attracted lower sliding scale royalty rates. Royalties per boe and as a percentage of petroleum and natural gas sales increased as compared to the same period in 2022 due to the full utilization of the royalty holiday incentives on several high production wells in 2022, resulting in higher royalty rates on these same wells in the current quarter.
Derivative Financial Instruments
Commodities
The Company enters into derivative and physical risk management contracts in order to reduce volatility in financial results and to ensure a certain level of cash flow to fund planned capital projects. Crew's strategy focuses on the use of puts, costless collars, swaps and fixed price contracts to limit exposure to fluctuations in commodity prices, interest rates and foreign exchange rates, while allowing for participation in spot commodity prices. The Company's financial derivative trading activities are conducted pursuant to the Company's Risk Management Policy, approved by the Board of Directors.
These contracts had the following impact on the statements of income and comprehensive income:
Three months | Three months | Three months | |
ended | ended | ended | |
($ thousands) | March 31, | December 31, | March 31, |
2023 | 2022 | 2022 | |
Realized gain (loss) on derivative financial instruments | 14,002 | (17,300) | (15,504) |
Per boe | 4.72 | (5.72) | (5.16) |
Unrealized gain (loss) on derivative financial instruments | 8,238 | 48,831 | (55,152) |
4 Q1 2023 MANAGEMENT DISCUSSION & ANALYSIS
CREW ENERGY INC.
As at March 31, 2023, the Company held derivative commodity contracts as follows:
Strike | Option | ||||
Notional Quantity | Term | Price | Traded | Fair Value | |
Natural Gas CDN$ - AECO Daily Index: | |||||
35,000 gj/day | April 1, 2023 - June 30, 2023 | $4.08/gj | Swap | $ | 5,045 |
7,500 gj/day | April 1, 2023 - October 31, 2023 | $4.31/gj | Swap | 3,231 | |
12,500 gj/day | April 1, 2023 - December 31, 2023 | $4.77/gj | Swap | 7,562 | |
35,000 gj/day | July 1, 2023 - September 30, 2023 | $3.83/gj | Swap | 5,207 | |
35,000 gj/day | October 1, 2023 - December 31, 2023 | $4.40/gj | Swap | 4,642 | |
Natural Gas CDN$ - AECO Monthly Index: | |||||
10,000 gj/day | April 1, 2023 - December 31, 2023 | $4.00 - $5.18/gj | Collar(1) | 4,267 | |
7,500 gj/day | April 1, 2023 - June 30, 2023 | $4.41/gj | Swap | 1,257 | |
7,500 gj/day | July 1, 2023 - September 30, 2023 | $4.02/gj | Swap | 1,257 | |
7,500 gj/day | October 1, 2023 - December 31, 2023 | $4.72/gj | Swap | 1,257 | |
Natural Gas USD$ - AECO Monthly Index to NYMEX Basis Differential: | |||||
2,500 mmbtu/day | April 1, 2023 - October 31, 2023 | ($1.25/mmbtu) | Swap | (256) | |
CDN$ Edmonton C5 Blended Index: | |||||
1,250 bbl/day | April 1, 2023 - June 30, 2023 | $106.80/bbl | Swap | 655 | |
250 bbl/day | April 1, 2023 - December 31, 2023 | $102.50/bbl | Swap | 305 | |
750 bbl/day | July 1, 2023 - December 31, 2023 | $99.50/bbl | Swap | 410 | |
Total | $ | 34,839 |
Note:
- The referenced contract is a costless collar whereby the Company receives $4.00/gj when the market price is below $4.00/gj, and receives $5.18/gj when the market price is above $5.18/gj.
Subsequent to March 31, 2023, the Company entered into the following derivative commodity contracts:
Notional | Strike | Option | ||
Quantity | Term | Price | Traded | |
CDN$ Edmonton C5 Blended Index: | ||||
250 bbl/day | July 1, 2023 - December 31, 2023 | $100.25/bbl | Swap | |
Net Operating Costs(1) | ||||
Three months | Three months | Three months | ||
ended | ended | ended | ||
($ thousands, except per boe) | March 31, | December 31, | March 31, | |
2023 | 2022 | 2022 | ||
Operating expenses | 12,558 | 11,115 | 11,359 | |
Processing revenue | (636) | (616) | (830) | |
Net operating costs(1) | 11,922 | 10,499 | 10,529 | |
Per boe(1) | 4.02 | 3.47 | 3.50 |
Note:
- Non-IFRSmeasure or ratio that does not have any standardized meaning as prescribed by International Financial Reporting Standards, and therefore, may not be comparable with the calculations of similar measures or ratios for other entities. See "Non-IFRS and Other Financial Measures" contained within this MD&A.
Net operating costs and costs per boe for the first quarter of 2023 increased as compared to the previous quarter and the same period in 2022 due to an increase in the British Columbia provincial government carbon tax levy, inflationary cost increases and an increase in winter operations and maintenance costs.
Q1 2023 MANAGEMENT DISCUSSION & ANALYSIS 5
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Crew Energy Inc. published this content on 08 May 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 08 May 2023 21:39:29 UTC.
