CALGARY, ALBERTA–(Marketwired – Feb. 28, 2017) – Pengrowth Energy Corporation (TSX:PGF)(NYSE:PGH) delivered strong operating and financial results in 2016. The Company increased its net asset value per share by approximately 70 percent, delivered robust production and significantly increased reserves, while reducing costs across all segments of its business. The Company also reduced outstanding debt and positioned itself to further improve the strength of its balance sheet with a significant reduction of its outstanding debt early in 2017.
Derek Evans, President and Chief Executive Officer of Pengrowth commented, “Our operational performance was excellent in 2016, with low cost reserve growth, strong production performance, and significant and sustainable year over year cost savings across all segments of our business. We were successful in selling assets, reducing debt and accumulating a significant cash position. We continued to build the required foundation for long-term production and reserves growth and have positioned the Company to further reduce debt in 2017 and improve our balance sheet.”
- Delivered full year funds flow of $429.7 million ($0.79 per share), which was slightly lower than 2015 full year funds flow of $459.3 million ($0.85 per share), in a year where commodity prices fell by approximately 18 percent and production declined by 20 percent.
- Repaid $108 million of debt outstanding on the Company’s credit facilities and finished the year with approximately $287 million of cash on hand, which grew to approximately $530 million by January 6, 2017, providing the ability to repay $126.6 million of 6.25% convertible debentures on maturity on March 31, 2017 and prepay US $300 million of the 6.35% senior term notes which are scheduled to mature on July 26, 2017. When taken together, this should reduce interest expenses on an annualized basis by more than $30 million per year.
- Achieved significant and sustainable savings across all segments of the business totalling $125 million in 2016.
- Maintained production at 91 percent of 2015 levels after taking into account asset sales and with no active drilling program highlighting the low decline nature of the asset base.
- Sold a four percent non-convertible gross overriding royalty on Lindbergh, together with certain proprietary seismic, for $250 million, which closed on January 6, 2017.
- Increased December 31, 2016 total Proved and total Proved plus Probable Reserves by 13 percent and seven percent to 285.8 million barrels of oil equivalent (boe) and 608.5 million boe, respectively, compared to year end 2015.
- Replaced 289 percent of 2016 production with Proved plus Probable Reserve additions after the impact of dispositions.
- Delivered finding and development costs of $3.38 per boe and finding, development and acquisition costs of $1.23 per boe, including changes in future development costs.
- Increased the net present value of Proved plus Probable Reserves (10 percent discount, before tax) by 39 percent to $4.5 billion resulting in a net asset value per share of $6.30 at GLJ pricing, an increase of approximately 70 percent from $3.75 per share at year end 2015.
- Received Environmental Protection and Enhancement Act (EPEA) approval for the Phase Two expansion of our Lindbergh thermal production to an aggregate of 30,000 barrels (bbl) per day. An amendment to the scheme was subsequently submitted in February 2017 to increase the maximum production following the Phase Two development to an aggregate of 40,000 bbl per day.
Pengrowth achieved full year 2016 average daily production of 57,058 boe per day, which was at the mid-point of the Company’s production guidance of 56,000 to 58,000 boe per day. Full year average daily production from Lindbergh was 15,296 bbl per day at an average steam oil ratio of 2.39. Pengrowth’s 2016 corporate production declined 20 percent from 2015 levels primarily due to the absence of production volumes associated with asset dispositions which closed late in 2015 and the first quarter of 2016, and to the absence of any drilling capital. Net of disposition volumes year over year, production declines would have amounted to approximately nine percent, demonstrating the quality and resilience of Pengrowth’s low decline asset base.
Building on the success achieved thus far at Lindbergh, Pengrowth has included in its 2017 capital program, a Lindbergh optimization program that will see the Company drill the first new wells into the project since commercial production commenced in April 2015. In 2017, Pengrowth plans on drilling seven new well pairs, two infill wells, and expanding the associated infrastructure. The completion of the planned optimization activities in 2017 is expected to increase production from the first phase to approximately 18,000 bbl per day by the end of the year.
In May 2016, the Company received EPEA approval for the second phase expansion of Lindbergh, which would increase the nameplate production capacity of the project by an incremental 17,500 bbl per day, to a level of 30,000 bbl per day. In December 2016, an EPEA application was filed for Pengrowth’s 50 percent working interest in the Selina thermal project. The Selina project is located approximately 30 kilometers northeast of Lindbergh and is designed for annual production of 12,500 bbl per day of bitumen. In late February 2017, Pengrowth submitted a scheme amendment and an EPEA update to increase Lindbergh Phase Two production capacity to 27,500 bbl per day, resulting in the maximum production capacity following the Phase Two development to 40,000 bbl per day in aggregate.
Focus on Cost Structures
The Company’s ongoing focus on cost reduction initiatives resulted in significant and sustainable savings across all cost structures year over year. Operating expenses declined by $96.7 million (26 percent) year over year to $275.4 million and resulted in per unit operating costs of $13.19 per boe. Similarly, cash G&A expenses fell by $16.6 million (19 percent) compared to 2015, to $70.4 million ($3.37 per boe), while transportation expenses fell by $11.8 million (26 percent) compared to the same period in 2015, to $33.7 million ($1.61 per boe). These realized cost savings are expected to be sustainable.
The Company delivered full year 2016 funds flow of $429.7 million ($0.79 per share), which was slightly lower than funds flow of $459.3 million ($0.85 per share) for the same period in 2015, despite a 20 percent reduction in production and an 18 percent decline in commodity prices over the same period.
Pengrowth realized a total of $385.7 million ($18.47 per boe) for the full year from its commodity risk management program. Included in these numbers are gains of $77.2 million realized from the early settlement of the 2017 through 2019 commodity risk management contracts. Pengrowth’s risk management activities over the past two years generated over $700 million in risk management gains as a result of the falling commodity price environment. Also in the fourth quarter, Pengrowth monetized its foreign exchange swap contracts on its U.S. dollar denominated term debt for cash proceeds of $47.0 million.
These achievements, coupled with the Company’s successful reduction in its cost structures, allowed it to build a substantial cash position of approximately $287 million by year end. The cash position was further enhanced with proceeds from the sale of a four percent non-convertible gross overriding royalty on Lindbergh, together with certain proprietary seismic, for $250 million, which closed on January 6, 2017 and resulted in the cash position increasing to approximately $530 million on that date.
Financial Resources and Liquidity
Pengrowth’s total debt at December 31, 2016 amounted to Cdn $1.69 billion compared to Cdn $1.86 billion at December 31, 2015. The Company was successful in reducing total debt by $169 million through a combination of repayment of outstanding credit facilities, repurchase of a portion of the outstanding convertible debentures and favourable movements in the US$/Cdn$ foreign exchange rate. The majority of Pengrowth’s long term debt and interest payments are denominated in US dollars and, as such, are subject to fluctuations in the exchange rate between the Canadian and US dollars. Pengrowth manages this foreign exchange exposure through swap contracts on the majority of its outstanding foreign denominated notes. At December 31, 2016 Pengrowth held US $920 million of swap contracts at a weighted average exchange rate of Cdn $0.75/US $1.00.
Pengrowth is proactively in discussions with the lenders of its syndicated credit facility and with the holders of its senior term notes in an effort to seek covenant amendments to provide the Company with additional financial flexibility as it works to improve its debt position. If the Company is unable to obtain a waiver or relaxation of its debt covenants and is not able to remain in compliance with them, the senior unsecured notes and credit facilities may become due on demand and the undrawn portion of the credit facilities would no longer be available to the Company.
For the reporting period of December 31, 2016, Pengrowth received a waiver from the holders of its senior unsecured notes for the total senior debt before working capital as a percent of total book capitalization ratio covenant. On February 9, 2017 the senior debt before working capital to total book capitalization covenant in the term credit facility was permanently removed, effective December 31, 2016. After making the announced debt repayments by March 31, 2017, Pengrowth anticipates it will remain in compliance with its covenants through the end of 2018. In order to comply with certain financial covenants in its senior unsecured notes and term Credit Facilities through 2017 and 2018, Pengrowth has run a scenario that accesses the capital markets before the end of 2017, and includes an improvement in realizations for oil and natural gas. Pengrowth is also continuing with its marketing efforts on various assets as an alternative means of raising money to reduce debt and maintain compliance with its debt covenants. The Company remains confident in its ability to complete additional transactions to further advance its debt reduction objectives.
On February 21, 2017 the Company announced its intention to use the approximate $530 million of cash it has on hand to retire the $126.6 million of 6.25% convertible debentures on maturity on March 31, 2017 and to prepay US $300 million of the 6.35% senior term notes which are schedule to mature July 26, 2017. The prepayment will be made on March 30, 2017. Following these payments, the Company’s proforma debt as of March 31, 2017 will be reduced to approximately $1.1 billion, which represents an approximate 32 percent decrease in indebtedness from December 31, 2015 levels. Pengrowth is focused on further strengthening its balance sheet and continues to pursue opportunities to further reduce its outstanding debt. If Pengrowth is successful in its asset sale initiatives, it intends to prepay the remaining US $100 million of the 2017 6.35% senior term notes as well as proceeding to prepay the remaining Notes outstanding in order of maturity.
Pengrowth maintains a $1.0 billion committed revolving credit facility, which was undrawn at the end of the fourth quarter and does not mature until March 31, 2019.
Currently, the Company has approximately 15,000 bbl per day of expected 2017 crude oil production (58 percent of estimated 2017 oil production) hedged at an average Canadian dollar equivalent price of $65.59 per bbl. The Company has a small amount of natural gas production hedged, with 4.7 MMcf per day of expected 2017 natural gas hedged (4 percent of estimated 2017 gas production) at an average price of Cdn$3.46 per Mcf.
A complete summary of Pengrowth’s commodity risk management contracts in place as at December 31, 2016 is provided in Note 17 in the Company’s Audited consolidated financial statements, which are available on the Company’s website at www.pengrowth.com and on SEDAR at www.sedar.com as well as on EDGAR at www.sec.gov.
Pengrowth’s reserves and resource values at year end 2016 were based on an independent engineering evaluation conducted by GLJ Petroleum Consultants Ltd. (GLJ) with an effective date of December 31, 2016.
The Company continued to create long-term value by growing its reserves and positioning itself for long-term growth.
- Reserves growth at the Company’s flagship Lindbergh thermal project resulted in a 42 percent increase in Proved Reserves to 146.3 million boe as compared with year end 2015. Total Proved plus Probable Reserves increased 21 percent to 317.9 million boe, compared with year end 2015.
- At the end of 2016, Pengrowth had total Proved Reserves of 285.8 million boe, an increase of 33.7 million boe or 13 percent compared with year end 2015. In total, 61.8 million boe of Proved Reserves were added through drilling and revisions, offset by reserve changes of 28.1 million boe due to annual production, dispositions and economic factors.
- Total Proved plus Probable Reserves increased by 39.4 million boe or seven percent to 608.5 million boe compared with year end 2015. A total of 78.2 million boe of Proved plus Probable Reserves were added primarily due to drilling additions and positive technical revisions, offset by 38.8 million boe of annual production, dispositions and minor reductions due to economic factors.
- Increases in Proved plus Probable Reserves resulted in the replacement of 289 percent of 2016 total production net of dispositions and 365 percent of 2016 total production before the impact of dispositions.
- 2016 finding and development (F&D) costs were $3.38 per boe including changes in future development costs (FDC) for Proved plus Probable Reserves. The 2016 F&D costs, excluding changes to FDC, were $0.84 per boe for Proved plus Probable reserves. Pengrowth’s three year weighted average F&D cost for Proved plus Probable reserves was $12.55 per boe, including FDC ($4.38 per boe excluding FDC).
- 2016 finding, development and acquisition costs (FD&A) costs were $1.23 per boe including changes in FDC for Proved plus Probable Reserves. The 2016 FD&A costs, excluding changes to FDC, were $0.09 per boe for Proved plus Probable Reserves. Pengrowth’s three year weighted average FD&A cost for Proved plus Probable Reserves was $13.00 per boe, including FDC ($3.97 per boe excluding FDC).
Further information on Pengrowth’s reserves and resources is available in the Company’s Annual Information Form (AIF) dated February 28, 2017, which is available on the Company’s website at www.pengrowth.com and on SEDAR at www.sedar.com as well as on EDGAR at www.sec.gov.
Net Asset Value
The following table provides a calculation of Pengrowth’s estimated net asset value (NAV) based on the estimated future net revenues associated with Pengrowth’s Proved plus Probable Reserves. Pengrowth calculates NAV to measure its performance. NAV is not necessarily calculated in the same manner by all issuers. Accordingly, it should not be used to make comparisons amongst different issuers.
|Table 1. Net Asset Value – Before Income Tax|
|As at December 31, 2016|
|($ millions, except percentages and share numbers)||Discounted
|Value of total Proved plus Probable Reserves(1)||7,426||4,535|
|Long-term debt, including convertible debentures and working capital(3)||(1,455||)||(1,455||)|
|Other assets/liabilities (asset retirement obligations, commodity contracts)(3)(5)||157||109|
|Net Asset Value||6,392||3,453|
|Shares outstanding (millions)||548||548|
|NAV per share ($ per share)||11.67||6.30|
- Discounted net present value of GLJ total Proved plus Probable Reserves.
- Internal undeveloped land value estimate.
- Based on estimated fair value of long-term debt. See the Annual Financial Statements.
- Prepaid reclamation costs for Sable Offshore Energy Project, Nova Scotia and Judy Creek, Alberta.
- Internal estimated fair value of commodity contracts and other liabilities.
As of December 31, 2016, Pengrowth’s estimated NAV, discounted at 10 percent, was $6.30 per share, which represents an approximate 70 percent increase from the 2015 year end estimated NAV of $3.75 per share. The increase in NAV year over year is primarily attributable to a higher reserve value resulting from reserve increases in various properties and lower forecasts of operating and capital costs due to the realization of cost efficiencies.
The Company continues to work to improve the strength of its balance sheet and materially reduce its outstanding debt. In 2017, Pengrowth will continue to seek additional financial flexibility from asset sales as a means to de-lever its balance sheet. The Company plans on directing all proceeds from asset divestitures to further reduce its outstanding debt by prepaying the remaining outstanding senior notes, in order of maturity. The Company remains in discussions with lenders of its syndicated bank facility and with the holders of its senior term notes to achieve the financial flexibility it needs to move forward with the development of the next expansion phase of its Lindbergh thermal project.
The 2017 capital program is strategically focused on our inventory of thermal oil opportunities with $80 million allocated towards development and maintenance activities at our Lindbergh thermal project. Lindbergh is one of the most economic, ultra-long life thermal projects with sizeable, low cost, low risk, organic growth opportunities. Capital has been allocated to the optimization of Phase One, which is expected to increase production from the first phase to approximately 18,000 bbl per day by the end of 2017. Capital is also being allocated towards the engineering and design work for the Phase Two expansion at Lindbergh. By the end of 2017, Pengrowth expects the design work to be approximately 70 percent complete and to be ready to execute on Phase Two as funds become available.
Year End Disclosure Documents
Today, Pengrowth Energy Corporation is filing its audited Annual Consolidated Financial Statements and related Management’s Discussion and Analysis, as well as its 40-F containing the AIF dated February 28, 2017, for the year ended December 31, 2016. The documents can be viewed on Pengrowth’s website at www.pengrowth.com. They are also available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. Hard copies of Pengrowth’s complete Annual Report can also be requested free of charge by contacting Pengrowth Investor Relations at [email protected].
Pengrowth will host an analyst call and listen-only audio webcast beginning at 6:30 A.M. Mountain Time (MT) on Wednesday, March 1, 2017, during which management will review Pengrowth’s fourth quarter results and respond to questions from the analyst community.
To ensure timely participation in the teleconference, callers are encouraged to dial in 10 minutes prior to the start of the call to register.
Toll free: (844) 358-9179 or International: (478) 219-0186
Live listen only audio webcast: http://edge.media-server.com/m/p/n587h8ip
Pengrowth Energy Corporation is an intermediate Canadian producer of oil and natural gas, headquartered in Calgary, Alberta. Pengrowth’s assets include the Lindbergh thermal oil, Cardium light oil, Swan Hills light oil and the Groundbirch and Bernadet Montney gas 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”.
PENGROWTH ENERGY CORPORATION