Cequence Energy Announces Second Quarter 2018 Financial Results

Second quarter and subsequent Company highlights include:

• Brought on stream 3 gross (2 net) Dunvegan oil wells, all exhibiting strong results;
• Achieved average quarterly production of 6,334 boe/d (25% liquids) with liquid volumes increasing by 34% over the first quarter of 2018;
• Funds flow from operations was $2.2 million or $0.01 per share;
• On May 1^st, the Company sold approximately 145 boe/d (90% gas) in the Gordondale area of Alberta for approximately $1.5 million;
• On April 1, 2018, the Company began selling approximately 1/3 of its gas at the Dawn, Ontario market where prices have averaged approximately $3.49/mcf compared to AECO pricing of approximately $1.16/mcf ; and
• As previously announced on July 27^th, 2018, the Company entered into a series of transactions that will refinance the Company’s balance sheet.

Financial

Funds flow from operations for the second quarter was $2.2 million, which reflects a 34 percent increase in liquids production from the first quarter of 2018.  Realized sales prices (including hedging) increased ten percent from the comparative period in 2017.  Comprehensive loss for the quarter ended June 30, 2018 was $2.7 million compared to a loss of $94.9 million in the second quarter of 2017.

Capital expenditures, net of dispositions, were $0.4 million in the second quarter primarily associated with completion and tie-in of the Company’s winter drilling program of 3.0 gross (2.0 net) Dunvegan horizontal oil wells including upgrading the access road.  On May 1^st, 2018, the Company sold approximately 145 boe/d (90% gas) in the Gordondale area of Alberta for $1.5 million.

Beginning on April 1, 2018, the Company has been selling 10,850 GJ/d of production in the Dawn market.  The Dawn marketing arrangement has provided the Company diversification away from the volatile AECO prices for approximately 1/3 of its gas production.  For the three months ended June 30, 2018, Dawn prices averaged approximately $3.49/mcf compared to AECO pricing of approximately $1.16/mcf.

On July 27, 2018 Cequence announced a series of transactions to refinance the Company’s balance sheet and provide greater flexibility and liquidity to execute the ongoing business plan of the Company.  Cequence entered into a second lien secured loan agreement for a $60 million term loan facility due October 3, 2022 to refinance the existing Senior Notes which were due on October 3, 2018.  At the same time Cequence filed a Rights Offering Circular for holders of common shares on August 9, 2018 to subscribe for up to 245,527,883 flow-through common shares of the Company at a price of $0.035 per share for gross proceeds of up to $8.6 million.  The Company has in place standby commitments from two of its directors that will, collectively, guarantee that at least $5 million will be raised under the Rights Offering. Cequence also amended its Credit Facility and extended the maturity date until September 28, 2018.

The Company has $73.5 million in net debt as at June 30, 2018, which is comprised of $60 million in senior notes carrying a four-year term (refinanced and now maturing in October 2022 subject to the Rights Offering closing) and a working capital deficiency of $13.5 million. The senior credit facility of $9 million remains undrawn other than letters of credit of $1.6 million. Upon closing of the Rights Offering and Term Loan, the Company has received a commitment from its lender to further extend the maturity date of the Credit Facility to May 31, 2019 with a borrowing base of $7 million.

Operational Update

Average production in the second quarter of 2018 was 6,334 boe/d (25% liquids).  The production increase was primarily associated with the Company’s recent 3 gross (2 net) Dunvegan oil wells that continued their strong performance.  The previously disclosed service rig work required on the new 11-14 (50% working interest) Dunvegan well was finished at the end of July.  Over the last ten operating days the 11-14 well flowed approximately 411 bbl/d of oil and 70 bbl/d of water.  It is expected that the well will continue to clean up with time.  Due to continued low AECO prices in the quarter, approximately 2,500 mcf/d of gas has been left shut-in until higher pricing is available.

The Company is currently planning to commence drilling activities on 2 gross (2 net) additional Dunvegan wells in the fall of 2018 subject to the successful closing of the Rights Offering.  Cequence estimates that there are approximately 26.5 net Dunvegan oil locations remaining on its land.

Operating costs for the second quarter were $11.72 / boe up 15% from the first quarter of 2018 as a result of lower production volumes and $0.5 million for one-time expenses with the startup of the 3 gross (2 net) oil wells during spring break up.   Another $0.4 million was spent on the removal and repair of longer term rental equipment no longer required.  This combined $0.9 million of one-time expenses represents $1.56 / boe costs in the second quarter.

With the forecasted higher oil volumes and lower gas volumes, operating costs are anticipated to be in the $10.00 to $11.00 / boe range for the remainder of 2018.

Outlook

The Company’s guidance for the year ended December 31, 2018 includes the results of the second quarter, the 3 gross (2.0 net) Dunvegan oil well results, the restructured $60 million Senior Notes (with its 5% interest rate), a minimum Rights Offering equity raise of $5 million, the inclusion of the north east B.C. asset operating results, and an additional planned 2 gross (2 net) Dunvegan oil wells drilled and on production in the fourth quarter of 2018. As a result, oil production increases from 245 bbl/d in the first quarter of 2018 to an expected average second half 2018 rate of 1,050 to 1,150 bbl/d.  The increase in oil production combined with improved oil prices and the Dawn, Ontario gas contract provide an estimated second half 2018 funds flow from operations of approximately $12 million.

About Cequence

Cequence is a publicly traded Canadian energy company involved in the acquisition, exploitation, exploration, development and production of natural gas and crude oil in western Canada. Further information about Cequence may be found in its continuous disclosure documents filed with Canadian securities regulators at www.sedar.com.