Touchstone Exploration Inc. (TSX, LON:TXP) reported today its operating and financial results for the three months ended June 30, 2021. Selected information is outlined below and should be read in conjunction with Touchstone’s June 30, 2021 unaudited interim consolidated financial statements and related Management’s discussion and analysis, both of which will be available under the Company’s profile on SEDAR (www.sedar.com) and the Company’s website (www.touchstoneexploration.com). Unless otherwise stated, all financial amounts herein are stated in United States dollars.
Operational and Financial Highlights
· Achieved quarterly crude oil sales of 1,402 barrels per day (“bbls/d”), an 8 percent increase relative to the preceding quarter and consistent relative to the 1,396 bbls/d produced in the same period of 2020.
· Despite COVID-19 challenges in Trinidad, executed an incident free $6,664,000 exploration program, primarily focused on Cascadura Deep-1 and Chinook-1 well production testing, Royston-1 lease and drilling expenditures, and the Royston area seismic program.
· Realized crude oil prices averaged $59.06 per barrel, representing a 13 percent increase from the first quarter of 2021 and a 101 percent increase from the second quarter of 2020.
· Generated an operating netback of $26.30 per barrel from an average Brent price of $68.98 per barrel.
· Despite limited petroleum asset capital investment of $125,000, generated funds flow from operations of $1,205,000 compared to a $450,000 use of funds flow in the second quarter of 2020.
· Recognized a reduced net loss of $284,000 ($0.00 per share) compared to a net loss of $2,742,000 ($0.01 per share) in the 2020 equivalent quarter.
· Liquidity remained strong as we ended the second quarter with cash of $11,214,000, a working capital balance of $4,671,000 and $7,500,000 drawn on our term credit facility, resulting in a net debt position of $2,829,000.
· Entered into revised ten-year lease operating agreements for our Coora-1, Coora-2, WD-4 and WD-8 blocks through December 31, 2030.
· Executed an amendment to our $20 million term loan facility agreement, extending the principal availability period from June 15, 2021 to December 31, 2021, thereby allowing us to access the outstanding $12.5 million available balance prior to the end of the year.
· Spudded our final Ortoire minimum exploration commitment well, Royston-1, on August 12, 2021.
Paul Baay, Touchstone Exploration President and Chief Executive Officer, commented:
“Our second quarter results continue to demonstrate the progress we are making in all areas of our operations in Trinidad and are a testament to the great work done by our dedicated staff amidst a challenging COVID environment. The positive cashflow derived from our base assets and our strong liquidity position have allowed us to advance our exploration operations while we work towards initial natural gas production at our Coho and Cascadura discoveries. The team has been active in increasing our base oil production through a series of low-cost workovers and well optimization while preparing for the four development well drilling program planned for the fourth quarter of 2021. On the Ortoire block, we are progressing on all fronts including road construction, bridge repairs, well testing, seismic shooting, facilities design, pipeline installation and drilling our highly anticipated Royston prospect. We remain confident that our available credit facility capacity combined with anticipated funds flow from operations will be sufficient to complete our budgeted four well development program as well as drilling Royston-1, one of a number of milestones that we forecast to achieve in the second half of 2021 as we conclude the first phase of our Ortoire exploration program.“
Despite numerous challenges surrounding the COVID-19 pandemic in Trinidad during the second quarter of 2021, we continued to progress with our Ortoire exploration program and increased our base crude oil production from the first quarter of 2021 while maintaining safe and reliable operations.
Our crude oil sales averaged 1,402 bbls/d in the second quarter of 2021, representing an 8 percent increase from the first quarter of 2021 and consistent with production realized in the second quarter of 2020. The increase in production was reflective of increased workover operations that mitigated natural declines.
Our focus in the second quarter of 2021 remained on Ortoire exploration operations, as we invested $6,664,000 and progressed with the following exploration activities.
· Executed production testing operations on the Cascadura Deep-1 well, with results indicating a liquids rich natural gas discovery.
· Continued progress on the Royston area 22-kilometre seismic program, which was completed in late July 2021.
· Completed the Royston-1 well access road and lease, with the well spudding on August 12, 2021.
· Continued Coho-1 natural gas facility construction operations and currently await stakeholder approval to proceed with pipeline installation.
· Perforated and initiated production testing of the Cruse Formation in the Chinook-1 well, with final results expected in late August 2021.
In June 2021, we executed ten-year Lease Operatorship Agreements (“LOAs”) with Heritage Petroleum Company Limited (“Heritage”) for our Coora-1, Coora-2, WD-4 and WD-8 blocks effective January 1, 2021. The LOAs governing our core legacy oil producing properties expire on December 31, 2030 and were renewed under substantially similar terms to the previous arrangements. In conjunction with the execution of the LOAs, our Board of Directors approved the drilling of four development wells, which are expected to be drilled in the fourth quarter of 2021 at a budgeted cost of $1 million per well.
We reported funds flow from operations of $1,205,000 in the second quarter of 2021 compared to $450,000 use of funds flow in the same period of 2020. In comparison to the second quarter of 2020, the increase primarily reflected a 101 percent increase in crude oil realized pricing, which increased 2021 second quarter operating netbacks by $2,004,000 from 2020. Relative to the second quarter of 2020, further savings in second quarter 2021 term loan interest costs were offset by increased general and administration costs and income tax expenses accrued from increased taxable income.
Touchstone recorded a net loss of $284,000 ($0.00 per share) in the second quarter of 2021 compared to a net loss of $2,742,000 ($0.01 per share) in the prior year equivalent quarter. The decreased net loss was primarily attributed to an increase in operating netbacks, which were driven by increased realized pricing and slightly offset by increases in associated royalties and operating costs as we resumed pre-pandemic field operation levels.
We exited the second quarter with a cash balance of $11,214,000, a working capital balance of $4,671,000 and $7,500,000 drawn on our term credit facility resulting in a net debt position of $2,829,000. Our near-term liquidity is augmented by $12.5 million of current undrawn credit capacity, which we may access any time prior to the end of the year based on an amendment to the $20 million term credit facility agreement executed in June 2021.
Our primary objective remains to bring our Coho and Cascadura area natural gas exploration discoveries at Ortoire onto production as soon as practicable. As the current economic and health related challenges persist, we will continue to adapt our business operations and capital programs to ensure health and safety and enhance long-term shareholder value.
The Coho facility construction is nearing completion, with all outstanding equipment in Trinidad or currently in transit. The 3-kilometre pipeline field construction has not commenced and is awaiting stakeholder approval for tie-in to the Central Block Baraka natural gas facility, with operations expected to begin in September 2021.
Our Ortoire exploration and production licence was set to expire on July 31, 2021, and we subsequently received regulatory approval to spud the final commitment well in August 2021. Upon completion of Royston-1 drilling operations, we will have fulfilled all minimum exploration work obligations with respect to the licence.
The Royston-1 well was spud on August 12, 2021 using Well Services Rig 60. The primary target is the Herrera Gr7a and the Gr7bc sands at a depth of approximately 9,600 feet, and the well is planned to terminate in the Gr7bc formation at an estimated total measured depth of 10,700 feet.
In July 2021, we completed the 2D seismic program commitment in the Royston area. Recording commenced on July 3, 2021 and was completed on July 26, 2021. Four northwest to southeast oriented lines were acquired totalling 22 kilometres in length. Processing of the lines are currently being undertaken by a third party, and preliminary analysis indicates that the Royston-1 and Krakken exploration targets have been imaged and the Bass prospect has been further delineated. The final processed volumes are expected to be received by the end of August 2021 for analysis.
In the fourth quarter of 2020 and the first quarter of 2021, we performed a total of three production tests on the Chinook-1 well in three unique Herrera sand reservoirs. All tests encountered minor amounts of oil and were subsequently abandoned.
A fourth zone was completed over a 25-foot interval in the Cruse Formation between 3,004 feet to 3,029 feet on July 3, 2021. The well was initially opened to flow and recovered load fluid and dry natural gas. Downhole pressure recorders and well testing equipment were installed to perform a deliverability flow test on July 13, 2021. The flow test spanned a total of 45 hours, comprised of an initial clean-up flow period, followed by an initial shut-in period and a five-step rate test, including a 24-hour extended flow test. During the extended flow test period, the well achieved a peak production rate of approximately 0.7 million cubic feet per day (“MMcf/d”) of dry natural gas and flowed at an average natural gas rate of approximately 0.35 MMcf/d with an average flowing pressure of approximately 200 pounds per square inch. No liquids or water was encountered during testing. The well was shut in on July 15, 2021 for a 30-day pressure buildup, after which the downhole pressure recorders are expected to be recovered in mid-August 2021 for further analysis.
We have completed the design of the surface facilities required to meet the initial and long-term production capabilities of the Cascadura-1ST1 and Cascadura Deep-1 exploration wells that have been successfully tested. The Company has submitted a comprehensive field development plan to the Trinidad and Tobago Ministry of Energy and Energy Industries in conjunction with a declaration of commerciality.
The Cascadura surface facility Certificate of Environmental Clearance (“CEC”) application was submitted to the Trinidad and Tobago Environmental Management Authority (“EMA”) in April 2021, and the EMA subsequently informed Touchstone that the application will require a Cascadura area Environmental Impact Assessment (“EIA”). The CEC application and associated EIA relate to the comprehensive development of the Cascadura reservoir, including a proposed main surface facility and an 8.3-kilometre liquids pipeline that is expected to run south from the surface facility to the Heritage Catshill manifold.
A third-party contractor has been engaged to assist with the Cascadura EIA Terms of Reference (“TOR”). Dry season baseline environmental survey work was completed in May 2021, and wet season baseline environmental study work is expected to commence in September 2021. Stakeholder engagement was conducted between June 2021 and early July 2021. No requests were made from the stakeholder engagement process for changes to the draft TOR, and the final TOR was received from the EMA on July 29, 2021. Touchstone expects to submit the final EIA TOR submission to the EMA by the end of 2021.