Rock has filed its unaudited condensed interim Consolidated Financial Statements for the period ended September 30, 2013 and related Management's Discussion and Analysis ("MD&A"). Copies of Rock's materials may be obtained on www.sedar.com and on our website at www.rockenergy.ca.
During the third quarter of 2013, Rock continued to deliver strong production and cash flow growth. The Company made significant progress in developing its Mantario oil pool, and generated positive exploratory drilling results within the Southwest Saskatchewan core area at both Mantario and Onward.
The quarter was highlighted by the following specific accomplishments:
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Generated funds from operations for the quarter of $11.5 million ($0.29/share). This is an increase of 71% from Q2/2013 ($0.17/share) and 210% more than Q3 of 2012;
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Averaged 3,886 boe per day (92% crude oil and liquids) of production representing an increase of (25%) from Q2/ 2013, and a 73% increase from a year ago;
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Drilled 7 (7.0 net) new wells at Mantario, including 4 (4.0 net) development wells on 40 acre spacing and 1 (1.0 net) well further extending the initial pool boundary;
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Drilled 4 (4.0 net) wells at Onward including the initial 2 (2.0 net) Viking horizontal test wells. Announced preliminary drilling results and accumulation of a significant land base at Onward for a potential Viking light oil resource play;
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Spent a total of $12.2 million on a capital expenditure program (excluding acquisitions and divestitures); and
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Acquired minor properties in our Onward area for $0.3 million.
Rock generated a field netback of $38.27 per boe in the third quarter of 2013 compared to $28.61 per boe in the second quarter of 2013. The improvement in netbacks can largely be attributed to strong commodity prices.
Rock's realized price in the third quarter of 2013 was $80.77 per boe compared to $64.56 per boe in the second quarter of 2013. The main contributors to the increase in realized prices have been the increase in the reference crude oil WTI and WCS prices and with narrowing differentials the corresponding reduction in blending costs. The reference price for WCS in Q3/2013 was $91.74/bbl while in Q2/2013 it was $76.92/bbl.
Operating costs continued to decrease during the third quarter to $19.30 per boe compared to $20.16 per boe in the second quarter of 2013. Rock expects to continue to reduce our operating costs going forward through the addition of lower cost production from Mantario and continued optimization initiatives at our operations in the greater Lloydminster area.
Gross capital expenditures for the third quarter of 2013 were $12.2 million, which were in line with our forecast capital program, but considerably more than in the second quarter which was affected by spring break up conditions.
Rock's daily production for the third quarter of 2013 averaged 3,886 boe/d (92% oil and liquids). Currently the Company is producing over 4,000 boe/d.
Area Activity Update
During the third quarter Rock drilled seven (7.0 net) wells at Mantario. This activity resulted in five (5.0 net) oil wells and two (2.0 net) unsuccessful wells. Four of the wells drilled were 40 acre locations to delineate the main pool, and three were drilled to test flank extensions of the main pool. One of the extension wells was successful, and the other two did not encounter the primary target. These
unsuccessful wells were cased as potential water source wells. The company now has 31 oil wells drilled into the main pool producing over 2,700 bopd.
The Company has continued to work towards the implementation of down spaced drilling, a water flood for pressure maintenance, and ultimately, the implementation of a polymer flood on the Mantario pool. During October, the first infill horizontal test wells were drilled and completed and will be evaluated over the fourth quarter. In addition, we have commenced capital spending to order long lead equipment necessary for the construction of a central processing facility and water injection plant.
At Onward, the Company announced it has assembled over 37 net sections of largely contiguous land, and confirmed the existence of light oil in the Viking Formation thereon. In late September, Rock drilled and completed its first two horizontal wells in the Viking, which had an average 30 day initial production rate of 40 bbls/d, in line with Management expectations and economic thresholds for the play.
To further test and derisk the Viking play at Onward, Rock's Board of Directors have approved a $6 million expansion to the 2013 capital program. This incremental capital will allow for 5 additional Viking wells to be drilled into the formation during Q4, as well as add additional capital to secure long lead time equipment for the Mantario infrastructure.
In addition to the development activity at Onward and Mantario, Rock plans to drill 2 - 3 exploratory wells to test new pools and formations in the South West Saskatchewan core area during the fourth quarter of 2013.
Outlook
2013
Rock's Board of Directors have approved an increase to the capital budget by $6 million to $48 million which includes drilling an estimated total of 42 (41.0 net) wells in 2013. The capital program now includes an anticipated $22 million focused on the development program at Mantario, $6 million to further test and derisk the Viking lands at Onward, $6 million in the greater Lloydminster area, $5 million for water flood initiatives associated with the development of its Onward asset and $9 million on exploration initiatives including drilling, land and seismic.
Given the expanded capital budget, and results achieved to date, the Company is forecasting to produce an average of approximately 3,300 - 3,500 boe/d during 2013. Assuming that for the remainder of 2013 crude oil prices average US $95.00 WTI per barrel, the WTI to WCS differential averages $30.00/bbl and natural gas at AECO averages $3.00 CDN/mcf with an exchange rate of $1.00 CDN$/US$, the Company would generate funds from operations of $28 - $30 million (or $0.72 - $0.76/share) and have a year-end 2013 net debt position of approximately $22 million (0.7 times fourth quarter funds from operations annualized).
2014
For 2014 Rock's Board of Directors have approved a capital spending program of $62 million. This capital budget will provide for the drilling of 35 - 40 wells, development of the production/water flood facility at Mantario, the continued development of the Viking light oil resource play at Onward and an active exploration program.
Specifically the program includes the drilling of 15 infill wells ($15 million) and the construction of the production/water flood facility at Mantario ($23 million), $11 million to drill 10 horizontal Viking wells to further test and derisk the lands at Onward, $4 million to the Plains core area to drill 5 wells, and $9 million for exploration activities including land, seismic and the drilling of 5 - 10 exploratory wells.
With this capital spending program, the Company is forecasting to produce an average of 4,000 - 4,200 boe per day, representing a year over year increase of approximately 15-20% from average 2013 projected levels.
Assuming 2014 crude oil prices average US $95.00 WTI per barrel, the WTI to WCS differential averages $20.00/bbl and natural gas at AECO averages $3.00 CDN/mcf with an exchange rate of $1.02 CDN$/US$, the company is forecasting to generate annual cash flow of $42 million ($1.08/share) and have year-end debt of $42 million (1.0 times cash flow).
The asset at Mantario continues to perform very well and Management believes it will be developed into a premier asset with a long reserve life, low decline, and high recovery factor. The Viking play at Onward is expected to provide a light oil production base, and Rock is focused on discovering the full potential of this asset. In addition to these development projects, the Company will be testing numerous exploration plays that could provide the next leg of growth.
The Company has continued to make progress in delivering on production growth and cost reduction targets. Rock's asset base is generating predictable cash flow for the Company. With ample opportunity, a strong balance sheet and a foundation of cash flow, Rock has the capability to provide its future growth.
Advisory Regarding Forward-Looking Information and Statements
This press release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "will", "expects", "believe", "plans", "potential" and similar expressions are intended to identify forward-looking statements or information. More particularly and without limitation, this press release contains forward looking statements and information concerning Rock's expectation of operating costs, future drilling and development under its capital program, as well as forecasts for average production, commodity prices, heavy oil differentials, funds from operations and net debt.
Statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described can be profitably produced in the future.
The forward-looking statements and information in this press release are based on certain key expectations and assumptions made by Rock, including prevailing commodity prices and exchange rates; applicable royalty rates and tax laws; future well production rates; reserve and resource volumes; the performance of existing wells; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the availability and cost of labour and services; and the receipt, in a timely manner, of regulatory and other required approvals. Although Rock believes that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward-looking statements and information because Rock can give no assurance that they will prove to be correct. There is no certainty that Rock will achieve commercially viable production from its undeveloped lands and prospects.
Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the oil and natural gas industry in general, such as: operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to reserves, production, costs and expenses; health, safety and environmental risks; commodity price and exchange rate fluctuations; marketing and transportation of petroleum and natural gas and loss of markets; environmental risks; competition; incorrect assessment of the value of acquisitions; failure to realize the anticipated benefits of acquisitions; ability to access sufficient capital from internal and external sources; stock market volatility; and changes in legislation, including but not limited to tax laws, royalty rates and environmental regulations.
Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could affect the operations or financial results of Rock are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com). The forward-looking statements and information contained in this press release are made as of the date hereof and Rock undertakes no obligation to update publicly or revise any forward- looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
For further information please visit Rock's website at www.rockenergy.ca.
