EARNINGS / Part 1 of 2 - Renaissance Energy First Quarter Report and
News Release
TSE, ME SYMBOL: RES
MAY 6, 1998
CALGARY, ALBERTA--RENAISSANCE ENERGY announces strong success in
natural gas exploration and development in the first three months
this year, with natural gas production up 7 percent from the
comparable period in 1997 and exiting the quarter in excess of 450
million cubic feet per day. Additional gathering systems were also
installed in the quarter to facilitate incremental production next
winter.
Renaissance focused its natural gas exploration activity on
winter-only access areas, resulting in 163 net wells being cased
for production out of a total of 274 tests. Operations were
initially focused on drilling in relative proximity to existing
infrastructure where natural gas could be put on-stream this past
winter. The latter part of the program was directed to more remote
exploratory drilling, which, together with several complementary
seismic programs, sets up the 1998/99 winter drilling season.
Natural gas prices averaged $2.37 per thousand cubic feet
(including a gain of $0.33 per thousand cubic feet on forward
sales), down from last year's record prices but still robust in
light of a very mild North American winter.
On the oil front, Renaissance's average price fell 44 percent to
$12.91 per barrel from $23.24 in the first quarter of 1997,
precipitated by a significant decline in world oil prices. The
benchmark WTI price, which exceeded US$26 in January 1997,
actually dropped below US$13 in mid-March 1998. This price erosion
was exacerbated by a widening differential between prices for
light crude oil and Renaissance's blend of medium crude oils.
However, Renaissance continued to explore and complete selected
oil development projects, concentrating on building an inventory
of projects for the future. In total, 101 net oil wells were cased
for production. Production averaged 80,567 barrels per day, 2
percent lower than in the comparable period in 1997, as marginal
oil wells were shut in and remedial work was postponed in view of
the uneconomic returns on certain oil fields.
"With the challenging oil price environment, we are focusing less
on drilling and more on the technical aspects of our oil pools,
including secondary recovery schemes," said President and Chief
Executive Officer Clayton Woitas. "We are still continuing to
build for the future on the oil side with exploratory drilling and
selected development."
However, the deterioration in oil prices led to an inevitable
decline in financial results. Cash flow dropped 41 percent to $91
million while net income fell 91 percent to $4 million.
/T/
SUMMARY
Three Months Ended
March 31 Percent
1998 1997 Change
--------------------------------------------------------------
FINANCIAL (millions except per share)
Gross revenues $ 187 $ 267 - 30
Cash flow from operations $ 91 $ 155 - 41
Per share - basic $ 0.78 $ 1.34 - 42
- fully diluted $ 0.75 $ 1.27 - 41
Net income $ 4 $ 44 - 91
Per share - basic $ 0.04 $ 0.38 - 89
- fully diluted $ 0.04 $ 0.36 - 89
PRODUCTION
Oil (thousands of barrels) 7,251 7,380 - 2
Daily average (barrels) 80,567 82,005
Sales price $ 12.91 $ 23.24 - 44
Royalties (2.02) (4.50) - 55
Operating costs (4.98) (4.59) + 8
-------------------------
Netback per barrel $ 5.91 $ 14.15 - 58
-------------------------
Natural gas (million cubic feet) 39,642 37,055 + 7
Daily average (million
cubic feet) 441 412
Sales price $ 2.37 $ 2.58 - 8
Royalties (0.26) (0.51) - 49
Operating costs (0.33) (0.27) + 22
-------------------------
Netback per thousand cubic feet $ 1.78 $ 1.80 - 1
-------------------------
Combined (mboe)(x) 11,215 11,086 + 1
Daily average (boe) 124,611 123,178
Sales price $ 16.71 $ 24.11 - 31
Royalties (2.20) (4.69) - 53
Operating costs (4.40) (3.97) + 11
-------------------------
Netback per boe 10.11 15.45 - 35
General and administrative (0.65) (0.58) + 12
Financial expenses (1.06) (0.68) + 56
Capital taxes (0.26) (0.21) + 24
-------------------------
Cash flow per boe 8.14 13.98 - 42
Non-cash items (7.75) (10.06) + 23
-------------------------
Net income per boe $ 0.39 $ 3.92 - 90
------------------------------------------------------------
(x) 10 mcf of natural gas =1 barrel of oil
/T/
OPERATIONAL REVIEW
During the first quarter of 1998, Renaissance discovered 14 new
natural gas pools through its exploration drilling efforts in the
Hotchkiss region of northwestern Alberta. The additional wells
drilled near its existing production infrastructure were
successful in doubling its natural gas production in this region
to 30 million cubic feet per day. The Hotchkiss and Lovet Creek
facilities were expanded to accommodate these incremental volumes.
A deep Slave Point exploratory well was drilled at Mega resulting
in a dual Mississippian and Slave Point discovery. One
Mississippian depth step-out well was successfully drilled to
confirm the size of the accumulation and a three-dimensional
seismic program was conducted to assist in identifying additional
Slave Point locations for next winter's drilling season. In
addition, a second Slave Point discovery was drilled and will be
completed early next winter.
/T/
CAPITAL EXPENDITURES (millions)
March 31
1998 1997
-----------------------------------------------------------
Property acquisitions $ 2 $ 5
Lease acquisitions and retentions 17 20
Seismic evaluations 28 37
Drilling and completion of wells 118 131
Equipping, pipelining and facilities 84 73
Head office expenditures 1 2
-------------
Total expenditures $ 250 $ 268
-----------------------------------------------------------
/T/
In the Athabasca North region, a total of 90 wells were drilled at
Marten Hills to extend the existing pools and obtain production
from new horizons. Incremental production of 35 million cubic feet
per day was added through four new production facilities. An
extensive regional gas accumulation was encountered in the
Mannville group at Mitsue South with individual well
deliverability of more than four million cubic feet of gas per
day. This play is part of an exploratory program which will be
extensively developed next winter. Well tie-ins are on-going in
this area.
On the crude oil side, Renaissance has enjoyed success with its
pressure maintenance program on selected oil reservoirs, markedly
boosting oil production in several areas. Currently, oil drilling
is being selectively pursued due to low oil prices and resultant
low netbacks. In addition, well maintenance is being performed
only when economics dictate.
/T/
NET WELLS DRILLED (Three months ended March 31)
1998 1997
Explor- Develop- Total Explor- Develop- Total
atory ment atory ment
--------------------------------------------------------------
Oil 28 73 101 32 136 168
Natural gas 135 26 161 166 11 177
Dry 111 28 139 179 21 200
------------------------------------------------
Total 274 127 401 377 168 545
--------------------------------------------------------------
/T/
With respect to building inventory, two major new pool oil
discoveries were made at Winter in the Macklin region of
west-central Saskatchewan. These will be developed later in 1998.
Exploratory drilling successfully expanded the Drake oil field, a
producing property purchased in 1997 and strategically situated
between our Northend and Border facilities.
At Bow Island in the Southern region of Alberta, 12 exploratory
wells were successfully drilled in the first quarter to prove up
large parts of the new oil pools identified in 1997. Each of these
wells boasts exceptionally high production rates. As well,
Renaissance is currently formulating plans for an extensive
development program in the Grand Forks area.
In the Southwest Saskatchewan region, Renaissance significantly
extended the boundaries of its Java oil field and undertook a
development program of a previous discovery at Webb West. An
extensive exploratory program, for both oil and natural gas, is
planned for the Southwest Saskatchewan region over the remainder
of the year. Natural gas production is expected to commence in the
third quarter.
/T/
NET UNDEVELOPED LAND HOLDINGS (thousands of acres)
March 31 December 31
1998 1997
-------------------------------------------------------------
Alberta 6,781 6,966
Saskatchewan 3,521 3,630
Manitoba 166 163
------------------
Total 10,468 10,759
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/T/
Financial Review
Cash flow decreased 41 percent to $91 million and earnings fell 91
percent to $4 million in the first quarter from the comparable
period in 1997, mainly due to the 58 percent decline in crude oil
netbacks. On a barrel of oil equivalent (boe) basis, production
remained relatively constant at 124,611 boe per day. Per share
results decreased commensurably, as the number of shares
outstanding remained virtually unchanged from the comparable
period in 1997.
The average oil price declined 44 percent in the first three
months of 1998 over 1997 due to a 30 percent reduction in the
benchmark WTI oil price from US$22.78 to US$15.95. This price
erosion was exacerbated by a widening of the differential between
the Renaissance blend of crude oils and the benchmark light oil
posting. The differential averaged $9.02 per barrel versus $7.03
in 1997.
On a percentage of revenue basis, oil royalties decreased from 19
percent to 16 percent in the first three months due to the
sensitivity of the calculation to lower prices. Operating costs
per barrel increased 8 percent in the first three months due to
the decline in production volumes caused by low prices at certain
oil fields.
The average natural gas price of $2.04 (excluding a $0.33 per mcf
gain from forward sales) declined 21 percent due to the relatively
warm weather experienced in North America this winter. As at April
30, 1998, Renaissance had sold forward 18.5 billion cubic feet of
gas for delivery at various dates in 1998 at prices averaging
US$2.29 per thousand cubic feet. If these positions had been
closed out on that date, a gain of Cdn$0.4 million would have been
realized.
On a percentage of revenue basis (excluding forward sales),
natural gas royalties decreased from 20 percent to 13 percent in
the first three months due to the sensitivity of the calculation
to industry's lower average prices and Renaissance's higher
realizations. Operating costs increased to $0.33 per thousand
cubic feet from $0.27 in the first three months as a result of
inflationary cost pressures from the service sector, higher
production volumes from the traditionally higher cost northern
regions, and the increased proportion of incremental volumes being
processed through other operators' facilities, as required by
regulation.
STOCK OPTION PLAN
On March 23, 1998, the Board of Directors approved management's
proposal to reprice the exercise prices of all outstanding
out-of-the-money stock options, excluding those held by directors
and officers. The number of stock options held by the employees
was reduced proportionately with the percentage change in the
exercise price and resulted in the cancellation of 1,140,418 stock
options previously issued at higher exercise prices.
Renaissance believes that this partial repricing and cancellation
of some of the outstanding stock options where the exercise prices
were out-of-the-money is an extraordinary event. The Board of
Directors approved this proposal in response to the strong
competitive environment for personnel that the industry is
experiencing and believes that the restrictions applied to the
process represent a fair balance for all shareholders and existing
stock optionees.
OUTLOOK
Natural gas prices for Canadian gas are expected to be strong as
pipeline expansions into the United States markets, which will be
completed in early November, will remove the made-in-Canada
discounted price.
Oil pricing is expected to be weak through the second quarter this
year, with improvement seen in the second half as the benefits of
the OPEC agreement lift the absolute price and differentials
narrow by virtue of reduced heavy crude oil supply and increased
demand.
Industry activity has shifted significantly from oil to natural
gas, and this is expected to continue until the relative
profitability of oil and natural gas becomes more balanced.
Renaissance will be emphasizing development activities on the
natural gas side including extensive pipelining and drilling to
build production volumes throughout the year. In addition, some 10
million cubic feet of natural gas per day is currently being
produced into long-term storage in eastern Canada to enhance
marketing flexibility.
Oil activities will focus on exploration with the intention of
building our development inventory. Oil development will be
selectively pursued, with major development activities contingent
upon a clear signal of sustained favourable netbacks.
Renaissance is taking advantage of the current lower demand period
for both oil and natural gas to perform annual facility
turnarounds in anticipation of price improvements. On the oil
side, this period is providing an incentive to review every aspect
of the company's oil production portfolio to prioritize
development plans and reduce costs.
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