Touchstone Exploration Inc. reports its operating and financial results for the three months and year ended December 31, 2019. Selected information is outlined below and should be read in conjunction with Touchstone's December 31, 2019 audited consolidated financial statements.
Subsequent Events and Outlook
- Subsequent to year-end, we issued 22,500,000 common shares raising net proceeds of approximately $10.8 million to primarily fund the Chinook prospect on our Ortoire block.
- Our emphasis remains on bringing Coho-1 and Cascadura-1ST1 onto production as soon as possible.
- We are preparing to drill an earning exploration well at the Chinook prospect and anticipate continuing with the planned exploration program unless it becomes absolutely necessary to suspend it.
- Touchstone has immediately responded to the significant global economic uncertainty created by the novel coronavirus ("COVID-19") pandemic combined with the unprecedented decline in crude oil prices. Discretionary costs have been minimized with field operations limited to emergency workovers.
- Management's main concern is the safety and wellbeing of its employees and stakeholders. International travel has been restricted, and remote working and physical distancing measures have been implemented where possible to allow our operations to continue as smoothly as possible in the circumstances.
- Aside from voluntarily restricting certain field operations, the Company has had no operational impacts from COVID-19 to date, and we will monitor the situation and adapt our operations accordingly.
- Our low base production decline rate, strong operating netbacks, top-tier capital efficiencies, lack of development drilling commitments and solely operated exploration capital program provide flexibility in this volatile market. Bolstered by the recent private placement, the Company had approximately $13.5 million of cash as at February 29, 2020, and no repayments are required on the Company's debt until January 2021. We remain focused on managing our operations to ensure that we operate within our credit facility financial covenants.
- Achieved annual crude oil sales of 1,825 barrels per day ("bbls/d"), a 6% increase relative to the 1,718 bbls/d produced in 2018.
- Executed a $10,113,000 exploration program to drill two gross (1.6 net) successful wells.
- Increased petroleum sales by 2% from the prior year, generating $38,654,000 versus $37,729,000 in 2018.
- Despite an annual 10% decrease in Brent reference pricing, we realized an operating netback of $26.61 per barrel in 2019, consistent with the $26.68 per barrel generated in the prior year.
- Reduced operating costs by 8% and 14% on an absolute and per barrel basis from the prior year, respectively.
- Despite a 90% annual decrease in discretionary development capital investment, we delivered funds flow from operations of $6,840,000 ($0.04 per share) compared to $8,548,000 ($0.07 per share) realized in 2018.
- Exited the year with cash of $6,182,000 and net debt of $16,503,000, representing 2.4 times net debt to annual funds flow from operations.
Throughout 2019, Touchstone conducted minimal capital development activity and continued to allocate capital to exploration activities on our Ortoire property. As a result, crude oil production during the fourth quarter averaged 1,690 bbls/d, a 9% decrease relative to the 1,851 bbls/d produced in the fourth quarter of 2018, as incremental production achieved from wells drilled in 2018 were offset by natural declines. 2019 crude oil production averaged 1,825 barrels per day, representing an increase of 6% from production delivered in 2018. We invested $1,388,000 in development activities in 2019, which mainly consisted of recompletion activities on legacy wellbores.
We commenced our onshore exploration program on the Ortoire block (80% working interest) in the second half of 2019, drilling two gross exploration wells (1.6 net). Coho-1, the first natural gas prospect, had an encouraging production test that exceeded the Company's expectations. Touchstone completed drilling its second Ortoire exploration prospect, Cascadura-1ST1, in December 2019, with production testing in February and March 2020 confirming a substantial liquids-rich gas discovery. In aggregate, we invested $10,113,000 in exploration activities, including $8,901,000 in drilling, completion and lease building activities (2018 - $2,557,000 and $nil, respectively).
Despite an 8% decrease in average Brent reference pricing, our fourth quarter operating netback was $25.12 per barrel, representing an 11% increase from the $22.55 per barrel operating netback achieved in the equivalent prior year period. Realized fourth quarter 2019 crude oil pricing was $57.38 per barrel, 2% less than the $58.54 per barrel received in the fourth quarter of 2018 as the Company's realized pricing differential to Brent reference pricing narrowed significantly. 2019 fourth quarter royalties represented 29.7% of petroleum sales compared to 25.3% in the prior year comparative period. This reflected an increase in overriding royalties, as production from development wells drilled in 2017 and 2018 qualified for reduced royalty rates throughout 2018. In comparison to the fourth quarter of 2018, operating expenses on a per barrel basis decreased 28% to $15.21 per barrel, predominately due to decreased well servicing expenditures and licence fees. On an annual basis, our 2019 operating netback of $26.61 per barrel was consistent with the $26.68 recorded in the prior year. Despite a 10% decrease in average Brent reference pricing, the Company realized $58.01 per barrel, a 4% decrease from the $60.15 per barrel recognized in 2018. In comparison to 2018, 2019 royalties per barrel increased by 2% while operating costs per barrel decreased by 14%, reflecting the Company's 2019 cost control efforts.
For the three months and year ended December 31, 2019, Touchstone delivered funds flow from operations of $2,018,000 ($0.01 per share) and $6,840,000 ($0.04 per share), respectively. Fourth quarter 2019 funds flow from operations increased by $536,000 from the $1,482,000 recorded in the corresponding 2018 period, reflecting savings in cash finance expenses from the reversal of previously accrued income tax interest expenses, slightly offset by increased income tax expenses recorded in 2019. 2019 funds flow from operations were $1,708,000 less than the $8,548,000 recognized in 2018. Annual savings in operating costs and cash finance expenses were offset by an increase of $3,513,000 in current income taxes. Fourth quarter and annual 2019 income taxes increased based on minimal capital development activity, which decreased credits used to offset supplemental petroleum taxes.
We recorded net losses of $3,549,000 ($0.02 per share) and $5,620,000 ($0.04 per share) during the three months and year ended December 31, 2019, respectively, in comparison to net earnings of $552,000 ($0.00 per share) and $358,000 ($0.00 per share) in the comparative 2018 periods, respectively. The annual variances were driven by property and equipment impairments, as $7,594,000 in impairments were recorded in the fourth quarter of 2019 versus impairment reversals of $3,719,000 recognized in the fourth quarter of 2018. The impairment expenses were minimized by their corresponding effect on deferred taxes, as recoveries of $3,945,000 and $1,813,000 were recognized during the three months and year ended December 31, 2019 (2018 - expenses of $3,228,000 and $6,897,000).
Touchstone exited the year with a cash balance of $6,182,000, a working capital deficit of $1,139,000 and a C$20 million principal term loan balance. Net debt as at December 31, 2019 was $16,503,000, which represented net debt to annual 2019 funds flow from operations of 2.4 times. In the fourth quarter of 2019, we increased the principal balance of our credit facility from C$15 million to C$20 million in order to fund the Cascadura-1ST1 exploration well. The credit facility does not require the commencement of principal payments until January 1, 2021, and we were within the financial covenants as at December 31, 2019.
Subsequent Events Outlook
On the basis of the successful results from the first two Ortoire exploration wells, the Company undertook a private placement in February 2020 in order to support the drilling of a further Ortoire exploration well at the Chinook prospect, which is targeting a separate structure along the same geological trend. The private placement raised net proceeds of approximately $10.8 million by way of a placing of 22,500,000 common shares at a price of 40 pence (approximately C$0.69). The net proceeds of the equity issuance are also expected to be used to complete the second stage of the Cascadura-1ST1 production test and provide additional working capital while we progress the Ortoire exploration program.
With the significant drop and volatility in financial markets and world crude oil prices as a result of the COVID-19 pandemic and concurrent oil market share war, consistent with past practices the Company will manage its development and operational spending and will only adjust the 2020 exploration capital program if absolutely necessary.
The Company's response to these events will be to continue its approach of maintaining prudence and financial flexibility with a focus on preserving value and financial liquidity. All operations will be thoroughly vetted to optimize corporate cash flows which may include shutting in any wells that will not generate positive cash flow under current forward crude oil prices. Further operating and corporate cost efficiencies will also be pursued in consideration of the current pricing environment. To date, the Company has not been subject to supply chain disruptions nor the unavailability of personnel.
We continue to monitor the situation and economic environment, and we will adapt our business operations to ensure that we preserve and grow long-term shareholder value. We thank our shareholders and stakeholders for their continuing support and look forward to coming out of this unprecedented challenge with a stronger and sustainable Company.