Calima Energy lifts guidance for Canadian operations in line with strong production growth

Calima Energy Ltd (ASX:CE1) has revised operational and financial guidance for the remainder of 2021 to reflect higher realised oil & gas prices, increased sales volumes based on production to-date and production results expected from the start of the company’s drilling campaign in Canada. The company’s subsidiary, Blackspur Oil Corp, recently spudded the first of three Sunburst horizontal wells (Gemini #1) at its Brooks core area and on June 7 the rig was released from Gemini #1 and moved to the second well of the Brooks Sunburst program (Gemini #2), with completion operations on Gemini #1 expected to begin shortly. As such, the company has updated its operational and financial estimates for May, with exit production for the month forecast at 3,100 barrels of oil equivalent/day, which is an 11% increase on April. The forecast funds flow from operations for May is A$2.6 million – an 18% increase on the previous month - and the December 2021 guidance exit has consequentially been increased to 4,500 barrels of oil equivalent/day (a 32% increase). The adjusted 2021 (8 months) EBITDA is now A$26.3 million. “Initial oil & gas shows excellent” As no fracture stimulation is required on these conventional open-hole horizontal wells, the completion process is minimal, and Gemini #1 will soon be tied into existing Blackspur infrastructure via an ‘on-lease tie in’. Blackspur chief executive officer Jordan Kevol said: “Gemini 1 encountered the Sunburst sand at the target depth in the first of three horizontal wells. “The initial oil and gas shows were excellent, and the chip samples show very high reservoir quality sand. “Based on the initial sand quality encountered, we are pleased with the potential for this horizontal well. “We are excited to move to the Gemini #2 well.” May 2021 operational and financial estimate highlights. Additional Sunburst wells At the Brooks area, the company has year-round access and 147 new well locations. Brooks wells in the Sunburst formation have EUR’s of 218,000 barrels of oil equivalent with IRR of over 500% at US$60 West Texas Intermediate (WTI). Well paybacks are six to nine months and the net present value of future cash flows discounted at 10% (NPV10) is estimated at C$3.2 million. The company’s proved plus probable (2P) reserves at Brooks are 11.6 million barrels of oil equivalent and growing. With the continued strong WTI oil and AECO natural gas pricing, the company is reviewing plans to add 1-2 additional Sunburst wells bringing the Sunburst Well Campaign to 5 wells. These 1-2 additional wells are expected to be drilled in late June to early July 2021. Thorsby drilling plans The company is finalising plans to undertake a three well Thorsby drilling campaign in July/August 2021. All three wells are classified as development wells, as they are being drilled into existing Sparky oil pools, which have been delineated by both existing Sparky wells and 3D seismic. Eleven wells have been drilled to date with well recoveries estimated at 358,000 barrels of oil equivalent to 468,000 barrels of oil equivalent and 79% oil. There are 89 net Sparky and 12 net Nisku wells in inventory identified with multiple pools to be delineated (28 booked Sparky locations) with total 2P reserves at Thorsby at 10.9 million barrels of oil equivalent. Prior to finalising this program, the company is also evaluating a longer horizontal component and a higher proppant hydraulic fracture stimulation (frac) to increase recoveries and returns. The new wells will flow into existing Blackspur oil facilities. The revised guidance for the 8 months to year-end. Hedging strategy Following a strong recovery of West Texas Intermediate (WTI) benchmark prices back to pre-COVID levels coupled with Western Canadian Select (WCS) differentials remaining tight, producers are in an environment that provides for robust netbacks. As a result, Calima has put in place a fairly aggressive hedging mandate to mitigate downside commodity price exposure for the current three well drill program and has entered into WTI and WCS swap contracts for the next 12 months. This strategy will ensure the cost recovery of the capital program is secure and will allow for net cash flow to be recycled into future drilling programs over the coming 24 months. As decisions are made to drill more wells, the company will protect the capital on each well by executing hedges on expected cumulative production that is required to achieve payback of the capital invested. Both Sunburst and Sparky wells have payback periods of six to nine months. In addition, the company will progressively layer in WTI and WCS swaps to the extent that around 50% of forecast production for the forward 12-month period is protected with fixed-price terms, ensuring robust netbacks at current prices while still maintaining upside exposure to rising energy prices. On May 26, 2021, Calima executed swaps totalling 163.8 Mbbl WTI (~450 barrels/day) at an average of US$62.23/barrel (C$75.30/barrel) for July 2021 to June 2022 and on June 2, 2021, it executed swaps totalling 163.8 Mbbl WCS basis (~450 barrels/day) at an average of US -$14.66/barrels (C $17.73/barrels) for July 2021 to June 2022.