CALGARY, ALBERTA–(Marketwired – Jan. 18, 2017) – Pengrowth Energy Corporation (TSX:PGF) (NYSE:PGH) today announced that the Company’s Board of Directors has approved an interim 2017 capital expenditure budget of $125 million. The interim nature of the budget reflects the current divestiture processes that are being pursued and the lack of visibility with respect to the capital programs associated with assets that may be sold. Upon the conclusion of these divestiture processes, and with the anticipated reduction in debt levels, Pengrowth will update investors on its future growth plans.
The interim 2017 capital budget is expected to support annual average daily production of between 50,000 and 52,000 barrels of oil equivalent per day (boe/d) before any potential dispositions. The majority of the interim 2017 capital budget will be spent at the Lindbergh thermal project, with a focus on the optimization of the first commercial phase as well as the continued engineering and design of the second commercial phase.
Derek Evans, President and Chief Executive Officer said, “We are excited to put further capital dollars to work at Lindbergh in order to optimize Phase One. The optimization activities are projected to generate high pad specific IRR’s ranging from approximately 30 to 50 percent at a West Texas (WTI) crude oil price of US $45.00/bbl and approximately 55 to 90 percent at a WTI price of US $55.00/bbl. The continued Phase Two design and engineering work will enhance our ability to quickly sanction the project upon conclusion of the contemplated asset sales and consequent reduction of indebtedness.”
2017 Capital Plan
The interim 2017 capital budget of $125 million represents a conservative spending level given the asset sales process and the Company’s focus on improving its financial flexibility ahead of its scheduled debt maturities in 2017. The 2017 capital budget was based on the assumption of an average WTI crude oil price of US $55.00/bbl, an AECO natural gas price of Cdn $3.25/Mcf and a $0.74 USD/Cdn exchange rate.
The Company is allocating approximately $80 million towards development and maintenance activities at its Lindbergh thermal project. Lindbergh is one of the most economic, ultra-long life thermal projects with sizeable low cost, low risk organic growth opportunities. In 2015, Pengrowth successfully executed the start-up of the first commercial phase of Lindbergh, which has generated much stronger production than the 12,500 barrels per day (bbl/d) (design steam oil ratio (SOR) of 3.6) nameplate design capacity of the project. Average production from the first commercial phase of Lindbergh for the five days ending December 31, 2016 was 15,654 bbl/d at an average SOR of 2.48. In May of 2016, the Company received regulatory approval for the next expansion phase of Lindbergh, which is expected to increase nameplate capacity to approximately 30,000 bbl/d once completed.
Approximately $60 million of the Lindbergh capital has been allocated to the optimization of Phase One production, which is expected to increase production from the first phase to approximately 18,000 bbl/d by the end of 2017. The optimization program includes the first new drilling since commercial production started in April of 2015. In 2017, Pengrowth plans on drilling seven new well pairs, two infill wells, and expand the associated infrastructure. These optimization activities on three well pads are anticipated to generate strong pad specific IRR’s ranging from approximately 30 to 50 percent at a WTI price of US $45.00/bbl and approximately 55 to 90 percent at a WTI price of US $55.00/bbl.
Ten million dollars of the capital allocated to Lindbergh is targeted towards engineering and design for the Phase Two expansion. By the end of the year, Pengrowth expects the design work to be approximately 70 percent complete and to be ready to execute on Phase Two as funds become available.
The remaining $10 million of capital allocated to Lindbergh is targeted towards maintenance activities on Phase One, including a planned plant turnaround in the third quarter of the year.
The interim 2017 capital program also includes approximately $42 million allocated towards safety, asset integrity and maintenance programs on Pengrowth’s conventional assets. This capital will be directed towards maintenance of infrastructure and integrity initiatives to support ongoing operations across Pengrowth’s conventional asset portfolio. The 2017 program currently has no development capital allocated for drilling in the conventional side of the business.
The make-up of 2017 expected production volumes of 50,000 to 52,000 boe/d, using the mid-point of guidance, is set out below:
|2017 Production Volume Summary|
|Light oil (bbl/d)||10,300|
|Thermal oil (bbl/d)||15,400|
|Total liquids (bbl/d)||31,800|
|Natural gas (Mfc/d)||115,000|
|*assumes mid-point of production guidance|
The make-up of 2017 expected capital expenditures by area is set out below:
|2017 Capital Allocation|
|Capital allocation by area||$ millions|
|Lindbergh development and maintenance||$80|
|Conventional maintenance and integrity||$42|
|Corporate (land, seismic, capitalized G&A)||$3|
Pengrowth’s continued focus on cost saving initiatives is expected to translate into an additional $23 million (9 percent) reduction in gross operating expenses in 2017 compared to 2016. This is in addition to approximately $97 million in savings that were realized in 2016 compared to 2015. Estimated operating expenses for 2017 include two planned turnarounds in the third quarter, one at Quirk Creek and one at Lindbergh. In addition, the Company will continue with expenditures on safety, integrity and maintenance on its conventional assets. On a unit basis, operating expenses are expected to remain essentially unchanged from 2016 levels to a range of $13.25/boe to $13.75/boe due to the previously mentioned expected savings offset by lower anticipated production volumes in 2017 compared to 2016. Pengrowth will continue with its emphasis on cost minimization and will seek out opportunities to further reduce its operating costs.
Cash General and Administrative Expenses
Cash general and administrative (G&A) expenses are expected to remain essentially unchanged, on a gross dollar basis, compared to 2016 expenses. Cost management efforts in 2016 translated into approximately $18 million savings in cash G&A compared to 2015. Despite maintaining the gross dollar savings through 2017, on a unit basis, 2017 cash G&A costs are expected to be in the range of $3.50/boe and $4.00/boe, which is approximately a 25 percent increase from 2016 per unit costs reflecting the lower production volumes expected in 2017.
Financial Flexibility and Liquidity
Pengrowth has been working on enhancing its financial flexibility ahead of its scheduled debt maturities in 2017. The Company has approximately $530 million of cash on hand today following the sale of a 4 percent non-convertible gross overriding royalty on Lindbergh, which closed on January 6, 2017. The interim 2017 capital budget is expected to be more than fully funded from operating funds flow, based on current price assumptions generating 2017 funds flow of approximately $195 million at a WTI crude oil price of US $55.00/bbl.
Risk Management Update
The Company has historically utilized an active risk management program to reduce commodity price volatility and reduce downside cash flow risk. Pengrowth’s risk management activities over the past two years generated approximately $700 million in risk management gains as a result of the falling commodity price environment. Given the recent strengthening in commodity prices, Pengrowth has moderated its commodity risk management program for 2017. Currently, the Company has approximately 15,000 bbl/d of expected 2017 crude oil production (58 percent of estimated oil production) hedged at an average Canadian dollar equivalent price of $66.04/bbl. The Company has a small amount of natural gas production hedged, with 4.7 MMcf/d of expected 2017 natural gas hedged (4 percent of estimated gas production) at an average price of Cdn$3.46/Mcf.
2017 Forecast Guidance Summary
The following is a summary of Pengrowth’s 2017 guidance and does not reflect any anticipated acquisition or divestment activity. Certain guidance estimates may fluctuate with changes in commodity prices.
|2017 Full Year Guidance|
|Average daily production (boe/d)||50,000 to 52,000|
|Total capital expenditures ($ millions)||125|
|Funds flow from operations1 ($ millions)||195|
|Royalties2 (% of sales)||9.0|
|Operating costs3 ($ per boe)||13.25 to 13.75|
|Cash G & A3 ($ per boe)||3.50 to 4.00|
|1. Based on a WTI crude oil price of US $55.00/bbl, an AECO natural gas price of Cdn $3.25/Mcf and a $0.74 USD/Cdn exchange rate
2. Royalties are before impacts of commodity risk management activities
3. Per boe estimates based on high and low ends of production guidance
Pengrowth has successfully managed the prolonged downturn in commodity prices, protecting its cash flows and financial flexibility through conservative capital spending, cost reduction efforts and its commodity risk management program. The Company continues to focus on enhancing its financial flexibility ahead of the debt maturities in 2017 with its ongoing asset sales activity and having adopted a conservative interim capital budget for the year. Pengrowth continues to be in discussions with the lenders of its syndicated bank facility and with the holders of its senior term notes. The Company remains confident that it will reach an agreement with its bank lenders and noteholders, in an effort to seek covenant amendments to provide Pengrowth with additional financial flexibility as it works to reduce its overall debt position.
Based on the current price assumptions in its 2017 capital budget, the Company expects to generate 2017 funds flow of approximately $195 million and free funds flow of approximately $70 million. Pengrowth continues to manage its financial situation and monitor commodity prices to assess market conditions. Should an agreement with its lenders be reached and/or a more favourable commodity price environment develop, then the Company may adjust spending levels and deploy additional capital towards development opportunities on its conventional assets.
Pengrowth Energy Corporation is an intermediate Canadian producer of oil and natural gas, headquartered in Calgary, Alberta. Pengrowth’s assets include the Cardium light oil, Lindbergh thermal and Swan Hills light oil projects. Pengrowth’s shares trade on both the Toronto Stock Exchange under the symbol “PGF” and on the New York Stock Exchange under the symbol “PGH”.