- Averaged strong first quarter 2020 production volumes of 319 MMcfe/d (53,141 boe/d) which is 18% higher than fourth quarter 2019 production of 271 MMcfe/d (45,173 boe/d).
- Realized an average natural gas price of $2.30/Mcf, 13% higher than the average AECO 5A daily spot price of $2.03/Mcf, and a combined realized price including liquids of $2.55/Mcfe during the first quarter of 2020 through a combination of diversified sales points and fixed physical pricing contracts.
- Renegotiated terms with AltaGas Ltd. (“AltaGas“) during the first quarter of 2020 which resulted in a processing take-or-pay reduction of 40 MMcf/d at the AltaGas Townsend Facility as well as other fixed and variable cost reductions.
- Reduced firm transportation obligations by 30 MMcf/d, split evenly over Enbridge’s T-North and TC Energy Corporation’s North Montney Mainline pipelines, which is expected, once fully implemented, to reduce Painted Pony’s cash transportation expenses.
- Drilling of the planned eight-well pad on the 25% working interest South Townsend block by our joint venture partner Tourmaline Oil Corporation (“Tourmaline“) which began during the first quarter of 2020, is progressing well with two wells drilled and another well underway. Management expects this eight-well pad to be on-stream later in the second half of 2020.
Patrick Ward, President and CEO of Painted Pony, in commenting on these highlights said, “North American crude oil prices fell dramatically in March and April 2020 and this has resulted in some producers shutting in significant volumes of crude oil production. The result of shut-in crude oil is a drop in associated natural gas production, which has reduced current and future natural gas supply across North America and increased forward strip pricing. It is encouraging to see improving natural gas forward strip prices in the second half of 2020 and 2021 after four years of weak natural gas prices. Station 2 forward strip pricing for the second half of 2020 and through 2021 is over 200% higher than the average price over the last three years while AECO, NYMEX and Dawn continue to strengthen as well. While the future strip prices for natural gas are encouraging, we are capital constrained. As volatility continues in both natural gas and liquids prices, we will review our capital spending for the second half of the year in late-June.”
Long Lateral Well Performance
Painted Pony continues to record production rates above management’s type curve from the three long lateral wells on the 74-F pad. These three long lateral wells are located at Blair Creek and were drilled into the Upper Montney with lateral lengths averaging approximately 3,050 meters. Initial rates from these wells were previously detailed in the Painted Pony press release dated November 6, 2019. After approximately five months of production, these wells are producing individual well calendar day natural gas rates of between 10 – 12 MMcf/d, and have produced cumulative natural gas of between 1.6 and 1.75 Bcf per well.
The drill and complete cost for the wells on this pad averaged $4.85 million per well compared to standard length wells with lateral lengths of 1,800 meters costing $4.2 million per well. These wells represent a lateral length increase of approximately 70% over standard lateral length wells (1,800 meters) while only increasing capital costs by approximately 15%.
FIRST QUARTER 2020 FINANCIAL & OPERATING RESULTS
Painted Pony’s first quarter 2020 average daily production volumes of 319 MMcfe/d (53,141 boe/d) were 18% higher than fourth quarter 2019 production volumes of 271 MMcfe/d (45,173 boe/d). First quarter 2020 liquids production averaged 3,594 bbls/d or approximately 7% of total first quarter 2020 production volumes.
Cost Structure Improvements
During the first quarter of 2020 Painted Pony signed a series of agreements which reduced natural gas processing and transportation take-or-pay obligations, as previously announced on March 11, 2020. Once fully implemented, natural gas processing cost structure improvements at the AltaGas Townsend Facility combined with reduced transportation obligations on both Enbridge’s T-North and TC Energy Corporation’s North Montney Mainline pipelines are expected to reduce Painted Pony costs by approximately $18 million per year.
Processing – The take-or-pay commitment at the AltaGas Townsend Facility has started to decrease and will ultimately decrease the total obligation by 15% or 40 MMcf/d in stages, by August 1, 2021. In addition, Painted Pony will realize a reduced capital facility fee at the AltaGas Townsend Facility, which has lowered per unit costs by approximately 10%. Additionally, the annual fixed-cost liquids transportation expense has been reduced by approximately 40% from the AltaGas Townsend Facility to the North Pine Fractionator.
Transportation – Painted Pony permanently reduced firm transportation obligations by a combined 30 MMcf/d. Effective August 1, 2020, Painted Pony’s excess firm transportation obligations will be reduced by 15 MMcf/d on the T-North pipeline and 15 MMcf/d on the North Montney Mainline.
Painted Pony invested $21 million of capital during the first quarter of 2020 which included $17 million, or 81% of total first quarter 2020 capital spending, on drilling 4 (3.25 net) wells and completing 2 (2.0 net) wells.
Painted Pony continues to forecast total first half 2020 capital spending of between $25 and $30 million. Painted Pony’s Board of Directors and management have planned a mid-year review to determine appropriate second-half spending.
Painted Pony realized an average price of $ 2.55/Mcfe, before realized risk management gains / losses, during the first quarter of 2020 compared to a realized price $3.67/Mcfe during the first quarter of 2019. This realized price of $2.55/Mcfe includes an average natural gas price of $2.30/Mcf, a 13% premium to the AECO 5A daily spot price of $2.03/Mcf.
Painted Pony’s market diversification was strengthened by entering into financial and physical commitments to a diversity of sales markets. As a result, Painted Pony’s marketing portfolio includes pricing exposure in the AECO, Dawn, NYMEX, Sumas and Station 2 markets, all of which are showing higher forward strip prices compared to six months ago. Additionally, Painted Pony has a fixed-price contract for the delivery of natural gas volumes to the Methanex methanol plant in Medicine Hat, Alberta. This existing long-term contract with Methanex Corporation increases from the current 10 MMcf/d to 20 MMcf/d in 2021 before increasing to 50 MMcf/d in 2023 and for the remainder of the contract. Painted Pony continues to pursue incremental long-term contracts with large end-users of natural gas, including utilities, petrochemical manufacturers, and LNG exporters.
Adjusted Funds Flow from Operations
For the first quarter of 2020, adjusted funds flow from operations were $5.4 million ($0.03 per share basic) and were impacted by a 31% decrease in realized commodity prices for natural gas and NGLs. Higher transportation expenses from acquired capacity on TC Energy Corporation’s North Montney Mainline pipeline, which came in service during the first quarter of 2020, also negatively affected adjusted funds flow from operations.
Finance Lease Treatment
As a result of changes in the agreement with AltaGas which reduced processing obligations and costs, certain costs no longer qualify as a finance lease. These processing and transportation costs at the AltaGas Townsend Facility are now recorded in operating expenses instead of finance lease expense and amortization of the finance lease obligation.
As at March 31, 2020, Painted Pony’s syndicated credit facilities consisted of available credit facilities of $375 million. The facilities revolve for a two-year period, which is extendable annually, subject to syndicate approval. The current maturity date is May 11, 2021. Due to commodity price volatility, Painted Pony and the banking syndicate have agreed to extend the date for completion of the annual borrowing base redetermination from April 30, 2020 to June 30, 2020. As part of this extension, Painted Pony’s available credit facilities were reduced from $375 million to $350 million. Painted Pony also has a $22 million unsecured letter of credit facility backstopped by Export Development Canada (“EDC“), bringing the Corporation’s present total credit capacity to $372 million.
As at March 31, 2020, Painted Pony was drawn approximately 32% or $121 million (excluding letters of credit) on the $375 million syndicated credit facility. Bank debt at the end of the first quarter 2020 was $18 million or 13% lower than at the end of the first quarter of 2019.
Recently announced Canadian Federal Government programs are designed to help Canada’s exploration and production industry by providing additional liquidity in this period of global pandemic and other market-based challenges. These programs, administered through EDC and the Business Development Bank of Canada, are intended to provide short term liquidity to companies like Painted Pony in these very challenging markets. Painted Pony is actively exploring the opportunity to participate in these programs.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
|Three months ended March 31,
|($ millions, except per share and shares outstanding)||2020||2019||Change|
|Natural gas and natural gas liquids revenue(1)||74.0||107.7||(31||)%|
|Cash flows from operating activities||20.9||53.8||(61||)%|
|Per share – basic(3)(8)||0.13||0.33||(61||)%|
|Per share – diluted(4)(8)||0.12||0.32||(61||)%|
|Adjusted funds flow from operations(2)||5.4||46.5||(88||)%|
|Per share – basic(3)||0.03||0.29||(88||)%|
|Per share – diluted(4)||0.03||0.27||(88||)%|
|Net income (loss) and comprehensive income (loss) – basic and diluted||(282.0||)||(2.6||)||> (100||%)|
|Per share – basic and diluted(3)(4)||(1.75||)||(0.02||)||> (100||%)|
|Cash capital expenditures (net)||20.9||36.9||(43||)%|
|Working capital (deficiency)(5)||(38.1||)||(6.2||)||> 100||%|
|Convertible debentures – liability||47.8||46.4||3||%|
|Shares outstanding (millions)||161.0||161.0||—||%|
|Basic weighted-average shares (millions)||161.0||161.0||—||%|
|Fully diluted weighted-average shares (millions)||169.9||169.9||—||%|
|Daily production volumes|
|Natural gas (MMcf/d)||297.3||300.2||(1||)%|
|Natural gas liquids (bbls/d)||3,594||4,350||(17||)%|
|Realized commodity prices before financial risk management contracts|
|Natural gas ($/Mcf)||2.30||3.24||(29||)%|
|Natural gas liquids ($/bbl)||36.01||51.17||(30||)%|
|Operating netbacks ($/Mcfe)(7)||0.84||2.45||(66||)%|
|Corporate netbacks ($/Mcfe)(7)||0.50||1.96||(74||)%|
- Before royalties.
- Adjusted funds flow from operations and adjusted funds flow from operations per share (basic and diluted) are non-GAAP measures used to represent cash flow from operating activities before the effects of changes in non-cash working capital and decommissioning expenditures. Adjusted funds flow from operations per share is calculated by dividing adjusted funds flow from operations by the weighted average number of basic or diluted shares outstanding in the period. See “Non-GAAP Measures”.
- Basic per share information is calculated on the basis of the weighted average number of shares outstanding in the period.
- Diluted per share information reflects the potential dilutive effect of stock options and convertible debentures.
- Working capital (deficiency) is a non-GAAP measure calculated as current assets less current liabilities. See “Non-GAAP Measures”.
- Net debt is a non-GAAP measure calculated as bank debt, senior notes, the liability portion of convertible debentures, and working capital deficiency, adjusted for the net current portion of fair value of risk management contracts and current portion of finance lease obligation. See “Non-GAAP Measures”.
- Operating netbacks and corporate netbacks are non-GAAP measures. Operating netbacks are calculated on a per unit basis as natural gas and natural gas liquids revenues, adjusted for realized gains or losses on risk management contracts, less royalties, operating expenses and transportation expenses. Corporate netbacks are calculated as operating netbacks less finance lease expense per unit. See “Non-GAAP Measures” and “Operating and Corporate Netbacks”.
- Cash flows from operating activities per share (basic and diluted) are non-GAAP measures calculated by dividing cash flows from operating activities by the weighted average of basic or diluted shares outstanding in the period. See “Non-GAAP Measures”.