Granite Oil Corp. Strategic Alternatives Process Overview Memorandum

Transcription

1 Granite Oil Corp. Strategic Alternatives Process Overview Memorandum April 218 PROCESS OVERVIEW Granite Oil Corp. ( Granite or the Company ) has initiated a formal process to review potential strategic alternatives in an effort to enhance shareholder value. Such strategic alternatives may include, but are not limited to, a sale or merger of the Company or other form of business combination; a sale or joint venture involving all or a portion of the assets; a recapitalization of the Company or other form of strategic investment; or the purchase of assets Granite has retained Cormark Securities Inc. and National Bank Financial Inc. as its co-financial advisors (individually, or collectively, the Financial Advisors ) to assist in this process OPPORTUNITY HIGHLIGHTS Significant, Delineated Bakken Oil Resource with an Early-Stage Enhanced Oil Recovery ( EOR ) Project Alberta Energy Regulator ( AER ) estimated MMbbls of original oil-in-place ( OOIP ) (1) within a 3 mile, 8 section delineated oil fairway (2) Proved + Probable Reserves of 15.5 MMbbls of Bakken oil (3) booked, representing a 3.6% recovery factor of the MMbbls of OOIP (1) Early entry into a sustainable, long-life gas injection EOR project with 2.2% recovery to date versus predicted 19.3% recovery based on independent reservoir modeling (4) Current EOR project approved flood area estimated to contain MMbbls of OOIP (2) Top tier Proved Developed Producing ( PDP ) oil reserves replacement: Three consecutive years of decreasing PDP F&D costs and increasing PDP recycle ratios through EOR reserves recognition Large inventory of potential infill drilling locations with significant extension and exploration opportunities (2) Substantial Free Cash Flow and Strong Balance Sheet Current production (March 218) of ~2,21 boe/d (97% oil; 29 o API), strong capital efficiencies and low operating cost structure provides for significant free cash flow generation (2) Corporate decline estimated at 24% (2) Net debt of $39.8 MM at December 31, 217 provided for D/217 CF of 1.6x Highly Economic Drilling Inventory (2) 87 potential infill drilling locations, representing 17 years of drilling with average production of ~2,54 boe/d (98% oil) ~$11,/bbl/d (IP365) capital efficiency 48% rate-of-return type curve at WTI US$6/bbl Toptierreturnoncapitalwithanestimated3.3x PDP recycle ratio 1% Ownership of Land and Facilities Allows for Control of Future Development Ability to ramp up production as oil price increases Facility ownership and capacity allows for future development at half-cycle economics No competitive drainage SNAPSHOT Production (March 218) 2,21 boe/d (97% oil) Operating Netback (217) $29.9/bbl P+P Reserves (3) 19.5 MMboe (83% oil) AER Estimated OOIP (1) MMbbls Estimated EOR Pool OOIP (2) MMbbls Developed/Undeveloped Land (5) 74,382/64,915 acres LMR (April 218) 8.85 (1) As per AER public pool data as at December 31, 216 (2) As per management estimates as at December 31, 217 (3) As per the Sproule Report as at December 31, 217 (4) As per independent engineering consultant s report dated February 214 (5) Land shown on a Company gross basis as at March 31, 218 FOCUSED, TOP TIER OIL ASSET AT FERGUSON, ALBERTA 3 mile Alberta Bakken Oil Fairway 1

2 Strategic Alternatives Process DELINEATED 4+ MMBBLS BAKKEN OIL RESOURCE WITH 2+ MMBBLS IN EOR PROJECT AREA 212 discovery; Gas injection EOR pilot started in 213 with current EOR approval of over sections of the 39 section delineated pool Estimated AER public pool data of MMbbls OOIP(2) The EOR project area is currently producing from 2 flowing wells and 35 pumping wells supported by 16 gas injectors 87 potential infill drilling locations on 2 m spacing identified within current Ferguson development area(3) Approved EOR project area contains an estimated MMbbls with 5.1 MMbbls recovered to date(1)(3) Granite internal assumptions of ave. Φ 11.6%, SW 25% 1% owned and operated land and facilities within a 3 mile oil fairway(1) Mapping and well logs highlight significant upside through drilling with extensions both east and west A A CROSS SECTION A-A 1/ W4 A 1/ W4 12/ W4 1/ W4 A Best porosity and permeability in POD 3; yet to be developed under full-scale EOR 14 m 16% Average Porosity (1) (2) (3) GR (API) 15 6 ND Porosity (%) GR (API) 15 6 As per management estimates As per AER public pool data as at December 31, 216 As at December 31, 217 ND Porosity (%) GR (API) 15 6 ND Porosity (%) GR (API) 15 6 ND Porosity (%) 2

3 EARLY ENTRY INTO A SUSTAINABLE, LONG-LIFE EOR PROJECT Granite s early life-cycle Alberta Bakken pool has transitioned into a sustainable, long-life EOR project EOR project implemented in 215 has resulted in significant improvements to capital and oil recovery efficiencies (1) : 78% reduction in annual capital spending; 7% reduction in annual lateral meters drilled; PDP Reserves growth of 45%; and increasing PDP recycle ratios (1) 2.2% recovery factor to date (5.1 MMbbls of the MMbbls in the EOR area) (1) with a modeled recovery factor of 19.3% on gas-flood pressure maintenance alone (2) Further upside in recoveries from undersaturated oil, CO 2 and future waterflood potential (1)(2) Best porosity and permeability in POD 3; yet to be developed under full-scale EOR Product ion ( bbl/d) 3, 2, 5 2, 1, 5 1, 5 Discovery/Primary Development Initiated Gas Injection EOR Pilot Commence focused EOR Development on Pod Jan-12 YE 212 Jan-13 YE 213 Jan-14 YE 214 Jan-15 YE 215 Jan-16 YE 216 Jan-17 YE 217 Jan-18 YE Total Capital ($MM) $91. $11. $84. $39. $21.6 $18.8 Bakken PDP Reserves (mbbl) 2,526 5,259 4,72 4,875 5,476 6,813 PDP F&D ($/bbl) $29.71 $25.25 $ $14.18 $13.4 $8.64 Pod 1 Pod 2 Pod 3 Pod 4 Expand focused EOR Development to Pod 2 Pods 3 and 4 supported by flank injection; yet to undergo focused EOR development ANALOGOUS GAS FLOOD EOR DEVELOPMENT PROFILE - SWANSON RIVER POOL, ALASKA (3) Oil Product ion ( mbbl/d) Gas Product ion ( mmcf/d) Injected Gas (mmcf/d) Testing EOR Responding to reservoir behavior; setting up for long-term pool performance Early Primary Development Initial drilling, primary production 1,. 1, Current Stage of Ferguson Field 3% of pool developed under full-scale EOR Full-scale EOR Maintaining pressure; managing production with reduced drilling and improved, long-term base decline Terminal Pool Decline and Blow Down Maximizing value from an end-of-life pool 53% recovery in 47 years from undersaturated Swanson River Pool Injection Gas (mmcf/d) Oil (mbbl/d) Gas (mmcf/d) Producing Wells Injecting Wells Producing W ell Count Injecting Well Count (1) As per management estimates (2) As per independent engineering consultant s report dated February 214 (3) Swanson River Pool historical production data as per the Alaska Oil and Gas Conservation Commission 3

4 SIGNIFICANT RUNNING ROOM WITH DELINEATED EOR DRILLING LOCATIONS 87 potential infill drilling locations identified on 2 m spacing (1) 1% owned with no competitive drainage Flexibility in development with years of running room in slow growth or accelerated growth production models LONG TERM, SUSTAINABLE DEVELOPMENT PLANS PROVIDE GROWTH OPTIONALITY Early life-cycle pool under EOR with a significant inventory of potential infill drilling locations provides flexibility in selffunded, cash flow generating development programs, ranging from: Slow growth and free cash flow model (1)(2) providing a free cash flow annuity: Grow production to ~2,8 bbl/d with five wells per year over 16 years with average capital spending of $1 million per year, generating cumulative free cash flow of ~$33 million at strip pricing over this period Accelerated growth and free cash flow model (1)(2) maximizing front-end reserves recovery and NPV: Grow production to ~3,64 bbl/d with eight wells per year over 1 years with average capital spending of $15 million per year, generating cumulative free cash flow of ~$193 million at strip pricing over this period Upside potential of 3%+ on cash flow generation with oil blending options to mitigate strip differential pricing ECONOMIC TYPE WELL (1)(3) Industry leading capital efficiencies for oil at $11,/bbl/d Low capital and operating costs allow for continued rate of return even in a low price environment (1) Av erage Mont hly Product ion (bbl/d) Type Well Economics EUR (TPP): 198 mbbls All-In-Capex: $1.5 million Horizontal Length: 2,1 m Capital Efficiency (IP365): $11,/bbl Royalty: FH Sliding 5-3% WTI/WCS WTI FX Differential P/I NPV 1 IRR IRR* Payout Payout* (US$/bbl) (US$/C$) (US$/bbl) (x) ($MM) (%) (%) (Mos.) (Mos.) $5 $.8 $2 2.x $1.5 31% 4% $6 $.8 $2 2.6x $2.4 48% 58% $7 $.8 $2 3.2x $3.3 68% 79% 1 9 * Based on average WTI/WCS differential of US$15/bbl Production Month Historical Wells (bbl/d) Type Well (bbl/d) (1) As per management estimates (2) Slow growth and accelerated growth models are available in the virtual data room (3) Based on historical production data of all wells producing within the Lower Banff-Exshaw-Big Valley B pool 4

5 Strategic Alternatives Process MATERIAL EXPLORATION OPPORTUNITIES Multiple exploration and extension targets over 3 mile oil fairway(1) Acquired 5, net acres of additional Bakken lands in 216 Exploration zones include: Mannville, Livingstone, Bakken, Big Valley all are proven productive in the map area AER defined pool boundary Ferguson Lower Banff-Exshaw-Big Valley B AER public pool data of MMbbls OOIP(2) 1% OWNED FACILITIES AND INFRASTRUCTURE IN PLACE FOR FULL-FIELD DEVELOPMENT Oil Batteries Gas Injection Facilities 13 km high-pressure system 48 km low-pressure system Gas Plant ( W4)(3) (1) (2) (3) Tied into natural gas utility system 5,34 Horsepower >2 mmcf/d injection capacity 25 km of injection lines 16 gas injection wells 1% Pipeline-connected 8,8 bbl/d capacity (<3% current utilization) 2, bbl storage 8.8 mmcf/d capacity 1,1 HP compression As per management estimates As per AER public pool data as at December 31, 216 Located to the north west of the facility map 5

6 HISTORICAL RESERVES PERFORMANCE (1)(2) Proved Developed Producing Total Reserves (m boe) 5,566 6,178 7,294 Reserves Additions (m boe) ,116 F&D ($/boe) $27.55 $13.2 $9. Recycle Ratio (x).9x 2.1x 3.3x Reserves Replacement (%) 117% 158% 215% Total Proved Total Reserves (m boe) 11,166 12,483 14,32 Reserves Additions (m boe) 783 1,316 1,819 Change in FDC ($s) ($1,561) ($9,883) $9,917 F&D ($/boe) $19.23 $4.96 $1.28 Recycle Ratio (x) 1.3x 5.6x 2.9x Reserves Replacement (%) 161% 225% 287% Proved Plus Probable Total Reserves (m boe) 17,74 18,653 19,534 Reserves Additions (m boe) Change in FDC ($s) ($28,779) ($12,43) $7,33 F&D ($/boe) $6.13 $4.61 $14.8 Recycle Ratio (x) 4.1x 6.x 2.1x Reserves Replacement (%) 158% 19% 19% RESERVES (3) Natural Oil NGLs Gas Total Reserves Category (m bbls) (m bbls) (m m cf) (m boe) Proved Developed Producing 6,966 1,969 7,294 Proved Developed Non-Producing ,769 2,37 Proved Undeveloped 4, ,971 Total Proved 11, ,685 14,32 Probable 4,3 83 5,96 5,232 Proved + Probable 16, ,781 19,534 Future Development PV Before Taxes Discounted at Capital 5% 1% 15% Undiscounted Reserves Category ($s) ($s) ($s) ($s) Proved Developed Producing $175,468 $132,984 $18,118 $1,195 Proved Developed Non-Producing $15,893 $8,413 $6,368 $1,647 Proved Undeveloped $121,475 $86,54 $63,624 $59,83 Total Proved $312,836 $227,451 $178,11 $62,672 Probable $145,36 $9,78 $64,791 $5,658 Proved + Probable $457,872 $318,159 $242,91 $68,33 Net Asset Values Per Share (As at December 31, 217) Net Debt ($s) $39,839 Undeveloped Land/Seismic Value ($s) $12, FD Shares Outstanding (s) 35,356 OPERATING AND FINANCIAL Jul - Dec WTI (US$/bbl) $44.31 $43.37 $5.93 Hardisty Bow River ($/bbl) $5.39 $49.62 $53.8 NYMEX (US$/mmbtu) $2.51 $2.55 $2.85 AECO Gas Price ($/mcf) $2.56 $2.17 $1.41 Natural Gas (mcf/d) 1, NGLs (bbl/d) Oil (bbl/d) 3,346 2,835 2,598 Total Production (boe/d) 3,56 2,866 2,668 Total Revenue ($MM) $28.4 $45.5 $52.7 Royalties ($MM) $8.2 $11.9 $13.4 Trans. & Operating Costs ($MM) $4.8 $9.2 $1.1 Net Operating Income ($MM) $15.4 $24.4 $29.2 Capital Expenditures ($MM) $15.2 $21.6 $18.8 Operating Free Cash Flow ($MM) $.2 $2.8 $1.5 Rev enue ($/boe) $43.3 $43.38 $54.9 Royalties (%) 29% 26% 26% Royalties ($/boe) $12.54 $11.32 $13.79 Trans. & Operating Costs ($/boe) $7.32 $8.74 $1.4 Operating Netback ($/boe) $23.46 $23.32 $29.9 Op. Netback (With Hedging) ($/boe) $46.62 $27.69 $29.72 CAPITAL STRUCTURE (AS AT MARCH 31, 218) Capital Structure (s) Basic Shares Outstanding 34,191 Performance-Based Awards Outstanding(4) 1,18 Time-Based Awards Outstanding 57 (5) Fully Diluted Shares Outstanding 35,356 Net Debt (As of December 31, 217) $39,839 Bank Line $5, Current Annualized Dividend Per Share $.276 TAX POOLS (As at December 31, 217) ($MM) COGPE $.7 CDE $95.3 CEE $1.3 UCC $9.2 NCL and Other $79.2 Share Issue Costs $1.5 Total $187.3 Totals may not add due to rounding Before Tax NAV Per Share Discounted at 1% ($/Share) Proved Developed Producing $2.97 Proved $5.64 Proved + Probable $8.21 CORPORATE Officers Michael Kabanuk - President and CEO Gail Hannon - CFO Tyler Klatt - VP, Exploration Directors Brendan Carrigy, Chair Michael Kabanuk Kevin Andrus Bradley Porter Martin Cheyne Kathy Turgeon Henry Hamm (1) Based on the reserve reports and audited financial statements for the respective years (2) Recycle ratio is calculated as operating netback divided by F&D costs, which include future development costs (3) Company gross basis; As per the Sproule Report as at December 31, 217 (4) Performance-based awards are currently subject to a 1.5x multiplier (5) Fully diluted shares outstanding does not take into account 1.5x multiplier of performance-based awards Advisors Auditors - KPMG LLP Independent Engineers - Sproule Associates Limited Legal Counsel - DLA Piper (Canada) LLP Bankers - National Bank of Canada - ATB Financial - Bank of Nova Scotia LMR (As at April 7, 218)

7 PROCESS OUTLINE The Financial Advisors have been retained by Granite to coordinate the strategic alternatives process for all parties who have expressed an interest in entering into a transaction with the Company ( Interested Parties ). Interested Parties should contact one of the Financial Advisor representatives below. Qualified Interested Parties that have executed a confidentiality agreement ( CA ) in a form acceptable to Granite will be permitted access to a virtual data room, physical data room and management technical presentations. Further process information will be communicated to those qualified Interested Parties that have signed a CA. Granite or the Financial Advisors reserve the right at any time to amend or terminate the sale process altogether, to decline to permit an Interested Party to participate in the process, to terminate discussions with any or all proposals submitted by Interested Parties, or to negotiate with any party with respect to a possible transaction. The bid date will be communicated to the qualified Interested Parties during the process. CONTACT INFORMATION All correspondence and inquiries related to the process should be directed to the Financial Advisors by contacting one of the representatives below Dion Degrand Managing Director, Head of Oil & Gas (43) ddegrand@cormark.com Michael Shumlich Vice President (43) mshumlich@cormark.com Ian Lamb* Associate (43) ilamb@cormark.com * CA contact Eighth Avenue Place, East Tower Suite 48, th Avenue SW Calgary, Alberta, Canada T2P 1G1 Toll Free: (8) Main: (43) Chris Muldoon Director (43) chris.muldoon@nbc.ca Rahim Daredia Director, Engineering (43) rahim.daredia@nbc.ca Ian Berman Director, Geology (43) ian.berman@nbc.ca Ryan Hoogendam* Associate (43) ryan.hoogendam@nbc.ca * CA contact Intact Place Suite 18, th Avenue SW Calgary, Alberta, Canada T2P 3H2 Main: (43)

8 DISCLAIMER Interested Parties are responsible for their own due diligence, review and evaluation of Granite and its assets. Granite and the Financial Advisors make no representation or warranty as to the accuracy or completeness of this document or the information contained herein. This Overview Memorandum is based on information provided by Granite from its own records and from other sources. The Overview Memorandum is being distributed, on behalf of Granite, by the Financial Advisors solely for the use of Interested Parties. The sole purpose of the Overview Memorandum is to assist Interested Parties in determining whether or not to proceed with further investigation of a potential transaction with Granite. The information contained in this Overview Memorandumandin any data room coordinated by the Financial Advisors and/or Granite in connection with a possible transaction ( Information ) is for informational purposes only, and does not under any circumstances constitute: (a) an offering or solicitation for the sale of securities; (b) a recommendation to purchase, sell or hold any securities; (c) an offering memorandum as contemplated by applicable securities laws; (d) an obligation by Granite to enter into any proposed transaction; or (e) investment, legal, financial, tax, accounting or other advice of any kind. The Information has been prepared to assist Interested Parties in completing their own independent evaluation of Granite and its assets, but does not purport to be all inclusive or to contain all of the information that an Interested Party may desire or that may be required by an Interested Party to properly evaluate the business, prospects or value of Granite and its assets. This Overview Memorandum contains forward looking statements. Such forward looking statements typically contain statements with words such as anticipate, expect, intend, estimate, propose or similar words suggesting future outcomes or statements regarding an outlook. More particularly and without limitation, this Overview Memorandum contains forward looking statements and information concerning the Company s review of strategic alternatives that may be available to it, the quantity of original oil-in-place and the recovery factor, oil and natural gas production levels, the success of the enhanced oil recovery program, and alternative development plans. Statements relating to reserves are also deemed to be forward-looking information, 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. The forward looking information is based on certain key expectations and assumptions made by Granite s management, including: expectations concerning prevailing commodity prices, applicable royalty rates and tax laws; capital efficiencies; legislative and regulatory environments of Alberta; 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; results of operations; performance; the availability and cost of financing, labour and services; and the ability to market oil and natural gas successfully. Except as explicitly stated in the Overview Memorandum, no independent third party has reviewed the reasonableness of any such statements, estimates or assumptions. Neither Granite nor the Financial Advisors represent or warrant that such forward-looking statements will be achieved or will prove to be correct. Actual future results and operations could vary materially from the forward-looking statements. Each Interested Party is deemed to acknowledge that neither it nor the Financial Advisors intend that the Financial Advisors act or be responsible as a fiduciary to the Interested Party, its management, shareholders, creditors or any other person. Each Interested Party and the Financial Advisors, by accepting and providing this Overview Memorandum respectively, is deemed to disclaim any fiduciary relationship and agree that the Interested Party is responsible for making its own independent judgments with respect to any transaction and any other matters regarding this Overview Memorandum. The Information should not and may not be relied upon by any Interested Party in considering the merits of any particular transaction. The Interested Party should consider its own financial situation, objectives and needs, and conduct its own independent investigation and assessment of the Information, including obtaining investment, legal, tax, accounting and such other advice as it considers necessary or appropriate. The Financial Advisors have not independently verified any of the Information contained herein. Neither the Financial Advisors nor the Company or their respective affiliates make any representation or warranty (expressed or implied) as to the accuracy or completeness of this Overview Memorandum. Granite and the Financial Advisors expressly disclaim any and all liability and responsibility for and associated with the quality, accuracy, completeness or materiality of the Information. Neither Granite nor the Financial Advisors assume any obligation to update, revise or correct the Information, except as may be required by applicable securities laws. The Financial Advisors and related entities may have interests in the securities, debt and other products referred to herein, including being directors of, or may have or may in the future act in various roles including as underwriter, dealer, broker, lender or financial advisor to, their issuers and may receive fees, brokerage or commission for acting in those capacities. The Financial Advisors may act as market makers or buy or sell those securities and other investment products as principals or agents and as such may effect transactions which are not consistent with this information. For the purposes of this Overview Memorandum, barrels of oil equivalent ( boe ) has been calculated on the basis of six thousand cubic feet of gas to one barrel of oil. The term boe may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet to one barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Original Oil-In-Place ( OOIP ) is the equivalent to Discovered Petroleum Initially-In-Place ( DPIIP ) for the purposes of this Overview Memorandum. DPIIP is defined as quantity of hydrocarbons that are estimated to be in place within a known accumulation, plus those estimated quantities in accumulations yet to be discovered. There is no certainty that it will be commercially viable to produce any portion of the resources. A recovery factor cannot be defined for this volume of DPIIP at this time, and as such it cannot be further sub-categorized. The OOIP estimates included in this Overview Memorandum have an effective date of December 31, 217, unless otherwise indicated. It is not an estimate of, nor is it equivalent to, Proved + Probable reserves, which is an estimate of the volume of hydrocarbons that can be economically extracted from a reservoir via existing technology with designated commodity price assumptions. In this Overview Memorandum, certain information with respect to certain of Granite s key operating areas is analogous information as defined in NI This analogous information includes estimates of OOIP, initial production and production type curves. This analogous information is presented on data derived from Granite s internal sources, as well as from a variety of publicly available information sources which are predominantly independent in nature. Some of this data may not have been prepared by qualified reserves evaluators or auditors and the preparation of any estimates may not be in strict accordance with the Canadian Oil & Gas Evaluation Handbook. Regardless, estimates by engineering and geo-technical practitioners may vary and the differences may be significant. Granite believes that the provision of this analogous information is relevant to Granite s oil and gas activities, given its acreage position and operations (either ongoing or planned) in the areas in question. Current Production refers to Granite s field-estimated production for March 218. Operating Netbacks are calculated by subtracting royalties and operating costs (including transportation) from the average price received or forecasted to be received during the period. The reserves data set forth in this Overview Memorandum is based upon an independent reserves assessment and evaluation prepared by Sproule with an effective date of December 31, 217 (the Sproule Report ). The information contained in this Overview Memorandum summarizes the Company s crude oil, natural gas liquids and natural gas reserves and the net present values before income tax of future net revenue for the Company s reserves using forecast prices and costs based on the Sproule Report. Additional disclosure required by NI is provided in Granite s Annual Information Form, which is available on SEDAR at All reserve references in this Overview Memorandum are Company share reserves. Company share reserves are the Company s total working interest reserves before the deduction of any royalties and including any royalty interests of the Company. 8