Perpetual is on track for profitable growth in 2017. Strategic focusing of the asset base and active balance sheet management positioned the Company for the renewal of capital investment through the first half of 2017 to grow operations in key plays in East Edson and Mannville. At the same time, attention on cost reductions in every component of the business is further boosting returns and translating into an increasingly solid platform for sustainable value creation.
SECOND QUARTER 2017 HIGHLIGHTS
Production and Operations
- Extremely wet spring break up conditions persisted over much of the second quarter, limiting capital activity. Perpetual’s exploration and development spending in the second quarter of 2017 totaled just $4.0 million, primarily for the drilling of one (1.0 net) horizontal gas well and preparatory work for frac activities for the three standing horizontal first quarter drills awaiting completion at East Edson.
- Average production of 9,223 boe/d was up 13% compared to the first quarter as natural declines were more than offset by increased production driven by the ramp up of capital investment. Production was down 42% from the second quarter of 2016, almost entirely related to the disposal of the vast majority of the Company’s shallow gas assets on October 1, 2016 (the “Shallow Gas Disposition”).
- Total production and operating expenses were relatively flat at $4.6 million as compared to the first quarter of 2017, but were down 51% compared to $9.5 million recorded during the same period in 2016. This decrease reflected the impact of the Shallow Gas Disposition and continued efficiencies realized through the Company-owned and operated gas plant at East Edson, offset somewhat by higher costs incurred for extra road and lease maintenance due to wet weather conditions throughout the quarter. Production and operating expenses on a unit-of-production basis were down 15% from the comparative 2016 quarter to $5.52/boe, (Q2 2016 – $6.53/boe; Q1 2017 – $6.28/boe) due to the strategic high grading of assets and are expected to continue to decrease through the remainder of 2017 as production grows through focused capital investment.
- With the completion of five wells at East Edson since the end of the second quarter, current production capability has now reached the Company’s forecast exit rate for year end 2017 of close to 13,000 boe/d.
Financial Highlights
- Realized revenue of $19.9 million was virtually flat as compared to the second quarter of 2016, despite the 42% decrease in production, due to increased realized commodity prices. Quarter over quarter in 2017, realized revenue increased 5% driven by strong production growth, offset by weaker prices for natural gas and natural gas liquids (“NGL”).
- Increased AECO Monthly Index prices were reflected in Perpetual’s natural gas price, including derivatives, of $3.18/Mcf for the second quarter of 2017, up 72% from $1.85/Mcf for the same period in 2016 (Q1 2017 – $5.04/Mcf) and 15% higher than the second quarter AECO Monthly Index price of $2.77/Mcf (Q2 2016 – $1.25/Mcf; Q1 2017 – $2.94/Mcf). Higher heat content gas (1.16 GJ:1 Mcf), as well as price optimization strategies applied to prompt month physical settlements, contributed to improved realized prices over the AECO Monthly Index price.
- Perpetual’s 2017 second quarter oil price, including derivatives, of $43.91/bbl increased 12% compared to the same period in 2016, due primarily to the 20% increase in Western Canadian Select (“WCS”) pricing driven by both higher benchmark West Texas Intermediate (“WTI”) prices, lower WCS differentials and a weaker Canadian dollar.
- Perpetual’s realized average NGL price for the second quarter of 2017 reached $44.28/bbl, up 28% from the second quarter of 2016, reflecting an increase in all NGL component prices as excess North American inventory levels began to stabilize as well as an adjustment for prior period sales.
- Royalty expenses for the quarter were $3.6 million, representing an increase in the effective combined average royalty rate on revenue to 18.3% (Q2 2016 – 11.3%; Q1 2017 – 17.1%). Average crown royalty rates increased to 3.8% in the second quarter of 2017 compared to 3.2% in the second quarter of 2016 (Q1 2017 – 2.6%), due to the completion of the initial reduced royalty period for several East Edson wells and disposition of lower net royalty assets sold as part of the Shallow Gas Disposition, combined with higher Alberta natural gas reference prices and higher oil prices. Freehold and overriding royalty rates increased from 8.1% in the second quarter of 2016 to 14.5% in the 2017 period (Q1 2017 – 14.5%), reflecting both the increase in natural gas prices and reduced total revenue following the Shallow Gas Disposition, leaving a larger percentage of total production sourced from East Edson wells in the second quarter of 2017. As the East Edson gross overriding royalty is a fixed volume of 5.6 MMcf/d plus associated liquids, royalties as a percentage of revenue are expected to decrease as production at East Edson grows in 2017 with renewed capital investment.
- Perpetual’s operating netback of $12.42/boe in the second quarter of 2017 increased 172% from $4.56/boe in the comparative period of 2016. This increase was due to the 71% increase in realized revenue per boe due to higher commodity prices and higher average heat content gas sales combined with the positive impact of the 15% reduction in unit production and operating expenses, offset by higher royalties. Quarter over quarter, operating netbacks were down slightly from $13.91/boe in the first quarter of 2017.
- Cash interest expense in the quarter decreased 57% to $1.9 million (Q2 2016 – $4.5 million; Q1 2017 – $1.9 million), primarily driven by the reduction of $214.4 million principal amount of 8.75% senior notes that were exchanged for 4.4 million of the Company’s shares of Tourmaline Oil Corp. (“TOU”) during the second quarter of 2016, combined with the early cash repayment on April 17, 2017 of $27.1 million of 8.75% senior notes due to mature on March 15, 2018 (the “2018 Senior Notes”). These cash interest expense reductions were partially offset by the $0.7 million in interest charged on the 8.1% $35 million term loan that was initially drawn on March 14, 2017 (the “Term Loan”).
- Despite the 42% drop in production, adjusted funds flow grew to $5.2 million, compared to negative $1.9 million in the second quarter of 2016 (Q1 2017 – $5.1 million).
- The Company recorded a net loss for the second quarter of 2017 of $7.2 million, compared to net income of $64.9 million in the comparative period of 2016 (Q1 2017 – $14.2 million loss). The gain in the 2016 period was primarily driven by the $81.6 million gain on the exchange of senior notes for TOU shares and a $21.4 million gain in the mark-to-market value of its TOU share investment.
2017 STRATEGIC PRIORITIES
During the second quarter of 2017, significant progress was made to advance Perpetual’s top four strategic priorities for 2017 which include:
- Grow value of Greater Edson liquids-rich gas;
- Optimize value potential of Eastern Alberta assets;
- Advance high impact opportunities; and
- Optimize balance sheet for growth.
Grow value of Greater Edson liquids-rich gas
- Despite higher than typical costs for road and site maintenance created by the excessive rain and wet conditions during the second quarter, Perpetual’s top quartile operating cost structure at East Edson further improved to average $3.11/boe (Q2 2016 – 3.29/boe; Q1 2017 3.63/boe). Road upgrades later in 2017 are budgeted to reduce future road maintenance costs and minimize access risks for NGL trucking.
- Drilling recommenced in early June, with one (1.0 net) new well drilled and rig released during the second quarter. The continuous, single rig drilling program has continued into the third quarter. Two additional wells on the current four-well pad are now rig released and drilling operations are ongoing on the fourth well post breakup.
- Plans are in place to continue the consecutive drilling program through to the first quarter of 2018, with the drilling of up to nine Wilrich horizontal development wells during the second half of 2017. Several of the locations will evaluate extended reach horizontals as well as progressive drilling and frac design changes, with the goal to continue to improve on capital efficiencies in the Wilrich play.
- Extremely wet conditions delayed planned completion and frac operations on three drilled first quarter wells to early July. The three wells tested inline as expected at an average level commensurate with the type curve and are now successfully tied-in and on production.
- Additionally, two of the new wells drilled post spring breakup were completed in early August and each tested on initial clean up and flow back at over 15 MMcf/d plus associated liquids, significantly exceeding the type curve for the Wilrich formation.
- The completion of the five wells since the end of the quarter has now established production capability in excess of the capacity of the Company-owned infrastructure of 60 to 65 MMcf/d plus associated liquids. With continuation of the drilling program, this production level is anticipated to be maintained for the remainder of 2017, subject to reductions related to several firm transportation outages anticipated in August.
- The Company continues to pursue activities to be positioned to step up natural gas sales at East Edson to the higher contracted firm transportation capacity of 78 MMcf/d in April 2018.
- With the building inventory of drilled wells as the one rig drilling program continues at East Edson, timing of completion activities will be managed to balance the optimization of field activities with availability of take away transportation.
Optimize value potential of Eastern Alberta assets
- Capital spending in Eastern Alberta amounted to $0.5 million during the second quarter and consisted of additional completion and equipping costs on the Q1 heavy oil drilling program, two oil well reactivations and eight gas recompletions.
- The development well targeting banked oil from waterflood, as well as two of the three exploratory oil pool tests in Q1, have established oil production and performance monitoring is ongoing. Follow on development drilling originally budgeted for the second half of 2017 will be deferred until higher commodity prices can be realized, allowing capital spending to be strategically high-graded for East Edson growth.
- Crude oil production in eastern Alberta grew 20% quarter over quarter to 1,032 bbl/d, reflecting the full impact from wells drilled in the first quarter as well as positive waterflood response and diligent operations reducing operational downtime.
- Waterflood activities to arrest production declines, increase heavy oil recoveries and improve netbacks continued to be optimized during the second quarter of 2017. Positive waterflood response is being observed in several heavy oil pools where producing gas-oil ratios are declining and oil production decline rates have stabilized and in some cases production is inclining with pressure support.
- Gas production in eastern Alberta was effectively flat at 6.4 MMcf/d quarter over quarter as recompletion and workover activities offset natural declines. Low variable operating costs in Mannville result in recompletions paying out within 6 months even at low commodity prices and these will continue during the second half of 2017 with up to 23 additional recompletions planned.
- Production and operating expenses in eastern Alberta were $15.74/boe during the second quarter (Q2 2016 – $10.44/boe; Q1 2017 – $16.18/boe), reflecting the increased downhole work to replace pumps and rods to restore production from several heavy oil wells that went down during the quarter. The Company continues to prioritize cost reductions on its eastern Alberta assets, including a focus on municipal property taxes which represent a significant portion of fixed operating costs as the tax base assessment is dramatically misrepresentative of the actual tangible property value.
- Perpetual spent $0.5 million on abandonment and reclamation projects during the first half of 2017, primarily in eastern Alberta. Plans are in place to execute an internally-managed asset-retirement program at Mannville in the second half of 2017 targeting well abandonments, pipeline discontinuations and abandonments, as well as reclamation work to reduce mineral and surface lease rental payments, maintenance costs and high municipal taxes associated with the linear property in the Mannville area. Anticipated expenditures over the remainder of 2017 are $1.5 million to $2.0 million.
Advance high impact opportunities
- The two horizontal wells drilled during the fourth quarter of 2016 and the first quarter of 2017 to advance the evaluation of the shallow shale gas play in the Viking and Colorado formations are on production at low rates and are being evaluated. Fracture stimulation of the Viking gas well has not been fully executed to date and additional spending has been delayed pending further learnings from performance monitoring and stronger natural gas prices.
- Perpetual turned down its cyclic heat stimulation (“CHS”) test at Panny during the second quarter after its fourth cycle of production. The CHS test provided high quality data and important knowledge to advance phase 1 of its low pressure electro-thermally assisted drive (“LEAD”) process pilot project targeting bitumen recovery from the Bluesky formation. The CHS test yielded valuable insights regarding reservoir performance, the functionality of the electrical heating cable, preliminary solvent opportunities and other operational considerations. Interpretation of the CHS test data will be refined over the coming months and learnings will be integrated into next steps to advance the assessment of the commercial development potential of this large scope Bluesky resource.
- In the Columbia area of west central Alberta, Perpetual will participate for its 40% working interest in a third-party operated horizontal well targeting the Notikewin formation. The well is expected to spud during the third quarter of 2017.
Optimize balance sheet for growth
- On April 17, 2017 Perpetual exchanged $0.5 million 2018 Senior Notes for new 8.75% senior notes maturing on January 23, 2022 (the “2022 Senior Notes”) and completed the early cash repayment of the remaining $27.1 million 2018 Senior Notes. In mid-July, $1.0 million face value of Senior Notes due to mature on July 23, 2019 (“2019 Senior Notes”) were purchased at 96.75% of face value and also retired.
- On July 4, 2017, the Company announced that it had doubled its borrowing capacity available under its reserve-based credit facility (the “Credit Facility”) to $40 million and extended its repayment term to two years, at lower borrowing costs.
- On July 31, 2017, Perpetual entered into a new $18.7 million margin loan secured by 1.67 million TOU shares that matures in July 2018. Proceeds on the new margin loan along with borrowings under the Credit Facility were used to repay the TOU share put option margin loans that were scheduled to mature in August and November of 2017. Proceeds of $1.0 million were realized from the sale of underlying put options.
- Total net debt at June 30, 2017 stood at $68.3 million, net of the market value of TOU shares held. Approximately $52.9 million, representing 49% of Perpetual’s debt and 77% of net debt, matures in 2021 or later.
- Incorporating net debt at June 30, 2017, adjusted for the financing transactions completed in July 2017, Perpetual has access to draw approximately $24 million under the Credit Facility and Term Loan. Combined with the current market value of the Company’s TOU share investment, net of the new margin loan, total current available liquidity is approximately $48 million.
- In light of the positive financing transactions, in early July, Moody’s Investor Service upgraded Perpetual’s corporate credit rating to Caa1 stable.
- To protect a base level of adjusted funds flow, Perpetual has commodity price contracts in place for the second half of 2017 on an estimated 45% of forecast production for the remainder of the year. These include a combination of forward month physical and financial natural gas contracts at AECO hub on a net 27,500 GJ/d to December 2017 at an average price of $3.15/GJ and 12,500 GJ/d for November 2017 through March 2018 at an average price of $2.94/GJ. Perpetual also has oil sales arrangements on 750 bbl/d for the remainder of 2017 securing a WTI floor price of $USD50.00/bbl.
- The Company has diversified its natural gas price exposure from AECO by entering into arrangements to sell 25,000 MMBtu/d priced using a basket of five North American natural gas hub pricing points (Chicago, Dawn, Empress, Malin and Mich Con) for a five year period, commencing November 1, 2017.
OUTLOOK
Success in advancing the Company’s strategic priorities has established a foundation for strong growth in production and adjusted funds flow in 2017. Financing transactions closed during 2017 have ensured sufficient liquidity to execute the planned growth-oriented capital program. The Company will continue its diligent focus on capital efficiency improvements and reductions in operating, financing and administrative costs to improve upon the sustainable cost structure driven by strategic decisions implemented over the past two years.
Based on the total capital spending plan in 2017 of $65 to $70 million, Perpetual expects to exit 2017 at a production rate of approximately 13,000 boe/d. This represents growth in exit rate based on average December production of approximately 60% compared to the prior year. Full year 2017 production is expected to average 10,000 to 11,000 boe/d (85% natural gas). Capital spending during the remainder of 2017 will be funded through adjusted funds flow generation, the final $10 million drawdown of the Term Loan and borrowings under the Credit Facility.
The forward market for oil and natural gas prices for the remainder of 2017 and 2018 has deteriorated over the past several months, eroding adjusted funds flow forecasts with these commodity price assumptions and increasing corresponding forecast debt balances. Based on current operating and financing assumptions, commodity price hedges in place and the forward market for oil and natural gas prices, Perpetual forecasts 2017 adjusted funds flow of approximately $28 to $32 million. Incorporating the current market value of 1.67 million TOU shares held, year end 2017 total net debt of approximately $90 to $100 million is forecast, with a corresponding net debt to trailing twelve months adjusted funds flow ratio of approximately 3.2 at year end 2017.
The Company will continue to monitor commodity market fundamentals closely over the coming months and adjust activities as required, balancing the positive momentum that is translating into operational excellence in executing our East Edson development program with spending within our means to maintain adequate liquidity and balance sheet strength.
About Perpetual
Perpetual is an oil and natural gas exploration, production and marketing company headquartered in Calgary, Alberta. Perpetual operates a diversified asset portfolio, including liquids-rich natural gas assets in the deep basin of west central Alberta, heavy oil and shallow natural gas in eastern Alberta, with longer term opportunities through undeveloped oil sands leases in northern Alberta. Additional information on Perpetual can be accessed at www.sedar.com or from the Corporation’s website at www.perpetualenergyinc.com.
The Toronto Stock Exchange has neither approved nor disapproved the information contained herein.
FINANCIAL AND OPERATING HIGHLIGHTS |
||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||
(Cdn$ thousands except volume and per share amounts) |
2017 |
2016 |
% Change |
2017 |
2016 |
% Change |
||
Financial |
||||||||
Oil and natural gas revenue |
19,728 |
16,501 |
20 |
37,886 |
41,195 |
(8) |
||
Cash flow from (used in) operating activities |
4,728 |
(3,396) |
(239) |
2,439 |
(10,166) |
(124) |
||
Adjusted funds flow(1) |
5,243 |
(1,852) |
(383) |
10,353 |
(1,804) |
(674) |
||
Per share(1)(2) |
0.09 |
(0.04) |
(325) |
0.18 |
(0.04) |
(550) |
||
Net earnings (loss) |
(7,219) |
64,925 |
(111) |
(21,391) |
97,689 |
(122) |
||
Per share – basic(2) |
(0.12) |
1.25 |
(110) |
(0.38) |
2.00 |
(119) |
||
Per share – diluted(2) |
(0.12) |
1.23 |
(110) |
(0.38) |
1.91 |
(120) |
||
Total assets |
343,751 |
477,438 |
(28) |
343,751 |
477,438 |
(28) |
||
Credit Facility outstanding |
4,404 |
– |
100 |
4,404 |
– |
100 |
||
Term Loan, at principal amount |
35,000 |
– |
100 |
35,000 |
– |
100 |
||
Carrying amount of TOU share margin loans |
35,543 |
31,794 |
12 |
35,543 |
31,794 |
12 |
||
Senior notes, at principal amount |
33,490 |
60,573 |
(45) |
33,490 |
60,573 |
(45) |
||
Carrying value of TOU share investment |
(46,489) |
(62,830) |
(26) |
(46,489) |
(62,830) |
(26) |
||
Adjusted working capital deficiency (surplus) |
6,389 |
(717) |
(991) |
6,389 |
(717) |
(991) |
||
Total net debt(1) |
68,337 |
28,820 |
137 |
68,337 |
28,820 |
137 |
||
Net capital expenditures |
||||||||
Capital expenditures |
4,006 |
1,286 |
212 |
28,596 |
6,100 |
369 |
||
Geological and geophysical expenditures |
(22) |
11 |
(300) |
(22) |
26 |
(185) |
||
Dispositions, net of acquisitions |
609 |
(302) |
(302) |
772 |
(6,768) |
(111) |
||
Disposition of gas storage facility investment |
– |
(19,750) |
(100) |
– |
(19,750) |
(100) |
||
Net capital expenditures |
4,593 |
(18,755) |
(124) |
29,346 |
(20,392) |
(244) |
||
Common shares outstanding (thousands)(3) |
||||||||
End of period |
59,035 |
52,209 |
13 |
59,035 |
52,209 |
13 |
||
Weighted average – basic |
59,045 |
52,140 |
13 |
56,769 |
48,856 |
16 |
||
Weighted average – diluted |
59,045 |
52,904 |
12 |
56,769 |
51,169 |
11 |
||
Operating |
||||||||
Average production |
||||||||
Natural gas (MMcf/d)(4) |
45.1 |
85.2 |
(47) |
42.9 |
91.7 |
(53) |
||
Oil and NGL (bbl/d)(4) |
1,714 |
1,755 |
(2) |
1,535 |
1,883 |
(18) |
||
Total (boe/d)(4) |
9,223 |
15,959 |
(42) |
8,686 |
17,169 |
(49) |
||
Average prices |
||||||||
Natural gas, before derivatives ($/Mcf) |
3.09 |
1.37 |
126 |
3.25 |
1.84 |
77 |
||
Natural gas, including derivatives ($/Mcf) |
3.18 |
1.85 |
72 |
4.05 |
2.55 |
59 |
||
Oil, before derivatives ($/bbl) |
45.92 |
38.47 |
19 |
44.93 |
29.91 |
50 |
||
Oil, including derivatives ($/bbl) |
43.91 |
39.17 |
12 |
38.24 |
36.42 |
5 |
||
NGL ($/bbl) |
44.28 |
34.71 |
28 |
46.54 |
31.75 |
47 |
||
Drilling (wells drilled gross/net) |
||||||||
Gas |
1/1.0 |
– |
7/7.0 |
1/1.0 |
||||
Oil |
– |
– |
4/3.3 |
– |
||||
Observation/Service |
– |
– |
– |
– |
||||
Total |
1/1.0 |
– |
11/10.3 |
1/1.0 |
||||
Success rate (%) |
100/100 |
– |
100/100 |
100/100 |
(1) |
These are non-GAAP measures. Please refer to “Non-GAAP Measures” below. |
(2) |
Based on weighted average basic or diluted common shares outstanding for the period. |
(3) |
Common shares are net of shares held in trust. |
(4) |
Production amounts are based on the Corporation’s interest before royalty expense. |