CALGARY, ALBERTA–(Marketwired – Feb. 14, 2017) – Peyto Exploration & Development Corp. (“Peyto” or the “Company”) (TSX:PEY) is pleased to present the results and analysis of its independent reserve report effective December 31, 2016. The evaluation encompassed 100% of Peyto’s reserves, was conducted by InSite Petroleum Consultants (“InSite”) and reflects the Alberta’s Modernized Royalty Framework that came into effect January 1, 2017.
The year 2016 marks the Company’s 18th year of profitable reserves development. Reserves per share grew in all categories and producing reserves were added at the lowest cost since 2003.
- Over the past 18 years, Peyto has explored for and discovered 5.2 TCFe of Alberta Deep Basin natural gas and associated liquids, of which 60% has now been developed. Each year the Company invests in the discovery of new reserves and the efficient and profitable development of existing reserves into high netback natural gas production for the purpose of generating the maximum return on capital for its shareholders. At the same time, this activity delivers significant financial benefits to Albertans.
- In those 18 years, $5.2 billion was invested in the acquisition and development of the 3.1 TCFe of developed reserves at an average cost of $1.69/MCFe, while a weighted average field netback1 of $4.20/MCFe has resulted in a cumulative recycle ratio1 of 2.5 times. Royalty payments to the Province of Alberta have totaled over $790 million.
- Based on the December 31, 2016 evaluation, the debt adjusted, Net Present Value of the Company’s remaining Proved plus Probable Additional reserves (“P+P NPV”, 5% discount, less debt) was $40/share, comprised of $22/share of developed reserves and $18/share of undeveloped reserves.
- For the year ended December 31, 2016, Peyto invested $469 million of capital to build 43,600 boe/d of new production2 at a cost of $10,800/boe/d. This is now the lowest cost to build new production in Peyto’s 18 year history and is inclusive of land, seismic, facilities, acquisitions, dispositions, and all well-related costs.
- Peyto developed over 327 BCFe (54.4 MMboes) of new Proved Producing (“PP”) reserves at a Finding, Development and Acquisition (“FD&A”) cost of $1.44/MCFe ($8.62/boe) while the average field netback1 was $2.64/MCFe ($15.84/boe), resulting in a 1.8 times recycle ratio2. The 2016 PP FD&A was 12% lower than 2015 due to reduced service costs, optimized well designs and superior operational execution.
- Peyto replaced 183% of annual production with new Total Proved (“TP”) reserves at a FD&A cost of $1.01/MCFe ($6.04/boe) and replaced 283% of annual production with new Proved plus Probable Additional (“P+P”) reserves at a FD&A cost of $0.62/MCFe ($3.74/boe) (including decreases in Future Development Capital (“FDC”) of $76 million and $94 million for the respective categories). For comparative purposes, FD&A costs before changes in FDC were $1.20/MCFe ($7.21/boe) and $0.78/MCFe ($4.67/boe), respectively.
- Company reserves increased by 8%, 8% and 11% to 1.5 TCFe, 2.4 TCFe and 3.9 TCFe for PP, TP and P+P reserves, respectively. Per share reserves were up 5%, 4%, and 7% for each of these respective categories.
- The Reserve Life Index (“RLI”) for the PP, TP and P+P reserves remained basically unchanged at 7, 11 and 18 years, respectively.
- At year end, P+P reserves of 655 MMboes (inclusive of 947 future locations) had been assigned to just 15% of Peyto’s total Deep Basin rights.
- For every well drilled, Peyto was able to recognize 1.9 new, undeveloped locations (P+P) in its booked inventory of future opportunities. This indicates new, independently validated, drilling opportunities continue to be added twice as fast as they are harvested.
- Peyto’s drilling plans for 2017 remain the same as previously announced, with a capital budget between $550 and $600 million and plans to drill 145 to 160 wells. In order to preserve the balance sheet and retain capital efficiencies, Peyto will remain nimble and ensure this capital plan remains flexible to account for changing commodity prices and service costs.
- Peyto has protected funding for the capital program with over 70% of forecast 2017 natural gas production pre-sold at an average price of $2.60/GJ ($3.00/mcf).
|1||Recycle Ratio is Field Netback divided by FD&A.|
|2||Capital Expenditures, Field Netback (Revenue less Royalties, Operating costs and Transportation), and Production are estimated and remain unaudited at this time.|
The following table summarizes Peyto’s reserves and the discounted Net Present Value of future cash flows, before income tax, using variable pricing, at December 31, 2016.
|Before Tax Net Present Value ($millions)|
|Oil & NGL (mstb)||BCFe
|Proved + Probable Additional||3,534||65,720||3,928||655||$13,666||$7,755||$5,951||$5,101|
Note: Based on the InSite report effective December 31, 2016. Tables may not add due to rounding.
ANALYSIS FOR SHAREHOLDERS
One of the guiding principles at Peyto is “to tell you the business facts that we would want to know if our positions were reversed.” Therefore, each year Peyto analyzes the reserve evaluation in order to answer the most important questions for shareholders:
- Base Reserves – How did the “base reserves” that were on production at the time of the last reserve report perform during the year, and how did any change in commodity price forecast affect their value?
- Value Creation – How much value did the 2016 capital investments create, both in current producing reserves and in undeveloped potential? Has the Peyto team earned the right to continue investing shareholders’ capital?
- Growth and Income – Are the projected cash flows capable of funding the growing number of undeveloped opportunities and a sustainable dividend stream to shareholders, without sacrificing Peyto’s financial flexibility?
- Risk Assessment – What are the risks associated with the assessment of Peyto’s reserves and the risk of recovering future cashflows from the forecast production streams?
1. Base Reserves
Peyto’s existing Proved Producing reserves at the start of 2016 (base reserves) were evaluated and adjusted for 2016 production as well as any technical or economic revisions resulting from the additional twelve months of production and commodity price data. As part of InSite’s independent engineering analysis, all 1,191 producing entities were evaluated. These producing wells and zones represent a total gross Estimated Ultimate Recoverable (EUR) volume of 3.0 TCFe. Consistent with past years, this estimate is within 0.3% of previous estimates. In aggregate, Peyto is pleased to report that its total base reserves continue to meet with expectation, which increases the confidence in the prediction of future recoveries.
The commodity price forecast used by the independent engineers in this year’s evaluation is slightly lower than last year which had the effect of reducing the Net Present Value of all reserve categories. For example, the debt adjusted NPV, discounted at 5%, of last year’s Proved Producing reserves, decreased $85 million, or 4%, due to the difference in commodity price forecasts and with Peyto’s realized historical offsets to posted prices. InSite’s price forecast used in the variable dollar economics is available on their website at www.insitepc.com.
For 2017, InSite is forecasting the total base production (all wells on production at Dec. 31, 2016) to decline to approximately 66,270 boe/d by December, 2017. This implies a base decline rate of approximately 36% from December 2016. This forecast decline rate is lower than the 2016 actual base decline of 40%. While rapid production growth has driven the base decline rate up in recent years, it is expected that the corporate decline rate will decrease into the future because production additions will represent a smaller proportion of total production, even as the Company’s total production continues to grow. The historical base decline rates and capital programs are shown in the following table:
|Base Decline (%/yr)||30%||29%||23%||26%||20%||22%||33%||35%||34%||38%||40%||40%||36%|
|Capital Expenditures ($MM)||$358||$312||$122||$139||$73||$261||$379||$618||$578||$690||$594||$469||$575|
*The base decline represents the aggregate annual decline of all wells on production at the end of the previous year.
2. Value Creation/Reconciliation
During 2016, Peyto invested a total of $469 million to drill 128 gross (121 net) gas wells, continued to reduce field operating costs, and enhanced realized prices for its NGLs. In keeping with Peyto’s strategy of maximizing shareholder returns, an evaluation of the economic results of this investment activity is necessary in order to determine, on a go-forward basis, the best use of shareholders’ capital. Not only does this look back analysis give shareholders a report card on the capital that was invested, it also helps illustrate the potential returns that can be generated from similar future undeveloped opportunities.
Exploration and Development Activity
Of the total capital invested in exploration and development activities in 2016, approximately 9% was spent acquiring lands and seismic, 13% on new facilities, and the remaining 78% was spent drilling, completing and connecting existing and new reserves. Of the 128 gross (121 net) wells drilled, 64% or 82 gross wells were previously identified as undeveloped reserves in last year’s reserve report (55 Proved, 27 Probable Additional). The remaining 46 wells were not recognized in last year’s report. This past year had a larger proportion of wells that weren’t recognized in the previous year’s reserve report as these wells were located in newer areas and deemed too exploratory to assign reserves at the time. As is the case in most years, a portion of Peyto’s drilling locations were chosen from the Company’s total internal drilling inventory which is larger and more comprehensive than that identified in the InSite report.
The undeveloped reserves originally booked to the 82 locations at year end 2015 totaled 253.8 BCFe (3.1 BCFe/well) of Proved Undeveloped plus Probable Additional reserves for a forecast capital investment of $297.2 million ($1.17/MCFe). In actuality, only $245.6 million of capital ($0.97/MCFe) was spent on these 82 wells during 2016, yielding Proved Producing plus Probable Additional reserves of 254.3 BCFe (3.1 BCFe/well).
With service cost deflation and an improvement in execution, far less capital was required to drill the undeveloped wells than originally forecast. The following table illustrates the Company’s historical performance in converting future undeveloped locations into producing wells.
|Reserve Year||Total Drills||Booked Locations Converted||Booked/Total||Forecast Outcome||Forecast Cost per Unit||Actual Outcome||Actual Cost per Unit||Actual/
Forecast Cost per Unit
|gross wells||gross wells||BCFe||Capex* $MM||$/MCFe||BCFe||Capex* $MM||$/MCFe|
*Capex represents only well related capital for drilling, completion, equipping and tie-in
This annual analysis of reserves that are converted from an undeveloped state to a producing state helps to validate the accuracy of the remaining future undeveloped reserves and their capital requirements. This accuracy, by which Peyto can predict future reserve recoveries and capital requirements, also helps to reduce the risk associated with valuing those undeveloped locations.
In order to measure the success of all of the capital invested in 2016, it is necessary to quantify the total amount of value added during the year and compare that to the total amount of capital invested. At Peyto’s request, the independent engineers have run last year’s reserve evaluation with this year’s price forecast to remove the change in value attributable to commodity prices. This approach isolates the value created by the Peyto team from the value created (or lost) by those changes outside of their control (ie. commodity prices). Since the capital investments in 2016 were funded from a combination of cash flow, debt and equity, it is necessary to know the change in debt and the change in shares outstanding to see if the change in value is truly accretive to shareholders.
At year-end 2016, Peyto’s estimated net debt had increased by 2.5% or $27.3 million to $1.132 billion while the number of shares outstanding had increased by 3.4% or 5.67 million shares to 164.777 million shares. The change in debt includes all of the capital expenditures, as well as any acquisitions, and the total fixed and performance based compensation paid out for the year. Although these estimates are believed to be accurate, they remain unaudited at this time and may be subject to change.
Based on this reconciliation of changes in BT NPV, the Peyto team was able to create $1.357 billion of Proved Producing, $1.979 billion of Total Proven, and $3.423 billion of Proved plus Probable Additional undiscounted reserve value, with $469 million of capital investment, cost reductions and NGL price enhancements. The ratio of capital expenditures to value creation is what Peyto refers to as the NPV recycle ratio, which is simply the undiscounted value addition, resulting from the capital program, divided by the capital investment. For 2016, the Proved Producing NPV recycle ratio is 2.9. This means for each dollar invested, the Peyto team was able to create 2.9 new dollars of Proved Producing reserve value.
The historic NPV recycle ratios are presented in the following table.
|NPV0 Recycle Ratio|
|Proved + Probable Additional||3.8||2.2||27.1||10.3||6.6||3.2||4.0||2.6||5.0||7.3|
*NPV0 (net present value) recycle ratio is calculated by dividing the undiscounted NPV of reserves added in the year by the total capital cost for the period (eg. 2016 Proved Producing ($1,357/$469) = 2.9).
Based on this reconciliation of value, the NPV5 of the Company’s remaining P+P reserves, on a debt adjusted, per share basis, has increased 20% from $33.60 in 2015 to $40.19 in 2016.
3. Growth and Income
As a dividend paying, growth oriented corporation, Peyto’s objective is to profitably grow the resources which generate sustainable income (dividends) for shareholders. In order for income to be more sustainable and grow, Peyto must profitably find and develop more reserves. Simply increasing production from the existing reserves will not make that income more sustainable. Reserve Life Index (RLI), or a reserve to production ratio, provides a measure of this long term sustainability.
During 2016, the Company was successful in replacing 153% of annual production with new Proved Producing reserves, resulting in an 8% increase in total PP reserves. Fourth quarter production, however, increased 5%, from 97,028 boe/d to 101,767 boe/d, which had the effect of increasing the Proved Producing reserve life index slightly from 6.5 years to 6.7 years. The RLI in all categories declined from 2009 until 2013 with the adoption of horizontal multi-stage fracture well designs where large initial production rates are combined with steep initial declines.
For comparative purposes, the Total Proved and P+P RLI index was 11 and 17 years, respectively. Management believes that the most meaningful method to evaluate the current reserve life is by dividing the Proved Producing reserves by the actual fourth quarter annualized production. This way production is being compared to producing reserves as opposed to producing plus non-producing reserves.
The following table highlights the Company’s historical RLI Index.
|Proved + Probable Additional||19||20||21||23||29||25||22||22||19||18||17||18|
Future Undeveloped Opportunities
As at December 31, 2016, Peyto had 703 net sections of Alberta Deep Basin lands. In many of these sections, mineral rights are held in a number of stacked prospective horizons expanding this land base by over four fold to a total of 2,987 net sections of rights over 7 separate Cretaceous horizons. Over Peyto’s 18 year history, the Company has found and developed 3.1 TCFe of EUR reserves which resides in 248 of these net sections. Effectively, Peyto has invested $5.2 billion to fully develop 8.3% of its existing land base which has also resulted in the generation of $2.2 billion in cumulative earnings to date.
Likewise, the remaining undeveloped land base holds significant future potential. The independent reserve evaluators have forecast development activity for the next five years as shown in the following table of future development capital.
|Future Development Capital|
|Proved Reserves||Proved+ Probable Additional Reserves|
|Year||Undisc., ($Millions)||Undisc., ($Millions)|
Every year Peyto finds and develops new drilling inventory that the independent evaluators review to create a forecast of future development activity. Their forecast is by no means a complete assessment of Peyto’s current opportunities, nor is Peyto content to just sit back and harvest these current opportunities. Each year the results from the drilling activity spawns additional offsetting locations both on currently owned lands and lands Peyto does not yet own but attempts to acquire. The pace of inventory generation has historically exceeded the pace of drilling activity at a ratio of 2:1, resulting in a growing number of future drilling locations recognized in Peyto’s reserve report. The rate at which booked inventory has exceeded drilling activity is shown in the table below and is expected to continue in the future.
|Locations Added To Reserves Report||73||93||96||149||151||156||220||257||208||245||165|
|Inventory Generation Rate||1.5||1.8||3.3||2.9||2.2||1.8||2.2||2.1||1.5||1.9||2.0|
During 2016 Peyto purchased 50 net sections of new land with 117 internally identified drilling targets. As well, Peyto’s development drilling activity proved up additional future drilling locations. As a result, the number of future drilling locations recognized in the reserve report has increased from 830 gross (676 net) locations to 947 gross (784 net) locations. Of these future locations, 51% are categorized by the independent reserve evaluators as Proven Undeveloped with the remaining 49% as Probable Undeveloped. The net reserves associated with the undeveloped locations (not including existing uphole zones) total 2.1 TCFe (346 mmboes) while the total capital required to develop them is estimated at $2.563 billion or $1.24/MCFe. This is forecast to create Net Present Value of $3.460 billion (5% discount rate, post capital recovery) or $21 per share at the current commodity price forecast.
The undiscounted, forecast for Net Operating Income for the Total Proved and P+P reserves over the first 5 years totals $3.4 billion and $5.0 billion, respectively, more than sufficient to fund the future development capital shown above, ensuring those reserve additions are accretive to shareholders.
The total estimated Future Development Capital for both Total Proved and P+P reserves were lowered from the previous year by $76 million and $94 million, respectively, which reflects the continued drop in service costs combined with improvements in operational execution. Future well costs are forecast to increase at a pace consistent with the forecast of increasing commodity prices. It is not expected that well costs will remain at current levels in a rising commodity price environment.
4. Risk Assessment
Effectively 100% of Peyto’s natural gas and natural gas liquid reserves exist in low permeability (tight), sandstone reservoirs in the Alberta Deep Basin. In almost all cases, the volumetric capacity of these sandstone reservoirs can be determined using traditional geological and reservoir engineering techniques, which, when complimented by production performance data, increases the certainty of the reserve estimates. In the majority of Peyto’s core areas, continuous drilling activity has further refined the geologic and geometric definition of these reservoirs to a higher level of certainty.
In addition, these Deep Basin sandstone reservoirs do not contain mobile water nor are they supported by active aquifers. Mobile water traditionally increases the risk associated with reservoir recovery by impeding the flow of hydrocarbons through the reservoir and up the wellbore. Water production, separation and disposal processes also increase operating costs which shortens the economic life of producing wells, further contributing to reduced recovery. As many of these traditional reserves determination and recovery risks are not present in Peyto’s Deep Basin reservoirs, Management has a higher level of confidence in its reserves and their ultimate recovery.
Peyto’s high operating margins have meant that forecasts of net operating income are less affected by commodity price volatility than in most traditional reserve evaluations. As a result, the predicted economic life of Peyto’s producing wells are less sensitive to changes in commodity prices. These high operating margins are achieved through the Company’s high level of ownership and control of all levels of production operations, through a concentrated geographic asset base, and by striving to be the lowest cost producer in the industry.
Peyto further reduces the risk of predicted operating incomes with an active hedging program that aims to achieve a fixed price on a descending graduated schedule of 85% of gross production for the immediate summer or winter season and 75%, 65%, 55%, 45% and 30% thereafter for the successive following seasons. These fixed prices are achieved through a series of frequent transactions which is similar to “dollar cost averaging” the future gas prices in order to smooth out volatility. At present, Peyto has over 70% of forecast 2017 natural gas production pre-sold at an average price of $3.00/mcf.
These cumulative factors, which reduce the traditional risk of realizing future cashflows from Peyto’s reserves, is why, in Management’s opinion, Peyto’s reserves can be valued at lower discount rates than other, more conventional asset bases.
Effective January 1, 2017, the Alberta Government has instituted a new royalty system for production from Crown lands entitled the Modified Royalty Framework (MRF). The implications of the new system has been evaluated as it pertains to both base reserves already on production and future reserves to be developed. In aggregate, and over a reasonable range of commodity prices, the new MRF system has been determined to have no material impact on the royalty burden of the Company.
The following table highlights annual performance ratios both before and after the implementation of horizontal wells in late 2009. These can be used for comparative purposes, but it is cautioned that on their own they do not measure investment success.
|Future Development Capital ($ millions)||$1,305||$1,381||$1,721||$1,406||$1,318||$1,111||$741||$446|
|Proved plus Probable Additional|
|Future Development Capital ($millions)||$2,563||$2,657||$2,963||$2,550||$2,041||$1,794||$1,310||$672|
- FD&A (finding, development and acquisition) costs are used as a measure of capital efficiency and are calculated by dividing the capital costs for the period, including the change in undiscounted FDC, by the change in the reserves, incorporating revisions and production, for the same period (eg. Total Proved ($469.4-$76.2)/(404.4-374.8+35.5) = $6.04/boe or $1.01/MCFe).
- The RLI is calculated by dividing the reserves (in boes) in each category by the annualized Q4 average production rate in boe/year (eg. Proved Producing 248,316/(101.767×366) = 6.7). Peyto believes that the most accurate way to evaluate the current reserve life is by dividing the proved developed producing reserves by the actual fourth quarter average production. In Peyto’s opinion, for comparative purposes, the proved developed producing reserve life provides the best measure of sustainability.
- The Recycle Ratio is calculated by dividing the field netback per boe, by the FD&A costs for the period (eg. Proved Producing (($15.84)/$8.62=1.8). The recycle ratio is comparing the netback from existing reserves to the cost of finding new reserves and may not accurately indicate investment success unless the replacement reserves are of equivalent quality as the produced reserves.
- The reserve replacement ratio is determined by dividing the yearly change in reserves before production by the actual annual production for the year (eg. Total Proved ((404.4-374.8+35.5)/35.5) = 183%).
Peyto has a reserves committee, comprised of independent board members, that reviews the qualifications and appointment of the independent reserve evaluators. The committee also reviews the procedures for providing information to the evaluators. All booked reserves are based upon annual evaluations by the independent qualified reserve evaluators conducted in accordance with the COGE (Canadian Oil and Gas Evaluation) Handbook and National Instrument 51-101. The evaluations are conducted using all available geological and engineering data. The reserves committee has reviewed the reserves information and approved the reserve report.
Although currently guarding against service cost inflation, Peyto is actively developing opportunities at some of the best efficiencies in the Company’s history and delivering some of the best returns in the industry today. The earnings generated from every well drilled provides confirmation of that fact. While the most recent full cycle supply cost of $2.20/MCFe, comprised of $1.44/MCFe of PP FD&A plus $0.76/MCFe of total cash costs, is the lowest in Peyto’s 18 year history, Management feels they can be reduced even more, with continued focus on cost control and operational execution, which would further enhance shareholder returns.
Although rapidly changing industry activity levels and volatile commodity prices are expected to continue, Peyto’s laser-like focus on maximizing returns for shareholders remains steadfast. Peyto has put in place risk mitigation strategies to deal with restricted access to take-away capacity, gas price volatility, and service cost inflation. These strategies will help protect the value of existing producing reserves and the profitability of future reserves that will be developed.
A continuously growing number of profitable future opportunities gives confidence that the Peyto strategy and its team can continue to generate returns for its shareholders for many years to come.
For more in depth discussion of the 2016 reserve report, a conference call will be held with the management on on Wednesday, February 15th, 2017, at 9:00 a.m. Mountain Standard Time (MST), or 11:00 a.m. Eastern Standard Time (EST). To participate, please call 1-844-492-6041 (North America) or 1-487-219-0837 for International participants. Shareholders and interested investors are encouraged to ask questions about Peyto and its most recent results. Alternatively, questions can be submitted to firstname.lastname@example.org. The conference call can also be accessed through the internet at http://edge.media-server.com/m/p/xn3bcd7q. The conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.
A complete filing of the Statement of Reserves (form 51-101F1), Report on Reserves (form 51-101F2), and Report of Management and Directors on Oil and Gas Disclosure (form 51-101F3) will be available in the Annual Information Form to be filed by the end of March 2017. Shareholders are encouraged to actively visit Peyto’s website located at www.peyto.com.