CALGARY, ALBERTA–(Marketwired – Nov. 9, 2016) – Peyto Exploration & Development Corp. (TSX:PEY) (“Peyto” or the “Company”) is pleased to present its operating and financial results for the third quarter of the 2016 fiscal year. An ongoing focus on cost control and prudent capital allocation resulted in a 76% operating margin (1) and a 14% profit margin (2). Additional highlights included:
- Production per share up 14%. Third quarter 2016 production increased 19%, 14% per share, from 487 MMcfe/d (81,208 boe/d) in Q3 2015 to 578 MMcfe/d (96,365 boe/d) in Q3 2016. Approximately 5,700 boe/d of new production (not included in the figure above) was deliberately deferred during the quarter due to low commodity prices.
- Cash costs of $0.76/Mcfe ($0.64/Mcfe or $3.82/boe excluding royalties). Total cash costs, including $0.12/Mcfe royalties, $0.25/Mcfe operating costs, $0.16/Mcfe transportation, $0.04/Mcfe G&A and $0.19/Mcfe interest expense, were down from $0.80/Mcfe in Q3 2015 despite the deferral of 5,700 boe/d of production. The 5% reduction in cash costs did not fully offset the 17% lower realized commodity prices, and resulted in a cash netback of $2.40/Mcfe ($14.43/boe) or a 76% operating margin.
- Funds from operations per share of $0.78. Generated $128 million in Funds from Operations (“FFO”) in Q3 2016 down 5% (8% per share) from $135 million in Q3 2015 due to the 17% reduction in realized commodity prices, which was mostly offset by the 19% increase in production volumes.
- Capital investment of $114 million. A total of 38 horizontal wells and 2 vertical wells were drilled in the third quarter. New wells brought on production over the last 12 months were producing 46,000 boe/d at the end of the quarter, which, when combined with a trailing twelve month capital investment of $502 million, equates to an annualized capital efficiency of $10,900/boe/d.
- Earnings of $0.14/share, dividends of $0.33/share. Earnings of $23 million were generated in the quarter while dividends of $54 million were paid to shareholders, representing a before tax payout ratio of 42% of FFO. This quarter represents Peyto’s 47th consecutive quarter of earnings, totaling over $2.1 billion in cumulative earnings.
Third Quarter 2016 in Review
Peyto is proud to have achieved two historical milestones during the third quarter. Total Company capital investments have now surpassed $5 billion, while total dividends and distributions to investors, paid out of cumulative earnings, have exceeded $2 billion. This historical ratio of profit to investment is unique in the Canadian energy industry and is a direct result of Peyto’s strategy to focus on generating returns rather than merely focusing on growth. This focus on returns continued throughout the third quarter as the Company invested $114 million developing low risk, sweet natural gas resources plays in its traditional Deep Basin areas. Wet weather hampered field operations in July and August requiring a 9th drilling rig to be added in mid-September to catch up to drilling plans for the year. Natural gas price recovery throughout the quarter allowed for the shut-in wells, which were accumulated in previous quarters, to be brought on production. Production climbed from a low of 85,500 boe/d in May to over 100,000 boe/d in September with an average of 5,700 boe/d still offline in the third quarter. Even in a challenging commodity price environment, the financial and operating performance resulted in an annualized 6% Return on Equity (ROE) and 5% Return on Capital Employed (ROCE).
- Operating Margin is defined as funds from operations divided by revenue before royalties but including realized hedging gains/losses.
- Profit Margin is defined as net earnings for the quarter divided by revenue before royalties but including realized hedging gains/losses.
Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet. This could be misleading, particularly if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead.
|Three Months ended September 30||%||Nine Months ended September 30||%|
|Natural gas (mcf/d)||534,710||455,137||17%||530,441||451,829||17%|
|Oil & NGLs (bbl/d)||7,247||5,352||35%||6,960||6,543||6%|
|Thousand cubic feet equivalent (mcfe/d @ 1:6)||578,189||487,250||19%||572,199||491,084||17%|
|Barrels of oil equivalent (boe/d @ 6:1)||96,365||81,208||19%||95,367||81,847||17%|
|Production per million common shares (boe/d)*||585||511||14%||589||521||13%|
|Realized Product prices|
|Natural gas ($/mcf)||2.88||3.57||-19%||2.86||3.68||-22%|
|Oil & NGLs ($/bbl)||39.76||41.69||-5%||38.54||40.58||-6%|
|Operating expenses ($/mcfe)||0.25||0.28||-11%||0.25||0.31||-19%|
|Field netback ($/mcfe)||2.63||3.21||-18%||2.59||3.32||-22%|
|General & administrative expenses ($/mcfe)||0.04||0.02||100%||0.04||0.03||33%|
|Interest expense ($/mcfe)||0.19||0.19||–||0.19||0.20||-5%|
|Financial ($000, except per share*)|
|Funds from operations||127,915||134,513||-5%||370,000||414,349||-11%|
|Funds from operations per share||0.78||0.85||-8%||2.29||2.64||-13%|
|Total dividends per share||0.33||0.33||–||0.99||0.99||–|
|Earnings per diluted share||0.14||0.23||-39%||0.46||0.60||-23%|
|Weighted average common shares outstanding||164,630,168||158,958,273||4%||161,882,961||156,994,934||3%|
|As at September 30|
|End of period shares outstanding||164,630,168||158,958,273||4%|
|*all per share amounts using weighted average common shares outstanding|
|Three Months ended September 30||Nine Months ended September 30|
|($000 except per share)||2016||2015||2016||2015|
|Cash flows from operating activities||129,057||139,275||370,299||399,724|
|Change in non-cash working capital||(10,256||)||(9,754||)||(20,647||)||4,941|
|Change in provision for performance based compensation||9,114||4,992||20,348||9,684|
|Funds from operations||127,915||134,513||370,000||414,349|
|Funds from operations per share||0.78||0.85||2.29||2,64|
(1) Funds from operations – Management uses funds from operations to analyze the operating performance of its energy assets. In order to facilitate comparative analysis, funds from operations is defined throughout this report as earnings before performance based compensation, non-cash and non-recurring expenses. Management believes that funds from operations is an important parameter to measure the value of an asset when combined with reserve life. Funds from operations is not a measure recognized by Canadian generally accepted accounting principles (“GAAP”) and does not have a standardized meaning prescribed by GAAP. Therefore, funds from operations, as defined by Peyto, may not be comparable to similar measures presented by other issuers, and investors are cautioned that funds from operations should not be construed as an alternative to net earnings, cash flow from operating activities or other measures of financial performance calculated in accordance with GAAP. Funds from operations cannot be assured and future dvidends may vary.
Exploration & Development
Spirit River formations again dominated the drilling targets for the third quarter with Wilrich, Falher and Notikewin formations accounting for 90% of the wells drilled. Peyto drilled its second faulted, vertical, Cardium well in the Brazeau area in the quarter, following up an initial successful well earlier in the year, along with its first vertical Belly River well. The Brazeau area accounted for approximately one quarter of all activity with development taking place across multiple formations.
In total, 40 gross wells were drilled across the land base as shown in the following table:
|Brazeau||Total Wells Drilled|
Third quarter drilling continued to take advantage of lower industry activity levels, lower costs and improved execution as the average horizontal well cost $1.8 MM for the second quarter in a row. Average completion costs increased 12% due to less pad completions conducted in the quarter. The following table illustrates the trend in drilling and completion costs since Peyto began drilling with horizontal wells in 2010:
|Gross Hz Spuds||52||70||86||99||123||140||36||19||38|
|Measured Depth (m)||3,762||3,903||4,017||4,179||4,251||4,309||4,231||4,269||4,238|
|Hz Length (m)||1,335||1,303||1,358||1,409||1,460||1,531||1,460||1,444||1,420|
|$ per meter||$734||$723||$694||$651||$626||$501||$453||$419||$426|
|$ per meter||$361||$429||$416||$389||$400||$281||$215||$157||$175|
Capital investments in the third quarter of 2016 totalled $113.6 million, comprised of $64.1 million for drilling, $26.9 million for completions, $13.2 million for wellsite equipment and well connections, $3.8 million for major pipelines and facilities, and $5.4 million for new seismic data and undeveloped land.
In total, 40 wells (92% Working Interest) were spud in the quarter, 38 horizontal wells and 2 vertical wells, and 37 wells (95% WI) were completed. Despite challenging ground conditions, Peyto was able to install wellsite equipment and pipelines to connect 41 wells (93% WI) and place them on production. Facility and pipeline investments of $3.8 million included the construction of two water source facilities at Brazeau. Finally, a total of 13 undeveloped sections (96% WI) of land were added in the quarter, acquired from other operators for $4.8 million or an average of $596/acre. These lands have an internal estimate of over 40 development locations that will be added to Peyto’s existing inventory of Deep Basin locations.
US (Henry Hub) natural gas prices continued to climb throughout the quarter finishing above $3USD/MMBTU. Alberta (AECO) natural gas prices effectively did the same, except for a two week period in the middle of the quarter when prices collapsed due to an interruption in TCPL’s mainline service at East Gate. By the end of the quarter however, AECO prices were approaching a high for 2016 at $2.75CAD/GJ.
The average third quarter 2016 AECO daily natural gas price was $2.20/GJ up 66% from the previous quarter but down 20% from the same period in 2015, while the average AECO monthly price was $2.09/GJ, up 75% from the previous quarter but down 22% from the prior year. As Peyto had committed 87% of its production to the monthly price, Peyto realized a volume weighted average natural gas price of $2.08/GJ or $2.39/Mcf, after the TCPL fuel charge and prior to a $0.49/Mcf hedging gain.
As a result of the Company’s hedging strategy, approximately 81% of Peyto’s natural gas production received a fixed price of $2.59/GJ, or $2.99/Mcf, when including hedges that were put in place over the previous 24 months, while the balance received the blended daily and monthly price of $2.08/GJ, resulting in an after-hedge price of $2.50/GJ or $2.88/Mcf.
Greater competition for fractionation and transportation of natural gas liquids has resulted in realized propane prices improving to the point where extracting propane from the gas stream and condensing it into liquid form is once again profitable. As a result, during the quarter Peyto began adjusting the operating conditions of the refrigeration process at its owned and operated processing facilities in order to recover more liquid propane and butane. The result was a 16% increase in total liquids yield as well a change in the blended realized liquids prices. Peyto realized an oil and natural gas liquids price of $39.76/bbl in Q3 2016 for its blend of condensate, pentane, butane and propane, which represented 73% of the $54.82/bbl average Canadian Light Sweet posted price, down from 76% in Q2 2016 and Q3 2015, as shown in the following table.
Commodity Prices by Component
|Three Months ended||Sept 30||Jun 30||Sept 30|
|Natural gas – after hedging ($/mcf)||2.88||2.60||3.50|
|Natural gas – after hedging ($/GJ)||2.50||2.26||3.06|
|AECO monthly ($/GJ)||2.09||1.18||2.66|
|Oil and natural gas liquids ($/bbl)|
|Total Oil and natural gas liquids ($/bbl)||39.76||41.46||41.69|
|Canadian Light Sweet postings ($/bbl)||54.82||54.70||54.70|
Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation.
Peyto’s realized natural gas price combined with realized liquids prices, resulted in unhedged revenues for the third quarter of $2.71/Mcfe ($3.16/Mcfe including hedging gains). Royalties of $0.12/Mcfe, operating costs of $0.25/Mcfe, transportation costs of $0.16/Mcfe, G&A of $0.04/Mcfe and interest expense of $0.19/Mcfe, all combined for total cash costs of $0.76/Mcfe ($4.54/boe). When Q3 2016 total cash costs of $0.76/Mcfe were deducted from realized revenues, it resulted in a cash netback of $2.40/Mcfe or a 76% operating margin.
Depletion, depreciation and amortization charges of $1.54/Mcfe, along with a provision for deferred tax and market based bonus payments reduced the cash netback to earnings of $0.43/Mcfe, or a 14% profit margin. Dividends of $1.02/Mcfe were paid to shareholders.
On October 24, 2016, Peyto closed an issuance of CAD $100 million of senior unsecured notes. The notes were issued by way of a private placement and rank equally with Peyto’s obligations under its bank facility and existing note purchase agreements. The notes have a coupon rate of 3.7% and mature in October 24, 2023. Peyto now has CAD $520 million of outstanding senior unsecured notes, representing approximately 50% of the Company’s net debt, at coupon rates ranging from 3.7% to 4.88%.
Natural Gas Marketing
As a result of increased Alberta natural gas price volatility, caused in part by continued transportation constraints on the NGTL/TCPL systems in the form of both periodic curtailments of take-away capacity and dramatic price impact through mainline capacity interruptions, Peyto’s Board of Directors has approved an increase to the hedging limit for future natural gas sales from 65% to 85% for the forecasted winter 2016/17 and Summer 2017. As a result, Peyto has been and will be increasing the frequency of future sales to achieve this new target.
The following table summarizes the remaining hedged volumes and prices for the upcoming years as of November 9, 2016.
|Future Sales||Average Price (CAD)|
*prices and volumes in mcf use Peyto’s historic heat content premium of 1.15.
Peyto is continuing its aggressive 2016 development program with 9 drilling rigs and 5 completion spreads active across its core areas. Four rigs are drilling in the heart of Sundance while 2 rigs are drilling on the east side of Sundance in the Edson and Ansell areas. The remaining 3 rigs are drilling in the Brazeau area.
So far, 18 wells (93% WI) have been drilled in the fourth quarter with another 16 wells (92% WI) expected to be drilled by the end of the year. Fifteen wells (90% WI) have been completed and 10 wells (87% WI) have been brought on production. Pad drilling has resulted in a backlog of completions (15 wells on 8 pads) which will to be resolved by December with the expectation that essentially all Q4 drills will be completed and on production by year end.
Production is currently fluctuating between 100,000 and 105,000 boe/d level with approximately 3,000 boe/d of additional volume behind pipe. Ongoing firm service curtailments on the NGTL system and anomalously high NGTL pipeline pressures are negatively affecting Peyto’s ability to take full advantage of its production capability. Peyto expects production to grow to the 110,000-115,000 boe/d level by year end with the completions that lie ahead and with reliable take away performance on the NGTL system.
Propane prices continue to recover with further price improvements occurring in mid-October giving rise to additional enhancements to plant propane recovery levels including the resumption of the Oldman deep cut plant operation. Total company liquids recovery has been increased from a Q3 average of 13.6 bbl/MMcf sales gas to a present level above 16.0 bbl/MMcf.
The original 2016 budget announced last November projected the drilling of 130 to 145 wells (95% WI) for approximately $600 to $650 million. Peyto is currently on track to drill 131 wells (95% WI) for total capital investment of approximately $475 million, approximately 20% less than originally planned.
The Board of Directors of Peyto has approved a preliminary 2017 budget which includes a capital program expected to range between $550 and $600 million. The capital program involves drilling between 145 and 160 wells (average of 94% working interest), along with associated pipeline and facility investments to accommodate the growing production base. The 9 drilling rigs currently contracted are deemed sufficient for this level of activity and are expected to be split with 5 rigs in the Greater Sundance area and 4 rigs drilling in Brazeau.
The 2017 drilling locations will be selected from Peyto’s large, internal inventory of profitable drilling locations and, based on the current strip price for natural gas and liquids, are all forecast to achieve the Company’s strict rate of return hurdle. These locations are expected to add between 47,500 and 52,500 boe/d of new working interest production, for a cost of approximately $11,500/boe/d, based on anticipated service costs and activity levels. A portion of the new production will offset an internal forecast of 36% base decline, while a portion will grow overall 2017 production from an expected 2016 exit level of 112,000 boe/d to between 120,000 boe/d and 125,000 boe/d.
The 2017 plan includes approximately $100 million in major gas plant and pipeline investments that will increase Peyto’s capacity in owned and operated infrastructure to over 950 mmcf/d. This includes a $60 million investment in a new, sweet gas plant at Brazeau East. This plant will be constructed in two phases; the first phase will include the installation of a refrigeration train and 6 compressors capable of 70 mmcf/d, while the second phase will include a second refrigeration process and 4 additional compressors. There will be the option to add additional compression in the future as required. Phase 1 of the Brazeau East gas plant is expected to be installed during the first quarter and operational by June 2017. Phase 2 is planned for later in the year as drilling plans progress.
In the Greater Sundance area Peyto has plans to install a liquids pipeline system in Q1 2017 for $15 million. This dual pipeline system will link the Oldman, Oldman North, Nosehill and Swanson gas plants for collection and transportation of both condensate and LPG production. The proposed pipeline will effectively eliminate expensive trucking costs while achieving a reduction in greenhouse gas emissions associated with trucking these products to sales. Liquids product pricing is also expected to be enhanced as a result of this pipeline system.
The future strip for Alberta natural gas prices is currently forecast to average approximately $2.55/GJ in 2017, along with Canadian Light Sweet oil prices of approximately $65/bbl. In accordance with Peyto’s historical hedging practice, the Company has already forward sold approximately 63% of 2017 forecast gas production at an average price of $2.58/GJ. These prices, when adjusted for Peyto’s historic NGL and heat content premiums of approximately 130% and combined with the Company’s industry leading cash costs of approximately $0.75/Mcfe ($4.50/boe), should yield cash netbacks of approximately $16/boe, and give Peyto the ability to fund its dividend and the majority of the capital program from internally generated FFO. For the remainder of the funding requirements for the capital program, Peyto has available capacity within its bank lines and working capital, while continuing to maintain a strong balance sheet.
Peyto remains committed to its strategy as a leading natural gas explorer and producer especially as demand for natural gas in North America continues to grow each year. With a strict focus on maximizing returns, the Company is encouraged that it has more opportunities for profitable investment today than ever before. While the competition for traditional gas markets has increased, Peyto remains confident it can compete as one of a select few operators than can demonstrate real and consistent profitability at current market prices. In many ways, the challenges of today are no different than those that have been successfully navigated in the past with a consistent focus on execution, risk management and cost control.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the 2016 third quarter financial results on Thursday, November 10th, 2016, at 9:30 a.m. Mountain Standard Time (MST), or 11:30 a.m. Eastern Standard Time (EST). To participate, please call 1-416-340-2220 (Toronto area) or 1-866-225-6564 for all other participants. The conference call will also be available on replay by calling 1-905-694-9451 (Toronto area) or 1-800-408-3053 for all other parties, using passcode 5941123. The replay will be available at 11:00 a.m. MST, 1:00 p.m. EST Thursday, November 10th, 2016 until midnight EDT on Thursday, November 17th, 2016. The conference call can also be accessed through the internet at http://www.gowebcasting.com/8090. After this time the conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.