Liquefied natural gases, such as condensate, is a crucial component for the dilution of bitumen to make dilbit, which enables pipeline transportation of bitumen. Bitumen is the heaviest crude oil used today found in natural oil sands deposits. The oil sands, also known as tar sands, contain a mixture of sand,

water and oily bitumen. In a liquid form, condensate takes up about 1/500th of the volume of conventional natural gas for the same energy output, making pumping and transportation more economical.

 

A crucial factor in investing in condensate companies in Alberta is supply and demand— Condensate domestic demand (Canada) exceeds supply by more than 250,000 bbl per day, which is why Canada imports condensate from the U.S.

 

 

With 7G leasing about 800 sections and a total of 500,000 net acres of land (Paramount has 2 million acres); 7G has divided land parcels into 3 nest areas—

 

1. Nest 1 is an ultra-rich condensate region with 37% IRR and a capital efficiency of $10,700/boe/day. In Q4 2019, there was a land swap that enables an optimized development plant. IP365 is 750 boe/d.

 

 

 

* All assumptions for IRR depend on a US 40/bbl WTI, $2.5 Hub, at $3 Condensate Differentials

 

Seven Generations has an excellent production mix consisting of approximately 60% NGLs & Condensate and 40% natural gas.

 

 

 

 

 

With 1.1B available on 1.37B (5 year term) of senior secured credit facility (unsecured notes). Seven Generations doesn’t have any near-term maturities— as of March, Q2, 2020, 298M was drawn on that revolver to repay some of the unsecured 2023 notes with accordion feature from the earlier conversion— which reduced interest rates from 6.8 % to about 2%. Maturity has now been pushed the end of 2024 from mid-2023. 700M at 5.375% is due in 2025.

 

By avoiding any exposure to maturity issues, and maintaining liquidity on the bank line, Seven Generations will be able to ride through commodity cycles. Seven Generation’s revolving credit facility is covenant based, not reserves based.

 

 

 

 

The desire to reduce debt levels towards the 1.0-1.5x Debt to Cash flow range will naturally diminish maintenance capital expenditures—with an 11% drop in production, this results in Capex down from 1.3-1.7B to 650-800M in 2020; management promises the capex to remain intact even if commodity prices improve. To give you historical reference— capital expenditures were 2012—280M, 2014—920M, 2015— 1.35B. This allows Seven Generations to maintain production in the 180,000 boe/day range.

 

To protect Seven Generation’s balance sheet and preserve drilling inventory, management reduced capital budget by 41% and deferred the start-up of 11 new wells with 65-70 development wells in 2020.

In Q1, 2020 drill and complete costs were about CAD 7.3 million per well, which is 1 million per well lower than originally budgeted for the year, and 33% below the costs for 2017. Operating costs in Q1 2020 were CAD 4.54/boe, about 20% below 2017 levels. Seven Generations completed the wind-down of its 8 drilling rig and 2 completion spread program in early Q2, and commenced an operational pause. Salary and benefits were also reduced.

 

CEO Marty Proctor said during a recent podcast interview the company's decline rate would diminish by about 3% every year, which will lower maintenance expenditures by CAD 60 to 80 million per year, or CAD 0.98/boe at the midpoint, assuming production remains near the 200,000 boe/day range.

 

Seven Generations has also maximized efficiency and output through multi-level stacked pads to improve infrastructure utilization— with a boost of 50% more inventory per section, and 30% increase in NPV per section and a reduction of 85,000 truck-loads of reduced water transportation. These operating cost efficiencies have given Seven Generations Energy much higher netbacks than competitors in the Canadian oil and gas landscape.

 

Seven Generations has greater than 80Mbbl/day capacity with more than 60Mbbl/day that is wholly owned and operated with optional access to an additional 20Mbbl/day from 3rd parties is and is able to average half-cycle IRRs greater than 50%.

 

its current program. Seven Generations will break-even on a drilling and completion basis at USD 33 per barrel, but declines in to the 30% range could bring it down to USD 29-31 per barrel.

 

In a low 40s WTI and at a $2.50 per MMBtu price environment— with weaker condensate differentials, Nest 3 is the best returning region in Seven Generation’s portfolio. As prices move into the mid-40s and condensate differentials improve to where we are today (September 2020), all regions start to exhibit favorable well economics.

 

Seven Generations is currently directing capital away from Nest 1 to Nest 3, which is more gas prone. All development activity for the second half of 2020 will be shifted towards the Nest 3 region to lower initial decline rate. While Nest 1 drilling economics have improved considerably, management should be flexible towards production allocations across wells.

 

In 2019, Seven Generations completed a 120 million pipeline network that connects the southern part, the Nest 3 area, to the core. The lower Montney well on the 10-16-62-4 pad in Nest 3 continues to exceed expectations, with the well continuing to be the best condensate producer on the pad. Overall IP270 volumes of 1,934 boe/d are 12% above the average upper/middle Montney locations on the pad, and condensate rates over the same time frame averaged 506 bbl/d, 39% above the average upper/middle Montney location on the pad.

 

The encouraging results from the first Nest 3 lower Montney well prompted Seven Generations to add two additional lower Montney wells in the area in 2020— improving the capital efficiency mix due to the high deliverability. Over the next 24 months, further benefits from decline rate moderation will result in another 6% to 12% decrease in total maintenance capex.

As oil prices firm up, the ability to blend more production from the Nest 1 region into Seven Generation’s total production profile is likely to put condensate yields back on track— similar to 2018.

 

In terms of Seven Generation’s internal rate of return for its projects, Nest 2 Wells have an IRR of roughly 40-60% at USD 40-50 WTI and USD 1.8-2.80 NYMEX gas, representing a payback period of 12-15 months. At a discount rate of 10%, the net present value of these wells is approximately 20-35 million.