Prairie Provident Resources Inc. announces our operating and financial results for the fourth quarter and year ended 2022. PPR’s audited annual consolidated financial statements and related Management’s Discussion and Analysis (MD&A) and annual information form dated March 31, 2023 (AIF) are available on our website at www.ppr.ca and filed on SEDAR at www.sedar.com.
MESSAGE TO SHAREHOLDERS
Although the Company achieved production only slightly (6%) below previously guided volumes, 2022 saw headwinds for Prairie Provident, primarily through $25.5 million of realized hedging losses from mandatory credit facility hedging requirements. When coupled with increasing royalty payments due to higher commodity prices and a historically high debt burden with interest paid-in-kind, the Company did not share in the amount of financial deleveraging realized by many of our peers. Earlier this week PPR announced a comprehensive recapitalization plan to significantly improve the Company's financial flexibility and sustainability (detailed below). The hedges that substantially limited upside expired at the end of 2022.1
The Company is also pleased to outline the following steps to reposition the Company for future success, further details of which can be found in the Company's updated investor presentation at www.ppr.ca:
Optimize free cash flow in the near term by spending a conservative amount of capital (made possible by the Company's low decline rate) on a low-risk well optimization program that aims to hold production relatively flat through high capital efficiency opportunities.
From an improved financial position from the recapitalization explore transactions that may unlock value within the Company. The Company has a 20.4-year reserve life index (based on proved plus probable reserves and current production levels) and significant tax pools of approximately $860 million ($560 million of which are immediately realizable).
Stringent focus on reducing operating expense and pursuing G&A efficiencies.
Apply disciplined capital in late 2023 and 2024 by investing in the Company's wide breadth of drilling opportunities to achieve sustainable production growth.
Recapitalization
On March 29, 2023, the Company announced a comprehensive recapitalization plan (the "Recapitalization") with a proposed structure that the Company believes is similar to recapitalizations completed by several other Canadian energy producers. Upon completion, the Recapitalization will remove significant uncertainty surrounding the Company's current financial position. It provides for:
Immediate extension of the First Lien Revolving Facility to July 1, 2024
Immediate extension of the Subordinated Notes due June 30, 2024 to December 31, 2024
Immediate funding of new US$3.6 million (approximately $5 million Canadian) second lien notes (the "Second Lien Notes"), and conversion of all outstanding warrants to equity
Reduced 24-month hedging requirements of 50% in the first year and 25% in the second year, which PPR intends to meet with puts, put spreads, and other instruments that offer downside protection while maintaining upside exposure
A proposed equity offering of at least $4.0 million (the "Equity Financing")
Estimated combined net proceeds of the Second Lien Notes issue (completed March 30, 2023) and proposed Equity Financing in excess of $8.0 million are expected to provide the Company with ample working capital
Conversion of the US$52.8 million (approximately CAN$72 million) Subordinated Notes to equity at an anticipated $0.105 conversion price (based on a $0.10 offering price under the Equity Financing) significantly reduces the Company's leverage, reducing the face value of its outstanding debt by nearly 50% and saving over $6 million a year in interest expense
Completion of the Recapitalization is contingent on successful completion of the Equity Financing. On March 29, 2023, the Company launched an offering of units (composed of common shares and warrants) that would satisfy the Equity Financing requirement. Failure to complete the Equity Financing by May 31, 2023 will constitute an event of default under the First Lien Revolving Facility, Second Lien Notes and Subordinated Notes.
FINANCIAL AND OPERATING SUMMARY
ANNUAL FINANCIAL & OPERATIONAL HIGHLIGHTS
Improved pricing in 2022 compared to 2021 resulted in an increase in PPR's oil and natural gas revenue of $36.2 million or 42.8% to $120.6 million. The increase was partially offset by a 5% decrease in production volumes.
For the year ended December 31, 2022, production averaged 4,072 boe/d (65% liquids), which was 5% or 196 boe/d lower than average production for 2021.
2022 average production was 6% lower than guidance, primarily driven by inflationary pressures impacting our drilling program and lower-than-expected production in the fourth quarter due to severe cold weather and constrained liquidity.
Drilled one gross (1.0 net) well in the Princess area and two gross (2.0 net) wells at Michichi, and initiated an optimization and reactivation program in the second half of 2022.
Operating netback1 for the year was $54.3 million ($36.54/boe) before the impact of realized losses on derivatives in 2022, or $28.8 million ($19.38/boe) after realized losses on derivatives, a 52% and 10% increase from 2021, respectively. Our mandatory hedge positions pursuant to credit facility covenants resulted in $25.5 million of realized losses in 2022, which partially dampened the 55% and 39% increase in realized light & medium and heavy crude oil prices, respectively, from 2021.
2022 operating expense was $30.88 boe/d, an increase of 23% compared to 2021 due to an increase in costs as a result of inflationary pressures, higher electricity costs as well as the impact of lower volumes, particularly lower volumes in the fourth quarter as a result of severe cold weather coupled with shut-in production and decreased well servicing due to liquidity challenges.
As at December 31, 2022, net debt1 totaled $147.8 million, which increased by $23.5 million from December 31, 2021. The increase was attributed to an increase in the Company's working capital deficit, deferred interest incurred and paid-in-kind, and a weakening of the Canadian Dollar against the US Dollar.
At year-end 2022, PPR had US$49.4 million of borrowings drawn against the US$50.0 First Lien Revolving Facility, and no available borrowing capacity as no additional draws were possible. In addition, US$51.6 million of Subordinated Notes (CAN$69.9 million equivalent) were outstanding at December 31, 2022, for total borrowings of US$101.0 million (CAN$136.8 million equivalent).
FOURTH QUARTER 2022 FINANCIAL AND OPERATIONAL HIGHLIGHTS
Production averaged 3,753 boe/d (64% liquids) for the fourth quarter of 2022, a 14% decrease from the same period in 2021, driven by turnarounds and cold weather as well as shut-in production and decreased well servicing due to liquidity challenges. The Company anticipates that the Recapitalization, including the proceeds from the Second Lien Notes financing that were received on March 30, should provide additional liquidity that can be immediately directed toward well reactivations and restoring production.
Fourth quarter 2022 operating netback1 before the impact of derivatives was $6.5 million ($18.94/boe), and $2.2 million ($6.47/boe) after realized losses on derivatives, a $5.1 million and $5.4 million decrease from the fourth quarter of 2021, respectively. Our hedging program, which was required under our credit facility covenants, resulted in $4.3 million of realized losses in the fourth quarter of 2022, which diminished the 18% and 19% increases in realized light & medium and heavy crude oil prices, respectively, from the corresponding period in 2021.
Net capital expenditures1 for the fourth quarter of 2022 of $1.2 million were largely directed towards critical operations in Evi, Princess and Michichi.
