CALGARY, ALBERTA–(Marketwired – Aug. 13, 2014) – Peyto Exploration & Development Corp. (TSX:PEY) (“Peyto” or the “Company”) is pleased to present its operating and financial results for the second quarter of the 2014 fiscal year. Profitable growth continued in the quarter with operating(1) and profit margins(2) of 78% and 30%, respectively. Additional highlights included:
Second Quarter 2014 in Review
Peyto had a very active second quarter despite spring breakup, which is the traditional period of reduced activity. Pad drilling, combined with active road maintenance in the Greater Sundance area, allowed for continuous drilling operations with an average of 8 rigs running throughout the quarter. This allowed the Company to maintain the industry leading capital efficiencies that have been achieved over the last few years, again adding new production for approximately $18,000/boe/d. While new production additions offset the base well declines, overall production growth was partially impeded by downtime and unscheduled disruptions caused by higher sales line pressures and power outages. Second quarter production averaged 72,302 boe/d, up slightly from the first quarter. Peyto also expanded its owned and operated gas plant capacity in the quarter, adding an aggregate of 7,000 boe/d at the Wildhay, Swanson, and Brazeau River gas plants. This additional capacity will accommodate new production volumes resulting from the balance of the 2014 drilling program. Both natural gas and propane prices were slightly lower than the previous quarter, but so were Peyto’s cash costs, resulting in cash netbacks that were approximately the same. The realized cash netbacks for the first half of 2014 are still up substantially (19%) from the previous year. These higher cash netbacks, combined with record production levels, lead to quarterly FFO of $162 million, or $1.05/share. The strong financial and operating performance delivered in the quarter resulted in an annualized 19% Return on Equity (ROE) and 14% Return on Capital Employed (ROCE).
| 3 Months Ended June 30 | % | 6 Months Ended June 30 | % | ||||||
| 2014 | 2013 | Change | 2014 | 2013 | Change | ||||
| Operations | |||||||||
| Production | |||||||||
| Natural gas (mcf/d) | 388,407 | 310,621 | 25 | % | 388,703 | 303,943 | 28 | % | |
| Oil & NGLs (bbl/d) | 7,568 | 6,374 | 19 | % | 7,472 | 6,109 | 22 | % | |
| Thousand cubic feet equivalent (mcfe/d @ 1:6) | 433,812 | 348,868 | 24 | % | 433,533 | 340,595 | 27 | % | |
| Barrels of oil equivalent (boe/d @ 6:1) | 72,302 | 58,145 | 24 | % | 72,256 | 56,766 | 27 | % | |
| Production per million common shares (boe/d)* | 470 | 391 | 20 | % | 473 | 382 | 24 | % | |
| Product prices | |||||||||
| Natural gas ($/mcf) | 4.37 | 3.72 | 17 | % | 4.41 | 3.61 | 22 | % | |
| Oil & NGLs ($/bbl) | 77.30 | 67.82 | 14 | % | 78.86 | 71.65 | 10 | % | |
| Operating expenses ($/Mcfe) | 0.36 | 0.35 | 3 | % | 0.37 | 0.33 | 12 | % | |
| Transportation ($/Mcfe) | 0.13 | 0.12 | 8 | % | 0.13 | 0.12 | 8 | % | |
| Field netback ($/Mcfe) | 4.32 | 3.77 | 15 | % | 4.36 | 3.72 | 17 | % | |
| General & administrative expenses ($/Mcfe) | 0.01 | 0.05 | (80 | )% | 0.03 | 0.04 | (25 | )% | |
| Interest expense ($/Mcfe) | 0.22 | 0.25 | (12 | )% | 0.22 | 0.23 | (4 | )% | |
| Financial ($000, except per share*) | |||||||||
| Revenue | 207,519 | 144,614 | 43 | % | 416,837 | 277,816 | 50 | % | |
| Royalties | 17,689 | 9,849 | 80 | % | 35,551 | 20,440 | 74 | % | |
| Funds from operations | 161,577 | 109,987 | 47 | % | 322,362 | 212,844 | 51 | % | |
| Funds from operations per share | 1.05 | 0.74 | 42 | % | 2.11 | 1.43 | 48 | % | |
| Total dividends | 43,033 | 32,727 | 31 | % | 79,538 | 59,493 | 34 | % | |
| Total dividends per share | 0.28 | 0.22 | 27 | % | 0.52 | 0.40 | 30 | % | |
| Payout ratio | 27 | 30 | (10 | )% | 25 | 28 | (11 | )% | |
| Earnings | 62,159 | 37,773 | 65 | % | 124,288 | 74,179 | 68 | % | |
| Earnings per diluted share | 0.41 | 0.25 | 64 | % | 0.81 | 0.50 | 62 | % | |
| Capital expenditures | 151,290 | 73,809 | 105 | % | 330,668 | 242,908 | 36 | % | |
| Weighted average common shares outstanding | 153,690,808 | 148,758,923 | 3 | % | 152,763,770 | 148,716,032 | 3 | % | |
| As at June 30 | |||||||||
| End of period shares outstanding | 153,690,808 | 148,758,923 | 3 | % | |||||
| Net debt | 880,386 | 746,094 | 18 | % | |||||
| Shareholders’ equity | 1,392,911 | 1,227,842 | 13 | % | |||||
| Total assets | 2,781,258 | 2,328,117 | 19 | % | |||||
| *all per share amounts using weighted average common shares outstanding | |||||||||
| 3 Months Ended June 30 | 6 Months Ended June 30 | |||
| ($000) | 2014 | 2013 | 2014 | 2013 |
| Cash flows from operating activities | 152,170 | 96,700 | 298,624 | 189,243 |
| Change in non-cash working capital | 2,560 | 8,946 | 10,523 | 17,730 |
| Change in provision for future compensation | 6,847 | 4,341 | 13,215 | 5,871 |
| Funds from operations | 161,577 | 109,987 | 322,362 | 212,844 |
| Funds from operations per share* | 1.05 | 0.74 | 2.11 | 1.43 |
| * 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 distributions may vary. |
Exploration & Development
Peyto’s second quarter 2014 activity continued to focus on the many stacked resource plays in the Alberta Deep Basin, with all zones yielding liquids rich, sweet natural gas. A total of 31 wells were drilled across the land base, targeting the many prospective zones, as shown in the following table:
| Field | Total Wells Drilled | |||||||||||||
| Zone | Sundance | Nosehill | Wildhay | Ansell | Berland | Kisku/ Kakwa |
Brazeau | |||||||
| Cardium | 2 | 2 | ||||||||||||
| Notikewin | 3 | 1 | 4 | |||||||||||
| Falher | 4 | 5 | 1 | 10 | ||||||||||
| Wilrich | 8 | 4 | 1 | 1 | 14 | |||||||||
| Bluesky | 1 | 1 | ||||||||||||
| Total | 18 | 6 | 4 | 2 | 1 | 31 | ||||||||
The majority of the activity in the quarter focused within the greater Sundance area where access to existing roads and leases was available.
Capital Expenditures
Over the course of the second quarter, Peyto spent $68.5 million to drill 31 gross (28.2 net) horizontal wells and $48.0 million to complete 30 gross (28.0 net) wells. Additionally, 32 gross (29.8 net) wells were brought onstream with $10.3 million of wellsite equipment and gathering pipelines. Major facility capital investment amounted to $16.3 million and included the installation and commissioning of an eighth compressor at the Wildhay gas plant (adding 10 MMcf/d capacity), the twinning of the Wildhay sales pipeline (providing 35 MMcf/d of additional sales gas transmission capacity), the installation of a large gathering line between the Oldman and Nosehill plants to take advantage of spare Nosehill plant capacity, and the commissioning of a fourth compressor at the Swanson Plant (adding 18 MMcf/d). A refrigeration plant and an additional compressor was also installed at the Brazeau River gas plant (adding 10 MMcf/d). Lastly, $1.0 million was directed towards preparation and fabrication for the planned Oldman North plant expansion (adding 40 MMcf/d with expected start-up in October).
During the second quarter, Peyto invested $5.9 million at Alberta Crown land sales on highly prospective Wilrich lands adjacent to the company’s existing Deep Basin land position. A total of 11 net sections (containing 34 internally identified new drilling locations) were added for $833/acre. Additionally, $2.3 million was spent on the acquisition of trade seismic data to support ongoing technical work in the Brazeau and Sundance areas.
By the end of the quarter, the 32 gross (29.8 net) wells brought onstream in Q2 2014 were contributing 14,850 boe/d to the quarter end exit rate of 73,000 boe/d.
Financial Results
Daily natural gas prices in Alberta (AECO) averaged $4.44/GJ in Q2 2014, while monthly AECO prices averaged $4.43/GJ. As Peyto had committed 88% of its production to the monthly price, Peyto realized a volume weighted average natural gas price of $4.44/GJ or $5.02/mcf, prior to a $0.65/mcf hedging loss.
Peyto realized a blended oil and natural gas liquids price of $77.58/bbl in Q2 2014, prior to a $0.28/bbl hedging loss, for its blend of condensate, pentane, butane and propane, which represented 74% of the $104.30/bbl average Edmonton light oil price.
Combining realized natural gas and liquids prices, Peyto’s unhedged revenues totaled $5.85/Mcfe ($5.26/Mcfe including hedging losses), or 132% of the dry gas price, illustrating the benefit of high heat content, liquids rich natural gas production.
Royalties of $0.45/Mcfe, operating costs of $0.36/Mcfe, transportation costs of $0.13/Mcfe, G&A of $0.01/Mcfe and interest costs of $0.22/Mcfe, combined for total cash costs of $1.17/Mcfe ($6.99/boe). These industry leading total cash costs resulted in a cash netback of $4.09/Mcfe ($24.52/boe) or a 78% operating margin.
Royalties per Mcfe were up 40% due to higher natural gas and liquids prices while operating costs were in line with the previous year but down from the previous quarter as methanol and maintenance costs were lower.
Depletion, depreciation and amortization charges of $1.73/Mcfe, along with a provision for future tax and market based bonus payments reduced the cash netback to earnings of $1.57/Mcfe, or a 30% profit margin, which funded dividends of $1.09/Mcfe.
Subsequent to the second quarter, Peyto issued CDN $50 million of senior unsecured notes pursuant to a note purchase and private shelf agreement. The notes have a coupon rate of 3.79% and mature on July 3, 2022. As the notes rank equally with Peyto’s obligations under its bank facility and existing note purchase agreements, Peyto’s aggregate borrowing capacity increased by $50 million to $1.32 billion.
Marketing
For the quarter, approximately 63% of Peyto’s natural gas production received a fixed price of $3.53/GJ from hedges that were put in place over the previous 16 months, while the balance received the blended daily and monthly price of $4.44/GJ, resulting in an after-hedge price of $3.87/GJ or $4.37/mcf.
Peyto’s practice of layering in future sales in the form of fixed price swaps, and thus smoothing out the volatility in gas prices, continued throughout the quarter. The following table summarizes the remaining hedged volumes and prices for the upcoming years, as of August 1, 2014.
| Future Sales | Average Price (CAD) | |||
| GJ | Mcf | $/GJ | $/Mcf | |
| 2014 | 42,155,000 | 36,656,522 | 3.66 | 4.21 |
| 2015 | 53,955,000 | 46,917,391 | 3.78 | 4.34 |
| 2016 | 5,005,000 | 4,352,174 | 3.79 | 4.35 |
| Total | 101,115,000 | 87,926,087 | 3.73 | 4.29 |
| *prices and volumes in mcf use Peyto’s historic heat content premium of 1.15. |
As illustrated in the following table, Peyto’s realized natural gas liquids prices (1) were up 14% year over year but down 4% from the previous quarter.
| Three Months ended June 30 | Q1 | ||
| 2014 | 2013 | 2014 | |
| Condensate ($/bbl) | 103.73 | 88.18 | 100.68 |
| Propane ($/bbl) (includes hedging) | 23.05 | 22.60 | 36.65 |
| Butane ($/bbl) (includes hedging) | 59.47 | 45.90 | 55.98 |
| Pentane ($/bbl) | 106.58 | 95.74 | 105.37 |
| Total oil and natural gas liquids ($/bbl) | 77.30 | 67.82 | 80.49 |
| Canadian Light Sweet postings ($/bbl) | 104.30 | 88.27 | 99.91 |
| (1) liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation. |
As a fixed offset to benchmark pricing can no longer be obtained for Propane and Butane prices, Peyto has discontinued the practice of forward selling these components of its natural gas liquids.
Activity Update
Continuous operations, through break-up and into the summer months, has been very successful in accelerating the 2014 capital plans resulting in strong production growth over the past two months. Well results throughout all geographic areas and across all zones, particularly the Notikewin, Falher and Wilrich formations in Sundance, Obed and Ansell areas, have provided steady growth from an average of 71,500 boe/d in April to an average of 74,800 boe/d in July. Most recently, August daily production has averaged 78,500 boe/d. Peyto remains on track to meet or exceed previous guidance of $625 million of capital and exit production of 81,500 boe/d.
Currently, the Company has all 9 of its drilling rigs active, with four completion spreads following up, and anticipates maintaining this activity level through to year end. One rig is currently drilling at Brazeau but will be accompanied by a second rig this fall. A major 23 km gathering line linking the Peyto Brazeau Gas Plant to the Company’s south acreage is in progress and is expected to be completed by early October which will connect a 6 well program to be drilled in that area. Focused drilling in the heart of Sundance for Notikewin, Falher, Wilrich and Bluesky targets is also programmed and will serve to fill the 40 MMcf/d of new Oldman North Plant capacity.
On August 13, 2014, Peyto celebrated the spudding of its 1,000th gas well in the Alberta Deep Basin at 16-28-54-21W5M in Sundance. Remarkably, this location is directly adjacent to Peyto’s original recompletion in Sundance at 15-30 -54-21W5M, which continues to produce some 15 years later. Over the last five years Peyto has drilled over 400 natural gas wells, making Peyto the most active Alberta Deep Basin gas driller. While there are many stories told of the significant resource potential in the Alberta Deep Basin, Peyto has been the one turning that potential into reality and the Company continues to be an industry leader when it comes to profitable resource development.
Outlook
Natural gas prices in both Canada and the US have recently softened as record US production and mild summer weather has refilled storage reservoirs faster than expected. This brings future natural gas prices in Canada back into Peyto’s “sweet spot” where significant profitable development can occur in Peyto’s many Deep Basin resource plays without the risk of increased activity driving cost inflation and eroding returns.
At no point in Peyto’s history has the Company had more opportunities than it does today and yet the team at Peyto continues to find additional new lands and drilling locations faster than they can be harvested. As demand for natural gas in North America continues to expand, Peyto is well positioned to keep applying its low cost advantage and delivering superior returns on invested capital.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the 2014 second quarter on Thursday, August 14th, 2014, at 9:00 a.m. Mountain Daylight Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT). To participate, please call 1-416-340-8530 (Toronto area) or 1-800-766-6630 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 7205959. The replay will be available at 11:00 a.m. MDT, 1:00 p.m. EDT Thursday, August 14th, 2014 until midnight EDT on Thursday, August 21st, 2014. The conference call can also be accessed through the internet at http://www.gowebcasting.com/5612. After this time the conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.
Management’s Discussion and Analysis
Management’s Discussion and Analysis of this second quarter report is available on the Peyto website at http://www.peyto.com/news/Q22014MDandA.pdf. A complete copy of the second quarter report to shareholders, including the Management’s Discussion and Analysis, and Financial Statements is also available at www.peyto.com and will be filed at SEDAR, www.sedar.com, at a later date.