CALGARY, ALBERTA–(Marketwired – May 6, 2015) – Peyto Exploration & Development Corp. (TSX:PEY) (“Peyto” or the “Company”) is pleased to present its operating and financial results for the first quarter of the 2015 fiscal year. Record low cash costs and improvements in capital efficiency combined for a 79% operating margin (1) and a 24% profit margin (2). Additional highlights included:
First Quarter 2015 in Review
The first quarter of 2015 was another active quarter for Peyto. Drilling activity started off slowly to allow for service cost reductions to take effect but was quickly ramped up to full capacity with 8 drilling rigs running at the end of the quarter. With significantly lower commodity prices, all focus was on lowering costs. On a per meter basis, drilling and completion costs were down 11% and 18% from the previous year, effectively reducing the cost to add new production in the quarter to less than $14,000/boe/d, resulting in a trailing twelve month capital efficiency of $15,800/boe/d. Record low cash costs were achieved in the quarter which helped offset the reduction in realized commodity prices. In addition to transportation curtailments that prevented 2,350 boe/d from being sold in the quarter, production was further impacted by 500 boe/d as Peyto rejected propane recoveries due to low propane prices. This move, however, which left the liquid propane in the sales gas, increased revenues in the quarter and helps illustrate the importance of operating and controlling processing facilities. Subsequent to the end of the quarter, additional equity and term debt issuances further strengthened Peyto’s balance sheet and increased unused borrowing capacity to $520 million which can be used to be opportunistic in this current commodity downturn. Despite the significant drop in commodity prices, the strong financial and operating performance delivered in the quarter resulted in an annualized 12% Return on Equity (ROE) and 9% Return on Capital Employed (ROCE).
| 1. Operating Margin is defined as funds from operations divided by revenue before royalties but including realized hedging gains/losses. |
| 2. Profit Margin is defined as net earnings for the quarter divided by revenue before royalties but including realized hedging gains/losses. |
| Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet. This could be misleading, particularly if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead. |
| 3 Months Ended March 31 | % | ||||
| 2015 | 2014 | Change | |||
| Operations | |||||
| Production | |||||
| Natural gas (mcf/d) | 444,794 | 389,002 | 14 | % | |
| Oil & NGLs (bbl/d) | 7,456 | 7,375 | 1 | % | |
| Thousand cubic feet equivalent (mcfe/d @ 1:6) | 489,528 | 433,252 | 13 | % | |
| Barrels of oil equivalent (boe/d @ 6:1) | 81,588 | 72,209 | 13 | % | |
| Production per million common shares (boe/d)* | 530 | 476 | 11 | % | |
| Product prices | |||||
| Natural gas ($/mcf) | 3.97 | 4.45 | -11 | % | |
| Oil & NGLs ($/bbl) | 37.03 | 80.49 | -54 | % | |
| Operating expenses ($/mcfe) | 0.32 | 0.39 | -18 | % | |
| Transportation ($/mcfe) | 0.15 | 0.13 | 15 | % | |
| Field netback ($/mcfe) | 3.52 | 4.39 | -20 | % | |
| General & administrative expenses ($/mcfe) | 0.04 | 0.04 | – | ||
| Interest expense ($/mcfe) | 0.20 | 0.23 | -13 | % | |
| Financial ($000, except per share*) | |||||
| Revenue | 183,812 | 209,318 | -12 | % | |
| Royalties | 7,992 | 17,861 | -55 | % | |
| Funds from operations | 144,643 | 160,785 | -10 | % | |
| Funds from operations per share | 0.94 | 1.05 | -10 | % | |
| Total dividends | 50,780 | 36,505 | 39 | % | |
| Total dividends per share | 0.33 | 0.24 | 38 | % | |
| Payout ratio | 35 | 23 | 52 | % | |
| Earnings | 44,513 | 62,129 | -28 | % | |
| Earnings per diluted share | 0.29 | 0.41 | -29 | % | |
| Capital expenditures | 138,077 | 179,378 | -23 | % | |
| Weighted average common shares outstanding | 153,852,570 | 151,826,431 | 1 | % | |
| As at March 31 | |||||
| End of period shares outstanding (includes shares to be issued | 153,921,273 | 153,690,808 | – | ||
| Net debt | 1,064,491 | 838,495 | 27 | % | |
| Shareholders’ equity | 1,528,959 | 1,344,704 | 14 | % | |
| Total assets | 3,163,162 | 2,686,661 | 18 | % | |
| *all per share amounts using weighted average common shares outstanding | |||||
| 3 Months Ended March 31 | |||
| ($000 except per share) | 2015 | 2014 | |
| Cash flows from operating activities | 126,134 | 146,452 | |
| Change in non-cash working capital | 15,488 | 7,964 | |
| Change in provision for performance based compensation | 3,021 | 9,369 | |
| Funds from operations | 144,643 | 160,785 | |
| Funds from operations per share | 0.94 | 1.05 | |
| (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
Peyto’s first quarter 2015 activity was concentrated in the Spirit River group of formations including the Notikewin, Falher and Wilrich formations, and within the Greater Sundance area where both cost savings could be realized and transportation restrictions minimized. A total of 31 wells were drilled across the land base, similar to Q1 2014, targeting sweet, liquids rich natural gas resource plays, as shown in the following table:
| Field | ||||||||
| Zone | Sundance | Nosehill | Wildhay | Ansell | Berland | Kisku/ Kakwa | Brazeau | Total Wells Drilled |
| Cardium | 0 | |||||||
| Notikewin | 2 | 6 | 8 | |||||
| Falher | 5 | 2 | 7 | |||||
| Wilrich | 1 | 8 | 1 | 5 | 15 | |||
| Bluesky | 1 | 1 | ||||||
| Total | 7 | 2 | 14 | 3 | 5 | 31 | ||
Both the average depth and lateral length of Peyto’s horizontal wells continued to increase in Q1 2015, as the Company attempts to develop more resource with each wellbore. At the same time, drilling costs per meter were 11% lower while completion costs per meter were 18% lower as service cost reductions were realized. The following table illustrates the ongoing efficiency gains which should contribute to lower development costs and ultimately greater returns:
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 Q1 | |||||||||
| Gross Spuds | 52 | 70 | 86 | 99 | 123 | 31 | ||||||||
| Measured Depth (m) | 3,762 | 3,903 | 4,017 | 4,179 | 4,251 | 4,416 | 4 | % | ||||||
| Hz Length (m) | 1,335 | 1,303 | 1,358 | 1,409 | 1,460 | 1,531 | 5 | % | ||||||
| Drilling ($MM/well) | $ | 2.763 | $ | 2.823 | $ | 2.789 | $ | 2.720 | $ | 2.660 | $ | 2.446 | (8 | %) |
| $ per meter | $ | 734 | $ | 723 | $ | 694 | $ | 651 | $ | 626 | $ | 555 | (11 | %) |
| Completion ($MM/well) | $ | 1.358 | $ | 1.676 | $ | 1.672 | $ | 1.625 | $ | 1.702 | $ | 1.440 | (15 | %) |
| $ per meter | $ | 361 | $ | 429 | $ | 416 | $ | 389 | $ | 400 | $ | 330 | (18 | %) |
Capital Expenditures
During the first quarter of 2015, Peyto spent $70 million to drill 31 gross (30.75 net) horizontal wells and $42.5 million completing 27 gross (27 net) wells. Wellsite equipment and tie-ins accounted for $7.2 million, while a total of $11.6 million was invested in pipelines and facilities. A 12 km, 10″ pipeline was installed in Ansell which twinned an existing trunk line to the Swanson plant and allowed for increased development of the Ansell Falher play. As well, progress continued on the 40 mmcf/d Swanson gas plant expansion which is scheduled to begin in June and projected to startup in Q3. Peyto invested $3 million into three small acquisitions in the Minehead, Pedley and Ansell areas for new undeveloped opportunities as well as $0.8 million for the purchase of 14 new sections of crown rights at an average cost of $90/acre. Approximately 167 km2 of new 3-D seismic was acquired in the quarter, along with the purchase of 117 km2 of industry data, in order to evaluate prospects in the Ansell, Brazeau, Minehead and North Kakwa areas. Seismic purchases totaled $3.3 million in Q1 2015.
By the end of the quarter, the 24 gross (24 net) wells that were brought onstream were contributing 17,270 boe/d to the quarter end exit rate of 85,000 boe/d.
Commodity Prices
The winter of 2014/15 was a combination of record breaking cold across the eastern side of North America and record breaking warmth across the western side of North America. The blended result was that approximately 29% less gas was withdrawn from US storage inventories during the heating season than the prior year. That reduced consumption, combined with increased US and Canadian supply, caused natural gas prices to fall. AECO (Alberta) daily natural gas prices, which averaged $4.04/GJ during the summer season (Apr-Oct 2014), fell 36% to $2.59/GJ by March 2015, or the end of the winter season.
The average first quarter 2015 Alberta (AECO) daily natural gas price was $2.60/GJ down over 51% from $5.36/GJ in Q1 2014, while the average AECO monthly price was $2.80/GJ down 38% from $4.51/GJ a year prior. As Peyto had committed 89% of its production to the monthly price, Peyto realized a volume weighted average natural gas price of $2.75/GJ or $3.16/mcf, prior to a $0.81/mcf hedging gain.
As a result of the Company’s hedging strategy, approximately 65% of Peyto’s natural gas production received a fixed price of $3.88/GJ from hedges that were put in place over the previous 24 months, while the balance received the blended daily and monthly price of $2.75/GJ, resulting in an after-hedge price of $3.48/GJ or $3.97/mcf.
Peyto realized an oil and natural gas liquids price of $37.03/bbl in Q1 2015 for its blend of condensate, pentane, butane and propane, which represented 70% of the $52.72/bbl average Canadian Light Sweet posted price, as shown in the following table.
Commodity Prices by Component
| Three Months ended March 31 | |||||
| 2015 | 2014 | ||||
| Natural gas – after hedging ($/mcf) | 3.97 | 4.45 | (11 | %) | |
| Natural gas – after hedging ($/GJ) | 3.48 | 3.90 | (11 | %) | |
| AECO monthly ($/GJ) | 2.80 | 4.51 | (38 | %) | |
| Oil and natural gas liquids ($/bbl) | |||||
| Condensate ($/bbl) | 48.64 | 100.68 | (52 | %) | |
| Propane ($/bbl) | 3.96 | 36.65 | (89 | %) | |
| Butane ($/bbl) | 28.28 | 55.98 | (49 | %) | |
| Pentane ($/bbl) | 46.87 | 105.37 | (56 | %) | |
| Total Oil and natural gas liquids ($/bbl) | 37.03 | 80.49 | (54 | %) | |
| Canadian Light Sweet postings ($/bbl) | 52.72 | 99.80 | (47 | %) | |
| liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation. |
Financial Results
Combining realized natural gas and liquids prices, Peyto’s unhedged revenues totaled $3.43/mcfe ($4.17/mcfe including hedging gains). Royalties of $0.18/mcfe, operating costs of $0.32/mcfe, transportation costs of $0.15/mcfe, G&A of $0.04/mcfe and interest costs of $0.20/mcfe, all combined for total cash costs of $0.89/mcfe ($5.34/boe). These industry leading total cash costs, when deducted from realized revenues, resulted in a cash netback of $3.28/mcfe or a 79% operating margin. Operating costs were 19% lower due to lower chemical and power costs and are expected to remain lower throughout 2015.
Depletion, depreciation and amortization charges of $1.83/mcfe, along with a provision for deferred tax and market based bonus payments reduced the cash netback to earnings of $1.01/mcfe, or a 24% profit margin, which funded dividends of $1.15/mcfe.
Subsequent to the end of the quarter, on April 16, 2015, Peyto announced it had closed a bought deal offering of common shares. Pursuant to the offering, the Company issued 5,037,000 common shares (including 657,000 common shares issued pursuant to the exercise in full of the over-allotment option granted to the underwriters) at a price of $34.25 per common share, for total gross proceeds of approximately $172.5 million.
In addition, on May 1, 2015, Peyto announced it had issued CND $100 million of senior unsecured notes pursuant to a note purchase agreement. The notes have a coupon rate of 4.26% and mature on May 1, 2025. 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 $100 million to $1.42 billion.
Marketing
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 May 6, 2015.
| Future Sales | Average Price (CAD) | |||
| GJ | Mcf | $/GJ | $/Mcf | |
| 2015 | 77,505,000 | 67,436,949 | 3.38 | 3.89 |
| 2016 | 54,060,000 | 47,037,500 | 3.17 | 3.65 |
| 2017 | 7,200,000 | 6,264,706 | 2.92 | 3.35 |
| Total | 138,765,000 | 120,739,154 | 3.28 | 3.77 |
| *prices and volumes in mcf use Peyto’s historic heat content premium of 1.15. |
Activity Update
Daily production currently ranges from 86,000 to 87,000 boe/d with ongoing TCPL curtailments still restricting approximately 1,000 boe/d of capability. Along the Alberta Deep Basin corridor, TCPL is holding producers to contracted firm transportation levels plus 20% of nominated interruptible levels for the near future. In addition, there are several more scheduled outages in Q2 2015 that will likely restrict production to firm transportation levels only, similar to those experienced in Q1 2015. TCPL has indicated that service is expected to return to normal levels by Q3 2015.
The Company’s capital investment program continues to yield impressive operating performance and profitable results. Drilling performance continues to improve while average well costs are approximately 15% lower than like wells drilled and completed a year ago. In aggregate, the new 2015 wells are currently contributing over 21,000 boe/d to total Company production and are meeting return expectations.
Peyto has six rigs currently drilling during this breakup period while the remaining rigs are idle and will resume operations after road bans are lifted in late May. The Company has additional rigs under consideration to add to the fleet to increase it to 10 rigs after breakup. Breakup conditions have thus far been favourable for ongoing activity while still realizing the 10% to 20% service cost reductions that have resulted from the reduced industry activity. To the end of April, an additional 9 gross (8.1 net wells) have been spud and 10 wells (9.25 net) have been completed.
The Swanson Gas Plant expansion is on schedule for a Q3 start-up. Two compressors will be incorporated into the facility this year adding 40 MMcf/d of capacity and taking the facility up to 105 MMcf/d of total capacity. Excess processing capacity will also be in place in order to accommodate two more compressors in the future. Peyto plans to fill this expansion with planned drilling in the Ansell area in combination with the recently installed pipeline loop.
The Brazeau Plant will be expanded by 10 MMcf/d to 50 MMcf/d immediately after breakup with the installation of a fifth compressor that is ready to move to the site. An additional expansion is envisioned for the end of the year or early 2016 as post-breakup drilling follows up on several highly successful pre-breakup Wilrich wells. Compression installations are also ready for Wildhay and Oldman North for the latter part of 2015 in response to successful pre-breakup drilling in those areas.
Peyto is keeping with its historic strategy of investing in owned and operated facility infrastructure which allows the Company to maintain its industry leading low costs, ensures production growth is realized in a timely fashion, gives Peyto the ability to modify operational parameters to maximize revenue, and creates significant barriers to entry for competitors.
2015 Budget
Peyto’s original 2015 budget of $700 to $750 million, announced November 12, 2014, has been revised to reflect the dramatic changes in industry service costs. The revised budget, which involves exactly the same amount of activity as the original budget, is expected to range between $575 to $625 million. The capital program involves drilling between 120 and 130 gross wells (at approximately 95% average working interest) utilizing 9 to 10 drilling rigs, with 6 to 7 rigs active throughout the entire second quarter.
As before, the 2015 drilling locations will be selected from Peyto’s internal inventory of over 1,900 Deep Basin locations and are expected to add between 41,000 and 45,000 boe/d of new production for a cost of approximately $14,000/boe/d. A portion of this new production will offset Peyto’s forecast 35% decline, while a portion will grow overall production to an expected 2015 exit level between 96,000 boe/d and 100,000 boe/d.
As always, maximizing the return on the invested capital and minimizing the risks will be the Company’s primary objective with the 2015 capital program. Achieving growth, regardless of how spectacular, without profit or return has no appeal to Peyto.
Outlook
Peyto remains committed to its counter cyclical investment strategy which takes advantage of lower costs and reduced industry activity to deliver superior returns and uniquely profitable growth to shareholders. The Company’s industry leading low costs are a key component to this strategy, along with a large inventory of low risk, repeatable drilling prospects. While, the current commodity price environment is challenging the economics of even the most profitable companies in the best resource plays in North America, Peyto is ensuring its opportunities remain profitable by focusing on cost control and execution efficiency.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the 2015 first quarter financial results on Thursday, May 7th, 2015, at 9:00 a.m. Mountain Daylight Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT). To participate, please call 1-416-340-2218 (Toronto area) or 1-866-223-7781 for all other participants. Shareholders and interested investors are encouraged to ask questions about Peyto and its most recent results. Alternatively, questions can be submitted to info@peyto.com or by calling Jim Grant, Investor Awareness at (403) 451-4102.
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 7866395. The replay will be available at 11:00 a.m. MDT, 1:00 p.m. EDT Thursday, May 7th, 2015 until midnight EDT on Thursday, May 14th, 2015. The conference call can also be accessed through the internet at http://www.gowebcasting.com/6431. After this time the conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.
Management’s Discussion and Analysis
A copy of the first quarter report to shareholders, including the MD&A, audited financial statements and related notes, is available at http://www.peyto.com/news/Q12015MDandA.pdf and will be filed at SEDAR, www.sedar.com at a later date.
Annual General Meeting
Peyto’s Annual General Meeting of Shareholders is scheduled for 3:00 p.m. on Tuesday, May 12, 2015 at Livingston Place Conference Centre, +15 level, 222-3rd Avenue SW, Calgary, Alberta.
Shareholders are encouraged to visit the Peyto website at www.peyto.com where there is a wealth of information designed to inform and educate investors. A monthly President’s Report can also be found on the website which follows the progress of the capital program and the ensuing production growth, along with video and audio commentary from Peyto’s senior management.
Darren Gee
President and CEO
May 6, 2015