Razor Energy Corp. Announces Strategic Acquisition and Second Quarter 2019 Results

CALGARY, Alberta, Aug. 21, 2019 (GLOBE NEWSWIRE) -- Razor Energy Corp. (“Razor” or the “Company”) (TSXV: RZE) is pleased to announce a strategic acquisition with Little Rock Resources Ltd. (“Little Rock”) and its second quarter 2019 financial and operating results. Selected financial and operational information is outlined below and should be read in conjunction with Razor’s unaudited condensed consolidated interim financial statements and management’s discussion and analysis for the quarter ended June 30, 2019 which are available on SEDAR at www.sedar.com and the Company’s website www.razor-energy.com.

STRATEGIC ACQUISITION

The Company has entered into a binding pre-acquisition agreement (the “Pre-Acquisition Agreement”) with Little Rock, an arm’s length private exploration and production company operating in southern Alberta. The Pre-Acquisition Agreement provides for the acquisition by Razor of all the issued and outstanding common shares (the “Little Rock Shares”) of Little Rock (the “Transaction”). There are 13,293,405 Little Rock Shares issued and outstanding.  

Under the terms of the Pre-Acquisition Agreement, Little Rock shareholders will receive 0.45 of a Razor common share for each Little Rock Share held. All the officers and directors of Little Rock have entered into support agreements in favor of the Transaction. The Transaction includes a reciprocal break fee of $0.5 million.

The Transaction implies a value of approximately $12.7 million for Little Rock, including $10.6 million of equity from Razor and the assumption of Little Rock’s net debt of $2.1 million. Little Rock’s current production is approximately 900 boe/d, while independently evaluated proved developed producing reserves were 2.15 MMBoe at December 31, 2018.

STRATEGIC RATIONALE

Razor has focused on the exploitation and optimization of legacy oil and gas producing fields, as demonstrated with its success in Swan Hills and Kaybob. Little Rock’s assets share similar operational criteria and opportunities and provide Razor with a second core region in southern Alberta, with a significant presence in the Jumpbush, Majorville, Badger, Enchant and Chin Coulee areas. Razor is aggressively seeking additional corporate and asset consolidation opportunities.

The table below are values and metrics based on Little Rock’s Reserve Report (as defined herein):

Reserves Category	Net Present Value of Future Net Revenue, Before Income Taxes Discounted at 10% 1		Working Interest Reserves boe	Working Interest Reserves boe / Implied Transaction Value
Proved Producing	$16,451,000		2,148,000	$5.93
Total Proved	$42,087,000		3,228,000	$3.95
Total Proved Plus Probable	$68,394,000		4,719,000	$2.70

1) Estimated values of future net revenue disclosed do not represent fair market value.

Using strip pricing assumptions and select maintenance spending, the total Transaction cost (including assumed debt) is approximately 3.6 times estimated annualized 2019 funds flow.

In addition to over 400 boe/d of well reactivation upside, drilling upside within certain Mannville lithic channels has been identified. Razor will carefully consider using different techniques to exploit this resource. Power generation, transportation and oil marketing opportunities will also be pursued within the areas.

The board of directors of each of Razor and Little Rock have unanimously approved the Transaction and recommended that Little Rock shareholders support the Transaction. The Transaction remains subject to customary closing conditions including the acquisition by Razor of not less than 90% of the Little Rock shares, the TSX Venture Exchange and other regulatory approvals, and is expected to close on or about September 19, 2019.

NEAR AND MEDIUM-TERM OBJECTIVES

•     Strengthening the balance sheet by reducing capital spend for the remainder of 2019 and actively seeking and considering business combinations with other oil and gas producers as well as service companies;•     Continuing to invest in infrastructure and equipment and increasing efficiencies;•     Improving production efficiency through low-risk, lower-cost capital activities which include waterflood optimization,       stimulations, recompletions and workovers;•     Developing a technically viable and commercially sustainable solution to recover geothermal waste heat;•     Analyzing further ancillary opportunities including various power generating projects, oil blending and services integration;•     Maintaining the monthly dividend; and•     Acquiring and consolidating complementary assets and disposing assets when appropriate.

Q2 2019 HIGHLIGHTS

OPERATING

•     Sales volumes averaged 4,332 boe/d, down 14% from the same quarter of last year, mainly due to operational challenges resulting from third party fuel gas composition and supply issues, the failure of a third-party fuel gas line that caused outages at Razor's major Swan Hills properties and wells awaiting downhole repair. Sales volumes were higher than production volumes in the second quarter as the Company continued selling inventory accumulated during Q4 2018.•     Reported cash flows from operating activities of $8.3 million in the second quarter of 2019 compared to $3.8 million in the second quarter of 2018.•     Reported funds flow of $3.9 million in the second quarter of 2019 compared to $8.5 million in the second quarter of 2018.•     Reported a $1.7 million net loss in the second quarter of 2019 compared to $2.5 million net income in the same period last year.

CAPITAL

•     Invested $4.6 million in its capital program in the second quarter of 2019, primarily in the well reactivation program.•     Reactivated 11 gross (10.9 net) wells during the second quarter of 2019, resulting in 205 boe/d of additional production.

DIVIDENDS

•    Paid a monthly cash dividend of $0.0125 per share for a total of $0.6 million in dividends paid in the quarter. The dividend is paid monthly and is   subject to commodity prices, production levels and other factors.

SELECT QUARTERLY HIGHLIGHTS

The following tables summarizes key financial and operating highlights associated with the Company’s financial performance.

	Three Months Ended June 30,				Six Months Ended June 30,
($000's, except for per share amounts and production)	2019		2018		2019		2018
Production
Light Oil (bbl/d)	2,744		3,274		2,704		3,153
Gas (mcf/d) 1	3,414		4,056		3,670		3,673
NGL (boe/d)	831		1,074		933		924
Total (boe/d)	4,143		5,023		4,249		4,690
Sales volumes 2
Light Oil (bbl/d)	2,932		3,274		2,837		3,153
Gas (mcf/d)1	3,414		4,056		3,670		3,673
NGL (bbl/d)	831		1,074		933		924
Total (boe/d)	4,332		5,023		4,382		4,690
Closing oil inventory volumes (bbls)	11,228		—		11,228		—
Revenue
Oil and gas sales	22,853		27,907		42,468		50,141
Sale of commodities purchased from third parties	2,413		7,031		8,454		7,031
Blending and processing income	2,332		3,560		4,573		5,935
Other revenue	272		1,642		625		1,875
Total revenue	27,870		40,140		56,120		64,982
Cash flows from operating activities	8,263		3,783		11,867		9,240
Per share -basic and diluted	0.54		0.24		0.78		0.59
Funds flow 3	3,878		8,468		5,043		13,786
Per share -basic and diluted	0.26		0.54		0.33		0.88
Adjusted funds flow 3	3,624		8,733		5,001		14,263
Per share -basic and diluted	0.24		0.55		0.33		0.91
Net income (loss)	(1,746	)	2,504		(11,537	)	2,771
Per share - basic and diluted	(0.12	)	0.16		(0.76	)	0.18
Dividends per share	0.04		—		0.08		—
Capital expenditures	4,619		11,981		8,694		26,383
Netback ($/boe)
Oil and gas sales 4	57.98		61.05		53.55		59.07
Royalties	(8.81	)	(8.61	)	(7.90	)	(10.50	)
Operating expenses	(34.12	)	(32.63	)	(34.09	)	(29.48	)
Transportation and treating	(2.72	)	(2.78	)	(2.34	)	(2.29	)
Operating netback 3	12.33		17.03		9.22		16.80
Income (loss) on sale of commodities purchased from third parties3	0.40		0.18		(0.14	)	0.10
Net blending and processing income 3	3.01		3.88		3.28		3.88
Realized loss on commodity contracts settlement	(4.72	)	(2.61	)	(2.72	)	(3.20	)
Other revenues	0.69		3.59		0.79		2.21
General and administrative	(2.06	)	(2.96	)	(3.87	)	(2.99	)
Interest	(3.13	)	(2.46	)	(3.06	)	(2.57	)
Corporate netback 3	6.52		16.65		3.50		14.23

1) Gas production and sales volumes include internally consumed gas used in power generation.2) Sales volumes include change in inventory volumes.3) Refer to "Non-IFRS measures". 4) Excludes the effects of financial risk management contracts but includes the effects of fixed price physical delivery contracts.

	June 30,	December 31,
($000's, except for share amounts)	2019	2018
Total assets	172,367	157,937
Cash	5,324	2,239
Long-term debt (principal)	46,017	46,155
Minimum lease obligation	5,108	3,860
Net debt 1	60,632	54,244
Number of shares outstanding	15,093,434	15,188,834
1) Refer to "Non-IFRS measures".

OPERATIONAL UPDATE

Sales volumes in the second quarter of 2019 averaged 4,332 boe/d, down 14% from the sales volumes in the same period in 2018 as the Company continued selling inventory accumulated during Q4 2018.

Production averaged 4,143 boe/d in Q2 2019 down 18% from the same quarter in 2018. Production in the second quarter was adversely impacted by the failure of a third-party fuel gas line, which caused outages at Razor’s major Swan Hills properties. Razor achieved a solution to enable temporary resumption of production. However, if Razor had not taken immediate action to secure fuel gas at key facilities within the Swan Hills area, production would have decreased by approximately 2,200 boe/d, which would have reduced Q2 2019 production by approximately 1,100 boe/d. Third-party fuel gas composition issues continued in Q2 2019, resulting in further production interruptions in the Swan Hills area throughout the quarter. These operational disruptions accounted for 285 boe/d in reduced production as compared to Q2 2018.  It is expected that these issues will be addressed in Q3 2019. Kaybob production was down in this quarter due to the sale of the Kaybob BHL Unit 1 in Q1 2019, as this Unit accounted for 173 boe/ d of production in Q2 2018. Kaybob production was further impacted in Q2 2019 compared to Q2 2018 due to wells awaiting downhole workovers.

Effective July 2018, Razor began utilizing a portion of its own gas production to generate electrical power. Gas production of internally consumed gas for the three and six months ended June 30, 2019 was 1,055 mcf/d and 933 mcf/d, respectively.

Due to the unprecedented discounts on Western Canadian Light Sweet Oil ("MSW") in the fourth quarter of 2018, Razor did not sell all of its produced oil, instead Razor was temporarily stored it in existing surface tanks which established material inventory. MSW differentials and WTI pricing improved significantly in 2019 and the Company has been reducing its inventory levels. As at June 30, 2019, Razor had 11,228 bbls of light oil inventory (December 31, 2018 - 35,267 bbls).

Razor realized an oil price of $76.48 per barrel during the second quarter of 2019, which was a 4% discount to the WTI (CAD), down from the 11% and 9% discounts in Q1 2019 and Q2 2018, respectively, mostly due to the tightening of the MSW differential to WTI since Q4 2018.

During the second quarter of 2019, the Company realized an average operating netback of $12.33/boe, down 28% from the second quarter of 2018, due to lower realized prices, decreased production volumes and higher per boe operating expenses. For the first six months of 2019, operating netback was down 45% from the same period in 2018 as a result of lower realized prices, which were down 9%, and higher operating costs, which were up 16%.

Royalty rates averaged 15% in the second quarter of 2019 compared to 14% for the same period in 2018. This increase is mostly due to the relative decrease in gas production compared to oil production, as gas volumes attract lower royalty rates than oil volumes. For the first six months of the year, royalties averaged 15%, down 17% from the same period last year, mostly due to lower prices and production volumes.

Operating expenses increased 5%, on a per boe basis, in the second quarter of 2019 compared to the same period in 2018, mostly due to lower sales volumes. On a dollar basis, operating expense was down 10% in the second quarter compared to the second quarter in 2018.  Workovers and facility and pipeline integrity expenses averaged $8.52/boe in the second quarter of 2019 compared to $9.23/boe in the same quarter of 2018. For the first six months of the year, operating costs were an average of 16% higher compared to the same period last year, mostly due to increased workover costs.

The top cost drivers, fuel and electricity, labour, property taxes and repairs and workovers accounted for 71% of total operating expenses in the second quarter of 2019 (70% in Q2 2018). Electricity and fuel increased 10% in the quarter due to failure of a third-party fuel gas pipeline in May 2019 as well as third party fuel gas composition issues that started in February 2019 and continued in Q2 2019.  In order to minimize production disruptions, as a result of these unforeseen gas supply disruptions, Razor trucked in compressed natural gas at a cost of $1.1 million or $2.73/boe in the second quarter of 2019. In June 2019, the Company implemented an alternative to natural compressed gas by repurposing certain pipelines to supply the gas required.  Excluding the cost of compressed natural gas, electricity and fuel costs decreased 16% in Q2 2019 from Q2 2018, mostly due to decreased usage of grid-based electricity directly attributable to the installation of natural gas power generation in July 2018.

Workovers decreased 64% in Q2 2019 from Q2 2018, accounting for 8% of operating expenses in the second quarter, down from 18% in the same period last year. Similarly, pipeline and facility repairs decreased 29% in Q2 2019 from Q2 2018, accounting for 17% of operating expenses in Q2 2019. For the first six months of the year, workovers increased 21%, mostly due to work deferred from Q4 2018 being completed in Q1 2019 and compressed natural gas costs in Q2 2019.

CAPITAL PROGRAM & GUIDANCE ADJUSTMENT

In the second quarter of 2019, the Company reactivated a total of 11 gross (10.9 net) wells, 7 of which were brought on production in the quarter.  The resulting production was 205 boe/d net.  The reactivation capital includes 9 Virginia Hills reactivations, 1 South Swan Hills Unit reactivation and 1 Kaybob reactivation.

During second quarter of 2019, Razor invested $0.8 million in the design phase of its co-produced geothermal electricity project. The Company expects the capital cost of the project to be $15 to $20 million, generating 3 to 5 MW of renewable electricity, with a $5 million contribution from Natural Resources Canada’s Clean Growth Program and a $2 million contribution from Alberta Innovates.

During the first half of 2019, Razor received $3.0 million in government grants from the clean power development and energy efficiency initiatives.

In response to lower than anticipated cash flow from operations resulting from the third-party outages, the Company anticipates capital spending in 2019 to be reduced $3.0 to $10.5 million net of government grants, including $1.0 million on end- of-life well and facility expenditures.

As a result of lower capital spending, third-party fuel gas pipeline supply and gas composition challenges in the Swan Hills area, additional third-party production curtailments starting in July 2019 at Simonette, the decision to shut in uneconomic gas production and offset by the business acquisition announced herein, Razor has revised its full-year production guidance to between 4,400 boe/d and 4,900 boe/d. The range reflects the uncertainty of when third-party production will resume.

Razor is working closely with the operators of the facilities and pipelines impacting production. Gas composition issues are expected to be resolved in September 2019, with the commissioning of key processing equipment in late August. The third-party gas pipeline is expected to be repaired in late Q3 or early Q4 2019. Uneconomic gas production will remain shut-in until gas and NGL prices improve.

ABANDONMENT, RECLAMATION, AND REMEDIATION EXPENDITURES

Razor inherited decommissioning liabilities in its Swan Hills and Kaybob acquisitions. As at June 30, 2019, the Company had 22 wells remaining in its Inactive Well Compliance program that need to be addressed before March 31, 2020. The Company continues to invest in end-of-life well and facility decommissioning.

ABOUT RAZOR

Razor is a publicly traded junior oil and gas development and production company headquartered in Calgary, Alberta, focused on shareholder returns through sustainable monthly dividends, production and margin growth through a combination of acquiring, enhancing, and producing oil and gas from properties primarily in Alberta. The Company is led by experienced management and a strong, committed Board of Directors, with a long-term vision of growth focused on efficiency and cost control in all areas of the business.

Razor started operations in the first quarter of 2017, through an acquisition of producing assets in the Swan Hills area.  In the second quarter of 2017, Razor added to its asset base with the acquisition of complementary assets in the Kaybob area. These predominantly light oil assets provide a foundation for strong shareholder return through abundant low risk operations. Razor plans to concurrently grow Swan Hills and Kaybob, and execute on similar acquisitions, using its experience to extract upside value.

Razor is a pivotal leading-edge enterprise, balancing creativity and discipline, focused on growing an enduring energy company. Razor currently trades on TSX Venture Exchange under the ticker “RZE”.

For additional information please contact:

Doug BaileyPresident and Chief Executive Officer   

OR

Kevin BraunChief Financial Officer

Razor Energy Corp.800, 500-5th Ave SW Calgary, Alberta T2P 3L5Telephone: (403) 262-0242www.razor-energy.com

Alliance Capital Partners Gordon Aldcorn www.alliancecapitalpartners.ca403-618-6507

READER ADVISORIES

FORWARD-LOOKING STATEMENTS: This press release may contain certain statements that may be deemed to be forward-looking statements. Such statements relate to possible future events, including, but not limited to: the Company’s near and medium-term objectives, which include strengthening the Company’s balance sheets, seeking and considering business combinations with other producers and service companies, investing in infrastructure and equipment, increasing efficiencies, improving production efficiencies through low-risk, lower-cost capital activities such as waterflood optimization, stimulation, recompletions and workovers, developing solutions to recover geothermal waste head, analyzing further ancillary opportunities, such as power generating projects, oil blend and services integration, maintaining a dividend, acquiring, consolidating and disposition assets; addressing the operational disruptions that occurred in Q2 2019 and timing thereof; the capital cost of the geothermal electricity project; reducing capital spending in 2019; resolving gas composition issues and timing thereof; repairing the third-party gas pipeline and timing thereof; shut-in of gas production; continuing to invest in end-of-life well and facility decommissioning; the completion of Transaction and the timing thereof; and pursuing power generation, transportation and oil marketing opportunities relating within the areas of the Mannville lithic channels and considering using different techniques to exploit this resources. . 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 “anticipate”, “believe”, "expect", “plan”, “estimate”, “potential”, “will”, “should”, “continue”, “may”, “objective” and similar expressions. The forward-looking statements are based on certain key expectations and assumptions made by the Company, including but not limited to expectations and assumptions concerning the availability of capital, current legislation, receipt of required regulatory approvals, the timely performance by third-parties of contractual obligation, the success of future drilling and development activities, the performance of existing wells, the performance of new wells, the Company’s growth strategy, general economic conditions, availability of required equipment and services prevailing commodity prices, price volatility, price differentials, the actual prices received for the Company's products and the receipt of regulatory and shareholder approvals of the Transaction. Although the Company believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. Since forward- looking statements 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, risks associated with the oil and gas industry and geothermal electricity projects in general (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; variability in geothermal resources; as the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), electricity and commodity price and exchange rate fluctuations, changes in legislation affecting the oil and gas and geothermal industries and uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Please refer to the risk factors identified in the annual information form and management discussion and analysis of the Company which are available on SEDAR at www.sedar.com. The forward-looking statements contained in this press release are made as of the date hereof and the Company 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.

This press release  contains  future-oriented financial information and financial outlook information (collectively, "FOFI") about Razor's prospective results of operations, sales volumes, production and production efficiency, balance sheet and investment infrastructure, all of which are subject to the same assumptions, risk factors, limitations, and qualifications as a set forth in the above paragraph. FOFI contained in this document was approved by management as of the date of this document and was provided for the purpose of providing further information about Razor's future business operations. Razor disclaims any intention or obligation to update or revise any FOFI contained in this document, whether as a result of new information, future events or otherwise, unless required pursuant to applicable law. Readers are cautioned that the FOFI contained in this document should not be used for purposes other than for which it is disclosed herein.

NON-IFRS MEASURES: This press release contains the terms "funds flow", "adjusted funds flow", "net blending and processing income", "net debt", "operating netback" and "corporate netback", which do not have standardized meanings prescribed by International Financial Reporting Standards ("IFRS") and therefore may not be comparable with the calculation of similar measures by other companies. Funds flow represents cash generated from operating activities before changes in non-cash working capital. Adjusted funds flow represents cash flow from operating activities before changes in non-cash working capital and decommissioning obligation expenditures incurred. Management uses funds flow and adjusted funds flow to analyze operating performance and leverage, and considers funds flow and adjusted funds flow from operating activities to be key measures as it demonstrates the Company's ability to generate cash necessary to fund future capital investments and repay debt. Net blending and processing income is calculated by adding blending and processing income and deducting blending and processing expense. Net debt is calculated as the sum of the long-term debt and lease obligations, less working capital (or plus working capital deficiency), with working capital excluding mark-to-market risk management contracts. Razor believes that net debt is a useful supplemental measure of the total amount of current and long-term debt of the Company. Operating netback equals total petroleum and natural gas sales less royalties and operating costs calculated on a boe basis. Razor considers operating netback as an important measure to evaluate its operational performance as it demonstrates its field level profitability relative to current commodity prices. Corporate netback is calculated by deducting general & administration, acquisition and transaction costs, and interest from operating netback.  Razor considers corporate netback as an important measure to evaluate its overall corporate performance.

ADVISORY PRODUCTION INFORMATION: Unless otherwise indicated herein, all production information presented herein is presented on a gross basis, which is the Company's working interest prior to deduction of royalties and without including any royalty interests.

INDEPENDENT RESERVES EVALUATION: Estimates of Little Rock’s reserves, as at December 31, 2018 are based upon the report prepared by GLJ Petroleum Consultants Ltd., dated February 1, 2019 (the “Little Rock Reserves Report”). The Little Rock Reserves Report was prepared in accordance with the Canadian Oil and Gas Evaluation Handbook requirements and National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities.

BARRELS OF OIL EQUIVALENT: The term "boe" or barrels of oil equivalent may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent (6 Mcf: 1 bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Additionally, 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 ratio of 6:1 may be misleading as an indication of value.

Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this news release.

Source: Razor Energy Corp.

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