Copyright of the Daily Oil Bulletin 2017
7G Prepares For Growth Post-2018; Takes Conservative Downtime Outlook
Seven Generations Energy Ltd.’s underestimation of the required Pembina Kakwa River natural gas processing plant downtime in 2017 is largely why the company will now take a more conservative outlook regarding third party-related infrastructure downtime for next year — likely to be around 30 to 45 days for the 12-month period.
“There is lots of downtime planned,” Marty Proctor, president and chief executive officer, told the 7G investor day on Thursday. Historically, 7G prefers to own and operate its own facilities. Last year, though, the company bought neighbouring Montney Nest assets for $1.9 billion that included access to Pembina Pipeline Corporation-owned processing infrastructure (DOB, July 7, 2016).
“It’s a plant that has not seen as much gas as we were putting into it, it’s a plant that wasn’t designed to handle all the liquids we do produce, and there is ownership on this from all sides,” said the CEO. “All sides will work together to ensure we get this plant more reliable.”
Because there remains uncertainty on the reliability of that plant for the rest of this year, he noted, 7G is calling for Q4 2017 average production of 195,000 to 200,000 boe/d. With restricted production on 11 new wells due to limited Pembina plant processing, 7G will defer 10,000 boe/d of Q4 production to 2018. The company will build infrastructure in the Kakwa field to allow diversion of 70 mmcf/d from the Pembina plant and company-operated plants.
“That third party is competent; they do a good job,” Proctor said, adding all parties are working to optimize how 7G manages growth and get processing capacity to where it needs to be. “It will be not just a scenario analysis, but it will be all about maximizing the net present value of the asset, considering the cost to build our own infrastructure versus the netback reduction of the processing cost you would pay to a third party.
“It will also, of course, be very dependent on reliability of those third-party facilities. That has been a challenge for us, and we are working very hard to fix that.”
Christopher Law, chief financial officer, told the investor day that 7G’s performance — surface issues aside — has been very consistent with the company’s expectations.
“I know there has been a lot of noise and a lot of question if the rock is producing or if there are other concerns subsurface, but when we look at it, we don’t see it. There have been surface issues, we admit that and we are willing to talk about ways we are willing to deal with those, but downhole we are very encouraged with the results we see.”
For infrastructure and certain growth investments to be made for next year, Proctor suggested a significant amount of that actually supports growth in 2019 and beyond.
“We are funding infrastructure in 2018 for growth into 2019, we are targeting a cash flow-neutral budget in 2019, a balanced budget in 2019, and we anticipate free cash in 2020.”
Capital spending in 2018 and beyond
Management projects fully-funded, organic production growth of 100,000 boe/d for 7G over the next five years, targeting a 2019 capital investment budget to be equal to funds flow.
“We are intending and we will keep a strong balance sheet, with debt-to-cash flow of less than two times,” Proctor said. This week, 7G approved 2018 capital investments of $1.675 billion to $1.775 billion that target a production range of 200,000 to 210,000 boe/d next year (up 15 per cent from forecasted 2017 average production) and to build longer-term capacity to produce in 2019 about 220,000 to 240,000 boe/d (DOB, Nov. 16, 2017).
According to Law, due to cycle times 7G is providing 2019 guidance, as whatever the company does next year from a capital perspective directly relates to the following year. Because it takes anywhere from six to nine months between committing money to a pad and actual production, management includes 2019 production in its outlook.
“It is actually not a great business to hold us accountable on a one-year, dollar-per-boe basis,” he said. “You have to look at it on a two or three year basis, because that is how the cycle works. Look at the returns and judge us on those returns all the way across the business.”
Of next year’s capital spending, approximately $1 billion is for sustaining capital, while around $175 million goes towards finishing the first phase of 7G’s wholly-owned natural gas processing plant currently underway at Gold Creek, with a processing capacity of 250 mmcf/d.
Regarding plans for a second phase of the Gold Creek gas plant, according to management, 7G actually does not need to expand that facility beyond the first phase to meet its 300,000 boe/d target set for 2022. Further Gold Creek expansion remains an option, though, which the company will determine based on commodity prices, its ability to improve efficiency in operations and capital spending, and free cash generation.
“We haven’t fully scoped that potential [further] expansion yet,” said Chris Feltin, vice-president of corporate planning. “There are pre-builds in place. We are thinking about H2S expansion for the whole plant. We are thinking about ethane extraction. Those are options that are available and are not part of the plan right now. As we scope for a potential second phase, those will be part of it.”
As recently reported in the Bulletin, 7G was able to lower drilling and completion costs in this year’s third quarter when compared to Q2 2017, with improved water sourcing logistics, as well as a deliberate move to work with fewer and more efficient business partners driving completions efficiencies (DOB, Nov. 2, 2017).
The 7G market access approach
For 7G, most value comes from liquids, notably condensate, but the company must move all products before it can sell any, and so access to markets for natural gas is incredibly meaningful — hence the emphasis on market diversity.
“As a company, we do what I think is an exceptional job of risk and opportunity analysis, and this has been part of our culture since the inception,” said Proctor. “Through that risk and opportunity analysis, we concluded many, many years ago there is too much gas in North America, and access to markets would be challenged.”
Even in 2013, 7G committed to deliver 500 mmcf/d on the Alliance pipeline to Chicago — a big commitment for the company back then, but one that has proven itself given AECO access issues. “That has really allowed us to have much, much better product pricing. Even today, the majority of our gas goes to Chicago.”
Tim Stauft, senior vice-president of market access, said the whole objective of 7G’s market access initiatives is to maximize resource value and ultimately to improve netbacks. For example, the company is looking at various gas-to-liquids technologies to create products such as methanol, diesel, gasoline and dimethyl ether.
“We are also looking at power generation. It’s pretty well known that coal retirement in Alberta is going to create some great opportunities for the natural gas business, and we are engaged with a lot of conversations on that as well.”
He added: “We are also, of course, looking at exports for LNG and NGL. We are also engaged with Stanford University, looking at other new technologies.”
Of those options, noted Stauft, LNG probably represents the best opportunity for the overall Canadian natural gas industry. He said current LNG spot prices for Asia would be $9.50/mmBtu. “The secret” to an LNG project fit for Canada is considering all projects that have come before and building one that is tailored to the basin, he suggested.
Susan Targett, executive vice-president of corporate, told the7G investor day the ability for LNG to displace coal in China for power generation is an important factor in mitigating climate change, which is why Stanford University, as well as the University of British Columbia and University of Calgary are conducting independent studies of a lifecycle assessment of Kakwa-derived LNG to fuel Chinese demand. The studies should be complete next year.
“When stakeholders are looking at greenhouse gas emissions and the carbon footprint, what they want to know is how that [looks] when we look at a global perspective,” she said, adding 7G participated in a carbon disclosure project, which showed carbon intensity in 2017 at 0.0126 tonnes of CO2/boe for the company — one per cent less than in 2016. “As part of that, what I think is really interesting is that we basically doubled our production during that time.”
Promotion at 7G
This week, 7G announced the promotion of Jordan Johnsen to the position of vice-president of operations and engineering. He will now lead implementation and execution of the company’s field level capital investment.
Based in Grande Prairie, Johnsen has helped lead development of Kakwa River project wells, super pads, production facility design and construction, as well as natural gas processing, in his role as lead engineer on 7G’s first Montney horizontal wells. He has an engineering degree from the U of C and is an Association of Professional Engineers and Geoscientists of Alberta member.