InPlay Oil (IPOOF) Q4 Results - March 13

[dan_s]

2023 Financial and Operations Highlights:

Achieved average annual production of 9,025 boe/d (58% light crude oil and NGLs) and average quarterly production of 9,596 boe/d (59% light crude oil and NGLs) in the fourth quarter, an increase of 7% compared to 9,003 boe/d (57% light crude oil and NGLs) in the third quarter of 2023. < Q4 production was below my forecast of 9,700 boepd

Achieved a quarterly record for light oil production of 4,142 bbl/d in the fourth quarter of 2023. < Nice 445 bopd increase over Q3 oil production.

Generated strong adjusted funds flow ("AFF") of $91.8 million ($1.03 per basic share), the second highest level ever achieved by the Company, despite WTI prices decreasing 18% and AECO natural gas prices decreasing 50% compared to 2022. < Full year operating cash flow beat my forecast.

Realized strong operating income profit margins of 58% during 2023 notwithstanding the significant benchmark commodity price decreases.

Returned $16.5 million to shareholders through our monthly base dividend and normal course issuer bid ("NCIB") share repurchases, representing an annual yield of 8.2% relative to year-end market capitalization. Since November 2022 InPlay has distributed $22.8 million in dividends, or $0.255 per share including dividends declared to date in 2024. < This is why I moved InPlay into our High Yield Income Portfolio.

Recorded net income of $32.7 million ($0.37 per basic share; $0.36 per diluted share). InPlay has now returned to a positive retained earnings position on the balance sheet demonstrating that the Company has generated positive earnings since inception (net of dividends paid).

Invested $84.5 million to drill, complete and equip 12 (10.5 net) Extended Reach Horizontal ("ERH") wells in Willesden Green, five (5.0 net) ERH wells in Pembina, one (1.0 net) multilateral Belly River well and three (0.6 net) non-operated ERH wells in Willesden Green, in addition to capital spent on two major natural gas facility upgrades to increase operated natural gas takeaway capacity for future growth.

Exited 2023 at 0.5x net debt to earnings before interest, taxes and depletion ("EBITDA") which is among the lower leverage ratios amongst our peers. < Strong Balance Sheet.

Renewed our revolving Senior Credit Facility with a total lending capacity and borrowing base of $110 million, providing significant liquidity to be used for tactical capital investment and strategic acquisitions.

Dedicated $3.3 million to the successful abandonment of 29 (23.1 net) wellbores, 114 (103.3 net) pipelines and the reclamation of 35 (29.3) wellsites.

2023 Reserve Highlights:

An organic 2023 capital program without acquisition/disposition ("A&D") activity resulted in:

Proved developed producing ("PDP") reserves of 17,293,000 boe (56% light and medium crude oil & NGLs)

Proved developed non-producing ("PDNP") reserves of 1,002,000 boe (76% light and medium crude oil & NGLs) are expected to move to the PDP reserve category throughout the year, with over 60% of the related wells expected to be finished and on production in the first half of 2024.

Total proved ("TP") reserves of 45,919,000 boe (62% light and medium crude oil & NGLs)

Total proved plus probable ("TPP") reserves of 61,594,000 boe (63% light and medium crude oil & NGLs)

On a year-over-year basis, PDP, TP and TPP reserves remained relatively unchanged.

Reserves life index ("RLI") for PDP, TP and TPP of approximately 5.2 years, 13.9 years and 18.7 years, respectively highlight a sizable drilling inventory for InPlay to sustainably develop over time.

Delivered TPP Finding, Development and Acquisition ("FD&A") costs (including changes in future development costs) of $23.36/boe notwithstanding $7 million in capital expenditures spent on non-recurring facility projects in 2023 to enhance our natural gas takeaway capacity. This generated a recycle ratio of 1.4x based on an operating netback of $31.61/boe. < This is outstanding!

Achieved healthy NPV BT10 reserve values:

NPV BT10:

PDP: $242 million

PDP+PDNP: $261 million

TP: $571 million

TPP: $824 million

Message to Shareholders:

InPlay had another year of solid operational and financial performance in 2023 while continuing to deliver strong returns to shareholders and maintaining a solid balance sheet. The continued development of our drilling inventory has yielded consistent and sustainable results, with our team constantly evaluating options to provide further shareholder returns.

Average 2023 production of 9,025 boe/d generated AFF of $91.8 million ($1.03 per share). InPlay returned $16.5 million to shareholders through our monthly base dividend and normal course issuer bid ("NCIB") share repurchases. The Company maintained its balance sheet strength with a net debt to EBITDA ratio of 0.5x and total debt capacity of $110 million, allowing the financial flexibility to take advantage of strategic opportunities and weather periods of market volatility.

InPlay achieved strong before tax estimated net present values ("NPV") of future net revenues associated with our 2023 year-end reserves and discounted at 10% ("NPV BT10") although impacted by weaker future commodity prices in comparison to December 31, 2022. Forecasted WTI and AECO prices used in the Reserve Report decreased by 8% and 48% in year one and 4% and 23% in year two respectively. The Company achieved NPV BT10 reserve values of $242 million (PDP), $571 million (TP) and $824 million (TPP) based on a three independent reserve evaluator average pricing, cost forecast and foreign exchange rates as at December 31, 2023 as used in the Reserve Report.

InPlay remains focused on disciplined development of our high rate of return assets with a focus on maximizing free adjusted funds flow alongside a reasonable production growth profile while maintaining conservative leverage ratios, with the ultimate goal of maximizing returns to shareholders. The Company will remain disciplined and flexible and can quickly adjust capital activity to respond to changing market conditions.

Outlook and Operations Update:

InPlay's capital program for the first quarter of 2024 started with a two (1.9 net) ERH well pad in Willesden Green which came on production at the end of February and is in the early stages of cleanup. Drilling of three (3.0 net) Pembina Cardium ERH wells has been completed with completion operations currently underway. These wells are expected to come on production by the end of March and offset five successful wells drilled in 2023 characterized by low decline rates and high light oil and liquids weightings. An additional two (0.3 net) non-operated Willesden Green ERH wells have recently been drilled, are being completed, and are expected to come online in mid-March with another one (0.35 net) non-operated Willesden Green ERH well drilled in March and expected to be on production in the second quarter. < I expect InPlay's production to be down a bit in Q1 since Janurary & February weather in Alberta always delays well completions. With lots of new wells coming online in March and April, we should see an nice spike in Q2 production.

The Company's first (1.0 net) multilateral Belly River horizontal well was brought on production in December. The well has been on production with no decline and is meeting internal expectations with initial production ("IP") rates of 84 boe/d (96% light crude oil and liquids) and 89 boe/d (97% light crude oil and liquids) over its first 30 and 60 days respectively. The Belly River is characterized by high quality sweet light oil that receives premium pricing to our realized benchmark MSW commodity price. We are encouraged by the results that we are seeing from this well and will continue to evaluate expanding the use of this technology on further potential areas in our Belly River play. < Surge Energy has also report nice results on their multilateral wells.

WTI prices remained volatile early in 2024 but have improved throughout the quarter to approximately US $78/bbl, exceeding the US $75/bbl assumption utilized in our previously released 2024 budget. Future differentials to WTI, including MSW , are forecasted to significantly improve by 55% – 60% throughout the balance of the year compared to the fourth quarter of 2023 and first quarter of 2024 as new pipeline capacity comes online in the second quarter. The relatively weak Canadian dollar is supportive of the Canadian crude oil price environment and is expected to continue throughout the year. Natural gas prices have been challenged with warmer than average temperatures impacting winter demand resulting in weak AECO prices forecasted through to the end of the summer. InPlay has implemented crude oil and natural gas hedges at favorable pricing levels to mitigate risk and add stability during periods of market volatility.

As previously announced, InPlay's Board of Directors approved a 2024 capital budget of $64 – $67 million which is forecast to result in annual average production of 9,000 – 9,500 boe/d (59% – 61% light crude oil and NGLs). InPlay has taken a measured and disciplined approach to capital allocation for 2024 with a program focused on high return oil weighted locations driving annual oil production growth at the midpoint of guidance of approximately 7% over 2023 despite a 20% to 25% reduction in capital spending year over year. The capital program is designed to responsibly manage the pace of development, maintain operational and financial flexibility and remain focused on delivering return of capital to shareholders. The Company achieved record quarterly light oil production of 4,142 bbl/d and increased our light oil and NGLs weighting to 59% in the fourth quarter of 2023. This higher weighting of light oil and NGLs is expected to continue in 2024 as a result of our oil focused drilling program, allowing the Company to take advantage of the strong oil price environment which is the Company's main revenue and AFF driver.
---------------------------
Overall a good report. Strong balance sheet and the 2024 capital program and dividends should be fully funded by operating cash flow. I do expect InPlay to make some bolt-on acquisitions in their core areas that will increase production over the guidance above.