CREW ENERGY INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL & OPERATING HIGHLIGHTS
Financial
($ thousands, except per share amounts)
Petroleum and natural gas sales
Adjusted funds flow (1)
Per share
-basic
-diluted
Net income
Per share
-basic
-diluted
Exploration and development expenditures
Property acquisitions (net of dispositions)
Net capital expenditures
Capital structure
($ thousands)
Working capital surplus (2)
Bank loan
Senior unsecured notes
Net debt
Common shares outstanding (thousands)
Operations
Daily production
Light crude oil (bbl/d)
Heavy crude oil (bbl/d)
Natural gas liquids (bbl/d)
Condensate (bbl/d)
Natural gas (mcf/d)
Oil equivalent (boe/d @ 6:1)
Average prices (3)
Light crude oil ($/bbl)
Heavy crude oil ($/bbl)
Natural gas liquids ($/bbl)
Condensate ($/bbl)
Natural gas ($/mcf)
Oil equivalent ($/boe)
Netback ($/boe)
Operating netback (4)
G&A
Financing costs on long-term debt
Other income
Funds from operations netback (4)
Drilling activity
Gross wells
Year ended
December 31, 2019
193,532
81,034
0.53
0.53
12,071
0.08
0.08
114,094
(19,084)
95,010
As at
December 31, 2019
(149)
52,136
51,987
295,868
347,855
Year ended
December 31, 2018
218,385
91,996
0.61
0.61
12,799
0.08
0.08
103,219
(9,806)
93,413
As at
December 31, 2018
(11,984)
59,904
47,920
294,885
342,805
151,534
151,730
Year ended
December 31, 2019
Year ended
December 31, 2018
216
1,639
2,056
2,693
97,398
22,837
63.24
50.65
6.78
64.40
2.53
23.22
14.05
(1.40)
(2.94)
-
9.71
276
1,782
1,761
2,380
106,116
23,885
65.32
39.27
23.18
72.22
2.80
25.05
14.49
(1.39)
(2.67)
0.11
10.54
8
8
100%
14
14
100%
Working interest wells
Success rate, net wells
Notes:
(1) Adjusted funds flow is calculated as cash provided by operating activities, adding the change in operating non-cash working capital, decommissioning obligations settled and accretion of
deferred financing costs on the senior unsecured notes. Adjusted funds flow is used to analyze the Company’s operating performance and leverage. Adjusted funds flow does not have a
standardized measure prescribed by International Financial Reporting Standards, and therefore, may not be comparable with the calculations of similar measures for other companies.
(2) Working capital surplus includes accounts receivable and net assets held for sale, less accounts payable and accrued liabilities. Refer to the section entitled “Non-IFRS Measures” contained
within this MD&A.
Average prices are before deduction of transportation costs and do not include gains and losses on financial instruments.
Operating netback equals petroleum and natural gas sales, including realized hedging gains and losses on commodity contracts, marketing income, less royalties, net operating costs and
transportation costs, calculated on a boe basis. Operating netback and funds from operations netback do not have a standardized measure prescribed by International Financial Reporting
Standards, and therefore, may not be comparable with the calculations of similar measures for other companies. Refer to the section entitled “Non-IFRS Measures” contained within this
MD&A.
Throughout this MD&A, other natural gas liquids or ngls comprise all natural gas liquids as defined by NI 51-101, other than condensate which is disclosed desperately.
(3)
(4)
(5)
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
1
CREW ENERGY INC.
ABOUT CREW
Crew Energy Inc. (“Crew” or the “Company”) is a growth-oriented oil and natural gas producer, committed to pursuing sustainable
per share growth through a balanced mix of financially responsible exploration and development complemented by strategic
acquisitions. The Company’s operations are primarily focused in the vast Montney resource, situated in northeast British Columbia
(“NE BC”), and include a large contiguous land base. Crew's liquids-rich Septimus and West Septimus areas ("Greater Septimus")
along with Groundbirch and the light oil area at Tower in British Columbia offer significant development potential over the long-
term. The Company has access to diversified markets with operated infrastructure and access to multiple pipeline egress options.
Crew’s common shares are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol “CR”.
ADVISORIES
Management’s discussion and analysis (“MD&A”) is the explanation of the financial performance for the period covered by the
consolidated financial statements along with an analysis of the financial position of the Company. Comments relate to and should
be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2019
and 2018. The consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”). All figures provided herein and in the December 31, 2019 audited consolidated financial statements are
reported in Canadian dollars (“CDN”). This MD&A is dated March 10, 2020.
Forward Looking Statements
This MD&A contains forward looking statements. Management’s assessment of future plans and operations, drilling plans and
the timing thereof, plans for the completion and tie-in of wells, facility and pipeline construction, commissioning and the timing
thereof, capital expenditures, including the Company’s 2020 exploration and development program (including guidance), timing
of capital expenditures and methods of financing capital expenditures and the ability to fund financial liabilities, production
estimates including 2020 average production forecast, expected commodity mix and prices, future operating costs, future
transportation costs, expected royalty rates, expected general and administrative expenses, expected interest rates, debt levels,
funds from operations, adjusted funds flow and the timing of and impact of implementing accounting policies, and potential
impact of possible future transactions may constitute forward looking statements under applicable securities laws and necessarily
involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production,
marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve
estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect
assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions or dispositions, delays resulting
from or inability to obtain required regulatory approvals and inability to access sufficient capital from internal and external sources.
As a consequence, the Company’s actual results may differ materially from those expressed in, or implied by, the forward looking
statements. Forward looking statements or information are based on a number of factors and assumptions which have been used
to develop such statements and information but which may prove to be incorrect. Although Crew believes that the expectations
reflected in such forward looking statements or information are reasonable, undue reliance should not be placed on forward
looking statements because the Company can give no assurance that such expectations will prove to be correct. In addition to
other factors and assumptions which may be identified in this document and other documents filed by the Company, assumptions
have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and
political environment in which Crew operates; the ability of the Company to obtain qualified staff, equipment and services in a
timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Company has an interest in
to operate the field in a safe, efficient and effective manner; Crew’s ability to obtain financing on acceptable terms; changes in the
Company’s banking facility; field production rates and decline rates; the ability to maintain operating and transportation costs; the
ability to replace and expand oil and natural gas reserves through acquisition, development or exploration; the timing and costs
of pipeline, storage and facility construction and expansion; the ability of the Company to secure adequate product transportation;
future petroleum and natural gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes
and environmental matters in the jurisdictions in which the Company operates; and Crew’s ability to successfully market its
petroleum and natural gas products. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional
information on these and other factors that could affect the Company’s operations and financial results are included in reports on
2
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com) or at the
Company’s website (www.crewenergy.com). The internal projections, expectations or beliefs contained in this MD&A are based
on the 2020 capital budget which is subject to change in light of ongoing results, prevailing economic circumstances, commodity
prices, and industry conditions and regulations. Accordingly, readers are cautioned that events or circumstances could cause
results to defer materially from those predicted. Furthermore, the forward looking statements contained in this document are
made as at the date of this document and the Company does not undertake any obligation to update publicly or to revise any of
the included forward looking statements, whether as a result of new information, future events or otherwise, except as may be
CREW ENERGY INC.
required by applicable securities laws.
Conversions
The oil and gas industry commonly expresses production volumes and reserves on a “barrel of oil equivalent” basis (“boe”), whereby
natural gas volumes are converted at the ratio of six thousand cubic feet to one barrel of oil. The intention is to sum crude oil,
condensate, other natural gas liquids (“ngl”) and natural gas measurement units into one basis for improved analysis of results and
comparisons with other industry participants.
Throughout this MD&A, Crew has used the 6:1 boe measure which is the approximate energy equivalency of the two commodities
at the burner tip. Boe does not represent a value equivalency at the wellhead nor at the plant gate which is where Crew sells its
production volumes and therefore may be a misleading measure, particularly if used in isolation. Given that the value ratio based
on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing
a 6:1 conversion may be misleading as an indication of value.
Non-IFRS Measures
Throughout this MD&A, the Company uses certain measures to analyze operational and financial performance. These non-IFRS
measures do not have any standardized meaning prescribed under IFRS and therefore, may not be calculated in a similar fashion
nor comparable to similar measures presented by other entities. Management believes that the presentation of these non-IFRS
measures provides useful information to shareholders and investors as the measures provide increased transparency and the ability
to better analyze performance against prior periods on a comparable basis.
Funds from Operations and Adjusted Funds Flow
One of the benchmarks Crew uses to evaluate its performance is funds from operations and adjusted funds flow. Funds from
operations and adjusted funds flow are measures not defined in IFRS but are commonly used in the oil and gas industry. Funds
from operations represents cash provided by operating activities before changes in operating non-cash working capital and
accretion of deferred financing costs. Adjusted funds flow represents funds from operations before decommissioning obligations
settled. The Company considers these metrics as key measures that demonstrate the ability of the Company’s continuing
operations to generate the cash flow necessary to maintain production at current levels and fund future growth through capital
investment and to service and repay debt. Management believes that such measures provide an insightful assessment of the
Company's operations on a continuing basis by eliminating certain non-cash charges and actual settlements of decommissioning
obligations, the timing of which is discretionary. Funds from operations and adjusted funds flow should not be considered as an
alternative to or more meaningful than cash provided by operating activities as determined in accordance with IFRS as an indicator
of the Company’s performance. Crew’s determination of funds from operations and adjusted funds flow may not be comparable
to that reported by other companies. Crew also presents adjusted funds flow per share whereby per share amounts are calculated
using weighted average shares outstanding consistent with the calculation of income per share.
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
3
CREW ENERGY INC.
The following table reconciles Crew’s cash provided by operating activities to funds from operations and adjusted funds flow:
($ thousands)
Cash provided by operating activities
Change in operating non-cash working capital
Accretion of deferred financing costs
Funds from operations
Decommissioning obligations settled
Adjusted funds flow
Operating Netback
Three months
ended
December 31, 2019
Three months
ended
December 31, 2018
Year ended
December 31,
2019
Year ended
December 31,
2018
21,106
(5,315)
(246)
15,545
541
16,086
22,878
843
(246)
23,475
237
23,712
81,395
(3,297)
(983)
77,115
3,919
81,034
89,162
2,663
(1,023)
90,802
1,194
91,996
Management uses certain industry benchmarks such as operating netback to analyze financial and operating performance. This
benchmark as presented does not have any standardized meaning prescribed by IFRS, and therefore may not be comparable with
the calculation of similar measures for other entities. Operating netback equals petroleum and natural gas sales including realized
gains and losses on commodity related derivative financial instruments, marketing income, less royalties, net operating costs and
transportation costs calculated on a boe basis. Management considers operating netback an important measure to evaluate its
operational performance as it demonstrates its field level profitability relative to current commodity prices. The calculation of
Crew’s netbacks can be seen in the section entitled “Operating Netbacks” of this MD&A.
Working Capital and Net Debt
The Company closely monitors its capital structure with a goal of maintaining a strong financial position in order to fund current
operations and the future growth of the Company. Crew monitors working capital and net debt as part of its capital structure.
Working capital and net debt do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable with
the calculation of similar measures for other entities.
The following tables outline Crew’s calculation of working capital and net debt:
($ thousands)
Current assets
Current liabilities
Derivative financial instruments
Working capital surplus
($ thousands)
Bank loan
Senior unsecured notes
Working capital surplus
Net debt
December 31,
2019
December 31,
2018
50,019
(46,690)
(3,180)
149
78,904
(58,538)
(8,382)
11,984
December 31,
2019
December 31,
2018
(52,136)
(295,868)
149
(347,855)
(59,904)
(294,885)
11,984
(342,805)
4
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
CREW ENERGY INC.
RESULTS OF OPERATIONS
Overview
In 2019, Crew continued to emphasize the drilling and completion of its higher-value, ultra condensate-rich (“UCR”) West Septimus
area, with a focus on increasing the Company’s higher valued liquids production. Production during the year averaged 22,837 boe
per day, a 4% decrease over 2018, with the Company successfully increasing condensate production by 13% year-over-year.
Production was impacted by third party facility and pipeline outages, and voluntary shut-ins of sub-economic natural gas
production. Crew’s 2019 adjusted funds flow decreased 12% over 2018, primarily driven by weaker commodity prices and higher
transportation costs. The weakness in North American commodity markets, in particular natural gas and ngl, has focused the
Company on a disciplined capital expenditure program, emphasizing UCR condensate production, reducing operating costs and
improving the efficiencies of our capital program.
During 2019, world crude oil prices underperformed 2018, with the average Canadian dollar denominated West Texas Intermediate
(“WTI”) price declining 10% year-over-year, as production growth from U.S. shale oil basins and slowing global oil demand growth
was not fully offset by OPEC production curtailments. Benchmark prices for Canadian light crude oil and condensate also declined
marginally, 10% and 11% respectively, as the Alberta Government’s production curtailment initiatives stabilized prices late in 2018.
Crew’s 2019 light crude oil and condensate prices followed the benchmark trends with year-over-year prices decreasing 3% and
11%, respectively.
The Canadian heavy crude oil benchmark was also fairly stable throughout 2019, but the average annual price increased 18% over
2018 as the Alberta Government’s curtailment initiatives and demand for Canadian heavy crude oil bolstered the 2019 average
price. The Company’s heavy crude oil price followed the benchmark trend, increasing 29% and exceeding the benchmark increase
as the Company benefited from lower relative blending costs required to facilitate pipeline transportation.
U.S. shale basin production of natural gas and ngl had a more dramatic impact on North American prices for these products in
2019. The supply of ngl in North America increased through the latter part of 2018 and throughout 2019. This coupled with
moderate weather through most of 2019, impacted domestic and international demand, which placed downward pressure on
prices throughout the year. The benchmark prices for the two main components of Crew’s ngl production, propane and butane,
declined in Crew’s primary market by 34% and 31% year-over-year, respectively. The impact of the downturn on the Company’s
ngl price in 2019 was a 71% drop as compared to 2018, reflective of the depressed North American market and enhanced by the
fixed cost of ngl fractionation embedded in the net price Crew receives for the majority of its ngl production.
During 2019, Crew’s natural gas sales were exposed to a diversified portfolio of North American pricing points, including
approximately 70% to U.S. based Chicago City and NYMEX pricing and approximately 30% to Canadian based Alliance, AECO and
Station 2 pricing. This U.S. focused weighting benefited Crew with strong U.S. pricing early in 2019, as low U.S. inventories and
early cold weather supported prices through late 2018 and the early part of 2019. As the year progressed and large volumes of
associated natural gas supply were brought on-stream, primarily from the Permian basin, U.S. natural gas prices at Crew’s primary
pricing points fell as the increasing supply overwhelmed North American demand. The price for Chicago City Gate natural gas,
delivered to Crew’s ATP delivery point, declined by 36% from the first quarter to the fourth quarter of 2019. Canadian natural gas
markets also benefited from supportive winter weather and low inventory early in the year, but substantially lagged behind U.S.
pricing as continued lack of egress and maintenance issues on major Canadian egress pipelines drove a wide differential between
the two markets. In September, TC Energy announced a Temporary Service Protocol (“TSP”) that stabilized spot and term AECO
pricing by reconnecting the AECO storage and transportation markets during periods of planned TC mainline maintenance. The
result was an immediate boost to Canadian prices and a corresponding reduction in the differential between Canadian and US
prices. The average price for Canadian Benchmark AECO 5A natural gas was enhanced by 173% in the fourth quarter as compared
to the third quarter, mainly the result of the TSP, which also helped to deliver a 17% increase in the average annual price for AECO
5A over 2018. With a large portion of Crew’s 2019 natural gas portfolio linked to U.S. price points, Crew’s average annual gas price
followed the U.S. year-over-year declining price trend with a realized natural gas price decline of 10% as compared to 2018.
Crew’s risk management program and market diversification strategy helped to mitigate a portion of the effects of the 2019
commodity price decline. The Company’s hedging program realized a gain of $2.4 million in 2019 as compared to a $10.6 million
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
5
CREW ENERGY INC.
loss in 2018. In addition, the Company’s exposure to U.S. natural gas markets at Dawn and Malin were monetized throughout the
year for a realized gain of $8.7 million as compared to $6.9 million in 2018.
Crew continues to work on lowering its controllable costs with net operating costs decreasing by 9% and gross general and
administrative costs declining by 5%. Transportation costs increased 42% over 2018 as contracts that were entered into 2015 and
2016, to increase the Company’s natural gas egress options, came into effect in March and November of 2019. This added capacity
will provide the Company with flexibility to alter its natural gas exposure to the most profitable natural gas markets over the next
two years and will replace more expensive natural gas egress options that expire in 2020 and 2021.
Capital expenditures during the year focused on the drilling and completion of wells primarily in the UCR area at West Septimus.
Exploration and Development expenditures totaled $114 million and included $89 million directed to the drilling of 8 (8.0 net)
wells, the completion of 13 (13.0 net) wells and the re-completion of 26 (25.0 net) heavy oil wells. Spending also included $14
million for facilities, equipment on well sites, gathering pipelines and infrastructure. During 2019 the Company also disposed of
minor non-producing properties in north eastern British Columbia for proceeds of approximately $21 million. The 2019 program
was highlighted by the drilling and completion of extended reach horizontal (“ERH”) wells of approximately 3,000 meters in length
in Crew’s UCR area. These wells recognized significant efficiencies and improvements in recoveries relative to previous shorter-
reach horizontal wells, with a 35% improvement in drilling costs per lateral length realized from 2016 to 2019. The ERH program
can generate improved recoveries and superior economic returns with a smaller environmental footprint, lower operating costs
and significantly lower development costs.
Throughout 2019, the Company worked towards the completion of a strategic debt and cost reduction initiative that resulted in
the early 2020 announcement of the sale of a 22% net working interest in each of its two Greater Septimus gas processing facilities
for $70 million. The transaction consists of two phases, the first of which closed in February, with the second expected to close in
November 2020, with each phase to include the sale of an 11% working interest in the facilities for $35 million. In a separate
transaction Crew has elected to exercise its option to acquire an approximate 16% interest in the same two facilities for
approximately $12 million. Upon the closing of the transactions, the net proceeds will be used to reduce the Company’s
outstanding indebtedness under Crew’s credit facility by a net $58 million.
Crew exited 2019 with net debt of $348 million, which is slightly higher than the $343 million outstanding at the end of 2018. Year-
end net debt was comprised of approximately $52 million, or 22%, drawn on the Company’s $235 million bank facility, positive
working capital and the balance represented by the Company’s outstanding senior unsecured notes. Crew’s senior unsecured
notes carry a favorable interest rate of 6.5%, do not mature until March 2024 and have no financial maintenance covenants. With
no near-term maturities, a substantial reserve base and substantial liquidity, Crew is strongly positioned to manage its current debt
position.
6
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
CREW ENERGY INC.
Production
Three months ended
December 31, 2019
Three months ended
December 31, 2018
Oil Condensate
Ngl Nat. gas
Total
Oil Condensate
Ngl Nat. gas
Total
(bbl/d)
(bbl/d)
(bbl/d)
(mcf/d)
(boe/d)
(bbl/d)
(bbl/d)
(bbl/d)
(mcf/d)
(boe/d)
NE BC
251
2,455
2,011
96,743
20,840
Lloydminster
1,600
-
-
33
1,606
Total
1,851
2,455
2,011
96,776
22,446
260
1,634
1,894
2,446
1,832
97,239
20,745
-
-
26
1,638
2,446
1,832
97,265
22,383
Production during the fourth quarter of 2019 was consistent with the same period in 2018, as declines were replaced by a successful
2019 drilling program.
Year ended
December 31, 2019
Year ended
December 31, 2018
Oil Condensate
Ngl Nat. gas
Total
Oil Condensate
Ngl Nat. gas
Total
(bbl/d)
(bbl/d)
(bbl/d)
(mcf/d)
(boe/d)
(bbl/d)
(bbl/d)
(bbl/d)
(mcf/d)
(boe/d)
NE BC
216
2,693
2,056
97,351
21,190
Lloydminster
1,639
-
-
47
1,647
Total
1,855
2,693
2,056
97,398
22,837
276
1,782
2,058
2,380
1,761
106,108
22,102
-
-
8
1,783
2,380
1,761
106,116
23,885
Production in 2019 decreased 4% when compared to the same period in 2018, as a result of natural production declines, voluntary
shut-ins of sub-economic natural gas production, pipeline outages in the second quarter of 2019 and a third party facility outage
in NE BC. These declines were partially offset by new production added from the completion of 12 wells in the UCR area at Greater
Septimus during the year.
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
7
CREW ENERGY INC.
Petroleum and Natural Gas Sales
Petroleum and natural gas sales ($ thousands)
Light crude oil
Heavy crude oil
Natural gas liquids
Condensate
Natural gas
Total
Crew average prices
Light crude oil ($/bbl)
Heavy crude oil ($/bbl)
Natural gas liquids ($/bbl)
Condensate ($/bbl)
Natural gas ($/mcf)
Oil equivalent ($/boe)
Benchmark pricing
Light crude oil – WTI (Cdn $/bbl)
Heavy crude oil – WCS (Cdn $/bbl)
Condensate – Condensate @ Edmonton (Cdn $/bbl)
Natural Gas:
AECO 5A daily index (Cdn $/mcf)
AECO 7A monthly index (Cdn $/mcf)
Alliance 5A (Cdn $/mcf)
Chicago City Gate at ATP (Cdn $/mcf)
Henry Hub Close (Cdn $/mcf)
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
1,449
6,591
1,602
14,291
21,008
44,941
62.85
44.76
8.66
63.29
2.36
21.76
75.19
54.18
70.40
2.48
2.34
2.05
2.15
3.30
912
1,560
2,478
11,892
33,996
50,838
38.18
10.38
14.71
52.85
3.80
24.69
77.56
25.14
59.89
1.56
1.90
2.71
4.13
4.81
4,993
30,310
5,086
63,290
89,853
193,532
6,582
25,548
14,900
62,731
108,624
218,385
63.24
50.65
6.78
64.40
2.53
23.22
75.69
58.79
70.37
1.76
1.62
1.76
2.47
3.49
65.32
39.27
23.18
72.22
2.80
25.05
83.89
49.73
79.00
1.50
1.53
2.17
3.20
4.00
In the fourth quarter of 2019, the Company’s petroleum and natural gas sales decreased 12% as compared to the same period in
2018, as a result of a 12% decrease in realized wellhead pricing during the quarter.
The Company’s fourth quarter realized light crude oil price increased 65% over the fourth quarter of 2018, while the Company’s
Cdn$ WTI benchmark decreased by 3% over the same period. This divergence was the result of depressed year end 2018 Canadian
crude oil prices caused by high Canadian inventory levels brought on by a lack of Canadian egress and reduced demand due to
extended fall 2018 refinery outages. Crew’s fourth quarter heavy crude oil price increased 331% as compared to the same period
last year, which is greater than the 116% increase in the Company’s Western Canadian Select (“WCS”) benchmark, as a result of a
decrease in the relative cost of diluent utilized to blend with the heavy crude oil for transportation purposes. In addition, the
Company had entered into short term sales contracts at weaker spot pricing to manage inventory levels during the fourth quarter
of 2018. Crew’s ngl realized price decreased 41% in the fourth quarter as compared to the same period in 2018, due to a decrease
in the value of component pricing, in particular a large decline in realized propane and butane pricing. Crew’s ngl pricing includes
embedded cost to process the ngl product out of the Company’s gas stream, which occurs after the custody transfer point. The
Company’s fourth quarter realized condensate price increased 20% over the same period in 2018, which approximated the 18%
increase in the Condensate at Edmonton benchmark price.
Crew’s realized natural gas price decreased by 38% in the fourth quarter of 2019, which is higher than the 29% decrease in the
Company’s natural gas sales portfolio weighted benchmark price. The variance was the result of Crew’s gas sold at Chicago City
Gate and Henry Hub prices being physically sold at the Alliance Trading Pool in Canada, where it is bought by third parties at a
Chicago City Gate or Henry Hub market price less a fixed cost to transport the product to the end market. As the fixed cost is
embedded in the price, the impact of a fluctuating price, as compared to benchmark pricing, is enhanced.
8
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
The Company’s fourth quarter 2019 natural gas sales portfolio was based approximately on the following reference prices:
CREW ENERGY INC.
AECO 5A
AECO 7A
Alliance 5A
Chicago City Gate at ATP
Henry Hub
Station 2
Sumas
Total
Q4 2019
Q4 2018
7%
0%
16%
58%
16%
3%
0%
13%
5%
23%
45%
10%
3%
1%
100%
100%
For 2019, the Company’s petroleum and natural gas sales decreased 11% as compared to the prior year as a result of the 4%
decrease in production combined with a 7% decrease in realized commodity pricing.
The Company’s realized light crude oil price decreased 3% which was less than the WTI benchmark decrease of 10% in 2018, as a
result of Crew’s 2018 realized pricing being discounted by the previously mentioned 2018 wide differential between WTI and
Canadian light sweet crude oil. Crew’s heavy crude oil price for 2019 increased 29% as compared to the same period last year,
which was greater than the 18% increase in the Company’s WCS benchmark, as a result of a decrease in the cost of diluent utilized
to blend with the heavy crude oil. For 2019, the Company’s realized ngl price decreased 71% over to the same period in 2018, due
to substantial decreases in component pricing at the Company’s primary pricing point. The Company’s realized condensate price
decreased 11%, which was consistent with the 11% decrease in the Condensate at Edmonton benchmark price as compared to the
prior year.
The Company’s natural gas price decreased 10% over 2018, which is lower than the Company’s natural gas sales portfolio weighted
benchmark price decrease of 1%, due to the aforementioned fixed transportation costs embedded in the price received for a
portion of the Company’s natural gas sales.
Royalties
($ thousands, except per boe)
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
Royalties
Per boe
Percentage of petroleum and natural gas sales
4,076
1.97
9.1%
3,433
1.67
6.8%
14,758
1.77
7.6%
15,123
1.73
6.9%
For the fourth quarter of 2019 and year ended December 31, 2019, royalties per boe and as a percentage of petroleum and natural
gas sales increased over the same periods in 2018, predominantly due to a one-time prior period gas cost allowance adjustment
related to the Company’s NE BC royalty assessments, partially offset by a decrease in realized wellhead pricing. The Company
expects its royalties as a percentage of revenue to average between 5% and 7% in 2020.
Derivative Financial Instruments
Commodities
The Company enters into derivative and physical risk management contracts in order to reduce volatility in financial results and to
ensure a certain level of cash flow to fund planned capital projects. Crew’s strategy focuses on the use of puts, costless collars,
swaps and fixed price contracts to limit exposure to fluctuations in commodity prices, interest rates and foreign exchange rates,
while allowing for participation in commodity price increases. The Company’s financial derivative trading activities are conducted
pursuant to the Company’s Risk Management Policy, approved by the Board of Directors.
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
9
CREW ENERGY INC.
These contracts had the following impact on the consolidated statements of income and comprehensive income;
($ thousands)
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
Realized gain (loss) on derivative financial instruments
Per boe
Unrealized (loss) gain on financial instruments
1,621
0.78
(4,079)
(1,291)
(0.63)
25,456
2,352
0.28
(5,202)
(10,645)
(1.22)
8,035
As at December 31, 2019, the Company held derivative commodity contracts as follows:
Subject of
Contract
Notional
Quantity
Term
Reference
Strike
Price
Option
Traded
Fair Value
Gas
12,500 mmbtu/day
January 1, 2020 -
December 31, 2020
Chicago Citygate
$3.32/mmbtu
Swap
$ 2,300
Gas
2,500 mmbtu/day
January 1, 2020 -
US$ Nymex Henry
December 31, 2020
Hub
$2.48/mmbtu
Swap
199
Oil
Oil
Oil
Oil
Oil
250 bbl/day
250 bbl/day
500 bbl/day
1,000 bbl/day
250 bbl/day
Condensate
250 bbl/day
Total
January 1, 2020 -
June 30, 2020
CDN$ WTI
$75.50/bbl
Swap
(102)
January 1, 2020 -
USD$ WCS - WTI
June 30, 2020
Differential
($17.25)/bbl
Swap
January 1, 2020 -
June 30, 2020
January 1, 2020 -
December 31, 2020
July 1, 2020 -
December 31, 2020
January 1, 2020 -
March 31, 2020
CDN$ WCS
$52.25/bbl
Swap
CDN$ WTI
$77.65/bbl
Swap
CDN$ WCS
$51.50/bbl
Swap
USD$ C5+
Differential
$2.00/bbl
Swap
131
(9)
639
5
17
$ 3,180
Subsequent to December 31, 2019, the Company entered into the following derivative commodity contracts:
Subject of
Contract
Oil
Oil
Oil
Notional
Quantity
250 bbl/day
250 bbl/day
250 bbl/day
Term
Reference
July 1, 2020 -
USD$ WCS - WTI
September 30, 2020
Differential
Strike
Price
Option
Traded
($16.00/bbl)
Swap
July 1, 2020 -
December 31, 2020
CDN$ WTI
$76.00/bbl
Swap
July 1, 2020 -
USD$ WCS - WTI
December 31, 2020
Differential
($15.60/bbl)
Swap
10
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
Marketing Income
($ thousands, except per boe)
Marketing revenue
Marketing expense
Marketing income
Per boe
CREW ENERGY INC.
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
(32)
-
(32)
(0.02)
2,968
(852)
2,116
1.03
8,658
(414)
8,244
0.99
6,855
(2,914)
3,941
0.45
Through 2018 and the first three quarters of 2019, the Company recognized marketing revenue from the monetization of the
Company’s exposure to the Dawn, Malin and Sumas natural gas markets. During the third quarter of 2019, the value inherent in
the Dawn, Malin and Sumas markets faded as the differential between Canadian natural gas prices and US natural gas prices
narrowed. In the fourth quarter of 2019, the Company recognized a small loss on the monetization of its Malin exposure, while
the Dawn and Sumas contracts had been monetized in previous quarters.
Net Operating Costs
($ thousands, except per boe)
Operating costs
Processing revenue
Net operating costs
Per boe
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
12,015
(640)
11,375
5.51
13,010
(1,105)
11,905
5.78
52,487
(3,090)
49,397
5.93
58,341
(4,134)
54,207
6.22
During the fourth quarter of 2019 and year ended December 31, 2019, net operating costs and net operating costs per boe
decreased as compared to the same periods in 2018, as a result of efforts by the Company to optimize field operations and reduce
costs across all operating areas, coupled with volume declines in Tower and Lloydminster production, which yield higher operating
costs per boe. The Company forecasts 2020 net operating costs to average between $6.25 and $6.75 per boe.
Transportation Costs
($ thousands, except per boe)
Transportation costs
Per boe
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
5,943
2.88
3,719
1.81
22,804
2.74
16,007
1.84
For the fourth quarter of 2019 and year ended December 31, 2019, the Company’s transportation costs increased 60% and 42%,
respectively, as compared to the same periods in 2018, as a result of the Company’s new West Septimus to TC Energy’s Saturn
meter station natural gas sales pipeline system, which came on-line late in the first quarter of 2019. The Company also added firm
TC Energy mainline receipt service in conjunction with the new sales pipeline commissioning that has increased the Company’s
exposure to diversified natural gas markets. The Company forecasts 2020 transportation costs to average between $3.25 and
$3.75 per boe.
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
11
CREW ENERGY INC.
Operating Netbacks(1)
($/boe)
Septimus
Heavy Oil
NE BC
December 31, 2019
December 31, 2018
Greater
Lloydminster
Other
ended
ended
Three months
Three months
Petroleum and natural gas sales
Royalties
Realized commodity hedging gain (loss)
Marketing income
Net operating costs
Transportation costs
Operating netbacks
20.13
(1.76)
0.90
(0.02)
(3.99)
(2.61)
12.65
44.67
(6.03)
(0.81)
-
(21.94)
(0.41)
15.48
18.81
(0.76)
0.96
-
(6.41)
(7.12)
5.48
21.76
(1.97)
0.78
(0.02)
(5.51)
(2.88)
12.16
24.69
(1.67)
(0.63)
1.03
(5.78)
(1.81)
15.83
Production (boe/d)
18,720
1,606
2,120
22,446
22,383
Operating netbacks for the fourth quarter of 2019 decreased 23% over the same period in 2019 as a result of lower realized natural
gas pricing, higher royalties and transportation costs, and lower marketing income. This was partially offset by increased realized
commodity hedging gains and decreases in net operating expenses at Greater Septimus and Other NE BC properties.
($/boe)
Septimus
Heavy Oil
NE BC
December 31, 2019
December 31, 2018
Greater
Lloydminster
Other
Year ended
Year ended
Petroleum and natural gas sales
Royalties
Realized commodity hedging gain (loss)
Marketing income
Net operating costs
Transportation costs
Operating netbacks
21.31
(1.40)
0.56
1.17
(4.39)
(2.44)
14.81
50.46
(6.93)
(3.30)
-
(21.68)
(0.55)
18.00
18.84
(1.01)
0.60
-
(8.09)
(7.83)
2.51
23.22
(1.77)
0.28
0.99
(5.93)
(2.74)
14.05
25.05
(1.73)
(1.22)
0.45
(6.22)
(1.84)
14.49
Production (boe/d)
19,373
1,647
1,817
22,837
23,885
Note:
(1) Non-IFRS measure. See ”Non-IFRS Measures” contained within this MD&A.
For the year ended December 31, 2019, operating netbacks decreased 3% as compared to the prior year due to a decrease in
realized commodity prices, higher royalties and transportation costs, partially offset by increased realized hedging gains, marketing
income and reduced net operating costs.
General and Administrative Costs
($ thousands, except per boe)
Gross costs
Operator’s recoveries
Capitalized costs
General and administrative expenses
Per boe
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
4,081
(38)
(1,305)
2,738
1.33
4,548
(97)
(1,264)
3,187
1.55
17,607
(91)
(5,880)
11,636
1.40
18,565
(749)
(5,726)
12,090
1.39
Gross and net general and administrative (“G&A”) costs decreased in both the fourth quarter of 2019 and year ended December
31, 2019 as compared to the same periods in 2018, mainly due to the impact from the adoption of IFRS 16, where a portion of the
Company’s head office lease is no longer charged to G&A, partially offset by a decrease in operator’s recoveries as a result of
reduced capital spending on partnered wells. The decrease in G&A costs per boe in the fourth quarter of 2019 is mainly due to
12
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
the aforementioned impact from the adoption of IFRS 16. The increase in G&A costs per boe in the year ended December 31,
2019 is mainly due to a decrease in production and operator’s recoveries as compared to the same period in 2018, partially offset
by the aforementioned impact from the adoption of IFRS 16. Crew forecasts G&A costs per boe to average between $1.25 and
CREW ENERGY INC.
$1.50 in 2020.
Share-Based Compensation
($ thousands)
Gross costs
Capitalized costs
Total share-based compensation
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
2,187
(1,058)
1,129
3,430
(1,615)
1,815
10,237
(4,897)
5,340
13,457
(6,381)
7,076
In the fourth quarter of 2019 and year ended December 31, 2019, the Company’s total share-based compensation expense
decreased as compared to the same periods in 2018, mainly due to the lower value of awards granted in 2019 as compared to
2018.
Depletion and Depreciation
($ thousands, except per boe)
Depletion and depreciation
Per boe
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
18,356
8.89
18,459
8.96
75,776
9.09
77,373
8.88
In the fourth quarter of 2019, depletion and depreciation costs per boe decreased when compared to the same period in 2018,
due to a decrease in future development costs per boe associated with reserves bookings at the end of 2019 as compared to 2018,
partially offset by the addition of depreciation on right-of-use assets, which was the result of the adoption of IFRS 16 in the first
quarter of 2019. In 2019, depletion and depreciation costs per boe increased when compared to 2018 as a result of an increase
to the per boe depletion rate of Tower production, due to lower reserve bookings at Tower as some probable locations were
removed as their planned development extended beyond the required time guidelines. In addition, the aforementioned
depreciation on right-of-use assets contributed to the increase in depletion and depreciation costs per boe, partially offset by
lower land expiries as compared to the same period in 2018. Proved plus probable reserves remained relatively unchanged with
reserves of 410.6 MMboe at December 31, 2019, as compared to 411.0 MMboe at December 31, 2018.
Impairment
At December 31, 2019, due to weakness in the Canadian commodity price environment and the depressed share price of the
Company, the Company tested its northeast British Columbia cash-generating unit (“CGU”) and Lloydminster CGU for impairment.
It was determined that the recoverable amount of the northeast British Columbia CGU and Lloydminster CGU exceeded their
carrying value and an impairment charge was not recorded.
At December 31, 2018, the Company completed an assessment of the indicators of impairment. As a result of indicators being
present, the Company tested the northeast British Columbia CGU and Lloydminster CGU for impairment at December 31, 2018. It
was determined that the recoverable amount of both the northeast British Columbia CGU and Lloydminster CGU exceeded their
carrying value and therefore an impairment charge was not recorded.
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
13
CREW ENERGY INC.
Finance Expenses
($ thousands, except per boe)
Interest on bank loan and other
Interest on senior notes
Accretion of deferred financing charges
Accretion of the decommissioning obligation
Total finance expense
Average long-term debt level
Average drawings on bank loan
Average senior unsecured notes outstanding
Effective interest rate on senior unsecured notes
Effective interest rate on long-term debt
Financing costs on long-term debt per boe
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
1,151
4,915
246
462
6,774
352,128
52,128
300,000
6.5%
6.1%
3.06
546
4,915
246
491
6,198
353,425
53,425
300,000
6.5%
6.1%
2.77
4,009
19,500
983
1,901
26,393
352,191
52,191
300,000
6.5%
6.1%
2.94
2,735
19,500
1,023
1,958
25,216
346,121
46,121
300,000
6.5%
6.1%
2.67
Average corporate debt levels and the associated interest charges have remained relatively consistent year-over-year, as the
Company has limited net capital expenditures to approximate adjusted funds flow over the past several quarters. Crew forecasts
the effective interest rate on its long-term debt to average between 6.0% and 6.5% in 2020.
Gain on Divestitures of Property
During 2019, the Company disposed of non-core lands with no associated production or assigned reserves, for gross proceeds of
$20.8 million. The lands consisted of petroleum and natural gas properties and undeveloped land with a net book value of $1.1
million and associated decommissioning obligations of $0.3 million, resulting in a gain of $20.0 million.
During the first quarter of 2018, the Company disposed of non-core assets for cash proceeds of $10.0 million. The assets consisted
of petroleum and natural gas properties and undeveloped land with a net book value of $0.9 million and associated
decommissioning obligations of $0.4 million, resulting in a gain of $9.5 million on closing of the disposition.
Deferred Income Taxes
In the fourth quarter of 2019, the provision for deferred taxes was a recovery of $1.5 million as compared to an expense of $9.6
million for the same period in 2018. The deferred income tax recovery in the fourth quarter of 2019 is due to a pre-tax loss realized
in the fourth quarter of 2019, primarily a result of lower petroleum and natural gas sales as compared to the fourth quarter of 2018
and a large unrealized gain on financial instruments contributing to pre-tax income in the fourth quarter of 2018. For 2019, the
provision for deferred taxes was an expense of $0.8 million as compared to an expense of $10.4 million in 2018. The decrease in
expense is the result of lower pre-tax income in 2019, resulting from the aforementioned decrease in petroleum and natural gas
sales, partially offset by a realized gain as compared to a 2018 loss on financial instruments and higher gains on dispositions.
A summary of the Company’s estimated income tax pools is outlined below:
($ thousands)
December 31, 2019
December 31, 2018
Cumulative Canadian Exploration Expense
Cumulative Canadian Development Expense
Undepreciated Capital Cost
Non-capital losses
Share issue costs
Other
14
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
293,400
282,900
202,400
311,600
2,800
7,900
1,101,000
291,400
238,800
202,800
335,600
5,300
8,000
1,081,900
CREW ENERGY INC.
Cash, Adjusted Funds Flow and Net (Loss) Income
($ thousands, except per share amounts)
Cash provided by operating activities
Adjusted funds flow (1)
Per share
-basic
-diluted
Net (loss) income
Per share
-basic
-diluted
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
21,106
16,086
0.11
0.11
(6,235)
(0.04)
(0.04)
22,878
23,712
0.16
0.16
18,771
0.12
0.12
81,395
81,034
0.53
0.53
12,071
0.08
0.08
89,162
91,996
0.61
0.61
12,799
0.09
0.09
Note:
(1) Non-IFRS measure. Adjusted funds flow is calculated as cash provided by operating activities, adding the change in operating non-cash working capital, decommissioning obligations
settled and accretion of deferred financing costs on the senior unsecured notes. Adjusted funds flow is used to analyze the Company’s operating performance and leverage. Adjusted
funds flow does not have a standardized measure prescribed by International Financial Reporting Standards, and therefore, may not be comparable with the calculations of similar measures
for other companies. See “Non-IFRS Measures” contained within this MD&A.
Cash provided by operating activities and adjusted funds flow decreased in both the fourth quarter of 2019 and year ended
December 31, 2019, predominantly due to lower petroleum and natural gas sales, and increased transportation costs as compared
to the same periods in 2018. The Company had a net loss for the fourth quarter of 2019 as compared to net income in the same
period in 2018, predominantly due to lower petroleum and natural gas sales and a favourable unrealized hedging gain in the
fourth quarter of 2018 as compared to an unrealized hedging loss in the fourth quarter of 2019. Net income for the year ended
December 31, 2019 decreased as compared to the same period in 2018, due to lower petroleum and natural gas sales, partially
offset by higher gains on dispositions and lower operating costs.
Capital Expenditures, Property Acquisitions and Dispositions
($ thousands)
Land
Seismic
Drilling and completions
Facilities, equipment and pipelines
Other
Total exploration and development
Net property acquisitions (dispositions)
Total
Three months
ended
December 31,
2019
Three months
ended
December 31,
2018
Year ended
December 31,
2019
Year ended
December 31,
2018
890
234
19,954
3,976
1,336
26,390
82
26,472
1,393
1,188
32,829
(3,592)
1,356
33,174
175
33,349
3,311
1,163
89,156
14,069
6,395
114,094
(19,084)
95,010
4,121
1,939
71,524
19,318
6,317
103,219
(9,806)
93,413
In the fourth quarter of 2019, the Company spent a total of $26.4 million on exploration and development expenditures. The
majority of this amount was spent on the continued development of the Montney assets. During the quarter, $20.0 million was
spent on drilling and completion activities, $4.0 million on facilities, equipment and pipelines spending and $2.4 million was spent
on land, seismic, recompletions and other miscellaneous amounts. The Company completed four (4.0 net) natural gas wells in NE
BC and recompleted six (5.0 net) heavy crude oil wells in Lloydminster.
In 2019, the Company drilled a total of 8 (8.0 net) natural gas wells. During the year, the Company completed 13 (13.0 net) wells
and recompleted 26 (25.0 net) wells. The Company’s spending focus in 2019 was on UCR drilling and completions in the West
Septimus area.
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
15
CREW ENERGY INC.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
The capital intensive nature of Crew’s activities generally results in the Company carrying a working capital deficiency; however, at
the end of the fourth quarter of 2019, the Company carried a working capital surplus of $0.1 million. Working capital includes
accounts receivable and net assets held for sale less accounts payable and accrued liabilities. Included in the working capital
surplus is a receivable of $5.0 million for a Government of British Columbia infrastructure credit earned through the completion of
a pipeline connecting the West Septimus processing facility to the TC Energy Saturn meter station. The collection of the credit is
realized through the reduction of future royalties payable to the British Columbia government.
Subsequent to December 31, 2019, the Company entered into a final purchase and sale agreement with a third party midstream
company for the disposition of a 22% net working interest in each of its Septimus gas processing facility and West Septimus gas
processing facility located in Northeast British Columbia for aggregate consideration of $70.0 million. The purchase and sale
agreement is structured with two closings, whereby an 11% working interest was disposed of for $35 million on February 27, 2020,
with proceeds applied to reduce borrowings on the Facility, and the sale of an additional 11% working interest for $35 million is
expected to close in the fourth quarter of 2020, subject to certain closing conditions. This transaction will enable the Company to
capture efficiencies and strengthen the balance sheet, ultimately reducing net debt by $58.3 million with $2.1 million of annual
cost savings. As at December 31, 2019, the first closing was considered highly probable of occurring and the facilities were available
for immediate sale in their present condition and as such, were classified as held for sale and included in working capital.
The Company ensures that sufficient drawings are available from its Facility to satisfy working capital requirements. At December
31, 2019, the Company’s working capital surplus of $0.1 million, when combined with the drawings on its bank loan, represented
drawings of 22% on its $235 million Facility described below.
Capital Funding
Bank Loan
As at December 31, 2019, the Company’s bank facility consists of a revolving line of credit of $210 million and an operating line of
credit of $25 million (the "Facility"). The Facility revolves for a 364 day period and will be subject to its next 364 day extension by
June 4, 2020. If not extended, the Facility will cease to revolve, the margins thereunder will increase by 0.50 per cent and all
outstanding advances thereunder will become repayable in one year from the extension date. The available lending limits of the
Facility (the “Borrowing Base”) are reviewed semi-annually and are based on the bank syndicate’s interpretation of the Company’s
reserves and future commodity prices. The Facility requires the Company to maintain a Liability Management Rating (“LMR”) of
greater than 1.2:1 in the provinces of Alberta and Saskatchewan, and greater than 2.0:1 in the province of British Columbia, if the
uninflated, undiscounted abandonment and reclamation liabilities (“Decommissioning Obligations”), as determined by the
individual province, is greater than $20 million. If the LMR falls below the required level in any province, the lenders have the
option to re-determine the Borrowing Base. As at December 31, 2019, the Company’s Decommissioning Obligations exceeded
$20 million in the provinces of Alberta and British Columbia, which carried an LMR of 1.8:1 and 7.0:1, respectively. There can be
no assurance that the amount of the available Facility will not be adjusted at the next scheduled Borrowing Base review on or
before June 4, 2020. The Facility is secured by a floating charge debenture and a general securities agreement on all the assets of
the Company.
Senior Unsecured Notes
On March 14, 2017, the Company issued $300 million of 6.5% senior unsecured notes, due March 14, 2024 (the “2024 Notes”).
The 2024 Notes are guaranteed, jointly and severally, on an unsecured basis, by each of the Company’s current and future restricted
subsidiaries. Interest on the 2024 Notes accrues at the rate of 6.5% per year and is payable semi-annually.
Prior to March 14, 2020, the Company may redeem, on any one or more occasions, up to 35% of the aggregate principal amount
of the 2024 Notes, with the cash proceeds from certain equity issues, at a redemption price of 106.5%, plus accrued and unpaid
interest. In addition, at any time prior to March 14, 2020, the Company may redeem, on any one or more occasions, all or part of
the 2024 Notes at a price equal to par, plus a “make-whole” premium and any accrued and unpaid interest. At any time on or
16
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
after March 14, 2020, the Company may redeem, on any one or more occasions, all or part of the 2024 Notes at the redemption
prices set forth below, plus any accrued and unpaid interest:
CREW ENERGY INC.
Year(1)
2020
2021
2022
2023 and thereafter
(1)
For the 12 month period beginning on March 14 of each year.
Percentage
103.250%
102.145%
101.040%
100.000%
Upon the occurrence of a change of control, the Company will be required to offer to repurchase each holder’s notes at a price
equal to not less than 101% of the principal amount, plus any accrued and unpaid interest.
The Company will continue to fund its on-going operations from a combination of cash flow, debt, non-core asset dispositions
and equity financings as needed. As the majority of our on-going capital expenditure program is directed to the maintenance and
growth of reserves and production volumes, the Company is readily able to adjust its budgeted capital expenditures should the
need arise.
Share Capital
Crew is authorized to issue an unlimited number of common shares. As at March 10, 2020, there were 156,300,746 common shares
of the Company issued and outstanding, which includes 4,738,496 of shares held in trust for the potential future settlement of
awards issued under the Company’s Restricted and Performance Award Incentive Plan. In addition, there were 3,573,109 restricted
awards and 4,135,674 performance awards outstanding.
Related-Party and Off-Balance-Sheet Transactions
Crew was not involved in any off-balance-sheet transactions or related party transactions during the year ended December 31,
2019.
Capital Structure
The Company considers its capital structure to include working capital, long-term debt (including the bank loan and senior
unsecured notes) and shareholders’ equity. Crew’s primary capital management objective is to maintain a strong financial position
in order to continue to fund the future growth of the Company. Crew monitors its capital structure and makes adjustments on an
ongoing basis in order to maintain the flexibility needed to achieve the Company’s long-term objectives. To manage its capital
structure, the Company may adjust capital spending, hedge future revenue through commodity contracts, issue new equity, issue
new debt or repay existing debt through asset sales.
Contractual Obligations
Throughout the course of its ongoing business, the Company enters into various contractual obligations such as credit agreements,
purchase of services, royalty agreements, operating agreements, transportation agreements, processing agreements, right of way
agreements and lease obligations for office space. All such contractual obligations reflect market conditions prevailing at the time
of contract and none are with related parties. The Company believes it has adequate sources of capital to fund all contractual
obligations as they come due. The following table lists the Company’s obligations with a fixed term.
($ thousands)
Total
2020
2021
2022
2023
2024
Thereafter
Bank Loan (note 1)
Senior unsecured notes (note 2)
Lease obligations
Firm transportation agreements
Firm processing agreement
Total
52,136
300,000
3,381
240,332
94,558
690,407
-
-
290
48,467
16,337
65,094
52,136
-
-
42,804
12,354
107,294
-
-
244
30,753
12,354
43,351
-
-
731
25,994
12,354
39,079
-
300,000
731
25,524
12,388
338,643
-
-
1,385
66,790
28,771
96,946
Note 1 – Based on the existing terms of the Company’s Facility the first possible repayment date may come in 2021. However, it is expected that the Facility will be extended and no repayment
will be required in the near term.
Note 2 – Matures on March 14, 2024.
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
17
CREW ENERGY INC.
Lease obligations relate primarily to the Company’s commitment to a third party for the lease of office space.
Firm transportation agreements include commitments to third parties to transport condensate, ngl and natural gas from gas
processing facilities in northeast British Columbia.
Firm processing agreements include commitments to process natural gas through the Greater Septimus complex gas processing
facilities in northeast British Columbia.
GUIDANCE
Crew’s Board of Directors has approved full year 2020 capital expenditures of $35 million to $45 million, before acquisitions and
dispositions, of which approximately 60% is planned to be invested in the first half of 2020, and the remaining 40% in the second
half of 2020. This level of capital investment is a reflection of the current extreme volatility in commodity prices and the heightened
level of uncertainty associated with the global economy. The Company has taken a proactive approach to managing through this
environment and expects that capital expenditures will be limited, while higher-cost or lower-netback production may be shut-in
from time-to-time to preserve economics. With this in mind, Crew expects to generate average annual production of between
20,000 and 22,000 boe per day. Our focus in 2020 will be to preserve our reserves and resources, reduce water handling costs,
optimize production and improve financial strength through debt reduction.
The Company continues to prioritize financial flexibility and will take steps to refine our annual capital spending plans to maintain
a strong balance sheet and focus on developing and producing the assets which provide the highest returns in the current
environment.
ADDITIONAL DISCLOSURES
Quarterly Analysis
The following table summarizes Crew’s key quarterly financial results for the past eight financial quarters:
($ thousands, except per share
amounts)
Dec. 31
Sep. 30
June 30
Mar. 31
Dec. 31
Sep. 30
June 30
Mar. 31
2019
2019
2019
2019
2018
2018
2018
2018
Total daily production (boe/d)
22,446
22,824
22,865
23,222
22,383
23,680
23,583
25,939
Exploration and development
expenditures
26,390
18,466
13,997
55,241
33,174
23,656
12,468
33,921
Property acquisitions/(dispositions)
Average wellhead price ($/boe)
Petroleum and natural gas sales
Cash provided by operating activities
Adjusted funds flow(1)
Per share – basic
– diluted
Net (loss) income
Per share – basic
– diluted
82
21.76
44,941
21,106
16,086
0.11
0.11
7
(3,249)
(15,924)
19.81
41,597
8,877
16,664
0.11
0.11
24.77
51,543
40,879
22,513
0.15
0.15
26.53
55,451
10,533
25,771
0.17
0.17
175
24.69
50,838
22,878
23,712
0.16
0.16
(6,235)
(3,255)
15,375
6,186
18,771
(0.04)
(0.04)
(0.02)
(0.02)
0.10
0.10
0.04
0.04
0.12
0.12
9
24.82
54,080
19,095
20,107
0.13
0.13
(939)
(0.01)
(0.01)
17
(10,007)
25.18
54,040
31,304
21,804
0.14
0.14
(9,181)
(0.06)
(0.06)
25.46
59,427
15,885
26,373
0.18
0.17
4,148
0.03
0.03
Note:
(1) Non-IFRS measure. See ”Non-IFRS Measures” contained within this MD&A.
Over the past eight quarters, the Company continued to invest the majority of its capital expenditures in northeastern British
Columbia, including the completion of the West Septimus facility expansion in the fourth quarter of 2017, resulting in production
growth and infrastructure development in the area. The Company reduced capital spending in 2018 and 2019 as compared to
2017, due to weakening Canadian natural gas prices over the past three years. As a result, the Company’s net capital expenditures,
after proceeds from acquisitions and dispositions, have approximated adjusted funds flow over this period, effectively maintaining
production at a consistent level.
18
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
CREW ENERGY INC.
The significant fluctuations in commodity prices have impacted cash provided by operating activities, adjusted funds flow and net
income (loss). The Company has reduced the financial impact of volatile commodity prices by entering into derivative and physical
risk management contracts which can cause significant fluctuations in income due to unrealized gains and losses recognized on a
quarterly basis. Crew has also attempted to mitigate the lower price environment by reducing its controllable costs and achieve
operational efficiencies. Despite these efforts, cash flow from operations used to fund the Company’s capital program has been
impacted.
The following table summarizes Crew’s key financial results over the past three years:
($ thousands, except per share amounts)
Year ended
Dec. 31, 2019
Year ended
Dec. 31, 2018
Year ended
Dec. 31, 2017
Petroleum and natural gas sales
193,532
218,385
Cash provided by operating activities
Adjusted funds flow(1)
-basic
-diluted
Per share
Net income
Per share
-basic
-diluted
Daily production (boe/d)
Crew average sales price ($/boe)
Total assets
Working capital surplus (deficiency)(2)
Bank loan
Senior unsecured notes
Total other long-term liabilities
81,395
81,034
0.53
0.53
12,071
0.08
0.08
22,837
23.22
1,451,647
149
52,136
295,868
143,295
89,162
91,996
0.61
0.61
12,799
0.08
0.08
23,885
25.05
1,451,923
11,984
59,904
294,885
142,246
214,154
117,290
108,129
0.73
0.72
34,405
0.23
0.23
23,061
25.44
1,388,120
(29,143)
21,977
293,862
130,795
Note:
(1)
(2)
Non-IFRS measure. Adjusted funds flow is calculated as cash provided by operating activities, adding the change in operating non-cash working capital, decommissioning obligations
settled and accretion of deferred financing costs on the senior unsecured notes. Adjusted funds flow is used to analyze the Company’s operating performance and leverage. Adjusted
funds flow does not have a standardized measure prescribed by International Financial Reporting Standards, and therefore, may not be comparable with the calculations of similar measures
for other companies. See “Non-IFRS Measures” contained within this MD&A.
Non-IFRS measure. Working capital includes accounts receivable, net assets held for sale and accounts payable and accrued liabilities. See “Non-IFRS Measures” contained within this
MD&A.
Over the last three years, a volatile commodity price environment has impacted revenue, cash provided by operating activities,
adjusted funds flow and net income. The overall decline in forecasted future commodity prices has also led to the assessment and
realization of impairment charges on certain CGUs in 2017.
New Accounting Pronouncements
The Company has reviewed the following new and revised accounting pronouncements that have been issued and has determined
that the following may have an impact on the Company’s financial statements:
a) Adoption of IFRS 16 – Leases:
On January 1, 2019, the Company adopted IFRS 16 Leases, which replaces IAS 17 Leases and IFRIC 4 Determining Whether
an Arrangement Contains a Lease. IFRS 16 uses a single lease accounting model for lessees, which requires the Company
to recognize a right-of-use asset and lease liability on the statement of financial position, for all contracts that contain a
lease.
The Company adopted IFRS 16 using the modified retrospective approach, and therefore comparative information has
not been restated and continues to be reported under IAS 17 and IFRIC 4. The cumulative effect of initially applying the
standard was recognized through $2.6 million in right-of-use assets (included in “Property, plant and equipment”) and
$2.6 million in lease obligations, split between the current portion of $1.1 million included in “Accounts payable and
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
19
CREW ENERGY INC.
accrued liabilities”, and the long term portion of $1.5 million included in “Lease obligations”. The weighted average
incremental borrowing rate used to calculate the lease obligation at adoption was 4.5%. The right-of-use assets and
lease obligations relate primarily to the Company’s head office lease in Calgary.
The Company applied the following practical expedients as permitted under the standard. Some of these expedients are
on a lease-by-lease basis and others are applicable by class of underlying assets:
Maintain classification of contracts previously identified as leases under IAS 17 and IFRIC 4;
Account for leases with a remaining term of less than 12 months at January 1, 2019 as short-term leases;
Account for lease payments as an expense and not recognize a right-of-use asset if the underlying asset is of a
lower dollar value;
Apply a single discount rate to a portfolio of leases with similar characteristics; and
Recognize lease liabilities at the present value of the remaining lease payments, discounted using the interest
rate implicit in the lease or the Company’s incremental borrowing rate as at January 1, 2019. The associated
right-of-use assets will be measured at the amount equal to the lease liability on the date of transition, with no
impact to opening retained earnings (deficit).
As at December 31, 2018, the Company had operating lease commitments of $2.7 million, which would have resulted in
a discounted lease obligation of $2.6 million. At January 1, 2019, the Company recognized a current and non-current
lease obligation of $2.6 million.
Application of Critical Accounting Estimates
Crew’s significant accounting policies are disclosed in note 3 to the December 31, 2019 consolidated financial statements. Certain
accounting policies require that management make appropriate decisions with respect to the formulation of estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Crew continuously refines its
management and reporting systems to ensure that accurate, timely and useful information is gathered and disseminated. Crew’s
financial and operating results incorporate certain estimates including the following:
Estimated accruals for revenues, royalties, operating expenses and general administrative expenses where actual revenues
and costs have not been received;
Estimated capital expenditures where actual costs have not been received or for projects that are in progress;
Estimated depletion, depreciation and amortization charges are based on estimates of oil and gas reserves that Crew
expects to recover in the future. As a key component in the depletion, depreciation and amortization calculation, the
reserve estimates have a significant impact on net earnings and the Company’s financial results could differ if there is a
revision in our estimate of reserve quantities;
Estimated future recoverable value of property, plant and equipment and any related impairment charges or recoveries
are assessed for impairment when circumstances suggest the carrying amount may exceed its recoverable amount. The
recoverable amount calculation requires the use of estimates which are subject to change as new information becomes
available. Changes in assumptions used in determining the recoverable amount could affect the carrying value of the
related assets;
Estimated fair values of derivative contracts, which are used to manage commodity price, foreign currency and interest
rate swaps, are determined using valuation models which require assumptions regarding the amount and timing of future
cash flows and discount rates. As the Company’s assumptions rely on external market data, the resulting fair value
estimates may not be indicative of the amounts realized or settled and are therefore subject to market uncertainty;
Decommissioning obligations are based on assumptions which take into consideration current economic factors and
experience to date which we believe are reasonable. The actual cost of the Company’s decommissioning obligations may
change in response to numerous factors;
20
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
CREW ENERGY INC.
Estimated deferred income tax assets and liabilities are based on current tax interpretations, regulations and legislation
which are subject to change. As a result, there are usually a number of tax matters under review and therefore income
taxes are subject to measurement uncertainty.
Crew hires employees and engages consultants who have the expertise to ensure these estimates are accurate and ensures
departments with the most knowledge of the activity are responsible for the estimates. Past estimates are reviewed and analyzed
regularly to ensure future estimates continue to track actuals. The emergence of new information and changed circumstances
may result in actual results or changes to estimate amounts that differ materially from current estimates.
Disclosure Controls and Procedures and Internal Controls over Financial Reporting
The Company's Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have designed, or caused to be designed under
their supervision, disclosure controls and procedures, as defined in national Instrument 52-109 Certification of Disclosures in
Issuers’ Annual and Interim Filings (“NI 52-109”), to provide reasonable assurance that: (i) material information relating to the
Company is made known to the Company's CEO and CFO by others, particularly during the period in which the annual and interim
filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other
reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period
specified in securities legislation. Such officers have evaluated, or caused to be evaluated under their supervision, the effectiveness
of the Company's disclosure controls and procedures at the financial year end of the Company and have concluded that the
Company's disclosure controls and procedures are effective at the financial year end of the Company.
The Company’s CEO and CFO have designed, or caused to be designed under their supervision, internal controls over financial
reporting, as defined in NI 52-109, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with IFRS. Utilizing the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) Internal Control – Integrated Framework (2013), such officers have evaluated,
or caused to be evaluated under their supervision, the effectiveness of the Company's internal controls over financial reporting at
the financial year end of the Company and concluded that the Company's internal controls over financial reporting are effective,
at the financial year end of the Company. The Company is required to disclose herein any change in the Company's internal
controls over financial reporting that occurred during the period beginning on October 1, 2019 and ended on December 31, 2019
that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
No material changes in the Company's internal controls over financial reporting were identified during such period that have
materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
It should be noted that a control system, including the Company's disclosure and internal controls and procedures, no matter how
well conceived, can provide only reasonable, but not absolute assurance that the objectives of the control system will be met and
it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.
Dated as of March 10, 2020
2019 ANNUAL MANAGEMENT DISCUSSION & ANALYSIS
21
CREW ENERGY INC.
MANAGEMENT’S REPORT
Management, in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting
Standards Board, has prepared the accompanying consolidated financial statements of Crew Energy Inc. (“Crew” or the
“Company”). Financial and operating information presented throughout this report is consistent with that shown in the
consolidated financial statements.
Management is responsible for the integrity of the financial information. Internal control systems are designed and maintained
to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and to produce reliable accounting
records for financial reporting purposes.
KPMG LLP were appointed by the Company’s Board of Directors to conduct an audit of the consolidated financial statements.
Their examination included a review and evaluation, including tests and procedures, of Crew’s internal control systems as they
considered necessary, to provide reasonable assurance that the consolidated financial statements are presented fairly in
accordance with IFRS.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal
control. The Board exercises this responsibility through the Audit Committee, with assistance from the Reserves Committee
regarding the annual evaluation of our petroleum and natural gas reserves. The Audit Committee meets regularly with
management and the independent auditors to ensure that management’s responsibilities are properly discharged, to review the
consolidated financial statements and recommend that the consolidated financial statements be presented to the Board of
Directors for approval. The Audit Committee also considers the independence of the external auditors and reviews their fees.
The external auditors have access to the Audit Committee without the presence of management.
(signed)
Dale O. Shwed
(signed)
John G. Leach
President and Chief Executive Officer
Executive Vice-President and Chief Financial Officer
March 10, 2020
2019 ANNUAL FINANCIAL STATEMENTS
1
KPMG LLP
205 5th Avenue SW
Suite 3100
Calgary AB T2P 4B9
Telephone (403) 691-8000
Fax (403) 691-8008
www.kpmg.ca
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Crew Energy Inc.
Opinion
We have audited the consolidated financial statements of Crew Energy Inc. (the
“Company”), which comprise:
−
−
−
−
the consolidated statements of financial position as at December 31, 2019 and
December 31, 2018
the consolidated statements of income and comprehensive income for the years then
ended
the consolidated statements of changes in shareholders’ equity for the years then ended
the consolidated statements of cash flows for the years then ended
− and notes to the consolidated financial statements, including a summary of significant
accounting policies
(Hereinafter referred to as the “financial statements”.)
In our opinion, the accompanying financial statements present fairly, in all material respects,
the consolidated financial position of the Company as at December 31, 2019 and December
31, 2018, and its consolidated financial performance and its consolidated cash flows for the
years then ended in accordance with International Financial Reporting Standards (“IFRS”).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in the “Auditors’
Responsibilities for the Audit of the Financial Statements” section of our auditors’ report.
We are independent of the Company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our other
ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated
with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG
LLP.
Other Information
Management is responsible for the other information. Other information comprises:
−
the information included in Management’s Discussion and Analysis filed with the relevant
Canadian Securities Commissions.
Our opinion on the financial statements does not cover the other information and we do not
and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is
materially inconsistent with the financial statements or our knowledge obtained in the audit
and remain alert for indications that the other information appears to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed with
the relevant Canadian Securities Commissions as at the date of this auditors’ report. If,
based on the work we have performed on this other information, we conclude that there is
a material misstatement of this other information, we are required to report that fact in the
auditors’ report.
We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the
Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with IFRS, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing as applicable, matters related
to going concern and using the going concern basis of accounting unless management
either intends to liquidate the Company or to cease operations, or has no realistic alternative
but to do so.
Those charged with governance are responsible for overseeing the Company’s financial
reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we
exercise professional judgment and maintain professional skepticism throughout the audit.
2
We also:
−
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for
our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery, intentional omissions,
misrepresentations, or the override of internal control.
− Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control.
− Evaluate the appropriateness of accounting policies used and the reasonableness of
accounting estimates and related disclosures made by management.
− Conclude on the appropriateness of management's use of the going concern basis of
accounting and, based on the audit evidence obtained, whether a material uncertainty
exists related to events or conditions that may cast significant doubt on the Company’s
ability to continue as a going concern. If we conclude that a material uncertainty exists,
we are required to draw attention in our auditors’ report to the related disclosures in the
financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditors’
report. However, future events or conditions may cause the Company to cease to
continue as a going concern.
− Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
− Communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that we identify during our audit.
− Provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and communicate with them all
relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this auditors’ report is Timothy Arthur
Richards.
Chartered Professional Accountants
Calgary, Canada
March 10, 2020
3
CREW ENERGY INC.
December 31,
2019
December 31,
2018
$ 26,994
3,180
19,845
50,019
$ 70,522
8,382
-
78,904
1,401,628
$ 1,451,647
1,373,019
$ 1,451,923
$
45,949
741
46,690
52,136
295,868
2,708
87,024
53,563
1,478,294
71,644
(636,280)
913,658
$
58,538
-
58,538
59,904
294,885
-
89,448
52,798
1,468,986
75,715
(648,351)
896,350
$ 1,451,647
$ 1,451,923
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(thousands)
Assets
Current Assets:
Accounts receivable
Derivative financial instruments (note 6)
Assets held for sale (note 7)
Property, plant and equipment (note 8)
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable and accrued liabilities
Liabilities associated with assets held for sale (note 7)
Bank loan (note 10)
Senior unsecured notes (note 11)
Lease obligations (note 12)
Decommissioning obligations (note 13)
Deferred tax liability (note 15)
Shareholders’ Equity
Share capital (note 14)
Contributed surplus
Deficit
Commitments (note 20)
Subsequent event (note 6, 7)
See accompanying notes to the consolidated financial statements.
On behalf of the Board of Directors:
(signed)
David G. Smith
Director
(signed)
Ryan A. Shay
Director
2019 ANNUAL FINANCIAL STATEMENTS
5
CREW ENERGY INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(thousands, except per share amounts)
Revenue
Petroleum and natural gas sales (note 16)
Royalties
Realized gain (loss) on derivative financial instruments
Unrealized (loss) gain on derivative financial instruments
Other revenue (note 16)
Expenses
Operating
Transportation
Marketing
General and administrative
Share-based compensation
Depletion and depreciation (note 8)
Income from operations
Financing (note 17)
Gain on divestiture of property, plant and equipment (note 8)
Income before income taxes
Deferred tax expense (note 15)
Net income and comprehensive income
Net income per share (note 14)
Basic
Diluted
See accompanying notes to the consolidated financial statements.
Year ended
December 31, 2019
Year ended
December 31, 2018
$ 193,532
(14,758)
2,352
(5,202)
11,748
187,672
52,487
22,804
414
11,636
5,340
75,776
168,457
19,215
26,393
(20,014)
12,836
765
$ 12,071
$ 218,385
(15,123)
(10,645)
8,035
11,989
212,641
58,341
16,007
2,914
12,090
7,076
77,373
173,801
38,840
25,216
(9,546)
23,170
10,371
$ 12,799
$ 0.08
$ 0.08
$ 0.08
$ 0.08
6
2019 ANNUAL FINANCIAL STATEMENTS
CREW ENERGY INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(thousands)
Number of
shares, net of
shares in trust
Share capital
Contributed
surplus
Total
Shareholders’
equity
Deficit
Balance January 1, 2019
Net income for the year
Share-based compensation expensed
Share-based compensation capitalized
Issued from treasury on vesting of share awards
Released from trust on vesting of share awards
Purchase of shares held in trust (note 14)
Balance, December 31, 2019
151,730
-
-
-
4,542
45
(4,783)
151,534
$ 1,468,986
-
-
-
14,212
96
(5,000)
$1,478,294
$
75,715
-
5,340
4,897
(14,212)
(96)
-
$ 71,644
$ (648,351)
12,071
-
-
-
-
-
$ (636,280)
$ 896,350
12,071
5,340
4,897
-
-
(5,000)
$ 913,658
(thousands)
Balance January 1, 2018
Net income for the year
Share-based compensation expensed
Share-based compensation capitalized
Issued on vesting of share awards
Balance, December 31, 2018
Number of
shares
Share capital
Contributed
surplus
Total
Shareholders’
equity
Deficit
149,328
-
-
-
2,402
151,730
$ 1,458,086
-
-
-
10,900
$1,468,986
$
73,158
-
7,076
6,381
(10,900)
$ 75,715
$ (661,150)
12,799
-
-
-
$ (648,351)
$ 870,094
12,799
7,076
6,381
-
$ 896,350
See accompanying notes to the consolidated financial statements.
2019 ANNUAL FINANCIAL STATEMENTS
7
CREW ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
Cash provided by (used in):
Operating activities:
Net income
Adjustments:
Unrealized loss (gain) on derivative financial instruments
Share-based compensation
Depletion and depreciation (note 8)
Financing expenses (note 17)
Interest expense (note 17)
Gain on divestiture of property, plant and equipment (note 8)
Deferred tax expense (note 15)
Decommissioning obligations settled (note 13)
Change in non-cash working capital (note 19)
Financing activities:
(Decrease) increase in bank loan
Payments on lease obligations (note 12)
Shares purchased and held in trust (note 14)
Investing activities:
Property, plant and equipment expenditures (note 8)
Property acquisitions (note 8)
Property dispositions (note 8)
Change in non-cash working capital (note 19)
Year ended
December 31, 2019
Year ended
December 31, 2018
$ 12,071
$ 12,799
5,202
5,340
75,776
26,393
(23,516)
(20,014)
765
(3,919)
3,297
81,395
(7,768)
(1,071)
(5,000)
(13,839)
(114,094)
(1,570)
20,654
27,454
(67,556)
(8,035)
7,076
77,373
25,216
(22,235)
(9,546)
10,371
(1,194)
(2,663)
89,162
37,927
-
-
37,927
(101,878)
(201)
10,007
(35,017)
(127,089)
Change in cash and cash equivalents
-
-
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
-
$ -
-
$ -
See accompanying notes to the consolidated financial statements.
8
2019 ANNUAL FINANCIAL STATEMENTS
CREW ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2019 and 2018
(Tabular amounts in thousands)
1. Reporting entity:
Crew Energy Inc. (“Crew” or the “Company”) is an oil and gas exploration, development and production company based in
Calgary, Alberta, Canada. Crew conducts its operations in the Western Canada Sedimentary basin, primarily in the provinces
of British Columbia, Saskatchewan and Alberta. The consolidated financial statements (the “financial statements”) of the
Company are comprised of the accounts of Crew and its wholly owned subsidiary, Crew Oil and Gas Inc. which is
incorporated in Canada, and two partnerships, Crew Energy Partnership and Crew Heavy Oil Partnership. Crew’s principal
place of business is located at Suite 800, 250 – 5th Street SW, Calgary, Alberta, Canada, T2P 0R4.
2. Basis of preparation:
These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board. A summary of the significant accounting policies and method of
computation is presented in note 3.
The financial statements have been prepared on the historical cost basis except for derivative financial instruments which are
measured at fair value. The methods used to measure fair values are discussed in note 4.
These financial statements are presented in Canadian dollars (“CDN”), which is the functional currency of the Company, its
subsidiary and partnerships.
Expenses in the consolidated statements of income (“statements of income”) are presented as a combination of function
and nature in conformity with industry practice. Share-based compensation and depletion and depreciation expenses are
presented on separate lines by their nature, while operating, transportation, marketing and general and administrative
expenses are presented on a functional basis.
The financial statements were authorized for issuance by Crew’s Board of Directors on March 10, 2020.
3. Significant accounting policies:
The accounting policies set out below have been applied consistently to all years presented in these consolidated financial
statements, with the exception of the adoption of IFRS 16 Leases, as described in note 5.
(a) Basis of consolidation:
(i)
Subsidiaries:
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power to govern
the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control,
substantive potential voting rights are taken into account. The financial statements of subsidiaries are included
in the financial statements from the date that control commences until the date that control ceases. The
acquisition method of accounting is used to account for acquisitions of subsidiaries and assets that meet the
definition of a business under IFRS. The cost of an acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets
acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at
their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the identifiable
assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of acquisition is less than
the fair value of the net assets of the subsidiary acquired, the difference is recognized immediately in the
statements of income.
2019 ANNUAL FINANCIAL STATEMENTS
9
CREW ENERGY INC.
(ii)
Jointly owned assets:
Some of the Company’s oil and natural gas activities involve jointly owned assets. The financial statements
include the Company’s share of these jointly owned assets and its proportionate share of the relevant revenue
and related costs.
(iii)
Transactions eliminated on consolidation:
Intercompany balances and transactions, and any unrealized income and expenses arising from intercompany
transactions, are eliminated in preparing the financial statements.
(b) Foreign currency:
Transactions in foreign currencies are translated to Canadian dollars at exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies are translated to Canadian dollars at the period end
exchange rate. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value
are translated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign
currency differences arising on translation are recognized in the statements of income.
(c) Financial instruments:
(i)
Non-derivative financial instruments:
Non-derivative financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts
payable, the bank loan and the senior unsecured notes. Non-derivative financial instruments are recognized
initially at fair value plus, for instruments not at fair value through the statements of income, any directly
attributable transaction costs. Subsequent to initial recognition, non-derivative financial instruments are
measured as described below.
Cash and cash equivalents is comprised of cash on hand, term deposits held with banks and other short-term
highly liquid investments with original maturities of three months or less. Bank overdrafts that are repayable on
demand and form an integral part of the Company’s cash management, whereby management has the ability
and intent to net bank overdrafts against cash, are included as a component of cash and cash equivalents for the
purpose of the statement of cash flows.
Other non-derivative financial instruments, such as accounts receivable, the bank loan, the senior unsecured
notes and accounts payable, are measured at amortized cost using the effective interest method, less any
impairment losses.
(ii) Derivative financial instruments:
The Company enters into certain financial derivative contracts in order to manage the exposure to market risks
from fluctuations in commodity prices, interest rates and the exchange rate between Canadian and United States
dollars. These instruments are not used for trading or speculative purposes. The Company has not designated
its financial derivative contracts as effective accounting hedges, and thus has not applied hedge accounting,
even though the Company considers all financial derivative contracts to be economic hedges. As a result, all
financial derivative contracts are classified at fair value through the statements of income and are recorded on
the statement of financial position at fair value. Transaction costs are recognized in the statements of income
when incurred.
(iii)
Share capital:
Common shares are classified as equity. Incremental costs directly attributable to the issuance of common
shares and restricted and performance awards are recognized as a deduction from equity, net of any tax effects.
10
2019 ANNUAL FINANCIAL STATEMENTS
(d) Property, plant and equipment and intangible exploration assets:
(i)
Recognition and measurement:
Exploration and evaluation (“E&E”) expenditures:
CREW ENERGY INC.
Pre-license costs are recognized in the statements of income as incurred.
E&E costs, including the costs of acquiring leases and licenses initially are capitalized as E&E assets. The costs
are accumulated in cost centres by well, field or exploration area pending determination of technical feasibility
and commercial viability.
E&E assets are assessed for impairment if (i) sufficient data exists to determine technical feasibility and
commercial viability, and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable
amount. For purposes of impairment testing, E&E assets are allocated to the related cash-generating unit
(“CGU”).
The technical feasibility and commercial viability of extracting a mineral resource is considered to be
determinable when proven and/or probable reserves are determined to exist. A review of each exploration
license or field is carried out, at least annually, to ascertain whether proven and/or probable reserves have been
discovered. Upon determination of proven and/or probable reserves, intangible E&E assets attributable to those
reserves are first tested for impairment and then reclassified from E&E assets to a separate category within
tangible assets referred to as oil and natural gas interests.
Development and production costs:
Items of property, plant and equipment, which include oil and gas development and production assets, are
measured at cost less accumulated depletion and depreciation and accumulated impairment losses.
Development and production assets are grouped into CGUs for impairment testing. When significant parts of an
item of property, plant and equipment, including oil and natural gas interests, have different useful lives they are
accounted for as separate items (major components).
Gains and losses on disposal of property, plant and equipment, property swaps and farm-outs, are determined
by comparing the proceeds or fair value of the asset received or given up with the carrying amount of property,
plant and equipment and are recognized in the statements of income.
(ii)
Subsequent costs:
Costs incurred subsequent to the determination of technical feasibility and commercial viability and the costs of
replacing parts of property, plant and equipment are recognized as oil and natural gas interests only when they
increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures
are recognized in the statements of income as incurred. Such capitalized oil and natural gas interests generally
represent costs incurred in developing proved and/or probable reserves and bringing on or enhancing
production from such reserves, and are accumulated on a field or geotechnical area basis. The carrying amount
of any replaced or sold component is derecognized. The costs of the day-to-day servicing of property, plant and
equipment are recognized in the statements of income as operating costs as incurred.
(iii) Depletion and depreciation:
The net carrying value of development or production assets is depleted using the unit of production method by
reference to the ratio of production in the year to the related proven and probable reserves, taking into account
estimated future development costs necessary to bring those reserves into production. Relative volumes of
reserves and production are converted at the energy equivalent conversion ratio of six thousand cubic feet of
natural gas to one barrel of oil. Future development costs are estimated taking into account the level of
development required to produce the reserves. These estimates are reviewed by independent reserve engineers
at least annually.
2019 ANNUAL FINANCIAL STATEMENTS
11
CREW ENERGY INC.
The estimated useful lives for certain production assets for the current and comparative years are as follows:
Gas processing plants
Pipeline facilities
Turnaround and workover costs
Unit of production
Unit of production
2 years straight line
For other assets, depreciation is recognized in the statements of income on a straight-line basis over the
estimated useful lives of each part of an item of property, plant and equipment.
The estimated useful lives for other assets for the current and comparative years are as follows:
Office equipment
5 years
Depreciation methods, useful lives and residual values are reviewed at each reporting date.
(iv)
Assets held for sale:
Non-current assets, or disposal groups consisting of assets and liabilities, are classified as held for sale if their
carrying amounts will be recovered through a sale transaction rather than through continuing use. This
condition is met when the sale is highly probable and the asset is available for immediate sale in its present
condition.
Non-current assets classified as held for sale are measured at the lower of the carrying amount and fair value less
costs to sell, with impairments recognized in the statements of income in the period measured. Non-current
assets and disposal groups held for sale are presented in current assets and liabilities on the statement of
financial position.
(e) Leased assets:
When Crew is party to a lease arrangement as the lessee, it recognizes a right-of-use asset ("ROU asset") and a
corresponding lease obligation on the balance sheets on the date that a leased asset becomes available for use.
Interest associated with the lease obligation is recognized over the lease period with a corresponding increase to the
underlying lease obligation. ROU assets are depreciated on a straight-line basis over the shorter of the asset’s useful
life and the lease term. Depreciation on ROU assets is recognized in depletion and depreciation. ROU assets and lease
obligations are initially measured on a present value basis. Lease obligations are measured as the net present value of
the lease payments which may include: fixed lease payments, variable lease payments based on an index or a rate, and
amounts expected to be payable under residual value guarantees and payments to exercise an extension or termination
option, if Crew is reasonably certain to exercise either of those options. ROU assets are measured at cost, which is
composed of the amount of the initial measurement of the lease obligation, less any incentives received, plus any lease
payments made at, or before, the commencement date and initial direct costs and asset restoration costs, if any. The
rate implicit in the lease is used to determine the present value of the liability and ROU asset arising from a lease, unless
this rate is not readily determinable, in which case the Company's incremental borrowing rate is used.
In cases where the leased asset is used in the Company’s jointly controlled operations, Crew, as the operator, is the
obligor to the lessor and presents the full amount of the lease obligation and ROU asset at the commencement date of
the lease. Certain payments relating to the Company’s lease obligation may be recovered over time in accordance with
billings for each partner’s proportionate interest in the joint operation and are recognized in other revenue.
Short-term leases and leases of low-value assets are not recognized on the statement of financial position and lease
payments are instead recognized in the financial statements as incurred. For certain classes of leases, Crew does not
separate lease and non-lease components, accounting for these leases as a single lease component.
12
2019 ANNUAL FINANCIAL STATEMENTS
(f) Impairment:
(i)
Financial assets:
CREW ENERGY INC.
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is
impaired by measuring the asset’s expected credit loss ("ECL”). Accounts receivable are due within one year or
less; therefore, these financial assets are not considered to have a significant financing component and a lifetime
ECL is measured at the date of initial recognition of the accounts receivable.
The ECL pertaining to accounts receivable is assessed at initial recognition and this provision is re-assessed at
each reporting date. ECLs are a probability-weighted estimate of all possible default events related to the
financial asset (over the lifetime or within 12 months after the reporting period, as applicable) and are measured
as the difference between the present value of the cash flows due to Crew and the cash flows the Company
expects to receive. In making an assessment as to whether financial assets are credit-impaired, the Company
considers historically realized bad debts, evidence of a debtor’s present financial condition and whether a debtor
has breached certain contracts, the probability that a debtor will enter bankruptcy or other financial
reorganization, changes in economic conditions that correlate to increased levels of default, the number of days
a debtor is past due in making a contractual payment, and the term to maturity of the specified receivable. The
carrying amounts of financial assets are reduced by the amount of the ECL through an allowance account and
losses are recognized in the statements of income.
Individually significant financial assets are tested for impairment on an individual basis. The remaining financial
assets are assessed collectively in groups that share similar credit risk characteristics.
All impairment losses are recognized in the statements of income. An impairment loss is reversed if the reversal
can be related objectively to an event occurring after the impairment loss was recognized.
(ii)
Non-financial assets:
The carrying amounts of the Company’s non-financial assets, other than E&E assets and deferred tax assets, are
reviewed at each reporting date to determine whether there is any indication of impairment. If any such
indication exists, then the asset’s recoverable amount is estimated. For goodwill, an impairment test is
completed each year. E&E assets are assessed for impairment when they are reclassified to property, plant and
equipment, and also if facts and circumstances suggest that the carrying amount exceeds the recoverable
amount.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that
generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or
groups of assets or CGUs. The recoverable amount of an asset or a CGU is the greater of its value in use and its
fair value less costs to sell.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the
asset. Value in use is generally computed by reference to the present value of the future cash flows expected to
be derived from production of proven and probable reserves.
The goodwill acquired in an acquisition, for the purpose of impairment testing, is allocated to the CGUs that are
expected to benefit from the synergies of the combination. E&E assets are allocated to related CGUs when they
are assessed for impairment, both at the time of any triggering facts and circumstances as well as upon their
eventual reclassification to property, plant and equipment.
An impairment loss is recognized if the carrying amount of an asset or its CGU exceeds its estimated recoverable
amount. Impairment losses are recognized in the statements of income. Impairment losses recognized in
respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units and then
to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.
2019 ANNUAL FINANCIAL STATEMENTS
13
CREW ENERGY INC.
An impairment loss in respect of property, plant and equipment and E&E assets, recognized in prior years, is
assessed at each reporting date for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to determine the recoverable
amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the
carrying amount that would have been determined, net of depletion and depreciation or amortization, if no
impairment loss had been recognized. An impairment loss in respect of goodwill is not reversed.
(g) Share based payments:
The grant date fair value of restricted and performance awards granted to employees is recognized as compensation
expense, with a corresponding increase in contributed surplus over the vesting period. A forfeiture rate is estimated on
the grant date and is adjusted to reflect the actual number of restricted and performance awards that are expected to
vest. A performance multiplier is estimated on the grant date for performance awards and adjusted to reflect the
number of performance awards that are expected to vest.
(h) Provisions:
A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that
can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the
obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and the risks specific to the liability. Provisions are not
recognized for future operating losses.
(i)
Decommissioning obligations:
The Company’s activities give rise to dismantling, decommissioning and site disturbance remediation activities.
Provision is made for the estimated cost of site restoration and capitalized in the relevant asset category.
Decommissioning obligations are measured at the present value of management’s best estimate of expenditure
required to settle the present obligation at the statement of financial position date. Subsequent to the initial
measurement, the obligation is adjusted at the end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. The increase in the provision due to the passage of
time is recognized as a finance cost whereas increases/decreases due to changes in the estimated future cash
flows are capitalized. Actual costs incurred upon settlement of the decommissioning obligations are charged
against the provision to the extent the provision was established.
(i) Revenue:
Revenue from the sale of crude oil, natural gas, condensate and natural gas liquids is recorded when control of the
product is transferred to the buyer based on the consideration specified in the contracts with customers. This usually
occurs when the product is physically transferred at the delivery point agreed upon in the contract and legal title to the
product passes to the customer.
The Company evaluates its arrangements with third parties and partners to determine if the Company acts as the
principal or as an agent. In making this evaluation, the Company considers if it obtains control of the product delivered
or services provided, which is indicated by the Company having the primary responsibility for the delivery of the
product or rendering of the service, having the ability to establish prices or having inventory risk. If the Company acts
in the capacity of an agent rather than as a principal in a transaction, then the revenue is recognized on a net-basis,
only reflecting the fee, if any, realized by the Company from the transaction.
Tariffs, tolls and other fees charged to other entities for use of pipelines and facilities owned by the Company are
evaluated by management to determine if these originate from contracts with customers or from incidental or
collaborative arrangements. Fees charged to other entities that are from contracts with customers are recognized in
revenue when the related services are provided.
14
2019 ANNUAL FINANCIAL STATEMENTS
CREW ENERGY INC.
Royalty income is recognized as it accrues in accordance with the terms of the overriding royalty agreements.
(j) Finance income and expenses:
Finance expense comprises interest expense on borrowings, accretion of the discount on provisions, accretion of
deferred financing costs, impairment losses recognized on financial assets and corporate acquisition costs.
Borrowing costs incurred for the construction of qualifying assets are capitalized during the period of time that is
required to complete and prepare the assets for their intended use or sale. All other borrowing costs are recognized in
the statements of income using the effective interest method. The capitalization rate used to determine the amount of
borrowing costs to be capitalized is the weighted average interest rate applicable to the Company’s outstanding
borrowings during the period.
Interest income is recognized as it accrues in the statements of income, using the effective interest method.
(k)
Income tax:
Income tax expense comprises current and deferred tax. Income tax expense is recognized in the statements of income
except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is recognized using the balance sheet method, providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred
tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination.
In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of
goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they
reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets
and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the
same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities
and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against
which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are
reduced to the extent that it is no longer probable that the related tax benefit will be realized.
(l) Earnings per share:
Basic earnings per share is calculated by dividing the profit or loss attributable to common shareholders of the
Company by the weighted average number of common shares outstanding during the period. Diluted earnings per
share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average
number of common shares outstanding for the effects of dilutive instruments such as restricted and performance
awards granted to employees.
(m) Flow-through shares:
The resource expenditure deductions for income tax purposes related to exploration and development activities funded
by flow-through share arrangements are renounced to investors in accordance with tax legislation. On issuance, the
premium received on the flow-through shares, being the difference in price over a common share with no tax
attributes, is recognized on the statement of financial position. As expenditures are incurred the deferred tax liability
associated with the renounced tax deductions are recognized through the statements of income along with a pro-rata
portion of the deferred premium.
2019 ANNUAL FINANCIAL STATEMENTS
15
CREW ENERGY INC.
(n)
Inventory:
The Company evaluates the carrying value of its inventory at the lower of cost and net realizable value. The net
realizable value is estimated based on anticipated current market prices that the Company would expect to receive from
the sale of its inventory.
(o) Critical accounting judgments and key sources of estimation uncertainty:
The timely preparation of the financial statements requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and reported amounts of assets and liabilities and
income and expenses. Accordingly, actual results may differ from these estimates. Estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods affected. Significant estimates and judgments made by
management in the preparation of these financial statements are outlined below.
Critical judgments in applying accounting policies:
The following are the critical judgments that management has made in the process of applying the Company’s
accounting policies and that have the most significant effect on the amounts recognized in these consolidated financial
statements:
(i)
Identification of CGUs
Crew’s assets are aggregated into CGUs, for the purpose of calculating impairment, based on their ability to
generate largely independent cash flows. By their nature, these estimates and assumptions are subject to
measurement uncertainty and may impact the carrying value of the Company’s assets in future periods.
(ii)
Impairment of petroleum and natural gas assets
Judgments are required to assess when impairment indicators, or reversal indicators, exist and impairment
testing is required. In determining the recoverable amount of assets, in the absence of quoted market prices,
impairment tests are based on estimates of reserves, production rates, future oil and natural gas prices, future
costs, discount rates, market value of land and other relevant assumptions.
(iii) Exploration and evaluation assets
The application of the Company’s accounting policy for exploration and evaluation assets requires
management to make certain judgments as to future events and circumstances as to whether economic
quantities of reserves have been found in assessing economic and technical feasibility.
(iv) Deferred income taxes
Judgments are made by management to determine the likelihood of whether deferred income tax assets at
the end of the reporting period will be realized from future taxable earnings. To the extent that assumptions
regarding future profitability change, there can be an increase or decrease in the amounts recognized in
respect of deferred tax assets as well as the amounts recognized in the statements of income in the period in
which the change occurs.
(v) Leased assets
The Company is required to make judgements and assumptions on incremental borrowing rates and lease
terms. The carrying amount of the ROU assets, lease obligations, interest and depreciation expense may differ
due to changes in market conditions and expected lease terms. Incremental borrowing rates are based on the
Company’s borrowing rate at the commencement date of the lease, the security of the asset and market
conditions. Lease terms are based on management’s assumptions of future market conditions and operational
decisions.
16
2019 ANNUAL FINANCIAL STATEMENTS
Key sources of estimation uncertainty:
The following are the key assumptions concerning the sources of estimation uncertainty at the end of the reporting
period, that have a significant risk of causing adjustments to the carrying amounts of assets and liabilities.
CREW ENERGY INC.
(i) Reserves
The assessment of reported recoverable quantities of proved and probable reserves include estimates
regarding production profile, commodity prices, exchange rates, remediation costs, timing and amount of
future development costs, and production, transportation and marketing costs for future cash flows. It also
requires interpretation of geological and geophysical models in anticipated recoveries. The economical,
geological and technical factors used to estimate reserves may change from period to period. Changes in
reported reserves can impact the carrying values of the Company’s petroleum and natural gas properties and
equipment, the calculation of depletion and depreciation, the provision for decommissioning obligations, and
the recognition of deferred tax assets due to changes in expected future cash flows. The recoverable
quantities of reserves and estimated cash flows from Crew’s petroleum and natural gas interests are
independently evaluated by reserve engineers at least annually.
The Company’s petroleum and natural gas reserves represent the estimated quantities of petroleum, natural
gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified
degree of certainty to be economically recoverable in future years from known reservoirs and which are
considered commercially producible. Such reserves may be considered commercially producible
if
management has the intention of developing and producing them and such intention is based upon (i) a
reasonable assessment of the future economics of such production; (ii) a reasonable expectation that there is a
market for all or substantially all the expected petroleum and natural gas production; and (iii) evidence that
the necessary production, transmission and transportation facilities are available or can be made available.
Reserves may only be considered proven and probable if producibility is supported by either production or
conclusive formation tests. Crew’s petroleum and gas reserves are determined pursuant National Instrument
51-101, Standard of Disclosures for Oil and Gas Activities.
(ii) Decommissioning obligations
The Company estimates future remediation costs of production facilities, wells and pipelines at different stages
of development and construction of assets or facilities. In most instances, removal of assets occurs many years
into the future. This requires assumptions regarding abandonment date, future environmental and regulatory
legislation, the extent of reclamation activities, the engineering methodology for estimating cost, future
removal technologies in determining the removal cost and liability-specific discount rates to determine the
present value of these cash flows.
(iii) Business combinations
In a business combination, management makes estimates of the fair value of assets acquired and liabilities
assumed which includes assessing the value of oil and gas properties based upon the estimation of
recoverable quantities of proven and probable reserves being acquired.
(iv) Share-based payments
All equity-settled, share-based awards issued by the Company are recorded at fair value. The fair value of
restricted and performance awards are valued based on the closing stock price at grant date. In assessing the
fair value of equity-based compensation, estimates have to be made regarding the performance multiplier for
performance awards.
2019 ANNUAL FINANCIAL STATEMENTS
17
CREW ENERGY INC.
(v)
Income taxes
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect
amounts recognized in the statements of income both in the period of change, which would include any
impact on cumulative provisions, and in future periods. Deferred tax assets, if any, are recognized only to the
extent it is considered probable that those assets will be recoverable. This involves an assessment of when
those deferred tax assets are likely to reverse.
(vi) Derivatives
The Company’s estimate of the fair value of derivative financial instruments is dependent on estimate forward
prices and volatility in those prices.
4. Determination of fair values:
A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial
and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes
based on the following methods. When applicable, further information about the assumptions made in determining fair
values is disclosed in the notes specific to that asset or liability.
(i) Property, plant and equipment and exploration assets:
The fair value of property, plant and equipment recognized in an acquisition is based on market values. The market
value of property, plant and equipment is the estimated amount for which property, plant and equipment could be
exchanged on the acquisition date between a willing buyer and a willing seller in an arm’s length transaction after
proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market
value of oil and natural gas interests (included in property, plant and equipment) and intangible exploration assets is
estimated with reference to the discounted cash flows expected to be derived from oil and natural gas production
based on externally prepared reserve reports. The risk-adjusted discount rate is specific to the asset with reference to
general market conditions.
The market value of other items of property, plant and equipment is based on the quoted market prices for similar
items.
(ii) Cash and cash equivalents, accounts receivable, accounts payable, bank loans and the senior unsecured notes:
The fair value of cash and cash equivalents, accounts receivable, accounts payable, bank loans and the senior unsecured
notes are estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting
date. At December 31, 2019 and December 31, 2018, the fair value of accounts receivable and accounts payable
approximated their carrying value due to their short term to maturity. Bank loans bear a floating rate of interest and
the margins charged by the lenders are indicative of current credit spreads and therefore carrying value approximates
fair value. The fair value of the senior unsecured notes fluctuates in response to changes in the market rates of interest
payable on similar instruments. At December 31, 2019, the carrying value of the unsecured notes made up 120% of the
approximated fair value.
(iii) Derivatives:
The fair value of forward contracts and swaps is determined by discounting the difference between the contracted
prices and published forward price curves as at the statement of financial position date, using the remaining contracted
volumes and a credit adjusted interest rate. The fair value of options and costless collars is based on option models
that use published information with respect to volatility, prices and interest rates.
(iv) Restricted and performance awards:
The fair value of restricted and performance awards is measured at the grant date using the closing price of the
common shares.
18
2019 ANNUAL FINANCIAL STATEMENTS
CREW ENERGY INC.
5. Change in accounting policies:
(i) Adoption of IFRS 16 – Leases:
On January 1, 2019, the Company adopted IFRS 16 Leases, which replaces IAS 17 Leases and IFRIC 4 Determining
Whether an Arrangement Contains a Lease. IFRS 16 uses a single lease accounting model for lessees, which requires
the Company to recognize a ROU asset and lease liability on the statement of financial position, for all contracts that
contain a lease.
The Company adopted IFRS 16 using the modified retrospective approach, and therefore comparative information has
not been restated and continues to be reported under IAS 17 and IFRIC 4. The cumulative effect of initially applying the
standard was recognized through $2.6 million in ROU assets (included in “Property, plant and equipment”) and $2.6
million in lease obligations, split between the current portion of $1.1 million included in “Accounts payable and accrued
liabilities”, and the long term portion of $1.5 million included in “Lease obligations”. The weighted average incremental
borrowing rate used to calculate the lease obligation at adoption was 4.5%. The ROU assets and lease obligations
relate primarily to the Company’s head office lease in Calgary.
The Company applied the following practical expedients as permitted under the standard. Some of these expedients
are on a lease-by-lease basis and others are applicable by class of underlying assets:
Maintain classification of contracts previously identified as leases under IAS 17 and IFRIC 4;
Account for leases with a remaining term of less than 12 months at January 1, 2019 as short-term leases;
Account for lease payments as an expense and not recognize a ROU asset if the underlying asset is of a lower
dollar value;
Apply a single discount rate to a portfolio of leases with similar characteristics; and
Recognize lease liabilities at the present value of the remaining lease payments, discounted using the interest
rate implicit in the lease or the Company’s incremental borrowing rate as at January 1, 2019. The associated
ROU assets will be measured at the amount equal to the lease liability on the date of transition, with no impact
to opening retained earnings (deficit).
As at December 31, 2018, the Company had operating lease commitments of $2.7 million, which would have resulted in
a discounted lease obligation of $2.6 million. At January 1, 2019, the Company recognized a current and non-current
lease obligation of $2.6 million.
The additional disclosures required by IFRS 16 are disclosed in note 12.
6. Financial risk management:
The Company’s activities expose it to a variety of financial risks that arise as a result of its exploration, development,
production, and financing activities such as:
Credit risk;
Market risk; and
Liquidity risk.
This note presents information about the Company’s exposure to each of the above risks, the Company’s objectives, policies
and processes for measuring and managing risk and the Company’s management of capital. Further quantitative
disclosures are included throughout these financial statements.
The Board of Directors oversees management’s establishment and execution of the Company’s risk management
framework. Management has implemented and monitors compliance with risk management policies. The Company’s risk
management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits
and controls, and to monitor risks and adherence to market conditions and the Company’s activities.
2019 ANNUAL FINANCIAL STATEMENTS
19
CREW ENERGY INC.
(a) Credit risk:
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to
meet its contractual obligations and arises principally from the Company’s receivables from partners within jointly
owned assets and operations, oil and natural gas marketers and counterparties to derivative financial assets. The
maximum exposure to credit risk at year-end is as follows:
Trade and other receivables
Derivative financial assets
Trade and other receivables:
December 31,
2019
December 31,
2018
$
$
26,994
3,180
30,174
$
$
70,522
8,382
78,904
Substantially all of the Company’s petroleum and natural gas production is marketed under standard industry terms.
Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following
production. The Company’s policy to mitigate credit risk associated with these balances is to establish marketing
relationships with large credit worthy purchasers and to sell through multiple purchasers. During 2019, the Company
had four customers that individually accounted for 10% or more of the Company’s total revenues. The Company
historically has not experienced any collection issues with its petroleum and natural gas marketers. Receivables from
partners within jointly owned assets and operations are typically collected within one to three months of the bill being
issued to the partner. The Company attempts to mitigate the risk from these receivables by obtaining partner approval
of significant capital expenditures prior to the expenditure. However, the receivables are from participants in the
petroleum and natural gas sector and collection of the outstanding balances can be impacted by industry factors such
as commodity price fluctuations, limited capital availability and unsuccessful drilling programs. The Company does not
typically obtain collateral from petroleum and natural gas marketers or joint asset partners; however, the Company can
cash call for major projects and does have the ability, in some cases, to withhold production from joint asset partners in
the event of non-payment.
Derivative financial assets:
Derivative financial assets can consist of commodity, interest rate and foreign exchange contracts used to manage the
Company’s exposure to fluctuations in commodity prices, interest rates and the exchange rate between United States
and Canadian dollars. The Company manages the credit risk exposure related to derivative financial assets by selecting
investment grade counterparties and by not entering into contracts for trading or speculative purposes.
The carrying amount of accounts receivable and derivative financial assets, when outstanding, represents the maximum
credit exposure. As at December 31, 2019, the Company’s receivables consisted of $19.7 million (December 31, 2018 -
$23.9 million) of receivables from petroleum and natural gas marketers, of which all have been subsequently collected,
$0.6 million (December 31, 2018 - $34.6 million) from partners with jointly owned assets and operations, none of which
has been subsequently collected, and $6.7 million (December 31, 2018 - $12.0 million) of deposits, prepaids and other
accounts receivable, which includes a $5.0 million (December 31, 2018 - $9.5 million) receivable for a Government of
British Columbia infrastructure credit earned through the completion of a pipeline connecting the West Septimus
processing facility to the TC Energy Saturn meter station. The Company does not consider any of its receivables to be
past due.
(b) Market risk:
Market risk is the risk that changes in market conditions, such as commodity prices, foreign exchange rates and interest
rates, will affect the Company’s cash flow, income or the value of financial instruments. The objective of market risk
management is to manage and control market risk exposures within acceptable parameters, while maximizing the
Company’s return.
20
2019 ANNUAL FINANCIAL STATEMENTS
The Company utilizes both financial derivatives and physical delivery sales contracts to manage market risks. All such
transactions are conducted in accordance with the Company’s risk management policy that has been approved by the
CREW ENERGY INC.
Board of Directors.
Foreign currency exchange rate risk:
Foreign currency exchange rate risk is the risk that the fair value of future cash flows will fluctuate as a result of changes
in foreign exchange rates. The majority of the Company’s petroleum and natural gas sales are conducted in Canada
and are denominated in Canadian dollars; however, Canadian commodity prices are influenced by fluctuations in the
Canadian to U.S. dollar exchange rate.
Interest rate risk:
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The
Company is exposed to interest rate fluctuations on its bank loan which bears a floating rate of interest. Average bank
debt outstanding during the year ending December 31, 2019 was $52.2 million (December 31, 2018 - $46.1 million). For
the year ended December 31, 2019, a 1.0 percent change to the effective interest rate would have had a $0.5 million
impact on net income (December 31, 2018 - $0.5 million). The interest rate on the senior unsecured notes is fixed and
is not subject to interest rate risk.
Commodity price risk:
Commodity price risk is the risk that future cash flows will fluctuate as a result of changes in commodity prices.
Commodity prices for petroleum and natural gas are impacted by not only the relationship between the Canadian and
United States dollar, but also regional, North American and global economic events that dictate the levels of crude oil,
natural gas and natural gas liquids supply and demand. The Company has attempted to mitigate a portion of the
commodity price risk through the use of a diversified portfolio of market pricing points and the use of various financial
derivative and physical delivery sales contracts as outlined below. The Company’s policy is to only enter into
commodity price contracts when considered appropriate to a maximum of 50% of forecasted gross production volumes
for a period of not more than two years. Any contracts for volumes greater than 50% of forecasted gross production or
extending beyond two years require approval from the Board of Directors.
Derivative assets:
Derivatives are recorded on the statement of financial position at fair value at each reporting period with the change in
fair value being recognized as an unrealized gain or loss on the statements of income.
The Company’s derivatives are measured in accordance with a three level hierarchy. The hierarchy groups financial
assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial
assets and liabilities. The fair value hierarchy has the following levels:
a) Level 1: fair value is based on quoted prices (unadjusted) in active markets for identical assets or liabilities;
b) Level 2: fair value is based on inputs other than quoted prices included within Level 1 that are observable for
the asset or liability, either directly (ie. as prices) or indirectly (ie. derived from prices); and
c)
Level 3: fair value is based on inputs for the asset or liability that are not based on observable market data
(unobservable inputs).
The Company’s derivative contracts are valued using Level 2 of the hierarchy.
2019 ANNUAL FINANCIAL STATEMENTS
21
CREW ENERGY INC.
At December 31, 2019, the Company held derivative commodity contracts as follows:
Subject of
Contract
Notional
Quantity
Term
Reference
Strike
Price
Option
Traded
Fair Value
Gas
12,500 mmbtu/day
January 1, 2020 -
December 31, 2020
Chicago Citygate
$3.32/mmbtu
Swap
$ 2,300
Gas
2,500 mmbtu/day
January 1, 2020 -
US$ Nymex Henry
December 31, 2020
Hub
$2.48/mmbtu
Swap
199
Oil
Oil
Oil
Oil
Oil
250 bbl/day
250 bbl/day
500 bbl/day
1,000 bbl/day
250 bbl/day
Condensate
250 bbl/day
Total
January 1, 2020 -
June 30, 2020
CDN$ WTI
$75.50/bbl
Swap
(102)
January 1, 2020 -
USD$ WCS - WTI
June 30, 2020
Differential
($17.25)/bbl
Swap
January 1, 2020 -
June 30, 2020
January 1, 2020 -
December 31, 2020
July 1, 2020 -
December 31, 2020
January 1, 2020 -
March 31, 2020
CDN$ WCS
$52.25/bbl
Swap
CDN$ WTI
$77.65/bbl
Swap
CDN$ WCS
$51.50/bbl
Swap
USD$ C5+
Differential
$2.00/bbl
Swap
131
(9)
639
5
17
$ 3,180
As at December 31, 2019, a 10% change in future commodity prices applied against these contracts would have a $3.9
million impact on net income.
Subsequent to December 31, 2019, the Company entered into the following derivative commodity contracts:
Subject of
Contract
Oil
Oil
Oil
Notional
Quantity
250 bbl/day
250 bbl/day
250 bbl/day
Term
Reference
July 1, 2020 -
USD$ WCS - WTI
September 30, 2020
Differential
Strike
Price
Option
Traded
($16.00/bbl)
Swap
July 1, 2020 -
December 31, 2020
CDN$ WTI
$76.00/bbl
Swap
July 1, 2020 -
USD$ WCS - WTI
December 31, 2020
Differential
($15.60/bbl)
Swap
(c) Liquidity risk:
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with the financial
liabilities. The Company’s financial liabilities consist of accounts payable, financial instruments, the bank loan and the
senior unsecured notes. Accounts payable consists of invoices payable to trade suppliers for office, field operating
activities and capital expenditures. The Company processes invoices within a normal payment period. Accounts
payable and financial instruments have contractual maturities of less than one year. The Company maintains a
revolving credit facility, as outlined in note 10, which is subject to annual renewal by the lenders and has a contractual
maturity in 2021 if not extended. In addition, the Company issued $300 million in senior unsecured notes in 2017 that
are scheduled to mature in 2024, as discussed in note 11.
The Company maintains and monitors cash flow which is used to partially finance operating and capital expenditures.
The Company does not pay dividends.
Capital management:
The Company considers its capital structure to include working capital, long-term debt (including the bank loan and
senior unsecured notes) and shareholders’ equity. Crew’s primary capital management objective is to maintain a strong
financial position in order to continue to fund the future growth of the Company. Crew monitors its capital structure
22
2019 ANNUAL FINANCIAL STATEMENTS
CREW ENERGY INC.
and makes adjustments on an ongoing basis in order to maintain the flexibility needed to achieve the Company’s long-
term objectives. To manage its capital structure, the Company may adjust capital spending, hedge future revenue
through commodity contracts, issue new equity, issue new debt or repay existing debt through asset sales.
In the current depressed and volatile commodity price environment, Crew plans to monitor capital expenditures. With
only 22% drawn on the Company’s $235 million Facility and the senior unsecured notes termed out to 2024, the
Company’s financial position remains strong. The Company will continue to monitor debt levels and, if necessary, it will
consider divesting of non-core properties, will further adjust its annual capital expenditure program or may consider
other forms of financing to further strengthen its financial position.
Net debt:
The Company closely monitors its capital structure with a goal of maintaining a strong financial position in order to
fund current operations and the future growth of the Company. Crew monitors net debt as part of its capital structure.
The following tables outline Crew’s calculation of net debt:
Current assets
Current liabilities
Derivative financial instruments
Working capital surplus
Bank loan
Senior unsecured notes
Net debt
December 31,
2019
December 31,
2018
$ 50,019
(46,690)
(3,180)
149
(52,136)
(295,868)
$ 78,904
(58,538)
(8,382)
11,984
(59,904)
(294,885)
$ (347,855)
$ (342,805)
Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. The Facility is
subject to a semi-annual review of the Borrowing Base which is directly impacted by the value of the oil and natural gas
reserves (Bank loan – note 10).
Funds from operations and adjusted funds flow:
One of the benchmarks Crew uses to evaluate its performance is funds from operations and adjusted funds flow. Funds
from operations represents cash provided by operating activities before changes in operating non-cash working capital
and accretion of deferred financing costs. Adjusted funds flow represents funds from operations before
decommissioning obligations settled. The Company considers these metrics as key measures that demonstrate the
ability of the Company’s continuing operations to generate the cash flow necessary to maintain production at current
levels and fund future growth through capital investment and to service and repay debt. Management believes that
such measures provide an insightful assessment of the Company's operations on a continuing basis by eliminating
certain non-cash charges and actual settlements of decommissioning obligations, the timing of which is discretionary.
2019 ANNUAL FINANCIAL STATEMENTS
23
CREW ENERGY INC.
Cash provided by operating activities
Change in operating on-cash working capital
Accretion of deferred financing costs
Funds from operations
Decommissioning obligations settled
Adjusted funds flow
7. Assets held for sale:
Year ended
December 31, 2019
Year ended
December 31, 2018
$ 81,395
(3,297)
(983)
77,115
3,919
$ 81,034
$ 89,162
2,663
(1,023)
90,802
1,194
$ 91,996
Assets held for sale
Transfer from property, plant and equipment – cost
Transfer from property, plant and equipment – accumulated depletion and depreciation
Balance, December 31, 2019
Liabilities associated with assets held for sale
Transfer from decommissioning obligations
Balance, December 31, 2019
Total
21,824
(1,979)
19,845
Total
741
741
$
$
$
$
Subsequent to December 31, 2019, the Company entered into and closed on February 27, 2020, a final purchase and sale
agreement with a third party midstream company for the disposition of an 11% net working interest in each of its Septimus
gas processing facility and West Septimus gas processing facility located in Northeast British Columbia for aggregate
consideration of $35.0 million.
As at December 31, 2019, the closing was considered highly probable of occurring and the facilities were available for
immediate sale in their present condition and, as such, were classified as held for sale. Immediately prior to classifying the
assets as held for sale, the Company conducted a review of the assets' recoverable amounts based on expected
consideration to be received and transferred these assets at their carrying amount, with no impairment or reversal of
impairment recognized.
8. Property, plant and equipment:
Cost
Balance, January 1, 2018
Additions
Acquisitions
Divestitures
Change in decommissioning obligations
Capitalized share-based compensation
Balance, December 31, 2018
Additions
Acquisitions
Increase in right-of-use assets
Transfer to assets held for sale (note 7)
Divestitures
Change in decommissioning obligations
Capitalized share-based compensation
Balance, December 31, 2019
24
2019 ANNUAL FINANCIAL STATEMENTS
Total
$ 2,414,325
103,219
201
(875)
730
6,381
$ 2,523,981
114,094
1,570
3,974
(21,824)
(1,300)
686
4,897
$ 2,626,078
Accumulated depletion and depreciation
Balance, January 1, 2018
Depletion and depreciation expense
Balance, December 31, 2018
Depletion and depreciation expense
Divestitures
Transfer to assets held for sale (note 7)
Balance, December 31, 2019
Net book value
Balance, December 31, 2019
Balance, December 31, 2018
CREW ENERGY INC.
Total
$ 1,073,589
77,373
$ 1,150,962
75,776
(309)
(1,979)
$ 1,224,450
Total
$ 1,401,628
$ 1,373,019
The calculation of depletion for the three months ended December 31, 2019 included estimated future development costs
of $1,787.2 million (December 31, 2018 - $1,894.4 million) associated with the development of the Company’s proved plus
probable reserves and excludes salvage value of $70.6 million (December 31, 2018 - $70.5 million) and undeveloped land of
$155.7 million (December 31, 2018 - $159.3 million) related to future development acreage, with no associated reserves.
During 2019, the Company disposed of non-core lands with no associated production or assigned reserves, for gross
proceeds of $20.8 million. The lands consisted of petroleum and natural gas properties and undeveloped land with a net
book value of $1.1 million and associated decommissioning obligations of $0.3 million, resulting in a gain of $20.0 million.
During the first quarter of 2018, the Company disposed of non-core assets for cash proceeds of $10.0 million. The assets
consisted of petroleum and natural gas properties and undeveloped land with a net book value of $0.9 million and
associated decommissioning obligations of $0.4 million, resulting in a gain of $9.5 million on closing of the disposition.
9.
Impairment:
Impairment losses:
property, plant and equipment
Assessment:
Year Ended
December 31, 2019
Year Ended
December 31, 2018
$ -
$ -
$ -
$ -
At December 31, 2019 and 2018, the Company completed an assessment of the indicators of impairment. As a result of
indicators being present, the Company tested the northeast British Columbia CGU and Lloydminster CGU for impairment.
For the purpose of impairment testing, the recoverable amount of the Company’s CGUs is the greater of its value in use and
its fair value less costs to sell. Value in use is generally the future cash flows expected to be derived from production of
proven and probable reserves estimated by the Company’s third party reserve evaluators and the internally estimated future
cash flows of undeveloped lands. At December 31, 2019, the Company used value in use, discounted at pre-tax rates
between 10% and 30% (December 31, 2018 – 10% and 30%) dependent on the risk profile of the reserve category and CGU.
Impairment reversals are recognized to the extent that impairment had been previously recorded, but are limited to the net
book value that would exist had the original impairment never been recorded, including estimates for depletion.
2019 ANNUAL FINANCIAL STATEMENTS
25
CREW ENERGY INC.
(a) Results of 2019 assessment:
The following estimates were used in determining whether an impairment or reversal to the carrying value of the CGU
existed at December 31, 2019:
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Remainder
WTI Oil (US$/bbl)
WCS ($CDN/bbl)
AECO Gas
($CDN/mmbtu)
61.00
65.00
67.00
68.34
69.71
71.10
72.52
73.97
75.45
76.96
78.50
+2.0%/yr
59.81
63.98
63.77
65.04
66.34
67.67
69.02
70.40
71.81
73.25
74.71
+2.0%/yr
2.04
2.27
2.81
2.89
2.98
3.06
3.15
3.24
3.33
3.42
3.51
+2.0%/yr
$US/$CDN
0.76
0.77
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80 thereafter
At December 31, 2019, due to weakness in the Canadian commodity price environment and the depressed share price of the
Company, the Company tested its northeast British Columbia CGU and Lloydminster CGU for impairment. It was
determined that the recoverable amount of the northeast British Columbia CGU and Lloydminster CGU exceeded their
carrying value and an impairment charge was not recorded.
(b) Results of 2018 assessment:
The following estimates were used in determining whether an impairment or reversal to the carrying value of the CGUs
existed at December 31, 2018:
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Remainder
WTI Oil (US$/bbl)
WCS ($CDN/bbl)
AECO Gas
($CDN/mmbtu)
63.00
67.00
70.00
71.40
72.83
74.28
75.77
77.29
78.83
80.41
82.02
+2.0%/yr
59.47
62.31
67.45
69.53
71.66
73.10
74.56
76.05
77.57
79.12
80.70
+2.0%/yr
1.95
2.44
3.00
3.21
3.30
3.39
3.49
3.58
3.68
3.78
3.88
+2.0%/yr
$US/$CDN
0.77
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80
0.80 thereafter
At December 31, 2018, due to weakness in the Canadian commodity price environment, the Company tested its northeast
British Columbia CGU and Lloydminster CGU for impairment. It was determined that the recoverable amount of the
northeast British Columbia CGU and Lloydminster CGU exceeded their carrying value and an impairment charge was not
recorded.
26
2019 ANNUAL FINANCIAL STATEMENTS
CREW ENERGY INC.
10. Bank loan:
As at December 31, 2019, the Company’s bank facility consists of a revolving line of credit of $210 million and an operating
line of credit of $25 million (the "Facility"). The Facility revolves for a 364 day period and will be subject to its next 364 day
extension by June 4, 2020. If not extended, the Facility will cease to revolve, the margins thereunder will increase by 0.50 per
cent and all outstanding advances thereunder will become repayable in one year from the extension date. The available
lending limits of the Facility (the “Borrowing Base”) are reviewed semi-annually and are based on the bank syndicate’s
interpretation of the Company’s reserves and future commodity prices. The Facility requires the Company to maintain a
Liability Management Rating (“LMR”) of greater than 1.2:1 in the provinces of Alberta and Saskatchewan, and greater than
2.0:1 in the province of British Columbia, if the uninflated, undiscounted abandonment and reclamation liabilities
(“Decommissioning Obligations”), as determined by the individual province, is greater than $20 million. If the LMR falls
below the required level in any province, the lenders have the option to re-determine the Borrowing Base. As at December
31, 2019, the Company’s Decommissioning Obligations exceeded $20 million in the provinces of Alberta and British
Columbia, which carried an LMR of 1.8:1 and 7.0:1, respectively. There can be no assurance that the amount of the available
Facility will not be adjusted at the next scheduled Borrowing Base review on or before June 4, 2020. The Facility is secured
by a floating charge debenture and a general securities agreement on all the assets of the Company.
Advances under the Facility are available by way of prime rate loans with interest rates between 0.50 percent and 2.50
percent over the bank's prime lending rate and bankers' acceptances and LIBOR loans, which are subject to stamping fees
and margins ranging from 1.50 percent to 3.50 percent depending upon the debt to EBITDA ratio of the Company
calculated at the Company's previous quarter end. Standby fees are charged on the undrawn Facility at rates ranging from
0.338 percent to 0.788 percent depending upon the debt to EBITDA ratio. As at December 31, 2019, the Company’s
applicable pricing included a 0.50 percent margin on prime lending, a 1.50 percent stamping fee and margin on bankers’
acceptances and LIBOR loans along with a 0.338 percent per annum standby fee on the portion of the Facility that is not
drawn. Borrowing margins and fees are reviewed annually as part of the bank syndicate’s annual renewal.
At December 31, 2019, the Company had issued letters of credit totaling $11.4 million (December 31, 2018 - $20.9 million).
11. Senior unsecured notes:
On March 14, 2017, the Company issued $300 million of 6.5% senior unsecured notes, due March 14, 2024 (the “2024
Notes”). The 2024 Notes are guaranteed, jointly and severally, on an unsecured basis, by each of the Company’s current and
future restricted subsidiaries. Interest on the 2024 Notes accrues at the rate of 6.5% per year and is payable semi-annually.
Prior to March 14, 2020, the Company may redeem, on any one or more occasions, up to 35% of the aggregate principal
amount of the 2024 Notes, with the cash proceeds from certain equity issues, at a redemption price of 106.5%, plus accrued
and unpaid interest. In addition, at any time prior to March 14, 2020, the Company may redeem, on any one or more
occasions, all or part of the 2024 Notes at a price equal to par, plus a “make-whole” premium and any accrued and unpaid
interest. At any time on or after March 14, 2020, the Company may redeem, on any one or more occasions, all or part of the
2024 Notes at the redemption prices set forth below, plus any accrued and unpaid interest:
Year(1)
2020
2021
2022
2023 and thereafter
(1)
For the 12 month period beginning on March 14 of each year.
Percentage
103.250%
102.145%
101.040%
100.000%
Upon the occurrence of a change of control, the Company will be required to offer to repurchase each holder’s notes at a
price equal to not less than 101% of the principal amount, plus any accrued and unpaid interest.
At December 31, 2019, the carrying value of the 2024 Notes was net of deferred financing costs of $4.1 million (December
31, 2018 – $5.1 million).
2019 ANNUAL FINANCIAL STATEMENTS
27
CREW ENERGY INC.
12. Lease obligations:
Less than 1 year
1 – 3 years
After 3 years
Total undiscounted future lease payments
Total undiscounted future interest payments
Present value of lease obligations
Current portion of lease obligations, included in accounts payable
and accrued liabilities
Long-term portion of lease obligations
Principal payments
Interest payments
Total cash outflow
As at
December 31, 2019
$ 290
244
2,847
$ 3,381
(485)
$ 2,896
(188)
$ 2,708
Year ended
December 31, 2019
$ 1,071
100
$ 1,171
The Company’s total undiscounted future lease payments of $3.4 million equate to future operating lease obligations. This
amount excludes commitments for firm transportation and processing agreements, as disclosed in note 20, as they do not
meet the definition of a lease as the Company does not control the asset or receive substantially all of the asset’s economic
benefits.
13. Decommissioning obligations:
Decommissioning obligations, beginning of year
Obligations incurred
Obligations settled
Obligations divested
Change in estimated future cash outflows
Accretion of decommissioning obligations
Transferred to liabilities associated with assets held for sale
Decommissioning obligations, end of year
As at
December 31, 2019
As at
December 31, 2018
$
$
89,448
3,481
(3,919)
(351)
(2,795)
1,901
(741)
87,024
$
$
88,368
1,523
(1,194)
(414)
(793)
1,958
-
89,448
The Company’s decommissioning obligations result from its ownership interest in oil and natural gas assets including well
sites and facilities. The total decommissioning obligation is estimated based on the Company’s net ownership interest in all
wells and facilities, estimated costs to reclaim and abandon these wells and facilities and the estimated timing of the costs
to be incurred in future years. The Company has estimated the net present value of the decommissioning obligations to be
$87.0 million as at December 31, 2019 (December 31, 2018 - $89.4 million) based on an inflation adjusted undiscounted
total future liability of $110.1 million (December 31, 2018 - $117.8 million). These payments are expected to be made over
the next 40 years with the majority of costs to be incurred between 2022 and 2036. The inflation rate applied to the liability
is 1.35% (December 31, 2018 – 2%). The discount factor, being the risk-free rate related to the liability, is 1.76% (December
31, 2018 – 2.13%). The $2.8 million (December 31, 2018 - $0.8 million) change in estimated future cash outflows is a result of
a change in the inflation rate, discount factor and estimated future obligations.
28
2019 ANNUAL FINANCIAL STATEMENTS
CREW ENERGY INC.
14. Share capital:
At December 31, 2019, the Company was authorized to issue an unlimited number of common shares with the holders of
common shares entitled to one vote per share.
Restricted and Performance Award Incentive Plan:
The Company has a Restricted and Performance Award Incentive Plan (“RPAP”) which authorizes the Board of Directors to
grant restricted awards (“RAs”) and performance awards (“PAs”) to directors, officers, employees, consultants or other
service providers of Crew and its affiliates.
Subject to terms and conditions of the RPAP, each RA and PA entitles the holder to an award value to be typically paid as to
one-third on each of the first, second and third anniversaries of the date of grant. For the purpose of calculating share-
based compensation, the fair value of each award is determined at the grant date using the closing price of the common
shares. In the case of PAs, the award value is adjusted for a payout multiplier which can range from 0.0 to 2.0 and is
dependent on the performance of the Company relative to pre-defined corporate performance measures for a particular
period. On the vesting dates, the Company has the option of settling the award value in cash or common shares of the
Company.
Subsequent to May 21, 2018, being the third anniversary from the date the Company last obtained approval from
shareholders for the continued issuance of common shares from treasury under the RPAP, the Company is no longer eligible
to issue common shares from treasury to settle the award value of any newly granted RAs and PAs. The Company remains
eligible to settle the award value for any such grants either in cash or in common shares acquired by an independent trustee
in the open market for such purposes. Common shares acquired in the open market are held in trust for the potential future
settlement of award values and are netted out of share capital, including the cumulative purchase cost, until they are
distributed for future settlements. For the year ended December 31, 2019, the trustee purchased 4,783,000 common shares
for a total cost of $5.0 million and as at December 31, 2019, holds 4,738,000 common shares in trust.
Upon the vesting of 1,459,000 RAs and 2,036,000 PAs, when taking into account the earned multipliers for PAs, 4,542,000
common shares of the Company were issued from treasury and 45,000 common shares were released from trust in
settlement of such awards for the year ended December 31, 2019.
The number of RAs and PAs outstanding are as follows:
Balance January 1, 2018
Granted
Vested
Forfeited
Balance December 31, 2018
Granted
Vested
Forfeited
Balance December 31, 2019
Per share amounts:
Number of RAs
Number of PAs
1,616
2,628
(729)
(78)
3,437
1,825
(1,459)
(190)
3,613
2,221
3,427
(989)
(164)
4,495
2,050
(2,036)
(337)
4,172
Per share amounts have been calculated on the weighted average number of shares outstanding. The weighted average
shares outstanding for the year ended December 31, 2019 was 151,893,000 (December 31, 2018 – 151,095,000).
In computing diluted earnings per share for the year ended December 31, 2019, 38,000 (December 31, 2018 – 725,000)
shares were added to the basic weighted average common shares outstanding to account for the dilution of RAs and PAs
2019 ANNUAL FINANCIAL STATEMENTS
29
CREW ENERGY INC.
that will be settled with common shares issued from treasury. There were 4,662,000 (December 31, 2018 – 8,773,000) RAs
and PAs that were not included in the diluted earnings per share calculation because they were anti-dilutive.
The volume weighted average trading price of the Company’s common shares was $0.86 during the year ended December
31, 2019 (December 31, 2018 - $1.95).
15. Income taxes:
(a) Deferred income tax expense:
The deferred income tax expense in the financial statements differs from the result which would have been obtained by
applying the combined federal and provincial income tax rate to the Company’s income before income taxes. This
difference results from the following items:
Year ended
December 31, 2019
Year ended
December 31, 2018
Income before income taxes
$
12,836
$
23,170
Combined federal and provincial income tax rate
26.7%
27.0%
Computed “expected” income tax expense
$
3,431
$
6,256
Increase (decrease) in income taxes resulting from:
Change in income tax rates
Non-deductible expenses and other
Change in share-based compensation estimate
(4,633)
36
1,931
-
63
4,052
Deferred income tax expense
$ 765
$ 10,371
In 2019, the blended statutory tax rate was 26.7% (December 31, 2018 – 27.00%). In the second quarter of 2019, the
Alberta government enacted a decrease in the Alberta corporate income tax rate from 12% to 11% effective July 1,
2019, with a further reduction of 1% on January 1st for each of the years 2020, 2021 and 2022 bringing the provincial
rate to 8%.
(b)
Deferred income tax liability:
The components of the Company’s deferred income tax liability are as follows:
December 31,
2019
December 31,
2018
$ 144,436
789
7,369
$ 158,926
2,263
6,362
$ (21,766)
(77,265)
$ (24,151)
(90,602)
$ 53,563
$ 52,798
Deferred tax liabilities:
Property, plant and equipment
Derivative financial instruments
Other
Deferred tax assets:
Decommissioning obligations
Non-capital losses
Deferred income tax liability
30
2019 ANNUAL FINANCIAL STATEMENTS
The following tables provide a continuity of the deferred income tax liability:
January 1,
2019
Recognized
in equity
Recognized
in other
Recognized in
statements of
income
Property, plant and equipment
Decommissioning obligations
Derivative financial instruments
Non-capital losses
Other
$ 158,926
(24,151)
2,263
(90,602)
6,362
$ 52,798
$ -
$ -
-
-
-
-
$ -
-
-
-
-
$ -
$ (14,490)
2,385
(1,475)
13,337
1,008
$ 765
January 1,
2018
Recognized
in equity
Recognized
in other
Recognized in
statements of
income
Property, plant and equipment
Decommissioning obligations
Derivative financial instruments
Non-capital losses
Other
$ 132,749
(23,859)
94
(69,409)
2,852
$ 42,427
$ -
$ -
-
-
-
-
$ -
-
-
-
-
$ -
$ 26,177
(292)
2,169
(21,193)
3,510
$ 10,371
CREW ENERGY INC.
December 31,
2019
$ 144,436
(21,766)
788
(77,265)
7,370
$ 53,563
December 31,
2018
$ 158,926
(24,151)
2,263
(90,602)
6,362
$ 52,798
The Company’s assets have an approximate tax basis of $1,101.0 million at December 31, 2019 (December 31, 2018 -
$1,081.9 million) available for deduction against future taxable income. The following table summarizes the tax pools:
Cumulative Canadian Exploration Expense
Cumulative Canadian Development Expense
Undepreciated Capital Costs
Non-capital losses
Share issue costs
Other
Estimated tax basis
December 31,
2019
December 31,
2018
$
293,400
282,900
202,400
311,600
2,800
7,900
$
291,400
238,800
202,800
335,600
5,300
8,000
$
1,101,000
$
1,081,900
Non-capital losses will begin expiring in 2028. The estimated income tax pools for 2019 have been reduced by the
estimated deferred partnership income for 2019.
16. Revenue:
Petroleum and natural gas sales:
Crew sells its production pursuant to fixed or variable-price contracts. The transaction price for variable priced contracts is
based on the commodity price, adjusted for quality, location or other factors, whereby each component of the pricing
formula can be either fixed or variable, depending on the contract terms. Under the contracts, the Company is required to
deliver a fixed or variable volume of crude oil, condensate, other natural gas liquids (“ngl”) or natural gas to the customer.
Revenue is recognized when a unit of production is delivered to the customer. The amount of revenue recognized is based
on the agreed transaction price, whereby any variability in revenue relates specifically to the Company’s efforts to transfer
production, and therefore the resulting revenue is allocated to the production delivered in the period during which the
variability occurs. As a result, none of the variable revenue is considered constrained.
2019 ANNUAL FINANCIAL STATEMENTS
31
CREW ENERGY INC.
Crude oil, condensate and ngl are sold under contracts of varying terms of up to one year. The majority of the Company’s
natural gas is sold on multi-year contracts. Revenues are typically collected on the 25th day of the month following
production.
The following table summarizes the Company’s petroleum and natural gas sales, all of which are from revenue with
contracts with customers:
Light crude oil
Heavy crude oil
Natural gas liquids
Condensate
Natural gas
Other revenue:
The following table summarizes the Company’s other revenue:
Marketing revenue
Processing revenue
Other
17. Financing:
Interest expense
Gain on lease modification
Accretion of deferred financing costs
Accretion of decommissioning obligations
18. Key personnel expenses:
The aggregate payroll expense of key personnel was as follows:
Short-term benefits
Long-term benefits
Year ended
December 31, 2019
Year ended
December 31, 2018
$ 4,993
30,310
5,086
63,290
89,853
$ 193,532
$ 6,582
25,548
14,900
62,731
108,624
$ 218,385
Year ended
December 31, 2019
Year ended
December 31, 2018
$ 8,658
$ 6,855
3,090
-
4,134
1,000
$ 11,748
$ 11,989
Year ended
December 31, 2019
Year ended
December 31, 2018
$ 23,516
(7)
983
1,901
$ 26,393
$ 22,235
-
1,023
1,958
$ 25,216
Year ended
December 31, 2019
Year ended
December 31, 2018
$ 3,579
4,905
$ 8,484
$ 3,545
6,836
$ 10,381
Crew has determined that its key personnel include both officers and the Company’s Board of Directors. Short-term
benefits are comprised of salaries and directors fees, annual bonuses and other benefits. Long-term benefits include share-
based compensation expense from share awards under Crew’s long-term incentive plans. Short-term employee benefits
32
2019 ANNUAL FINANCIAL STATEMENTS
and share-based compensation include the capitalized and non-capitalized portion of these expenditures recorded in the
CREW ENERGY INC.
financial statements during the respective periods.
19. Supplemental cash flow information:
Changes in non-cash working capital is comprised of:
Changes in non-cash working capital:
Accounts receivable
Accounts payable and accrued liabilities
Other long-term assets
Operating activities
Investing activities
Current portion of lease obligations, included in accounts
payable and accrued liabilities
Interest paid
20. Commitments:
Year ended
December 31, 2019
Year ended
December 31, 2018
$ 43,528
(12,589)
-
$ 30,939
$ (29,592)
(11,535)
3,447
$ (37,680)
$ 3,297
27,454
$ (2,663)
(35,017)
188
-
$ 30,939
$ (37,680)
$ (22,871)
$ (22,167)
Total
2020
2021
2022
2023
2024 Thereafter
Firm transportation agreements
Firm processing agreement
$ 240,332
94,558
$ 48,467
16,337
$42,804
12,354
$30,753
12,354
$25,994
12,354
$25,524
12,388
$ 66,790
28,771
Total
$ 334,890
$64,804
$55,158
$43,107
$38,348
$37,912
$ 95,561
Firm transportation agreements include commitments to third parties to transport natural gas and natural gas liquids from
gas processing facilities in northeast British Columbia.
Firm processing agreements include commitments to process natural gas through the Greater Septimus complex gas
processing facilities in northeast British Columbia.
2019 ANNUAL FINANCIAL STATEMENTS
33