CALGARY, ALBERTA–(Marketwired – Aug. 9, 2017) – 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 2017 fiscal year. A 75% operating margin(1) and a 22% profit margin(2) in the quarter delivered an annualized 10% return on equity (ROE) and 8% return on capital employed (ROCE). Additional highlights included:
- Earnings of $0.24/share, dividends of $0.33/share. Earnings of $40 million were generated in the quarter while dividends of $54 million were paid to shareholders. Dividend payments represented a before tax payout ratio of 41% of Funds from Operations (“FFO”), down from 53% in Q2 2016. The Company has never incurred a write down or recorded an impairment and this quarter represents Peyto’s 50th consecutive quarter of earnings.
- Funds from operations of $0.81/share. Generated $133 million in FFO in Q2 2017 up 31% from $102 million in Q2 2016 (29%/share) as 11% higher production was combined with 15% higher commodity prices. For the first half of 2017, funds from operations were 8% higher than capital expenditures, or $21 million of free cashflow (before dividend payments).
- Total cash costs of $0.85/Mcfe (or $0.68/Mcfe ($4.11/boe) excluding royalties). Industry leading total cash costs, including $0.17/Mcfe royalties, $0.24/Mcfe operating costs, $0.18/Mcfe transportation, $0.05/Mcfe G&A and $0.21/Mcfe interest, combined with a realized price of $3.36/Mcfe, resulting in a $2.51/Mcfe ($15.04/boe) cash netback, up 18% from $2.12/Mcfe in Q2 2016.
- Capital investment of $98 million. A total of 25 gross wells (24 net) were drilled in the second quarter, 24 gross wells (22 net) were completed, and 29 gross wells (26 net) brought on production. Over the last 12 months new wells brought on production accounted for 34,929 boe/d at the end of the quarter, which, when combined with a trailing twelve month capital investment of $495 million, equates to an annualized capital efficiency of $14,160/boe/d. Peyto had 19 gross wells that were waiting on completion and/or tie in representing an expected 11,500 boe/d of behind pipe production which would have reduced the capital efficiency to the $11,000/boe/d target levels
- Production per share up 9%. Second quarter 2017 production of 585 MMcfe/d (97,531 boe/d) was up 11% from Q2 2016. The backlog of drilled but uncompleted wells has now been connected with August daily production to date averaging 111,000 boe/d.
Second Quarter 2017 in Review
The plan to take advantage of reduced industry activity and reduced service costs in the second quarter was partly hampered by heavy rains and wet ground conditions that limited the majority of drilling and completion activity to the month of June. Despite the challenging surface conditions Peyto was still able to drill and complete 25 new wells and bring 29 wells on production. Average drilling costs of $1.8 million/well and completion costs of $0.9 million/well were achieved, consistent with 2016 levels. The liquids pipeline constructed in Q1 2017, connecting four of the nine gas plants, was utilized for the last half of the quarter to reduce liquids trucking in the quarter, increasing the Company’s realized liquids prices by approximately $2.50/bbl, and reducing road maintenance and environmental emissions. Operating costs were lower as warmer weather reduced chemical consumption and facility utilizations were optimized. Peyto added 13 sections of new land with pre-identified drilling locations to its inventory of future prospects for an average price of $113/acre. A strict focus on cost control improved operating margins resulting in increased year over year returns on capital employed.
1. Operating Margin is defined as funds from operations divided by revenue before royalties but including realized hedging gains/losses.
2. Profit Margin is defined as net earnings for the quarter divided by revenue before royalties but including realized hedging gains/losses. Natural gas volumes recorded in thousand cubic feet (mcf) are converted to barrels of oil equivalent (boe) using the ratio of six (6) thousand cubic feet to one (1) barrel of oil (bbl). Natural gas liquids and oil volumes in barrel of oil (bbl) are converted to thousand cubic feet equivalent (Mcfe) using a ratio of one (1) barrel of oil to six (6) thousand cubic feet. This could be misleading, particularly if used in isolation as it is based on an energy equivalency conversion method primarily applied at the burner tip and does not represent a value equivalency at the wellhead.
|Three Months Ended June 30||%||Six Months Ended June 30||%|
|Natural gas (mcf/d)||535,274||489,337||9%||542,118||528,284||3%|
|Oil & NGLs (bbl/d)||8,319||6,621||26%||8,949||6,815||31%|
|Thousand cubic feet equivalent (mcfe/d @ 1:6)||585,187||529,064||11%||595,813||569,171||5%|
|Barrels of oil equivalent (boe/d @ 6:1)||97,531||88,177||11%||99,302||94,862||5%|
|Production per million common shares (boe/d)*||592||545||9%||602||591||2%|
|Natural gas ($/mcf)||2.92||2.60||12%||2.94||2.85||3%|
|Oil & NGLs ($/bbl)||48.33||41.46||17%||48.23||37.42||29%|
|Operating expenses ($/mcfe)||0.24||0.26||-8%||0.26||0.25||4%|
|Field netback ($/mcfe)||2.77||2.39||16%||2.78||2.57||8%|
|General & administrative expenses ($/mcfe)||0.05||0.06||-17%||0.05||0.04||25%|
|Interest expense ($/mcfe)||0.21||0.21||–||0.20||0.19||5%|
|Financial ($000, except per share*)|
|Funds from operations||133,487||102,178||31%||272,792||242,085||13%|
|Funds from operations per share||0.81||0.63||29%||1.66||1.51||10%|
|Total dividends per share||0.33||0.33||–||0.66||0.66||–|
|Earnings per diluted share||0.24||0.06||300%||0.49||0.32||53%|
|Weighted average common shares outstanding||164,874,175||161,845,999||2%||164,837,609||160,494,262||3%|
|As at June 30|
|End of period shares outstanding (includes shares to be issued||164,874,175||164,630,168||–|
|*all per share amounts using weighted average common shares outstanding|
|Three Months Ended June 30||Six Months Ended June 30|
|($000 except per share)||2017||2016||2017||2016|
|Cash flows from operating activities||127,980||103,123||249,117||241,241|
|Change in non-cash working capital||2,191||(9,279||)||18,351||(10,391||)|
|Change in provision for performance based compensation||3,316||8,334||5,324||11,235|
|Funds from operations||133,487||102,178||272,792||242,085|
|Funds from operations per share||0.81||0.63||1.66||1.51|
(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 dividends may vary.
Exploration & Development
Second quarter 2017 activity was primarily focused in the Greater Sundance area as wet conditions limited access in Brazeau and other areas during the quarter. Four drilling rigs were active during April and May, while nine rigs were drilling during June. The second quarter drilling activity was entirely focused on the Spirit River group of formations including the Notikewin, Falher and Wilrich. In total, 25 horizontal wells were drilled as shown in the following table:
Horizontal well drilling costs in Q2 2017 were in line with Q1 and with 2016 average costs despite the wetter conditions and delays associated with spring breakup. Completion costs (per meter of horizontal lateral) were down from Q1 2017 due to lower service costs and lower completion intensity in the Sundance area versus the Brazeau area. The following table illustrates the progression of cost optimization designed to contribute to lower overall development costs and ultimately greater returns:
|Gross Hz Spuds||52||70||86||99||123||140||126||40||25|
|Measured Depth (m)||3,762||3,903||4,017||4,179||4,251||4,309||4,197||4,313||4,143|
|$ per meter||$734||$723||$694||$651||$626||$501||$433||$423||$457|
|Hz Length (m)||1,335||1,303||1,358||1,409||1,460||1,531||1,460||1,547||1,498|
|$ per Hz Length (m)||$1,017||$1,286||$1,231||$1,153||$1,166||$792||$587||$705||$641|
|$ ‘000 per Stage||$231||$246||$257||$188||$168||$115||$79||$83||$76|
During the second quarter of 2017, Peyto spent $48 million on drilling, $21 million on completions, $9 million on wellsite equipment and tie-ins, $17 million on facilities and major pipeline projects, and $2 million on new Crown lands and seismic, for total capital investments of $98 million.
In addition to the 25 gross (24 net) horizontal wells drilled, 24 gross (23 net) wells were completed and 29 gross (26 net) wells were equipped and tied in. Peyto completed construction and commissioned its Greater Sundance liquids pipeline in the second quarter and installed a 6 km, 10″ gathering line in West Brazeau, which crosses the Nordegg river and connects several new locations to the Brazeau gathering system.
Peyto also purchased 13 sections of new Crown land at sales in the second quarter, mostly in the Greater Sundance area, for an average purchase price of $113/acre.
Average daily AECO natural gas prices were $2.64/GJ in Q2 2017, up slightly from $2.58/GJ the quarter before but up significantly from the $1.33/GJ in Q2 2016. US Henry Hub spot prices increased in a similar fashion. A return to historical norms for natural gas storage helped improve supply demand fundamentals contributing to the increase.
On average for Q2 2017, Peyto realized a natural gas price of $2.54/GJ or $2.92/Mcf. This was the result of a combination of approximately 17% of natural gas production being sold in the daily or monthly spot market at an average of $2.59/GJ ($2.99/Mcf) and 83% having been pre-sold at an average hedged price of $2.52/GJ (prices reported net of TCPL fuel charges).
In the second quarter of 2017, lower realized liquid propane prices combined with a progressively increasing carbon tax, which was imposed on Peyto’s Oldman deep cut plant, resulted in less propane recoveries than in Q1 2017. As a result, Peyto’s Q2 2017 blended, realized, oil and natural gas liquids price was $48.33/bbl, which represented 78% of the $61.95/bbl average Canadian Light Sweet posted price. Details of realized commodity prices by component are shown in the following table:
Commodity Prices by Component
|Three Months ended June 30|
|Henry Hub spot||($US/MMBTU)||3.08||2.14|
|Natural gas – prior to hedging||($/GJ)||2.59||1.21|
|Natural gas – after hedging||($/GJ)||2.54||2.26|
|Oil and natural gas liquids ($/bbl)|
|Total Oil and natural gas liquids ($/bbl)||48.33||41.46|
|Cnd Light Sweet stream ($/bbl)||61.95||54.70|
Liquids prices are Peyto realized prices in Canadian dollars adjusted for fractionation and transportation.
Approximately 20%, or $0.69/Mcfe, of Peyto’s revenue come from its liquids sales while 80%, or $2.67/Mcfe, came from natural gas. This liquids revenue covered all cash costs but royalties. Cash costs of $0.85/Mcfe, included royalties of $0.17/Mcfe, operating costs of $0.24/Mcfe, transportation costs of $0.18/Mcfe, G&A of $0.05/Mcfe and interest costs of $0.21/Mcfe. Cash costs were lower than the previous quarter due to reductions in operating costs and royalties, partially offset by increases in transportation, G&A and interest. These total cash costs, when deducted from realized revenues of $3.36/Mcfe, resulted in a cash netback of $2.51/Mcfe or a 75% operating margin. Historical cash costs and operating margins are shown in the following table. Going forward, Peyto expects per unit cash costs will continue to trend towards $0.80/Mcfe levels for the balance of 2017.
|Total Cash Costs||0.89||0.82||0.80||0.75||0.72||0.80||0.76||0.81||0.89||0.85|
Depletion, depreciation and amortization charges of $1.38/Mcfe, along with a provision for deferred tax and market based bonus payments reduced the cash netback to earnings of $0.75/Mcfe, or a 22% profit margin. Dividends of $1.02/Mcfe were paid to shareholders.
Natural Gas Marketing
Peyto’s practice of layering in future sales in the form of fixed price swaps, and thus smoothing out the volatility in natural gas prices, continued throughout the quarter. For the balance of 2017, approximately 68% of gas volumes have been hedged to protect against increased AECO volatility. The following table summarizes the remaining hedged volumes and prices for the upcoming years as of August 9, 2017:
|Future Sales||Average Price (CAD)|
*prices and volumes in mcf use Peyto’s historic heat content premium of 1.15.
In order to deal with restricted access to take-away capacity, Peyto has arranged for excess firm transportation on the NGTL system north of the James River receipt point of up to 120% of Peyto’s forecasted natural gas sales for the remainder of the year. Specific monthly excess service is projected to offset the outage forecast provided by NGTL and safeguard against potential curtailments due to limited capacity. Beyond 2017, Peyto has secured new firm transportation to accommodate its expected production growth.
Following an unusually wet spring breakup, continuous operations were resumed in late June and have continued through July and into August. The backlog of uncompleted wells accumulated during Q1 and carried through Q2 was effectively eliminated over this period. Consequently, Peyto’s has recently reached record daily production levels in excess of 115,000 BOE/d.
Peyto continues to run 9 drilling rigs (4 in Brazeau, 5 in Greater Sundance) and since the end of the second quarter has spud 18 gross (16.5 net) wells, completed 16 gross (16 net) wells, and tied in 22 gross (21.5 net) wells. Peyto now expects to drill and tie-in 80 wells in the second half of 2017. Included in this second half drilling will be step out Wilrich and Notikewin tests on newly acquired lands in south Brazeau, as well as Wilrich step outs in a new emerging area called Whitehorse. The Company has recently tied in 3 wells to a third-party processing facility in Whitehorse and is encouraged by the early results. Infrastructure plans for the Whitehorse area will be finalized in early 2018 and will likely include construction of a Peyto facility to process area volumes.
In addition, the site for the new Brazeau East gas plant is now ready, with the construction timeline aligned with the fall drilling and tie-in schedule. Pending installation of the first 70 mmcf/d of equipment, the Brazeau area will have over 210 mmcf/d of processing capacity.
Summer gas prices have been extremely volatile and although Peyto has an active hedging program, some volumes are still sold on the daily index. Ownership and operatorship of 99% of the production and processing facilities provides the flexibility to actively manage the daily volumes to ensure profit margins are preserved.
While natural gas prices have deteriorated of late, Management expects prices will improve entering the fall for the winter heating season. The current and future 5 year strip for AECO natural gas price is below $2.40/GJ and is insufficient to sustain current Canadian gas production levels which would result in a tightening of supply and demand. That said, the Company has reviewed the economic returns of its remaining 2017 capital program in light of the weaker price forecast and is confident the remaining drilling program continues to make the economic return hurdle and deliver full cycle value creation for shareholders.
As always, Peyto’s focus will be on maximizing efficiency and minimizing both capital and cash costs throughout its business. This laser like focus on profitability is unwavering and will continue to be used to direct capital to the highest return opportunities within Peyto’s portfolio. This portfolio of opportunities is growing, as Peyto adds new Crown lands with identified drilling locations at historically low cost per acre. The Company’s operation and financial flexibility, quality asset base and strong balance sheet position Peyto to continue to be opportunistic in this environment.
Conference Call and Webcast
A conference call will be held with the senior management of Peyto to answer questions with respect to the Q2 2017 financial results on August 10th, 2017 at 9:00 a.m. Mountain Daylight Time (MDT), or 11:00 a.m. Eastern Daylight Time (EDT). Please see the press release for conference call details. To participate, please call 1-844-492-6041 (North America) or 1-478-219-0837 (International). Shareholders and interested investors are encouraged to ask questions about Peyto and its most recent results. Questions can be submitted prior to the call at firstname.lastname@example.org. The conference call can also be accessed through the internet at http://edge.media-server.com/m/p/m67ombbn. The conference call will be archived on the Peyto Exploration & Development website at www.peyto.com.