CALGARY, Feb. 23, 2018 /CNW/ – (TSX:PMT) – Perpetual Energy Inc. (“Perpetual”, the “Corporation” or the “Company”) is pleased to release its fourth quarter and year-end 2017 financial and operating results. A complete copy of Perpetual’s audited consolidated financial statements, Management’s Discussion and Analysis (“MD&A”) and Annual Information Form for the year ended December 31, 2017 will be available through the Corporation’s website at www.perpetualenergyinc.com and SEDAR at www.sedar.com.
The strategic focusing of our asset base, continued diligence to drive down costs, strengthening of our balance sheet, and steady execution of our growth-oriented capital program delivered attractive results in the fourth quarter and year ended December 31, 2017 as highlighted below:
Fourth Quarter 2017
- Adjusted funds flow of $12.5 million ($0.21/share) in the fourth quarter of 2017 was up 277% (250% on a per share basis) over the comparative period in 2016 and 53% over the third quarter of 2017. Cash flow from operations of $11.0 million in the fourth quarter of 2017 ($0.18/share), increased 131% over the prior year period.
- Proactive natural gas price hedging and optimization strategies and the November 1st commencement of delivery to the Company’s market diversification contracts effectively augmented revenue and insulated Perpetual from the impact of low and volatile natural gas prices in Alberta through much of the fourth quarter. Perpetual’s average realized natural gas price in the fourth quarter of $3.22/Mcf increased 34% from fourth quarter of 2016 compared to a 45% decrease year-over-year in the average AECO Daily Index natural gas price.
- Additional drivers of strong quarterly performance were the combination of production growth of 45% relative to the fourth quarter of 2016, coupled with a 17% reduction in cash costs per boe.
- Fourth quarter production and operating expenses were $3.45/boe, 24% lower than the fourth quarter of 2016 after adjusting for non-recurring items in the prior period.
Annual 2017
- Exploration and development capital investment of $73 million in 2017 replaced production by 248% at a proved plus probable finding and development (“F&D”) cost of $6.16/boe.
- Perpetual developed over 11.3 MMboe of new proved producing reserves (“PDP”) in 2017 at an F&D cost of $6.44/boe, resulting in a 2.2 times PDP recycle ratio relative to operating netback and 1.3 times relative to adjusted funds flow of $8.64/boe.
- Operating netbacks of $14.35/boe in 2017 were 120% higher than in 2016 ($6.53/boe), driven by the establishment of a sustainable cost structure following the strategic disposition of high cost, high liability shallow gas assets in eastern Alberta (the “Shallow Gas Properties”) on October 1, 2016.
- Adjusted funds flow for 2017 grew thirty-fold to $31.1 million ($0.54/share) compared to $0.9 million ($0.02/share) in 2016.
- Improving operational performance led to three borrowing base increases to the Company’s reserve based revolving bank debt in 2017 and the syndicate was expanded to include three banks. On November 20, 2017, S&P upgraded Perpetual’s credit rating by two rating notches from CCC- to CCC+ with a stable outlook, based on Perpetual’s improved liquidity. The Company’s year-end 2017 net debt to fourth quarter 2017 annualized adjusted funds flow ratio was 2.1 times.
FOURTH QUARTER 2017 OPERATING AND FINANCIAL HIGHLIGHTS
Capital Spending, Production and Operations
- Exploration and development spending totaled $19.0 million in the fourth quarter, 93% focused on the development of liquids-rich natural gas in West Central Alberta, a significant increase over prior year spending of $7.0 million. Three (3.0 net) horizontal wells were drilled in the Wilrich formation at East Edson, including a second extended reach horizontal (“ERH”) well on the same pad as the first ERH well drilled in the third quarter of 2017. The two ERH wells were completed and tied in during the first quarter of 2018. Compression was added at the 100% owned and operated West Wolf Lake 10-3 plant, to align compression and process capacity at the facility, bringing the plant capacity to 65 MMcf/d, and area capacity to 78 MMcf/d, including the 15% working interest capacity held at a third-party operated facility in Rosevear. The facility expansion was completed in December 2017 for $2.1 million, on budget and three months ahead of schedule, to accommodate the accelerated availability of increased firm transportation on TCPL to 78 MMcf/d from April 1, 2018 to December 17, 2017. The fourth quarter 2017 capital program also included expenditures for heavy oil waterflood operations in the Mannville area. In addition, Perpetual spent $0.9 million on abandonment and reclamation projects during the quarter.
- Fourth quarter average production of 11,765 boe/d (14% oil and natural gas liquids (“NGL”)) was 14% higher than the third quarter and 45% higher than Q4 2016, driven by the focused capital program to develop Wilrich reserves, and more than offset the average 500 boe/d of voluntary shut-ins that the Company opportunistically implemented to maximize value. This price optimization strategy was set up by transportation constraints created by pipeline maintenance activities in Alberta during the third quarter and continued into the fourth quarter.
- Production growth was focused in West Central Alberta deep basin, which comprised 84% of total production, and increased 19% over the third quarter to 9,894 boe/d. The first ERH well at 4-23-51-16W5 represented the highest deliverability well drilled to date by Perpetual at East Edson with a thirty-day average initial productivity (“IP30”) of 15.6 MMcf/d of natural gas plus associated liquids based on field estimates, 75% higher than the length-adjusted type curve contained in the 2017 year-end McDaniel reserve report. The second ERH well, which is still under test and not optimized, appears to be below the length-adjusted type curve. The average deliverability of the two wells is anticipated to exceed McDaniel’s proven plus probable expectations. West Central production was somewhat constrained by Perpetual’s firm transportation capacity during the quarter until December 17, 2017, when Perpetual took early possession of an additional 20 MMcf/d of firm TCPL capacity to bring area firm transportation capacity to 78 MMcf/d, over three months ahead of the original April 1, 2018 contract start-up date.
- Total production and operating expenses continued to trend downward to $3.45/boe, 1% lower relative to the third quarter. This quarter-over-quarter decrease reflected reduced chemical costs, third party processing fees and water disposal costs at East Edson and lower property taxes at Mannville driven by abandonment and reclamation activity, more than offsetting the $0.9 million ($0.95/boe) of non-recurring adjustments in the third quarter. Operating costs were 133% higher compared to the fourth quarter of 2016, which included $1.8 million ($2.41/boe) of non-recurring adjustments associated with the Shallow Gas Properties. After adjusting for these non-recurring items, production and operating expenses decreased by 24% from $4.56/boe compared to the prior year period due to lower maintenance and repair costs, purchased energy costs, and processing fees combined with increased production. Operating costs per unit-of-production in West Central Alberta averaged $1.72/boe, as production ramped up on a relatively fixed operating base.
Financial Highlights
- Realized revenue for the fourth quarter of 2017 of $25.5 million was up 23% from $20.7 million in the third quarter and up 86% from the prior year period, reflecting strong production growth and effective commodity price management despite volatile natural gas prices. Natural gas revenue represented 67% of total petroleum and natural gas revenue in the quarter, despite reflecting 86% of average production.
- Perpetual’s average realized natural gas price in the fourth quarter of $3.22/Mcf increased by 4% from third quarter prices (34% increase from fourth quarter of 2016) compared to a 16% increase quarter-over-quarter (45% decrease year-over-year) in the average AECO Daily Index for the same periods. Perpetual’s average realized natural gas price was 191% of the AECO Daily Index price during the quarter driven by the higher heat content in the Company’s natural gas sales volumes, hedging gains, prompt month price optimization strategies as well as the commencement of market diversification contracts on November 1, 2017. The arrangements effectively shift the sales point of 34.1 MMcf/d to a basket of five North American natural gas hub pricing points increasing to 39.0 MMcf/d on April 1, 2018.
- Realized oil prices during the fourth quarter of $47.30/bbl were up 10% over the third quarter and 21% over the fourth quarter of 2016, reflecting increased WTI pricing combined with a reduced WCS differential compared to the prior year period. Included in Perpetual’s average oil price are deductions for quality adjustments, loss allowance, terminal fees and diluent blending fees. Realized NGL prices increased 39% and 15% over the same periods respectively to $54.17/bbl.
- Cash costs, comprised of royalties, production and operating, transportation, general and administrative and cash finance expenses (“Cash Costs”), decreased by 7% on a unit-of-production basis in the fourth quarter of 2017 compared to the previous quarter to $11.92/boe (down 17% relative to the prior year period), due to diligent cost management and the impact of increased production across the cost base.
- Cash flow from operating activities for the fourth quarter of 2017 was $11.0 million, up 131% from $4.7 million in the prior year period, primarily due to higher realized commodity prices, cost reductions and a 45% increase in average daily production.
- Adjusted funds flow reached $12.5 million ($0.21/share) in the fourth quarter, up 53% over third quarter adjusted funds flow of $8.2 million ($0.14/share) and 277% over the comparable period in 2016 (2016 – $3.3 million). Adjusted funds flow per boe was $11.60/boe, an increase of $2.97/boe (34%) from the third quarter of 2017 and $7.14/boe (160%) relative to the fourth quarter of 2016, as improved production, operating performance, cost management and a 29% ($5.26/boe) increase in realized revenue per boe all contributed to improve results compared to the prior year period.
- The Company recorded a net loss for the fourth quarter of 2017 of $6.5 million, as improved adjusted funds flow was offset by a non-cash loss of $4.3 million related to the change in fair value of the Company’s investment of 1.67 million shares of Tourmaline Oil Corp. (TSX – “TOU”) and a booked loss on disposition of $3.9 million (Q4 2016 – $19.5 million gain) associated with the sale of the Shallow Gas Properties in both years.
- Total net debt at December 31, 2017 was $106.0 million, an increase of 14% from September 30, 2017 of $92.7 million. Approximately $62.9 million, representing 59% of net debt, matures in 2021 or later. Revolving bank debt stood at $31.6 million at year-end 2017. In November, Perpetual’s credit facility lenders increased the borrowing limit from $40 million to $65 million. The maturity date of the revolving bank debt is May 31, 2019 and the next semi-annual borrowing base review is scheduled for May 31, 2018.
2017 ANNUAL FINANCIAL AND OPERATING HIGHLIGHTS
Capital Spending, Production and Operations
- Perpetual’s exploration and development spending in 2017 totaled $73.0 million, a five-fold increase over 2016 capital spending, adding proved plus probable reserves of 8.9 MMboe, equivalent to 248% of 2017 production, at a finding and development (“F&D”) cost of $6.16/boe. Approximately 90% of spending was concentrated on the West Central Alberta deep basin assets. Capital expenditures included drilling 19 wells (17.7 net), with 13 (13.0 net) liquids-rich wells at East Edson, one (0.4 net) well in the Brazeau area of West Central Alberta and four (3.3 net) horizontal heavy oil wells and one (1.0 net) shallow horizontal gas well as Mannville. Capital activity in 2017 also included $2.1 million to expand the processing capacity at the owned and operated West Wolf Lake gas plant in East Edson and heavy oil waterflood activities and a shallow gas recompletion program at Mannville. In addition, modest spending was committed to complete phase one of the Company’s strategic low pressure electro-thermally assisted drive (“LEAD”) pilot project with cyclic heat stimulation (“CHS”) testing of the bitumen extraction opportunity in the Bluesky formation at Panny.
- Net payments on dispositions were $2.0 million in 2017 and included $2.9 million in net payments associated with the retained marketing arrangements related to the sale of the Shallow Gas Properties in 2016, offset by $0.9 million in net proceeds on the sale of undeveloped land and seismic data.
- Perpetual spent $2.3 million on decommissioning expenditures during 2017 mainly in Eastern Alberta, down from $3.8 million in 2016 as a result of materially reduced obligations with the disposition of the Shallow Gas Properties.
- Total production for the year ended December 31, 2017 of 9,876 boe/d was 30% lower than 2016 (14,128 boe/d), reflecting the sale of close to 35.5 MMcf/d (5,900 boe/d) of natural gas with the Shallow Gas Property disposition. Perpetual’s natural gas production averaged 49.6 MMcf/d in 2017, 87% concentrated at East Edson. NGL production averaged 655 bbl/d (62% condensate), 7% higher than 614 bbl/d (66% condensate) in 2016. Oil production of 948 bbl/d for 2017 was 10% lower than 2016 (1,058 bbl/d).
- Total production and operating expenses decreased 53% to $16.3 million ($4.52/boe) for 2017 compared to $35.0 million ($6.77/boe) in 2016, reflecting company-wide cost saving initiatives, concentration of operations to the low-cost East Edson area and the full year impact in 2017 of the sale of the high cost Shallow Gas Properties. Operating costs in West Central Alberta averaged $2.68/boe for 2017 compared to $2.93/boe in 2016.
- Municipal property taxes of $2.2 million continued to represent a significant portion of fixed operating costs at $0.62/boe (14% of total operating costs) for the year ended December 31, 2017, particularly in the Company’s remaining Eastern Alberta properties. The calculation of property taxes for machinery and equipment, pipelines and wells is based on a prescribed formula methodology which results in a tax assessment base that is dramatically misrepresentative of the property value for the Company’s remaining mature shallow gas assets. As a result, property taxes for shallow gas assets in Eastern Alberta for 2017 were $1.0 million ($2.84/boe), which represented 46% of operating costs for the shallow gas production and 51% of the pre-municipal tax operating netback for these properties.
Financial Highlights
- Realized revenue of $85.0 million in 2017 was 1% lower than 2016 as the 30% decrease in production was offset by a similar increase in Perpetual’s average realized commodity prices, inclusive of the Company’s hedging, price optimization and market diversification strategies. Realized revenue per boe was $23.59/boe for 2017, up 42% over the prior year (2016 – $16.65/boe), driven by modestly improved benchmark commodity prices combined with the higher value production sales mix and effective natural gas price optimization strategies.
- AECO Daily Index prices were essentially flat year over year at $2.04/GJ. Perpetual’s average realized gas price, including derivatives, and adjusted for heat content increased 45% to $3.51/Mcf for the year ended December 31, 2017 from $2.42/Mcf in 2016. Perpetual’s average realized natural gas price in 2017 was 163% of the AECO Daily Index price as a result of positive hedging gains, prompt month price optimization strategies, and the commencement of the Company’s market diversification contracts in the fourth quarter as well as the higher heat content of the natural gas sales stream in the East Edson area.
- Perpetual’s realized oil price of $41.62/bbl, including derivatives, increased 11% compared to 2016, due primarily to the 29% increase in Western Canadian Select (“WCS”) pricing. The increase in the average WCS price was primarily driven by higher benchmark WTI prices and lower WCS differentials compared to the prior year. Also included in Perpetual’s realized oil price were realized losses of $0.8 million ($2.31/bbl) recorded on financial crude oil derivative contracts for the WCS differential and $0.9 million ($2.60/bbl) of losses realized on crystallizations of contracts before maturity.
- Perpetual’s realized average NGL price increased 31% from the prior year to $46.60/bbl, reflecting an increase in all NGL component prices due to an increase in year-over-year pricing for WTI. As well, propane prices increased due to US inventory levels for propane ending the year at the lowest level since 2013 due to increased exports from the United States to Asia and Europe.
- Royalty expenses for 2017 were $12.0 million ($3.32/boe), up from $9.4 million ($1.82/boe) in 2016 and representing a 26% increase in the effective combined average royalty rate on P&NG revenue to 14.6% from 11.6% in 2016. Average crown royalty rates increased to 2.5% in 2017 compared to 2.1% in 2016, due primarily to higher Alberta natural gas reference prices and increasing oil prices. Freehold and overriding royalty rates increased from 9.5% in 2016 to 12.1% in 2017 as the East Edson joint venture royalty represented a higher percentage of production and revenue following the Shallow Gas Property sale and other production additions in 2017 were subject to overriding royalties.
- Operating netbacks of $14.35/boe in 2017 were 120% higher than in 2016 ($6.53/boe), driven by higher realized revenue combined with lower production and operating expenses and transportation costs, offset by higher royalties.
- Cash interest expense in 2017 decreased 46% to $8.0 million (2016 – $14.7 million) due to the full year effect of the exchange during the second quarter of 2016 of $214.4 million principal amount of 8.75% senior notes for 4.4 million TOU shares owned by Perpetual (the “Security Swap”) and asset sales in 2016 contributing to a lower opening debt balance, partially offset by capital expenditures that exceeded adjusted funds flow through 2017.
- Cash Costs, were $53.3 million in 2017, 37% ($30.9 million) lower than 2016. On a unit-of-production basis, Cash Costs of $14.77/boe in 2017 were 10% lower ($1.56/boe) relative to 2016.
- Cash flow from operating activities was $19.2 million ($0.33/share), compared to negative $7.1 million ($0.14/share) in 2016. Year-over-year improvements in commodity prices combined with significant cost reductions in 2017 more than offset the impact of the 30% decline in average daily production from 2016 to 2017.
- Adjusted funds flow was $31.1 million or $0.54/share, compared to $0.9 million or $0.02/share in 2016 driven by the establishment of a sustainable cost structure with the strategic disposition of the Shallow Gas Properties in the fourth quarter of 2016.
- Perpetual recorded a net loss of $36.0 million ($0.62/share) in 2017, compared to net income of $107.1 million ($2.11/share) for 2016. Change in net income was primarily due to the absence of the 2016 $81.3 million gain on exchange of senior notes for TOU share investment, the $81.6 million year-over-year decrease in the change in fair value of TOU share investment and the $36.5 million year-over-year decrease in gains on disposition. Income (loss) from operating activities in 2017, before impairment losses (reversals), restructuring expense and loss (gain) on dispositions was $3.7 million compared to ($32.1 million) in 2016, representing a $35.8 million improvement due to higher realized commodity prices and cost reductions in 2017, and the sale of the Shallow Gas Properties in 2016.
- The Company’s balance sheet was strengthened during 2017 through the execution of a series of financing transactions. The repayment term of $17.9 million of senior notes that previously were scheduled to mature in 2018 and 2019 was extended to 2022 and $27.1 million of senior notes that were scheduled to mature in 2018 were redeemed. Further, the Company issued a $45 million term loan due in 2021 and raised gross proceeds of $9.0 million through the private placement of 5.1 million common shares and 6.5 million warrants. Finally, three borrowing base increases to the Company’s reserve based revolving bank debt during 2017 increased total borrowing capacity to $65 million.
2018 OUTLOOK
In response to recent commodity market changes, Perpetual revised its 2018 capital plan to preserve the value of its East Edson natural gas reserves by deferring 2018 development drilling at East Edson and accelerating spending on highly economic heavy oil projects at Mannville, for a net 32% reduction to the 2018 capital budget to $23 to $27 million from $37 million initially set in November 2017. The revised capital plan is expected to result in the drilling of one (1.0 net) ERH liquids-rich natural gas well in 2018 along with three (3.0 net) completion and fracs at East Edson and up to 13 gross (12.3 net) horizontal heavy oil wells in the Mannville area. The resultant investment split is expected to be evenly distributed between the two core operating areas and natural gas and oil commodities.
With the capital re-allocation strategy to heavy oil, first quarter 2018 continues to expect production to average close to 13,300 boe/d. Natural base production declines are anticipated to reverse in the fourth quarter with the planned late third quarter frac of the ERH well to coincide with expected higher seasonal natural gas prices. Perpetual forecasts year-over-year average annual production growth of 17% to approximately 11,500 boe/d for 2018 and anticipates to exit the year at approximately 10,700 boe/d (17% oil and NGL).
Based on the capital spending plan and production assumptions outlined above, and the current forward market for oil and natural gas prices at market pricing points, Perpetual forecasts 2018 adjusted funds flow of $33 to $37 million ($0.56/share to $0.62/share). Further detailed information regarding the Company’s 2018 outlook, including adjusted funds flow guidance assumptions and sensitivities, was released on February 7, 2018 and is available in Perpetual’s MD&A for the year ended December 31, 2017.
Changes to Board of Directors
Perpetual also announces the retirement of Mr. Randall E. Johnson from its board of directors effective February 22, 2018. Mr. Johnson has been a valued member of the board of directors since his appointment in 2006. Among his other responsibilities, Mr. Johnson served as the Chair of Perpetual’s Compensation and Corporate Governance Committee and as a member of the Audit Committee. In addition, he has provided the board and management with insightful guidance gained through his long career in the oil and gas corporate banking industry. Perpetual wishes to acknowledge and thank Mr. Johnson for his many contributions and dedicated service to the Company and shareholders.
Financial and Operating Highlights
|
Three Months ended December 31 |
Year ended December 31 |
|||||
($Cdn thousands, except volume and per share amounts) |
2017 |
2016 |
Change |
2017 |
2016 |
Change |
|
Financial |
|||||||
Oil and natural gas revenue |
23,810 |
17,940 |
33% |
81,722 |
81,403 |
0% |
|
Net earnings (loss) |
(6,498) |
20,379 |
(132%) |
(35,971) |
107,149 |
(134%) |
|
Per share – basic(2) |
(0.11) |
0.39 |
(128%) |
(0.62) |
2.11 |
(129%) |
|
Per share – diluted |
(0.11) |
0.37 |
(130%) |
(0.62) |
1.98 |
(131%) |
|
Cash flow from (used in) operating activities |
10,953 |
4,740 |
131% |
19,170 |
(7,136) |
369% |
|
Per share(1)(2) |
0.18 |
0.09 |
106% |
0.33 |
(0.14) |
335% |
|
Adjusted funds flow(1) |
12,541 |
3,326 |
277% |
31,093 |
920 |
3280% |
|
Per share(2) |
0.21 |
0.06 |
250% |
0.54 |
0.02 |
2600% |
|
Revolving bank debt |
31,581 |
– |
100% |
31,581 |
– |
100% |
|
Senior Notes, at principal amount |
32,490 |
60,573 |
(46%) |
32,490 |
60,573 |
(46%) |
|
Term Loan, at principal amount |
45,000 |
– |
100% |
45,000 |
– |
100% |
|
TOU share margin loans, at principal amount |
18,490 |
39,953 |
(54%) |
18,490 |
39,953 |
(54%) |
|
TOU share investment |
(37,985) |
(66,343) |
(43%) |
(37,985) |
(66,343) |
(43%) |
|
Net working capital deficiency(1) |
16,404 |
3,917 |
319% |
16,404 |
3,917 |
319% |
|
Total net debt(1) |
105,980 |
38,100 |
178% |
105,980 |
38,100 |
178% |
|
Net capital expenditures |
|||||||
Capital expenditures |
19,047 |
7,069 |
169% |
73,035 |
14,580 |
401% |
|
Geological and geophysical costs |
– |
(3) |
(100%) |
(22) |
23 |
(196%) |
|
Net payments (proceeds) on acquisitions and |
970 |
1,785 |
(46%) |
2,422 |
(5,972) |
(141%) |
|
Net capital expenditures |
20,017 |
8,851 |
126% |
75,435 |
8,631 |
774% |
|
Common shares outstanding (thousands)(3) |
|||||||
End of period(4) |
59,263 |
53,421 |
11% |
59,263 |
53,421 |
11% |
|
Weighted average – basic |
59,338 |
52,924 |
12% |
58,017 |
50,733 |
14% |
|
Weighted average – diluted |
59,338 |
54,678 |
9% |
58,017 |
54,038 |
7% |
|
Operating |
|||||||
Average production |
|||||||
Natural gas (MMcf/d) |
60.8 |
40.3 |
51% |
49.6 |
74.7 |
(34%) |
|
Oil (bbl/d) |
888 |
936 |
(5%) |
948 |
1,058 |
(10%) |
|
NGL (bbl/d) |
738 |
467 |
58% |
655 |
614 |
7% |
|
Total (boe/d) |
11,765 |
8,118 |
45% |
9,876 |
14,128 |
(30%) |
|
Average prices |
|||||||
Realized natural gas price ($/Mcf) |
3.22 |
2.41 |
34% |
3.51 |
2.42 |
45% |
|
Realized oil price ($/bbl) |
47.30 |
38.95 |
21% |
41.62 |
37.60 |
11% |
|
Realized NGL price ($/bbl) |
54.17 |
46.99 |
15% |
46.60 |
35.45 |
31% |
|
Wells drilled |
|||||||
Natural gas – gross (net) |
3 (3.0) |
3 (3.0) |
15 (14.4) |
4 (4.0) |
|||
Oil – gross (net) |
– |
– |
4 (3.3) |
– |
|||
Total – gross (net) |
3 (3.0) |
3 (3.0) |
19 (17.7) |
4 (4.0) |
(1) |
These are non-GAAP measures. Please refer to “Non-GAAP Measures” below. |
(2) |
Based on weighted average basic common shares outstanding for the period. |
(3) |
Common shares and per share amounts have been retroactively adjusted to reflect the consolidation of outstanding common shares on the basis of 20 common shares to one common share on March 24, 2016. All common shares are net of shares held in trust. |
(4) |
Reduced by shares held in trust (2017 – 447; 2016 – 260). See “Note 15 to the Audited Consolidated Financial Statements”. |