Touchstone Exploration Inc (LON:TXP) has reported its operating and financial results for the three months and year ended December 31, 2020. Selected information is outlined below and should be read in conjunction with Touchstone’s December 31, 2020 audited consolidated financial statements, the related Management’s discussion and analysis and Annual Information Form, all 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 rounded to thousands of United States dollars.
· Achieved annual crude oil sales of 1,392 barrels per day (“bbls/d”), a 24 percent decrease relative to the 1,825 bbls/d produced in 2019. As expected and consistent with 2019, our crude oil production has reduced due to the ongoing impact of natural declines, reflecting a strategic focus on our Ortoire exploration program which has limited development capital investment.
· Executed a high impact, incident free $17,861,000 exploration program, primarily focused on drilling two gross (1.6 net) wells.
· Despite limited capital and operational development asset investment and considerably lower crude oil pricing, generated funds flow from operations of $263,000 (2019 – $6,840,000) and an operating netback of $14.49 per barrel (2019 – $26.61).
· Continued to focus on discretionary cost reductions, with operating costs on a per barrel basis decreasing by 12 percent and general and administration expenses declining by 6 percent relative to 2019.
· Recognized a net loss of $11,030,000 ($0.06 per share) compared to a net loss of $5,620,000 ($0.04 per share) in 2019, driven by $11,418,000 in net impairment losses recorded in the year predominantly based on lower forecasted crude oil pricing.
· Established a $20 million term loan with a Trinidad based financial institution and successfully accessed capital markets to continue our Ortoire exploration program, raising total net proceeds of $39.2 million from two oversubscribed equity financings.
· Maintained financial flexibility, exiting the year with cash of $24,281,000, a working capital balance of $12,933,000 and $7,500,000 drawn on our $20 million term credit facility, resulting in a net surplus of $5,433,000.
· Business continuity plans remain effective across our locations in response to COVID-19 with minimal health and safety impacts or disruptions to production.
Paul Baay, President and Chief Executive Officer, commented:
“2020 presented significant challenges to the wider oil and gas industry due to the impact of COVID-19 on working operations and the volatile nature of global oil prices. It is against that backdrop that I am delighted to report another year of significant progress at Touchstone in which we have enhanced our financial position significantly, encountered major natural gas discoveries as well as signed a historic long-term natural gas sales agreement with the National Gas Company of Trinidad and Tobago.
I would like to thank the entire team at Touchstone for their dedication, perseverance and flexibility during this difficult period which has enabled us to achieve such success. As a result of their hard work, the Company is very well positioned for another year of growth as we move forward with our exploration, development and production program at Ortoire and across the wider portfolio.”
2020 Annual Summary and Outlook
The resilience and quality of our employees and asset base were demonstrated throughout an extremely challenging operational and financial period in 2020. The impacts on our business due to COVID-19 and the associated volatility in crude oil prices forced prompt decisions to preserve financial flexibility and protect the health of our employees and stakeholders. We remain focused on protecting the health of our employees and communities while ensuring a decisive response for our investors. We will continue to follow the advice of public health officials in supporting our employees, their families, and our business partners.
Despite these challenges, Touchstone continued with its focus on improving financial liquidity, capturing cost savings, and increasing the long-term value of our core assets. We managed our business prudently during the year, progressing with our Ortoire exploration program and maintaining our base production while continuing safe and reliable operations.
The enhanced liquidity provided from our debt refinancing and our 2020 equity financings are expected to allow us to fund our exploration program in 2021, with a core focus on drilling our final work commitment exploration well (Royston-1), completing our 2D seismic program, testing our two exploration wells drilled in 2020, and bringing our Coho-1 and Cascadura-1ST1 discoveries onto production in 2021.
Our primary objective remains to bring our two natural gas exploration discoveries at Ortoire onto production in 2021. Additionally, production testing operations are ongoing at our Chinook-1 and Cascadura Deep-1 prospects, and we anticipate drilling our Royston-1 location in the second quarter of 2021. 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.
Annual operating results
Throughout 2020, we conducted minimal capital development activity and continued to allocate capital to exploration activities on our Ortoire property. As a result, crude oil production during the fourth quarter averaged 1,274 bbls/d, a 25 percent decrease relative to the 1,690 bbls/d produced in the fourth quarter of 2019 based on the ongoing impact of natural declines. Further, commencing in March 2020, we deliberately reduced discretionary operating expenditures in response to lower crude oil pricing, focusing on performing well interventions on those deemed high priority. Accordingly, annual 2020 crude oil production averaged 1,392 bbls/d, representing a decrease of 24 percent from crude oil production delivered in 2019. We invested $709,000 in development activities in 2020, which mainly consisted of recompletion activities on legacy wellbores and upgrades to our oilfield service equipment to maintain base production levels.
We remained heavily focused on our Ortoire exploration activities in 2020, investing $17,861,000 in exploration assets during the year. In 2020, we drilled two gross exploration wells (1.6 net) and incurred production testing costs on the Cascadura-1ST1 well drilled in December 2019. The Chinook-1 exploration well reached its total depth on October 13, 2020, and we concluded drilling operations on Cascadura Deep-1 on December 19, 2020.
Annual financial results
We reported funds flow from operations of $263,000 in 2020 versus $6,840,000 generated in the prior year. Petroleum sales recognized in 2020 decreased by 49 percent or $19,062,000 from 2019, reflecting a 34 percent reduction in our realized sales pricing as a result of the COVID-19 pandemic and a 24 percent decline in crude oil production volumes from limited capital and operational investment. The reduction in 2020 petroleum sales resulted in a 50 percent decline in royalty expenses compared to 2019. In response to the drastic decrease in realized crude oil pricing, we instituted cost-saving initiatives, decreasing annual operating expenses by 33 percent and 12 percent on an absolute and per barrel basis from 2019, respectively. As a result, our annual 2020 operating netback was $14.49 per barrel versus $26.61 per barrel reported in 2019. In addition, we reduced annual 2020 general and administration expenses by 6 percent in comparison to 2019. Finance expenses increased by $3,419,000 from 2019, as non-cash finance expenses increased by $1,734,000 predominately as a result of the Company’s term loan refinancing. Further, Touchstone recognized a one-time $1,286,000 income tax interest reversal recorded in net finance expenses in the prior year. Relative to 2019, current income tax expense decreased by $5,094,000 or 95 percent, reflective of $4,914,000 in supplemental petroleum taxes incurred in the prior year from higher realized crude oil pricing.
We recorded a net loss of $11,030,000 ($0.06 per share) in 2020 compared to a net loss of $5,620,000 ($0.04 per share) in 2019. Touchstone recognized net impairment losses of $11,418,000 in 2020 compared to impairment losses of $7,960,000 recorded in 2019. 2020 impairments were a result of $795,000 of licence costs on non-core exploration assets and $10,623,000 in net property and equipment impairments. $19,215,000 in impairment losses were recognized in the first quarter of 2020 based on the precipitous decline in forward crude oil pricing, while net property and equipment impairment recoveries of $8,592,000 were recorded in the fourth quarter of 2020 based on our updated reserve report and a recovery of forward oil prices as at December 31, 2020. The net impairment losses were minimized by their corresponding effect on deferred taxes, as a recovery of $6,273,000 was recognized during the year ended December 31, 2020 (2019 – $1,813,000).
On the basis of the successful results from the first three Ortoire exploration wells, we undertook a private placement that closed on November 12, 2020 in order to support the completion of the initial phase of exploration work on the Ortoire block, raising net proceeds of $28,386,000. Touchstone exited the year with a cash balance of $24,281,000, a working capital surplus of $12,933,000 and $7,500,000 drawn on our term credit facility resulting in a net surplus position of $5,433,000. Our near-term liquidity is augmented by $12.5 million of undrawn credit capacity.