September-quarter results

Gas processing constraints, wildfire shut ins, and road closings combine to lower production

Curtailments hurt production, but drilling successes should offset lost sales

Results meet expectations, new drilling may be accelerating growth

Michael Heim

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Energy

Oil & Gas

InPlay Oil

<p><strong>Production levels hit by curtailments</strong></p>
<p><strong></strong>InPlay reported average quarterly production of 9,020 boe/d in the 2023-1Q versus 8,221 boe/d for 2022-1Q. Results were below production levels in the fourth quarter (9,837 boe/d) and the previous guidance range for the year of 9,500-10,500 boe/d. Management indicated that gas curtailments in the Pembina area (previously announced) reduced production by 475 boe/d. In addition, strong production rates from new wells in the Willesden Green area led to an additional curtailment of 150 boe/d. Increased back pressure has become an issue in recent quarters as production is rising faster than the infrastructure can handle, even as new infrastructure investments are being made. Results were well below our estimate which assumed a more modest reduction in production.</p>
<table border="1" style="border-collapse: collapse;width: 674px;height: 108px">
<tbody>
<tr style="height: 18px">
<td style="width: 267px;height: 18px">
         </td>
<td style="width: 85px;height: 18px">2023-1Q</td>
<td style="width: 88px;height: 18px">2022-1Q</td>
<td style="width: 99px;height: 18px">2022-4Q</td>
<td style="width: 135px;height: 18px">Noble Est.</td>
</tr>
<tr style="height: 18px">
<td style="width: 267px;height: 18px">Average Oil Prod (bbl/d)</td>
<td style="width: 85px;height: 18px">3,788</td>
<td style="width: 88px;height: 18px">3,571</td>
<td style="width: 99px;height: 18px">3,909</td>
<td style="width: 135px;height: 18px">3,948</td>
</tr>
<tr style="height: 18px">
<td style="width: 267px;height: 18px">Average NGL Prod (bble/day)</td>
<td style="width: 85px;height: 18px">1,458</td>
<td style="width: 88px;height: 18px">1,307</td>
<td style="width: 99px;height: 18px">1,532</td>
<td style="width: 135px;height: 18px">1,547</td>
</tr>
<tr style="height: 18px">
<td style="width: 267px;height: 18px">Average Gas Prod (mmcf/day)</td>
<td style="width: 85px;height: 18px">22,648</td>
<td style="width: 88px;height: 18px">20,054</td>
<td style="width: 99px;height: 18px">25,090</td>
<td style="width: 135px;height: 18px">25,090</td>
</tr>
<tr style="height: 18px">
<td style="width: 267px;height: 18px">Average Production (boe/d)</td>
<td style="width: 85px;height: 18px">9,020</td>
<td style="width: 88px;height: 18px">8,221</td>
<td style="width: 99px;height: 18px">9,837</td>
<td style="width: 135px;height: 18px">9,677</td>
</tr>
</tbody>
</table>
<p>
   </p>
<p><strong>Lower production caused bottom-line numbers to be below expectations</strong></p>
<p>Although InPlay did a good job holding the line on costs, it was unable to offset the reduction in sales caused by lower production volumes. InPlay does not give quarterly guidance. Previous guidance for 2023 cited a AFF range of $126-$138 million. That range has since been lowered&nbsp; $117-$123 million (which is an average of approximately $30,000 per quarter) implying that growth will need to accelerate as the year progresses. There is good reason to believe cash flow will rise in upcoming quarters. The company had the most active quarter in history drilling eight wells and accelerating the drilling of two wells that were planned for the second quarter. It has shifted drilling towards oil-rich areas in response to gas curtailment and lower gas prices. The initial production rates for wells brought on during the quarter were impressive, far surpassing expectations. InPlay continues to improve drilling results with the use of longer horizontal laterals. In total, the company spent $29.6 million on exploration and development during the quarter, more than it generated in cash flow. As a result, net debt rose to $42.2 million from $32.9 million at the end of 2022.</p>
<table border="1" style="border-collapse: collapse;width: 660px;height: 71px">
<tbody>
<tr style="height: 17px">
<td style="width: 269px;height: 17px">(CDN $000 except EPS)</td>
<td style="width: 81px;height: 17px">2023-1Q</td>
<td style="width: 86px;height: 17px">2022-1Q</td>
<td style="width: 105px;height: 17px">2022-4Q</td>
<td style="width: 119px;height: 17px">Noble Est.</td>
</tr>
<tr style="height: 18px">
<td style="width: 269px;height: 18px">Revenues&nbsp;</td>
<td style="width: 81px;height: 18px">45,301</td>
<td style="width: 86px;height: 18px">52,156</td>
<td style="width: 105px;height: 18px">58,162</td>
<td style="width: 119px;height: 18px">54,405</td>
</tr>
<tr style="height: 18px">
<td style="width: 269px;height: 18px">Adjusted funds flow</td>
<td style="width: 81px;height: 18px">21,296</td>
<td style="width: 86px;height: 18px">29,379</td>
<td style="width: 105px;height: 18px">32,777</td>
<td style="width: 119px;height: 18px">24,463</td>
</tr>
<tr style="height: 18px">
<td style="width: 269px;height: 18px">EPS (diluted)</td>
<td style="width: 81px;height: 18px">$0.10</td>
<td style="width: 86px;height: 18px">$0.21</td>
<td style="width: 105px;height: 18px">$0.21</td>
<td style="width: 119px;height: 18px">$0.15</td>
</tr>
</tbody>
</table>
<p>
   </p>
<p><strong>Guidance is lowered, but only slightly</strong><br />
   </p>
<p>Because of recent drilling successes and the fact that InPlay was able to bring wells to production before the spring thaw, it has made only minor changes to 2023 production guidance despite curtailment issues in the first quarter. Management has lowered the upper end of production guidance and taken down adjusted fund flow guidance by 5-10%. Our estimates remain within, or below, guidance. Notably, management did not make changes to 2024 or 2025 production, adjusted fund flow or EBITDA guidance signaling that it views the curtailment issues of the first quarter to be temporary.</p>
<table border="1" style="border-collapse: collapse;width: 656px">
<tbody>
<tr>
<td style="width: 215px">2023 Guidance Changes</td>
<td style="width: 151px">Updated&nbsp;</td>
<td style="width: 183px">Previous</td>
<td style="width: 107px">Noble Est.</td>
</tr>
<tr>
<td style="width: 215px">Average production (boe/d)</td>
<td style="width: 151px">9,500-10,000</td>
<td style="width: 183px">9,500-10,500</td>
<td style="width: 107px">9,823</td>
</tr>
<tr>
<td style="width: 215px">Adjusted fund flow (mil)</td>
<td style="width: 151px">$117-123</td>
<td style="width: 183px">$126-138</td>
<td style="width: 107px">$96</td>
</tr>
</tbody>
</table>
<p>
   </p>
<p><strong>InPlay is killing it at the drill, bit so don&#8217;t worry about short-term curtailment issues</strong></p>
<p><strong></strong>InPlay continues to find ways to improve its drilling techniques and improve production rates. Yes, curtailment issues in the first quarter will mean lower results for the year, but management is finding ways to offset the issues. Eventually, infrastructure improvements or normal well declines will solve backflow pressure issues. If that happens, look for production to soar. Higher production, combined with improving natural gas prices, should mean an acceleration of cash flow generation like we saw over the last two years. And if that happens, we would expect the stock price to rise like it did between 2020 and 2022. We reiterate our&nbsp;<strong>Outperform</strong> rating and our $6.00 price target.</p>
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InPlay Oil (IPOOF)

Curtailments hurt production, but drilling successes should offset lost sales

Fundamental Analysis:

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September-quarter results (IPOOF)

Gas processing constraints, wildfire shut ins, and road closings combine to lower production (IPOOF)

Curtailments hurt production, but drilling successes should offset lost sales (IPOOF)

Results meet expectations, new drilling may be accelerating growth (IPOOF)

Inbox Intel from Channelchek.