Granite Oil Corp. began operations as a dividend-paying company in May 2015 as part of a transaction where DeeThree Exploration Ltd. was split into Granite Oil Corp. and Boulder Energy Ltd. Granite's key asset is a 100%-owned-and-operated Alberta Bakken oil pool in southern Alberta.
Granite's primary operational focus during 2015 was to reduce well declines and improve the long-term performance and recovery of its Bakken oil pool through the expansion of the gas flood enhanced oil recovery ("EOR") program. The Company significantly expanded the EOR program in 2015, increasing the number of gas injector wells from three to seven, and increasing injection compression capacity and injection rates by 200% and 250% year-over-year, respectively. As a result, the Company significantly improved pressure support within the Bakken oil pool, resulting in reduced production declines and material improvements in overall pool performance.
Granite elected to drill and complete only four horizontal production wells in the second half of 2015 ― down from the six originally planned ― and decreased capital costs by 29 percent through the year to $2.0 million per well. These savings were achieved through a combination of decreased service costs and substantial drilling and completion design modifications. Through the second half of 2015, average rig time was reduced by four days (25%) per well relative to the first half of 2015, ensuring continued capital savings independent of future service costs.
Granite also made significant improvements to its operating cost structure in 2015. By year-end, operating costs averaged $6.00 per boe, a 20 percent reduction from originally budgeted costs of $7.50 per boe.
As a result of these substantial cost savings and the improved efficiencies achieved through the EOR scheme, Granite was able to increase its dividend by 17 percent to $0.42 per share annually, and exited the year with net debt of $39.6 million, a 12 percent reduction relative to second quarter 2015.
The Company's strong operational results carried through to its 2015 reserves evaluation, conducted by Granite's independent reserve auditor, Sproule Associates Ltd. The total proved plus probable (2P) reserves of Granite's assets increased by 4.4% year-over-year to 17.7 MMboe (83% oil), while proved developed producing (PDP) oil reserves increased 7.4 percent to 5.05 million bbls. Additionally, with lower capital costs per well, 2015 finding and development costs, including the change in future development capital, totalled $6.13 per boe (Proven + Probable).
Outlook for 2016
In response to lower oil prices during the fourth quarter of 2015, Granite capitalized on low equipment costs and accelerated its plans to further ramp-up gas injection in the EOR program through the purchase of approximately 2,000 HP of additional gas injection compression and related equipment. This equipment will be installed in the first quarter of 2016 and on-stream in April 2016. With this expansion, Granite will increase gas injection volumes to match or exceed production volumes, achieving a 100 percent voidage replacement ratio ― an important milestone in the ongoing development of the EOR program. As well, the expanded facilities have the capacity to maintain 100% voidage replacement at higher levels of oil production from the pool. With the success of the program to-date, Granite expects this expansion to have material impacts on pool performance and long-term decline rates, and offer greater opportunities for capital-efficient drilling.
Granite's 2016 budget includes two sustainable budget scenarios based on a US$37.00/bbl WTI case and a US$32.50/bbl WTI case. Under the $37.00 case, Granite anticipates production of 3,250 bbl per day of oil, while funding both total capital expenditures of $14.2 million (including $11.4 million for six horizontal wells) and dividends of $12.8 million with anticipated funds flow of $27.1 million. Under the US$32.50/bbl WTI case, the Company expects oil production to average 3,000 bbl per day of oil, with funds flow of $23.0 million funding both capital expenditures of $10.2 million (including $7.6 million for four horizontal wells), and the annual dividend of $12.8 million.
Under either scenario, the Company retains its balance sheet flexibility, with less than $40 million of net debt forecast at the end of 2016. Granite has the ability to react quickly to improved commodity prices and increase its capital program accordingly.
Granite is off to a very strong start in 2016. Our goal remains to be an efficient oil producer with a strong balance sheet that is sustainable for the long term. We will continue to carefully manage costs and make choices that generate long-term value from our assets while maintaining our low level of debt.
Reader Advisories
Forward-Looking Statements. Certain statements contained in this news release may constitute forward-looking statements or information (collectively, "forward-looking statements" or "statements"). These statements relate to future events or Granite's future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. Statements relating to "reserves" are also deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and that the reserves can be profitably produced in the future. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. In particular, this news release contains forward-looking statements, pertaining to the following: forecasted capital expenditures and plans, drilling and development plans, Granite's financial strength, anticipated production rates, projections of market prices and costs, supply and demand for oil and natural gas, the quantity of reserves, oil and natural gas production levels, the success of the enhanced oil recovery scheme,, treatment under governmental regulatory and taxation regimes and expectations regarding Granite's ability to raise capital and to continually add to reserves through acquisitions and development.
Granite believes the expectations reflected in such forward-looking statements and the assumptions upon which such forward-looking statements are based, to be reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this news release should not be unduly relied upon by investors. These statements speak only as of the date of this news release and are expressly qualified, in their entirety, by this cautionary statement. Granite's actual results could differ materially from those anticipated in these forward-looking statements as a result of risk factors that may include, but are not limited to: volatility in the market prices for oil and natural gas; general economic conditions, stock market volatility and ability to access sufficient capital from internal and external sources, uncertainties associated with estimating reserves; uncertainties associated with Granite's ability to obtain additional financing on satisfactory terms; geological, technical, drilling and processing problems; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; incorrect assessments of the value of acquisitions; competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel. Readers are cautioned that the foregoing list of factors is not exhaustive. Management has included the above summary of assumptions and risks related to forward-looking information provided in this news release in order to provide securityholders with a more complete perspective on Granite's future operations and such information may not be appropriate for other purposes. Additional information on these and other factors that could affect Granite's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).
With respect to forward-looking statements contained in this news release, Granite has made assumptions regarding, among other things: prevailing commodity prices, exchange rates, interest rates, applicable royalty rates and tax laws; the legislative and regulatory environments of the jurisdictions where Granite carries on business or has operations; future production rates and estimates of operating costs; performance of existing and future wells; reserve and resource volumes; anticipated timing and results of capital expenditures; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the timing, location and extent of future drilling operations; the state of the economy and the exploration and production business; results of operations; performance; business prospects and opportunities; the availability and cost of financing, labour and services; the impact of increasing competition; ability to market oil and natural gas successfully and Granite's ability to obtain additional financing on satisfactory terms.
The forward-looking statements represent Granite's views as of the date of this document and such information should not be relied upon as representing its views as of any date subsequent to the date of this document. Granite has attempted to identify important factors that could cause actual results, performance or achievements to vary from those current expectations or estimates expressed or implied by the forward-looking information. However, there may be other factors that cause results, performance or achievements not to be as expected or estimated and that could cause actual results, performance or achievements to differ materially from current expectations. There can be no assurance that forward-looking statements will prove to be accurate, as results and future events could differ materially from those expected or estimated in such statements. Accordingly, readers should not place undue reliance on forward-looking information. Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements.
Non-GAAP Measurements. This news release contains the terms "operating netback" and "funds flow netbacks". Operating netback is calculated as the average sales price of the Company's commodities, less royalties, operating costs and transportation expenses. Funds flow netback starts with the operating netback and further deducts general and administrative costs, finance expense and unrealized gains on financial instruments, and then adds any finance income and realized gains on financial instruments, if applicable. No IFRS measure is reasonably comparable to netbacks.
Net debt, which represent current assets less current liabilities, excluding current derivative financial instruments, is used to assess efficiency, liquidity and the Company's general financial strength. No IFRS measure is reasonably comparable to working capital deficit.
BOE Presentation. References herein to "boe" mean barrels of oil equivalent derived by converting gas to oil in the ratio of six thousand cubic feet (Mcf) of gas to one barrel (bbl) of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
