CALGARY, ALBERTA–(Marketwired – Nov. 12, 2014) – Peyto Exploration & Development Corp. (“Peyto” or the “Company”) (TSX:PEY) is pleased to present its operating and financial results for the third quarter of the 2014 fiscal year. Record production and funds from operations were achieved in the quarter along with operating(1) and profit margins(2) of 79% and 33%, respectively. Additional highlights include:
Third quarter 2014 in Review
Peyto continued to actively develop its Alberta Deep Basin resource plays in the quarter, with 9 drilling rigs accomplishing what 10 rigs did a year ago. Improvements in operational execution, combined with longer horizontal well laterals, have resulted in a 10% average productivity improvement over previous years. As this was accomplished for the same capital cost, the trailing twelve month capital efficiency has improved to $16,330/boe/d. More importantly, the risked full cycle returns generated on the 2014 capital program to date has also improved, providing justification for the increased 2014 capital budget. Peyto continued to expand its pipeline and gas processing facility capacity throughout the quarter in order to accommodate growing production volumes. A doubling of the Oldman North gas plant capacity to 80 MMcf/d, along with large pipeline projects at Oldman, Ansell and South Brazeau, ensured timely production additions were realized from ongoing drilling activity. Both oil and natural gas prices declined throughout the quarter resulting in 11% lower realized prices (before hedges) than in the previous quarter, however lower cash costs ensured cash netbacks of approximately $24/boe were effectively preserved. The strong financial and operating performance delivered in the quarter resulted in an annualized 20% Return on Equity (ROE) and 14% Return on Capital Employed (ROCE).
| 3 Months Ended September 30 |
% | 9 Months Ended September 30 |
% | ||||
| 2014 | 2013 | Change | 2014 | 2013 | Change | ||
| Operations | |||||||
| Production | |||||||
| Natural gas (mcf/d) | 420,538 | 300,286 | 40% | 399,431 | 302,711 | 32% | |
| Oil & NGLs (bbl/d) | 7,502 | 6,295 | 19% | 7,482 | 6,172 | 21% | |
| Thousand cubic feet equivalent (mcfe/d @ 1:6) | 465,550 | 338,058 | 38% | 444,323 | 339,740 | 31% | |
| Barrels of oil equivalent (boe/d @ 6:1) | 77,592 | 56,343 | 38% | 74,054 | 56,623 | 31% | |
| Production per million common shares (boe/d)* | 505 | 379 | 33% | 484 | 381 | 27% | |
| Product prices | |||||||
| Natural gas ($/mcf) | 4.18 | 3.35 | 25% | 4.33 | 3.52 | 23% | |
| Oil & NGLs ($/bbl) | 71.01 | 70.91 | – | 76.21 | 71.40 | 7% | |
| Operating expenses ($/mcfe) | 0.33 | 0.37 | (11)% | 0.36 | 0.35 | 3% | |
| Transportation ($/mcfe) | 0.13 | 0.12 | 8% | 0.13 | 0.12 | 8% | |
| Field netback ($/mcfe) | 4.12 | 3.49 | 18% | 4.27 | 3.64 | 17% | |
| General & administrative expenses ($/mcfe) | 0.02 | 0.02 | – | 0.03 | 0.03 | – | |
| Interest expense ($/mcfe) | 0.20 | 0.25 | (20)% | 0.21 | 0.24 | (13)% | |
| Financial ($000, except per share*) | |||||||
| Revenue | 210,640 | 133,573 | 58% | 627,476 | 411,389 | 53% | |
| Royalties | 14,578 | 9,722 | 50% | 50,128 | 30,162 | 66% | |
| Funds from operations | 166,988 | 99,736 | 67% | 489,351 | 312,579 | 57% | |
| Funds from operations per share | 1.09 | 0.67 | 63% | 3.20 | 2.10 | 52% | |
| Total dividends | 46,107 | 35,702 | 29% | 125,645 | 95,197 | 32% | |
| Total dividends per share | 0.30 | 0.24 | 25% | 0.82 | 0.64 | 28% | |
| Payout ratio | 28 | 36 | (22)% | 26 | 30 | (13)% | |
| Earnings | 68,893 | 30,461 | 126% | 193,181 | 104,638 | 85% | |
| Earnings per diluted share | 0.45 | 0.21 | 114% | 1.26 | 0.71 | 77% | |
| Capital expenditures | 180,024 | 180,801 | – | 510,692 | 423,708 | 21% | |
| Weighted average common shares outstanding | 153,690,808 | 148,758,923 | 3% | 152,763,770 | 148,730,485 | 3% | |
| As at September 30 | |||||||
| End of period shares outstanding | 153,690,808 | 148,758,923 | 3% | ||||
| Net debt | 937,611 | 862,864 | 9% | ||||
| Shareholders’ equity | 1,434,754 | 1,218,362 | 18% | ||||
| Total assets | 2,913,345 | 2,429,125 | 20% | ||||
| *all per share amounts using weighted average common shares outstanding | |||||||
| Three Months ended September 30 |
Nine Months ended September 30 |
|||
| ($000) | 2014 | 2013 | 2014 | 2013 |
| Cash flows from operating activities | 150,763 | 101,361 | 449,386 | 290,343 |
| Change in non-cash working capital | 12,330 | (4,404) | 22,853 | 13,586 |
| Change in provision for future compensation | 3,895 | 2,779 | 17,112 | 8,650 |
| Funds from operations | 166,988 | 99,736 | 489,351 | 312,579 |
| Funds from operations per share* | 1.09 | 0.67 | 3.20 | 2.10 |
| (1) 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
Third quarter 2014 drilling activity focused predominantly on the deeper Cretaceous aged formations in the Greater Sundance core area, with the Middle Falher and Wilrich formations accounting for 75% of the drilling activity. In total, 32 wells were drilled across the land base, targeting the many prospective zones, as shown in the following table:
| Field | Total | |||||||
| Kisku/ | Wells | |||||||
| Zone | Sundance | Nosehill | Wildhay | Ansell | Berland | Kakwa | Brazeau | Drilled |
| Cardium | 1 | 1 | ||||||
| Notikewin | 1 | 1 | 2 | |||||
| Falher | 6 | 1 | 3 | 10 | ||||
| Wilrich | 7 | 2 | 1 | 1 | 3 | 14 | ||
| Bluesky | 2 | 1 | 2 | 5 | ||||
| Total | 16 | 4 | 2 | 7 | 3 | 32 |
Ongoing success in the Upper and Middle Falher formation has resulted in this zone becoming the second largest contributor to Peyto’s total production base at approximately 18,500 boe/d or 24% of Q3 2014 production.
Capital Expenditures
During the third quarter, Peyto invested $82.5 million to drill 32 gross (29.3 net) wells and $45.9 million to complete 32 gross (29.5 net) wells with horizontal multi-stage fracture treatments. A total of 30 gross (27.5 net) wells were brought onstream with $11.1 million invested in wellsite equipment and gathering pipelines. As illustrated in the following table, less time is required, than in previous years, to drill, complete, and bring on production, wells with even longer horizontal sections, contributing to the improved capital efficiency and increased returns on invested capital.
| 2011 | 2012 | 2013 | 2014 to Q3 | |
| Gross Spuds | 70 | 86 | 99 | 94 |
| Measured Depth (m) | 3,903 | 4,017 | 4,179 | 4,248 |
| HZ Length (m) | 1,303 | 1,358 | 1,409 | 1,467 |
| Average Drilling ($MM) | $2.823 | $2.789 | $2.720 | $2.623 |
| $ per MD meter | $723 | $694 | $651 | $618 |
| Spud-Onstream (days) | 59 | 50 | 59 | 43 |
Facility capital investments of $40.3 million included the majority of the equipment for the Oldman North plant expansion, a sales pipeline in Oldman, and large gathering lines in Ansell and Brazeau River.
Financial Results
Daily natural gas prices in Alberta (AECO) averaged $3.80/GJ in Q3 2014, while monthly AECO prices averaged $4.00/GJ. As Peyto had committed 85% of its production to the monthly price, Peyto realized a volume weighted average natural gas price of $3.93/GJ or $4.50/Mcf, prior to a $0.32/Mcf hedging loss.
Peyto realized a blended oil and natural gas liquids price of $71.27/bbl in Q3 2014, prior to a $0.26/bbl hedging loss, for its blend of condensate, pentane, butane and propane, which represented 73% of the $97.75/bbl average Canadian light sweet oil price.
Combining realized natural gas and liquids prices, Peyto’s unhedged revenues totaled $5.21/Mcfe ($4.92/Mcfe including hedging losses), or 133% of the dry gas price, illustrating the benefit of high heat content, liquids rich natural gas production.
Royalties of $0.34/Mcfe, operating costs of $0.33/Mcfe, transportation costs of $0.13/Mcfe, G&A of $0.02/Mcfe and interest costs of $0.20/Mcfe, combined for total cash costs of $1.02/Mcfe ($6.11/boe). These industry leading total cash costs resulted in a cash netback of $3.90/Mcfe ($23.39/boe) or a 79% operating margin. This operating margin represents the highest ever achieved in the Company’s sixteen year history and is significantly higher than the industry average.
Depletion, depreciation and amortization charges of $1.65/Mcfe, along with a provision for future tax and market based bonus payments reduced the cash netback to earnings of $1.61/Mcfe, or a 33% profit margin, from which dividends of $1.08/Mcfe were funded.
On July 3, 2014, Peyto issued CDN $50 million of senior unsecured notes pursuant to a note purchase 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 senior unsecured notes, Peyto’s aggregate borrowing capacity increased by $50 million to $1.32 billion.
Marketing
For the quarter, approximately 59% of Peyto’s natural gas production received a fixed price of $3.49/GJ from hedges that were put in place over the previous 16 months, while the balance received the blended daily and monthly price of $3.93/GJ, resulting in an after-hedge price of $3.67/GJ or $4.18/Mcf.
Peyto continued throughout the quarter its practice of layering in future sales in the form of fixed price swaps, and thus smoothing out the volatility in gas prices. The following table summarizes the remaining hedged volumes and prices for the upcoming years, as of November 12, 2014.
| Future Sales | Average Price (CAD) | |||
| GJ | Mcf | $/GJ | $/Mcf | |
| 2014 | 16,055,000 | 13,960,870 | 3.88 | 4.46 |
| 2015 | 82,255,000 | 71,526,087 | 3.75 | 4.31 |
| 2016 | 14,425,000 | 12,543,478 | 3.65 | 4.20 |
| Total | 112,735,000 | 98,030,435 | 3.75 | 4.31 |
| *prices and volumes in mcf use Peyto’s historic heat content premium of 1.15. | ||||
As illustrated in the following table, Peyto’s realized natural gas liquids prices (1) were effectively the same year over year but down 8% from the previous quarter.
| Three Months ended Sept 30 | Q2 | ||
| 2014 | 2013 | 2014 | |
| Condensate ($/bbl) | 90.58 | 95.96 | 103.73 |
| Propane ($/bbl) (includes hedging) | 24.82 | 24.70 | 23.05 |
| Butane ($/bbl) (includes hedging) | 56.50 | 49.72 | 59.47 |
| Pentane ($/bbl) | 93.13 | 99.44 | 106.58 |
| Total oil and natural gas liquids ($/bbl) | 71.01 | 70.91 | 77.30 |
| Canadian Light Sweet postings ($/bbl) | 97.75 | 104.71 | 104.3 |
| (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
Activity has remained robust throughout October and early November with 2014 capital investment on track towards the revised budget of $690 million. Newly drilled wells continue to meet or exceed expectations on cost and production outcomes, providing a continuation of the Company’s rapid production growth and value creation to date. Production is currently between 85,000 to 86,000 boe/d.
Peyto has nine contracted drilling rigs that have spud 17 gross (15.4 net) wells since quarter end. Two rigs are working in the emerging Brazeau River area, one rig is drilling key prospects in the Pedley area (South Wildhay), one rig is developing a prolific trend in the Ansell area and the remaining five rigs are drilling development opportunities in the heart of the Sundance area. A total of 20 gross (17.75 net) wells have been completed and 19 gross (16.75 net) wells have been brought on production since the end of Q3 2014.
Production has grown continuously from 72,000 boe/d at the start of Q3 2014 to 80,000 boe/d by the end of the quarter. This trend has continued through October (81,600 boe/d) and is currently in the range of 85,000 to 86,000 boe/d. The recent start-up of the South Brazeau gathering line has contributed to this increase while additional facility projects at Oldman North, Brazeau and Swanson will lead to additional volume increases over the final six weeks of the year and into 2015.
2015 Budget
The Board of Directors of Peyto has approved a preliminary 2015 budget which includes a capital program expected to range from $700 to $750 million. This will be the sixth year in a row that the capital budget will have increased from the previous year and represents the largest capital program in the Company’s history. The 2015 program involves drilling between 124 and 137 gross wells (117 and 130 net to Peyto’s working interest) utilizing 9 to 10 drilling rigs with only minimal interruption expected during the traditional spring breakup.
The 2015 drilling locations will be selected from Peyto’s current inventory of over 1,700 locations and are expected to add between 41,000 and 45,000 boe/d of new working interest production, for a cost of approximately $17,000/boe/d. While this level of capital efficiency is consistent with the past several years, more recently production has been added at $16,330/boe/d. A portion of this new production addition will offset an internally forecast 35% base decline, while a portion will grow overall 2015 production from an expected 2014 exit level of 85,000 boe/d to a forecast 2015 exit level between 96,000 boe/d and 100,000 boe/d.
Approximately 40 MMcf/d of additional processing capacity will be added to Peyto’s Swanson and Brazeau gas plants, while approximately 20 MMcf/d will be added to Peyto’s Oldman North and Wildhay gas plants, in order to accommodate the 2015 production growth. These facility investments, which represent 17% of the capital budget, have already been ordered to ensure that timely installation coincides with drilling results. By the end of 2015, Peyto expects to own and operate approximately 750 MMcf/d of processing capacity in the Alberta Deep Basin.
Alberta natural gas prices are currently forecast to average approximately $3.76/GJ in 2015, almost identical to the $3.73/GJ average price of Peyto’s hedges for the year (which volume represents approximately 40% of forecast production). These prices, when adjusted for Peyto’s historic NGL and heat content premiums of 135% and combined with the Company’s industry leading cash costs of approximately $1/Mcfe ($6/boe), should yield cash netbacks of approximately $23/boe to $24/boe and give Peyto the ability to fund its dividend and the majority of the capital program from internally generated FFO. The remainder of the capital program can be funded from available bank lines and working capital, while maintaining a strong balance sheet.
Dividend Increase
The Peyto strategy of total return means that profitable growth in the Company’s assets should yield growth in sustainable dividends for shareholders. Over the last year, production per share, funds from operations per share and earnings per share have increased 33%, 63% and 126%, respectively. In recognition of this profitable growth, the Board of Directors has approved a 10% increase to the monthly dividend to $0.11/month starting in November 2014. This represents the third dividend increase in the last two years.
Outlook
Peyto has consistently executed its business strategy in 2014, purposefully navigating infrastructure constraints and expanding its owned and operated processing capacity to ensure that successful drilling and resource development efforts are realized in a timely fashion. This proficiency in operational execution is critically important to maximize the returns for shareholders on what is now the largest pace of capital investment in the Company’s history. This proficiency is also what sets Peyto apart from the rest of the industry and illustrates the strength and depth of the Peyto team.
The 20% drop in Canadian light oil prices over the last few months is expected to put strain on the Canadian energy industry as margins are squeezed on the many producers that have moved to oil or condensate rich plays. Alberta natural gas prices, however, are expected to be 30% higher in Q4 2014 than the year before. With sector leading low cash costs, record operating margins, and sixteen years of Deep Basin expertise, Peyto is well positioned to continue to deliver superior returns to investors in the near term and for years to come.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the 2014 third quarter on Thursday, November 13th, 2014, at 9:00 a.m. Mountain Standard Time (MST), or 11:00 a.m. Eastern Standard Time (EST). 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 2212112. The replay will be available at 11:00 a.m. MST, 1:00 p.m. EST, Thursday, November 13th, 2014 until midnight EST on Thursday, November 20th, 2014. The conference call can also be accessed and replayed through the internet at http://www.gowebcasting.com/5956. After this time the conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.