Copyright of the Daily Oil Bulletin 2018
Bulk Of Pengrowth’s $65 Million 2018 Capital Budget Allocated To Lindbergh
Pengrowth Energy Corporation announced a 2018 capital expenditure budget of $65 million.
The company said late last year that its 2017 capital expenditure program was expected to come in at around $125 million.
Its 2018 capital spending will be focused on adding production volumes at the company’s two 100 per cent owned and operated assets at Lindbergh and Groundbirch.
The 2018 capital budget is expected to grow production volumes through the course of the year from a December 2017 exit production rate of approximately 19,000 boe/d excluding the Quirk Creek production volumes, to an estimated 2018 exit rate of approximately 24,000 boe/d, representing approximately 25 per cent production growth in 2018. On an annual basis, the 2018 budget is expected to deliver average daily production of between 22,500 and 23,500 boe/d.
2018 capital plan
The company has allocated approximately $45 million towards continued development and maintenance activities at its Lindbergh thermal project. Lindbergh is Pengrowth’s primary oil asset and with continued development is expected to deliver long-term growth in production and cash flow to the company.
Pengrowth’s 2018 development plans at Lindbergh will focus on continued optimization activities, including the drilling of eight additional infill wells. Approximately $33 million of the Lindbergh capital has been allocated to the optimization and infill well program. The remaining capital will be allocated to maintenance and enhancement activities to support the continued production growth from existing operations.
The wells that were drilled in 2017 as part of the optimization program are now on production and are contributing to growth in Lindbergh production volumes, with production from the project expected to reach 16,000 bbls/d by the end of the first quarter 2018. The eight infill wells in the 2018 capital program are scheduled to be drilled in the second quarter of 2018 and are expected to be brought onstream in the fourth quarter of 2018, increasing Lindbergh production to approximately 18,000 bbls/d by the end of the year.
At Groundbirch, Pengrowth’s Montney property in northeast British Columbia, $17 million of capital is being directed to the completion and tie-in of the four wells which were drilled in the fourth quarter of 2017. The completion of these wells is expected to increase natural gas production from Groundbirch from the current nine mmcf/d to approximately 30 mmcf/d, with the initial volumes coming on by the end of April 2018.
In addition to the drilling program, Pengrowth is working on the completion of a compression project which is expected to allow the company to shift transportation of natural gas production at Groundbirch away from Station 2 and onto the Nova system. Once production is on the Nova system, it is anticipated that the majority of the natural gas produced (approximately 87 per cent) will be transported to Lindbergh where it will be used to support the energy requirements of that project.
The pace of development at Groundbirch will be dependent on the energy requirements for Lindbergh operations. It is the company’s intention to utilize the majority of Groundbirch’s produced natural gas in its thermal operations and avoid having to export natural gas outside of the Western Canadian Sedimentary Basin.
An additional $3 million of capital has been allocated to Pengrowth’s remaining conventional assets as well as for general corporate purposes.
Total 2018 corporate operating costs are expected to be materially lower compared to 2017 costs primarily as a result of the company’s significant asset disposition activities in 2017. This process resulted in the sale of several high cost legacy assets, leaving the company with a portfolio centering on two 100 per cent owned and operated, low cost, growth assets. On a unit basis, operating expenses are expected to be between $10.50/boe to $11.50/boe, representing a decline of approximately 17 per cent from 2017 operating cost guidance, based on the midpoint of guidance. Pengrowth will continue with its emphasis on cost minimization and will seek out opportunities to further reduce its operating costs where possible.
Cash general and administrative expenses
With the extensive asset sales completed in 2017, the company has been reducing its staff count to align with its refocused asset base. This process is expected to be completed in the first half of the year and, as a result, the company expects to see a bifurcated cash general and administrative (G&A) expense profile in 2018, with G&A expenses being higher in the first half of the year averaging $3.93/boe and ultimately falling lower in the second half of 2018 to $2.46/boe. This is expected to result in full year 2018 cash G&A costs in a range of $3.10/boe and $3.35/boe, representing a decrease of approximately 14 per cent from 2017 G&A guidance, based on the mid-point of guidance.
The ongoing production growth in Canadian heavy oil and lack of new export pipeline capability has resulted in a widening of the Western Canadian Select (WCS) price differential. Pengrowth has protected from this volatility through its hedging activities. For 2018, the company has locked in the WCS heavy oil price differential at US$16.82/bbl for 17,000 bbls/d of Lindbergh blended production through physical sales. These sales provide stability to WTI-WCS differential pricing and in addition, these sale agreements ensure the company has committed purchases for approximately 75 per cent of its forecast Lindbergh production. In the fourth quarter, the delivery of Lindbergh production to these purchasers resulted in an operating netback of $23.19/bbl.
In addition to the WCS heavy oil price differential protection, Pengrowth has in place financial hedging contracts for 10,000 boe/d of 2018 oil production outlined in the following table:
The company’s capital focus is centered on continued efforts at its Lindbergh project, which is expected to ultimately grow oil volumes to 40,000 to 50,000 bbl/d once fully developed, supported by natural gas from its Groundbirch Montney gas development.
Pengrowth is formalizing a comprehensive strategy for the next phase of development at Lindbergh that contemplates splitting the expansion into smaller phases with a more manageable cost outlay per phase without impacting the ultimate potential for Lindbergh reaching 40,000 bbl/d to 50,000 bbl/d.