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Granite Oil Corp. Provides Operational and Strategic Alternatives Update and Reports First Quarter, 2018 Financial Results

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CALGARY, Alberta, May 10, 2018 (GLOBE NEWSWIRE) -- GRANITE OIL CORP. ("Granite" or the "Company") (TSX:GXO)(OTCQX:GXOCF) is pleased to provide an operational update and report its financial and operational results and for the three months ended March 31, 2018.

Operational Update

Granite has drilled and completed two wells to date in 2018. The first well was drilled on 200 meter offset spacing in the first quarter in its Pod 2 area and was recently followed by a well drilled on 400 meter spacing in its Pod 4 area in the second quarter. The first well in Pod 2 has been on for over three months, averaging approximately 300 bbl/d of oil over that time period and is currently flowing at 220 bbl/d. The second well was tested at an average rate of 620 bbl/d of oil and 250 mscf/d of gas over a 3.5 day flow test and at the end of the test was flowing at a rate of 1,100 bbl/d of oil and 420 mscf/d of reservoir gas at a wellhead pressure 70 psi. Both wells tested tighter frac spacing and increased sand density and have initially outperformed most of the Company's best wells to date, validating the productivity of significant new areas of expansion within its gas injection EOR scheme. Consistent with a well drilled late in 2017, these wells mark a return to high-torque drilling results, similar to those achieved in 2015 and 2016. 

Granite has taken a patient, results-based approach to the development of its large oil-in-place, early life-cycle Bakken oil pool by developing the most effective and efficient drilling strategy over a small test area of the pool first, so that it can then be applied to the remainder of the pool. At the same time, the Company continued to progressively expand out its highly effective gas injection EOR scheme to areas outside the test area in preparation for future drilling. After testing and evaluating 100 meter spacing over this small area in 2017, the Company suspended its drilling from August to December, and has since returned to 200 meter spacing in the expansion areas with exceptional results. In the last nine months, Granite has taken significant steps to optimize its scheme in this 100 meter spacing area, including shutting in production and prioritizing injection. The Company has successfully minimized the impact of the 100 meter spacing wells in this test area, shallowing declines and starting to recover reservoir pressure. Through this process the Company still achieved top-tier year-end 2017 reserve metrics in all categories, which were highlighted by a PDP recycle ratio of 3.3.

The Company is currently producing 2,500 bbl/d of oil with only three wells drilled in the last 10 months. The Company has a further 86 potential well locations on 200 meter spacing in its main pool area which provide years of go-forward development drilling. Granite is currently re-injecting all of its gas under the EOR scheme and is well positioned to take advantage of seasonally low gas prices with recent and planned well conversions set to re-pressurize key parts of its Bakken oil pool. 

With a return to consistent historical drilling results and a prepared well inventory, the Company will re-evaluate its 2018 budget over the coming weeks with a view towards taking advantage of high netbacks associated with current oil prices while continuing to protect its balance sheet and dividend.

Western Canada Select ("WCS") Price Differential Mitigation

Granite has historically been selling into a heavier oil pipeline system near its battery, getting a quality uptick to Western Canada Select pricing with its lighter oil. Though price differentials of WCS to West Texas Intermediate ("WTI") have recently narrowed significantly compared to the first quarter, the Company has aggressively pursued a number of differential mitigation options to protect its go-forward pricing and balance sheet. These options have included blending its oil with a lighter quality crude oil to attain a higher price premium, as well as railing options direct to refineries in the United States. Recently the Company has received up to a net USD $5.25/bbl increase over WCS.  The Company has recently committed to a one-month test contract to sell 20% of its oil production for the month of June directly to a U.S. refinery. The Company has a number of long term options with its battery located close to both major rail terminals and the U.S. border, and is well prepared to minimize the impacts of future WCS-WTI price differential swings go-forward.

Strategic Alternatives Update

On March 20, 2018, Granite announced the initiation of a process to review potential strategic alternatives and the engagement of Cormark Securities Inc. and National Bank Financial Inc. as financial advisors in respect of this process. Granite has not set a definitive schedule for the process and does not intend to provide updates or otherwise disclose developments with respect to the process until the Board has approved a definitive transaction or strategic alternative, or otherwise determines that disclosure is necessary or appropriate. 

First Quarter, 2018

The first quarter of 2018 presented challenges for Granite, the biggest impacts being lower production levels resulting from slower development and mitigation of the results from the 100 meter spacing wells, as well as increased WCS-WTI price differentials. The gap between WTI and WCS widened significantly beginning in the latter part of 2017 and continued throughout the first three months of 2018, averaging a $25.00 USD discount to WTI in the first quarter of 2018. This differential had a significant impact on the Company's funds flow. In addition, the Company had 1,300 bbl/d of oil hedged at an average price of $66.70 CAD during the first quarter, resulting in a realized hedging loss of approximately $1.4 million (approximately $7.19 per barrel).

Production during the first quarter averaged 2,205 boe/d (98% oil), largely due to the Company's decision to suspend its development drilling program over the period of July to December 2017 to further evaluate wells drilled on 100 meter spacing during the first-half of 2017. During this time, the Company re-evaluated its go-forward development drilling strategy for the broader pool and also evaluated the efficiency of its gas injection EOR scheme based on base declines during a period without development drilling. As anticipated, this period of slowed development has resulted in a shallower corporate decline profile and the Company has returned to drilling new infill wells on 200 or 400meteroffset spacing.

The planned disposition of a minor property referred to in the Granite's news release on December 18, 2017, was not completed and is currently included as part of the strategic alternatives review process resulting in a higher net debt position at March 31, 2018, than anticipated.

Outlook

Given recent positive moves in crude oil prices and WCS-WTI price differentials, along with the strong drilling results achieved in 2018, Granite is optimistic about the second-half of 2018. As well, with numerous options to effectively minimize future increases in WCS-WTI price differentials, the Company is well-positioned to mitigate future price swings that may affect the broader Canadian crude market.

Annual Meeting of Shareholders

The annual meeting of Granite's shareholders is presently scheduled to be held at 2:30 p.m. on Thursday, June 28, 2018. At this meeting, the shareholders will be asked to elect directors and appoint an auditor for the ensuing year. The three-year term during which awards may be granted under Granite's share incentive plan expires on May 14, 2018. The Corporation has determined that no further grants will be made under the Share Incentive Plan and shareholders will not be asked to re-approve the Share Incentive Plan at a future meeting of shareholders.

FINANCIAL AND OPERATING HIGHLIGHTS
Three Months Ended March 31,

  2018   2017
(000s, except per share amounts) ($) ($)
FINANCIAL    
Oil and natural gas revenues 10,675   14,451
Funds from operations (1)  2,711   6,560
Per share – basic 0.08   0.19
Per share – diluted (2)  0.08   0.19
Net income (loss)   (3,353 ) 2,500
Per share – basic   (0.10 ) 0.07
Per share – diluted (2)    (0.10 ) 0.07
Capital expenditures (3)  3,461   4,791
Net debt (4) 42,949   33,359
Shareholders' equity 195,391   214,680
(000s) (#) (#)
SHARE DATA    
At period-end 34,191   33,712
Weighted average – basic 34,191   33,693
Weighted average – diluted 34,357   34,044
OPERATING (5)     
Production    
Natural gas (mcf/d)  289   730
Crude oil (bbls/d) 2,157   2,887
Total (boe/d) 2,205   3,009
Average wellhead prices    
Natural gas ($/mcf) 2.19   2.45
Crude oil and NGLs ($/bbl) 54.71   54.99
Combined average ($/boe) (6)  53.80   53.36
Netbacks    
Operating netback ($/boe) (7) 20.12   27.79
Gross (net) wells drilled    
  Oil (#) 1 (1.0) 3 (3.0)
Total (#) 1 (1.0) 3 (3.0)
Average working interest (%) 100   100

(1)    Funds from operations and funds from operations per share are not recognized measures under International Financial Reporting Standards (IFRS). Refer to the commentary in the Reader Advisories under "Non-GAAP Measurements" for further discussion.

(2)      The Company uses the weighted average common shares (basic) when there is a net loss for the period and the weighted average common shares (diluted) when there is net income in the period to calculate net income (loss) per share diluted. The Company uses the weighted average common shares (diluted) to calculate the funds from operations diluted.

(3)     Total capital expenditures, excluding acquisitions and excluding non-cash transactions. Refer to commentary in the Q1 2018  Management's Discussion and Analysis under "Capital Expenditures and Acquisitions" for further information.

(4)       Net debt, which is calculated as current liabilities (excluding derivative financial instruments) and bank debt less current assets (excluding derivative financial instruments), is not a recognized measure under IFRS. Please refer to the Reader Advisories under "Non-GAAP Measurements" for further discussion.

(5)      For a description of the boe conversion ratio, refer to the Reader Advisories under "BOE Presentation".

(6)     Combined average realized prices includes all oil, gas and NGL sales revenue, excluding other income.   

(7)    Operating netback, which is calculated by deducting royalties, operating expenses and transportation expenses from oil and gas revenue and adjusting for any realized hedging on financial instruments, is not a recognized measure under IFRS. Please refer to the Reader Advisories under "Non-GAAP Measurements" for further discussion.

Contact Information

For further information, please contact Michael Kabanuk, President & CEO by telephone at (587) 349-9123 or Tyler Klatt, V.P. Exploration by telephone at (587) 349-9125.

Reader Advisories

Forward-Looking Statements.  Certain statements contained in this news release may constitute forward-looking statements or information (collectively, "forward-looking statements" or "statements"). These statements relate to future events or Granite's future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe" and similar expressions. Statements relating to "reserves" are also deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and that the reserves can be profitably produced in the future. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements.  In particular, this news release contains forward-looking statements, pertaining to the following: forecasted capital expenditures and plans, drilling and development plans, Granite's financial strength, anticipated production rates, projections of market prices and costs, supply and demand for oil and natural gas, the quantity of reserves, oil and natural gas production levels, the success of the enhanced oil recovery scheme, expectations regarding Granite's credit facility, treatment under governmental regulatory and taxation regimes and expectations regarding Granite's ability to raise capital and to continually add to reserves through acquisitions and development.

Granite believes the expectations reflected in such forward-looking statements and the assumptions upon which such forward-looking statements are based, to be reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this news release should not be unduly relied upon by investors. These statements speak only as of the date of this news release and are expressly qualified, in their entirety, by this cautionary statement. Granite's actual results could differ materially from those anticipated in these forward-looking statements as a result of risk factors that may include, but are not limited to: volatility in the market prices for oil and natural gas; general economic conditions, stock market volatility and ability to access sufficient capital from internal and external sources, uncertainties associated with estimating reserves; uncertainties associated with Granite's ability to obtain additional financing on satisfactory terms; geological, technical, drilling and processing problems; liabilities and risks, including environmental liabilities and risks, inherent in oil and natural gas operations; incorrect assessments of the value of acquisitions; competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel. Readers are cautioned that the foregoing list of factors is not exhaustive. Management has included the above summary of assumptions and risks related to forward-looking information provided in this news release in order to provide security holders with a more complete perspective on Granite's future operations and such information may not be appropriate for other purposes.  Additional information on these and other factors that could affect Granite's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

With respect to forward-looking statements contained in this news release, Granite has made assumptions regarding, among other things: prevailing commodity prices, exchange rates, interest rates, applicable royalty rates and tax laws; the legislative and regulatory environments of the jurisdictions where Granite carries on business or has operations; future production rates and estimates of operating costs; performance of existing and future wells; reserve and resource volumes; anticipated timing and results of capital expenditures; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the timing, location and extent of future drilling operations; the state of the economy and the exploration and production business; results of operations; performance; business prospects and opportunities; the availability and cost of financing, labour and services; the impact of increasing competition; ability to market oil and natural gas successfully and Granite's ability to obtain additional financing on satisfactory terms.

The forward-looking statements represent Granite's views as of the date of this document and such information should not be relied upon as representing its views as of any date subsequent to the date of this document. Granite has attempted to identify important factors that could cause actual results, performance or achievements to vary from those current expectations or estimates expressed or implied by the forward-looking information. However, there may be other factors that cause results, performance or achievements not to be as expected or estimated and that could cause actual results, performance or achievements to differ materially from current expectations. There can be no assurance that forward-looking statements will prove to be accurate, as results and future events could differ materially from those expected or estimated in such statements.  Accordingly, readers should not place undue reliance on forward-looking information. Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements.

Non-GAAP Measurements. This news release contains the terms "funds from operations" and "funds from operations per share", which should not be considered an alternative to or more meaningful than cash flow from (used in) operating activities as determined in accordance with IFRS. These terms do not have any standardized meaning under IFRS. Granite's determination of funds from operations and funds from operations per share may not be comparable to that reported by other companies. Management uses funds from operations to analyze operating performance and leverage, and considers funds from operations to be a key measure as it demonstrates the Company's ability to generate cash necessary to fund future capital investments and to repay debt, if applicable. Funds from operations is calculated using cash flow from operating activities as presented in the statement of cash flows, before changes in non-cash working capital. Granite presents funds from operations per share whereby per share amounts are calculated using weighted-average shares outstanding, consistent with the calculation of earnings per share.

The Company considers corporate netbacks to be a key measure as they demonstrate Granite's profitability relative to current commodity prices. Corporate netbacks are comprised of operating and funds flow netbacks. Operating netback is calculated as the average sales price of the Company's commodities, less royalties, operating costs and transportation expenses. Funds flow netback starts with the operating netback and further deducts general and administrative costs, finance expense and unrealized gains on financial instruments, and then adds any finance income and realized gains on financial instruments, if applicable. No IFRS measure is reasonably comparable to netbacks. See "Netbacks (per unit)" in the Company's management's discussion and analysis for the year ended December 31, 2017 filed on www.sedar.com for the netback calculations.

Net debt, which represent current assets less current liabilities, excluding current derivative financial instruments, is used to assess efficiency, liquidity and the Company's general financial strength. No IFRS measure is reasonably comparable to working capital deficit.

BOE Presentation. References herein to "boe" mean barrels of oil equivalent derived by converting gas to oil in the ratio of six thousand cubic feet (Mcf) of gas to one barrel (bbl) of oil. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, 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 conversion on a 6:1 basis may be misleading as an indication of value.

Test Rates. Test rates are not necessarily indicative of long-term performance or of ultimate recovery. Neither a pressure transient analysis nor a well-test interpretation has been carried out and the data should be considered to be preliminary until such analysis or interpretation has been done.

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