CALGARY, Dec. 14, 2017 /CNW/ – Painted Pony Energy Ltd. (“Painted Pony” or the “Corporation“) (TSX: PONY) announces a 2018 capital program focused on preserving financial flexibility and reducing balance sheet leverage ratios, while delivering annual average daily production volume growth of more than 45% over anticipated 2017 annual average daily production volumes.
2018 CAPITAL BUDGET
The 2018 Painted Pony capital budget shall limit capital investment to approximately match internally generated cash flow. Continued growth in operations combined with modest capital spending plans based on strip pricing(1) underscores Painted Pony’s commitment to cost discipline and capital efficiency. Painted Pony’s Board of Directors has approved a 2018 development capital budget which consists of:
- Investing $185 million of development capital;
- Targeting year-end 2018 net debt to annualized fourth quarter cash flow ratio of approximately 1.6x – 1.7x based on consensus pricing(2);
- Growing annual average daily production volume by over 45%;
- Increasing annual average daily liquids production by 47%, with approximately 50% of 2018 forecasted liquids volumes being condensate; and
- Carrying an inventory of eight drilled and uncompleted net wells (“DUCs“) from the fourth quarter of 2017 into 2018 will combine with drilling 29 net wells and completing 31 net wells.
Hedging and Market Diversification Update:
- Hedged approximately 52% of forecasted 2018 annual average daily production volumes at a volume-weighted average price of $3.57/Mcfe; and
- Market diversification combined with hedging results in approximately 9% of total volumes expected to be sold on Station 2 spot prices during 2018.
(1) Strip pricing – based on December 4, 2017 strip prices including NYMEX USD$2.91/MMbtu; AECO 7A CAD$1.71/Mcf; Station 2 CAD$1.16/Mcf; WTI USD$56.25/bbl; USD/CAD Exchange $0.79
(2) Consensus pricing – based on sector peer 2018 average commodity price assumptions of AECO CAD$2.50/Mcf; Station 2 CAD$1.95/Mcf; WTI USD$56.00/bbl; USD/CAD Exchange $0.78
Painted Pony has been one of the highest production growth rate natural gas producers in Canada over the last four years. Our high-growth strategy was designed to accelerate the timing of capturing the value of our extensive resource base and to build a productive and operational capacity material enough to enjoy economies of scale and the resulting lower unit capital and operating expenses. A significant part of our strategy has been to make infrastructure commitments to both take-away and processing capacity. The take-away commitments we have made have allowed us to materially diversify our pricing exposure, minimizing volumes sold at western Canadian pricing hubs. Our commitments to processing capacity were necessarily significant in order to incent our midstream partner to invest in the development of new plant capacity of a scale that would be material and economic to our business. During the fourth quarter, we reached production levels that will ensure Painted Pony has productive capacity to meet take-or-pay commitments on the Townsend Plant. Having achieved that milestone allows us the flexibility to moderate our pace of growth.
Painted Pony announces a 2018 capital budget that continues our growth strategy, while preserving our financial liquidity and improving our debt metrics. The operational efficiencies gained over the last four years provide us with ability to significantly grow productive capacity while investing only our expected internally generated funds from operations. Our successful risk management program allows us to make these capital commitments with a high degree of confidence in our ability to fund our plans. Those risk management plans includes hedging on both financial and physical contracts which result in sales of approximately 52% of our projected 2018 production at an average fixed price of $3.57/Mcfe, and a diversification of market for the balance of our sales at spot prices that includes 23% on AECO, 5% on NYMEX, 3% on Dawn, 8% on Sumas, and 9% on Westcoast Station 2.
Production and Capital Efficiencies
Annual daily production volumes for 2018 are anticipated to average between 366 MMcfe/d (61,000 boe/d) and 378 MMcfe/d (63,000 boe/d) and capital spending is expected to be $185 million.
Capital costs have come down in recent years through drilling and completions efficiencies, while well productivity has remained robust. As a result, Painted Pony has consistently achieved strong 12-month capital efficiencies. Based on the 2018 capital budget of $185 million and annual average daily production volumes at the low-point of the guidance range of approximately 366 MMcfe/d (61,000 boe/d), calculated first-year capital efficiencies are expected to average approximately $1,500/Mcfe/d ($9,000/boe/d), which management believes is among the strongest capital efficiencies within the Canadian gas-weighted sector.
Based on field estimates for both October and November and including pricing-related voluntary shut-ins during December, fourth quarter 2017 daily production volumes are expected to average between 306 MMcfe/d (51,000 boe/d) and 318 MMcfe/d (53,000 boe/d), an increase of 42% over fourth quarter 2016 volumes of 220 MMcfe/d (36,695 boe/d). Anticipated fourth quarter 2017 average daily production volumes were impacted by pricing-related voluntary shut-ins of 54 MMcfe/d (9,000 boe/d).
Improved Cash Costs
Higher 2018 annual average production volumes are expected to have a positive impact on Painted Pony’s cash costs on a per unit basis. Painted Pony will continue to innovate and streamline field operations as production grows to achieve increasing levels of efficiency while delivering lower per unit operating costs.
Lower per unit corporate cash costs from increased production volumes, innovative and diversified fixed-price contracts, and a large production base with a shallowing decline, combine to provide Painted Pony the capability of delivering production volume growth of approximately 45%. Limiting 2018 capital spending to expected internally generated cash flow is anticipated to result in the leverage ratio improving to a forecasted 2018 year-end net debt to fourth quarter annualized cash flow ratio of between 2.1x to 2.2x, using December 4, 2017 forward strip commodity prices.
Painted Pony is well-positioned to deliver another year of growth from the Corporation’s Montney assets and, similar to past years, expects to execute the 2018 capital development program focused on capital efficiency and cost discipline.
Mr. David Cornhill, a member of the Board of Directors and of the Governance Committee, provided the Corporation with notice of his resignation today. Mr. Cornhill has served as a director since May 2015.
“I am pleased with the progress Painted Pony has made since the signing of the Strategic Alliance with AltaGas in 2014. The relationship has proven to be beneficial to both companies, with the strong growth in Painted Pony production and the completion of AltaGas Townsend Facility, the Townsend Gas Processing Facility – Phase 2, and the North Pine Facility. These facilities will lead to future development and will connect producers to new markets, including Asia. I believe the timing is right for me to resign from the Painted Pony Board of Directors to pursue other professional interests,” said Mr. Cornhill.
The Board of Directors and the Corporation thank Mr. Cornhill for the guidance he has provided and for his commitment to Painted Pony and wish him every success in his future endeavours.
Mr. James Reimer, Vice President, Geoscience and Technology will retire effective January 31, 2018. Mr. Reimer joined Painted Pony in May 2011 and his contributions have been a significant part of the Corporation’s success during the past seven years. The Corporation and the Board of Directors thank him for his contributions and wish him all the best in his retirement.